RH - Q2 2024

Transcript

Operator (participant)

Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2023 RH 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, please press star one on your telephone keypad. If you would like to withdraw your question, press the pound key. We also ask that you limit yourself to one question and please requeue. Thank you. I will now turn the conference over to Allison Malkin of ICR. You may begin your conference.

Allison Malkin (Partner)

Thank you. Good afternoon, everyone. Thank you for joining us for our second 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 our 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)

Thank you. Let me begin with our letter to our peoples, partners and shareholders. Revenues of $800 million and adjusted operating margin of 22.2% exceeded our guidance for the second quarter due to a $25 million revenue benefit from faster than expected deliveries and a shift of approximately $40 million of advertising costs from Q2 to Q3, reflecting the later mailing of our RH Interiors Source Book. We are raising the low end of our revenue guidance for the year and now expect revenue in the range of $3.04 billion-$3.1 billion, versus our prior outlook of $3 billion-$3.1 billion, and are maintaining our outlook for adjusted operating margin of 14.5%-15.5%.

We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year, as mortgage rates continue to trend at 20-year highs and the current outlook for rates to remain unchanged until the second quarter of 2024. The company repurchased 3.7 million shares in the second quarter at an average price of $325.65, representing approximately 17% of the total shares outstanding at the beginning of the second quarter. Product elevation. We recently mailed our new 604-page RH Interiors Source Book, and while it's too early to read the response, with only 40% of the mailing in the home this week, the early indications do look promising.

We continue to expect our business trends to inflect in the second half of this year with the mailing of our RH Contemporary Source Book in late October and our RH Modern Source Book in early January, as well as the refresh of our galleries over the next several quarters. We believe our inflection point will peak in the first half of 2024 as our new collections fully ramp and we begin another cycle of source book mailings, completely transforming and refreshing the assortment across the entire brand over a 12-month period. We believe the new collections reflect a level of design and quality inaccessible in our current market and a value proposition that will be disruptive across multiple markets, positioning RH to gain market share throughout fiscal 2024.

While a product transformation of this magnitude will be margin dilutive in the short term as we cycle out of waning collections, we believe it will once again become margin accretive as selling rates stabilize and allow our supply chain and sourcing efficiencies. Platform expansion. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multibillion-dollar opportunity. This summer, we introduced RH to the United Kingdom in a dramatic and unforgettable fashion with the opening of RH England, the gallery at the historic Aynho Park, a 17th-century 73-acre estate that is a celebration of history, design, food, and wine.

We had a spectacular turnout for our opening event in early June, and the national and global press coverage the brand received was multiple times greater than any gallery we've ever opened. Due to RH England's countryside location, we expect the majority of revenues to be driven by our interior design and trade businesses, which are dependent on building books of business, books of business with high-value repeat clients like interior design firms and hospitality projects. The quote books are building, and we'll soon mail our first, first Source Book in the United Kingdom. While pleased with the early response, there is still much to learn about the seasonality of the business in the English countryside, especially in the winter season. We will know more once we start mailing Source Books and experience a couple of seasons.

Our global expansion also includes openings in Düsseldorf and Munich later this year, with Paris, Brussels, and Madrid scheduled for 2024, and London, Milan, and Sydney for 2025. Regarding our North American transformation, we continue to plan opening RH Indianapolis and RH Cleveland in the second half of this year, while RH Palo Alto and RH Montecito will now open in early 2024. Additionally, we have 12 North American galleries in the 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 have validated 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 just secured our first new location for Design Studio in Palm Desert, which should open in the first half of 2024. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Outlook.

As mentioned, we are raising the low end of our revenue guidance for the year to a range of $3.04 billion-$3.1 billion, and maintaining our outlook for adjusted operating margin in the range of 14.5%-15.5%. We estimate the fifty-third week will result in revenues of approximately $60 million. For the third quarter of fiscal 2023, we are forecasting revenues of $740 million-$760 million, and adjusted operating margin in the range of 8%-10%. We expect to have increased advertising costs of approximately $50 million versus Q2 2023, reflecting the shifting of the RH Interiors Source Book from Q2 to Q3, the mailing of our RH Contemporary Source Book, and the mailing of our first Source Book into the United Kingdom.

For the fourth quarter of fiscal 2023, we are forecasting revenues of $760 million-$800 million, and adjusted operating margin in the range of 14.4%-16.6%, with incremental advertising costs of $5 million versus the fourth quarter of last year. 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 and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, 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 product, to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste and placemaker.

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 luxury and privacy 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, and RH Three, our 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 brand and amplifying our core business while 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 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 7-10 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, a proprietary 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. The end of COVID confusion, the beginning of the next evolution. We've spent far too much time over the past four years debating if this was going to be the decade of home or the death of retail, if inflation was transitory or fiscal tightening was mandatory. Home sales and prices shooting up like a rocket and now falling to earth like a rock.

For the first time in my career, retailers were comparing their growth rates to any one of the past four years in any given month of any given year. The fact is, we're directionally in the same spot we were four years ago, worrying about a financial recession and the polls saying we might have a presidential regression. If there was ever a time the world needed a compass, this might be it. For the people of Team RH, our compass is our vision, values, beliefs, and culture. Those things that drive us and unite us, those things we live for, would fight for, and die for. After several years of being apart during COVID, we finally returned to the Palace of Fine Arts Theatre in San Francisco for what used to be our annual leadership conference, and we talked about those things.

For the first time in the past four years, everything came into focus. Clear replaced fear, and connections were personal and not virtual. It felt different because it was different. There is a different level of accountability when someone is standing in front of you, looking straight into your eyes and making a suggestion or a request, versus blankly into a screen, not knowing if those on the other end have you on mute or just aren't very interested. It's time to break the bad habits of COVID. It's time to get off the screens, get out of our home office, and reconnect in our team office, or as we did at the Palace. It just felt different because it was different, and I'm sure it's going to lead to an outcome that's different.

Yet it also felt familiar, like finding our way back home, back with our people, where none of us are smarter than all of us, getting all the brains in the game and the egos out of the room, listening and learning, discussing and debating, elevating and aligning. It felt like the beginning of our next evolution, and it felt like we were beginners again. Never underestimate the power of a few good people who don't know what can't be done, especially these people. Onward, Team RH. Carpe Diem. At this time, we'll open the call to questions.

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad. As a reminder, please ask one question and then queue. Your first question comes from the line of Steven Forbes from Guggenheim Securities. Please go ahead.

Steven Paul Forbes (Senior Managing Director Equity Research)

Good afternoon, Gary, Jack. Gary, I was hoping you could maybe just expand on what's driving your confidence in seeing an inflection in the business during the back half, and what the early indications from the RH Interior book, and I guess RH England as well, inform you about what the potential re-acceleration in demand could look like as we think out to 2024 and beyond?

Gary Friedman (Chairman and CEO)

Sure. I think there's a, there's a couple of dynamics happening. I think you're- you've got kind of a cycling of the, you know, backside of COVID, and you've got a cycling of the, you know, the dramatic rise in interest rates and the, you know, and the falloff of the highs of a, of a, what I call a COVID and a, and a zero, you know, Federal Funds Rate driven home, home market. So, you know, from our view, I think that cycling happens at the end of this year. And the question is, you know, the question is, is there a longer downdraft in the, you know, in the home cycle?

I think that the answered questions really deal with, you know, if you say, "What's the problem with the housing market today?" You've got this real delta in interest rates between people who bought a home over the last several years at dramatically low interest rates that are sitting there with 2.7, call it 3, you know, 4% interest rates. 90% of the market is fixed. So you've got 90% of the market owning homes with really low interest rates, and you've got, you know, interest rate gap, you know, current 30-year mortgages are going for 7%, somewhere between 6.8-7.4, you know, is kind of the range, depending on credit. So you've got a huge spread there.

And what's compounding that huge spread is you haven't had home prices drop enough yet, right? To offset that margin spread. You know, if home rates dropped, you know, you know, home prices went up 42% in the two years, you know, in the two years post the COVID, you know, through the COVID boom. You know, once COVID hit and there was a, you know, you know, everybody was stuck at home and, you know, focused on exiting cities. You had the biggest migration from cities to suburbs in history and biggest migration to second homes in history. So you've got a lot of people that moved, you know, at a record rate. You've got a lot of people locked into really low interest rates.

Now you've got really high interest rates, and you have no inventory in the market, and you have no inventory in the market because people can't afford to buy a new home once they sell their home, because they're gonna trade a, you know, like 2.7%-3.4% interest rate for, you know, call it a 7-7.2% interest rate at, at maybe at the midpoint. And so you've got a lock on that. Well, we're gonna begin to cycle this. So if the Fed has CPI, you know, if they have inflation under control and we don't, you know, there doesn't have to continue to be kind of tightening.

You know, the question is: When do home prices come down enough for people to step up and pay the higher rate, or when do rates come down and, you know, close that gap? You know, either housing prices have to come down, or interest rates have to come down, or the gap doesn't close, right? So you may kind of wallow at the bottom, or there could be a, you know, further downdraft if there's a more broader, you know, economic issue in the economy, or if anything that's happening with, the, you know, the commercial market with offices, you know, is not a good market, you know. And, you know, our view is not all of that negative news is kind of, you know, unveiled itself. So, there's...

You know, but we're from our view, we're kind of at the end of the worst of it. It's you know, is there gonna be a bounce? You know, I mean, you know, if you look forward at the markets as saying that we should expect interest rate cuts, you know, starting next year in Q2, Q3, you know, on a Q4, maybe 100 basis points. You know, does 100 basis points of interest rate cuts move the housing market much? Maybe it moves it a little, but I think there's gonna be a bigger... You gotta close this gap. You know, it's a gap that I've never seen, and I don't think anybody on the phone has ever seen, you know, that that's created kind of a conundrum, you know, in the housing market.

And then you've got, you know, look, the news and the press is, "oh, new houses are up, you know, 20%." Well, new houses are only 10% of the market. You know, the existing home sales is 90% of the market. So until you get existing home sales and this market stabilized, you know, and not a downdraft, that's gonna be critical. So we expect stabilization, we think, next year. We don't think there's gonna be acceleration until there's interest rate cuts or pricing comes down, home prices come down to kind of close that gap. So let's put that off to the side. That's, that's one issue. Then you've got, what we're doing, which is a complete transformation and reimagination, refresh of the brand, that we've been working on now for several years.

That's gonna, you know, be unveiled over the next several quarters. So, the early indications on the books, and again, we're hitting 40% of the books in home, you know, by the end of this week, look really good. You know, the early, early indications. Now, you gotta be careful in, you know, how you extrapolate that, because you have to extrapolate it on, okay, what does this look like when all the books get in home? What does this look like when, you know, the in-stocks reach their best, their optimum levels? What does this look like when you start, you know, refreshing the galleries and the stores? With those, there's all lift factors to all of that. So when we look at this and we extrapolate this, we think there's gonna be a real inflection point.

You know, how big is that inflection point? You know, it's, it's... To us, it looks like a meaningful inflection point. And then there is you know, part of our decision to kind of push the mailing into Q3 was to kind of take a longer-term view of what should be our contact strategy, as we've now, you know, are going through this brand refresh and reimagination and repositioning. Our view was, you know, we, we've, through history, we went through cycles where we contacted the customer twice a year, you know, with each book, and periods where, you know, years where we contacted the customer once a year, you know, one kind of big cycle of mailings.

And our view is, I think we've got to re-acclimate the consumer to, you know, the RH brand, to, you know, the newness, the excitement that's in the brand and everything we're doing. And our view is to set up a two contact strategy. So, so the timing of those contracts, contacts, we should, we believe, should be a fall contact, and, you know, and a, you know, kind of fall contact and a spring contact, is how I'd frame it. So fall being, kind of a, a mid to late August contact that gets in-home, you know, by, you know, end of September. Our books, you know, especially our interior books, our interior book is 604-page book. Nobody does a 604-page book than, than, you know, other than us.

Getting that printed and bound and through, you know, through the system takes longer than it will on our, on our other two books that will be more in the 300-page range. So, you know, we've got this first contact that'll get all in home, kind of call it end of September, first week of October. Then, we're gonna come out with the Contemporary book, kind of mid-October through late October, and then we'll come with the January book, with the Contemporary book in the October period, and then the Modern books in early January, when people get back from, you know, from holidays and so on and so forth, and everything reopens again.

Then we'll cycle back around, and we'll hit everyone with this next contact, you know, if you look at it over a 12-month period, and that will be kind of a, you know, March, April, May, June contact. And so the three books we'll hit again, we'll have another, you know, meaningful round of newness coming. And by the end of that contact, we will be kind of fully transitioned. Doesn't mean we won't have new product in the next contact when you think about the next fall. But the percentage newness will be more in the, you know, 15%-20% range, where this is basically, you know, an 80% refresh of the brand. It's massive.

It's the biggest product move I've ever made in the history of my career, and I've made some pretty big product moves. So you gotta kinda think about how you're spreading it out, you know, how much can the consumer digest at a time? You know, how are you gonna read it correctly? And how are you gonna have the contacts, you know, you know, not overwhelm them, and the news, not overwhelm them. So as we kind of took, you know, a bigger view at it, instead of, you know, this kind of one view and looked at it more, you know, how do we think about it strategically, maybe call it over the next three years? We think this is the right contact strategy.

And, you know, we'll, we'll create, you know, by the, by the peak of the inflection, I think it will be really meaningful. I think we will gain significant market share, you know, significant market share versus anybody else in our category. And I think the other thing that, to put into context is just, you know, how we think about disruptive pricing, you know, from a circular point of view. Which I think, you know, we've, you know, in, in our efforts to elevate the brand, you know, I think we, you know, we, we weren't as kind of critical-minded looking at price. You know, I, I mentioned this last conference call, you know, I thought we, we probably were a bit, a bit arrogant, looking, you know, looking back.

And now I think we're laser-focused and laser sharp, you know, so we're gonna be very aggressive. You know, we're gonna use the size and strength of our platform and the leverage it gives us, to, you know, be disruptive from a pricing point of view. So, I think that's gonna make a meaningful impact. I think if you look at the new book, you know, and you look at the messaging, and you look at the key items, and you look at the key collections, you know, and you look at the quality of the product, you know, the design, the quality design, and the quality of the make of the product, and you look at the value, the price, you know, value of that product, I think it's gonna disrupt a lot of people.

And so I think we're, you know, we're as confident as we've ever been. I think, you know, that's the timing. And then the unknown is: What does the housing market do? Is it flat? Does it go down another 5% or 10%, or do we get a bounce? You know, regardless of whatever happens with the housing market, we're gonna have a meaningful inflection point with the business and the brand. And you know, that's why we deployed the capital. That's why we bought back 17% of the shares, 3.7 million shares. And you know, so we like, you know, we like what we see early with the books here. We like, you know, our strategy. I think we're laser focused on this, and you know, I think we're gonna come out looking really good.

So that's how we see it.

Steven Zaccone (Senior Analyst)

Thank you, Gary.

Operator (participant)

Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Ari Gutman (Executive Director and Senior Equity Analyst)

Hey. Hey, Gary. Hey, Jack. My question, one question, maybe two parts, is: You mentioned product transformation and margin dilution. Is that all contained to 2023, or does some of it move into 2024? And then, Gary, to your point, if this market wallows a little, and we do have another downdraft, given that you have leverage, or the business has leverage now, or a little more than it's normally used to, do you operate anything differently if the macro just takes longer to come out and then maybe the curve is steeper in later years, but it's flatter in the medium term?

Gary Friedman (Chairman and CEO)

Yeah, I think, I think by this first half of next year, the inflection is, is gonna be much more significant than the macro. So I don't think it changes anything for us.

Jack M. Preston (CFO)

On the margin dilution, Simeon, I look, I think about it also just rel- where the margin or the discounting activity and clearance of that inventory will be in Q1 of 2024 versus Q1 of 2023. So-

Gary Friedman (Chairman and CEO)

Yeah.

Jack M. Preston (CFO)

Yeah, there's gonna be still some of that, in the first part of the year, but-

Gary Friedman (Chairman and CEO)

But there's gonna be... I think about it, you know, there's two things, right? You've got margin dilution from a product margin point of view, as we're transitioning the assortment, and but you're gonna have leverage and margin accretion, you know, throughout the model based on what we believe what will happen with our top line. So, yeah, I just think 2024 is gonna be a very good year, unless there is some kind of crazy crisis that, you know, we don't believe is on the horizon. You know, I think that, you know, I think, you know, the history would tell us if you know, things really got worse, that the Fed is gonna ease.

You know, like, if I look back at the last 20 years, I mean, the Fed's been very consistent. We've lived in a very long period of really low-interest rates with just a few slight blips, you know, that are high. I think the Fed, you know, will act in a way that will, you know, stimulate the economy again. So... And then housing will, at some point, housing will take off, right? You've got, you got a lot of pent-up demand. It's just that, you know, the demand can be super pent-up, but if the gap doesn't change, right? If either pricing doesn't come down or interest rate, yeah, doesn't change, interest rates have to come down. One of the two things happen.

If they both happen, prices come down and the Fed eases, you know, you can get a—I think we can get a really good bounce in the housing market. But, you know, we just can't control that. We have a point of view on it, you know, share our point of view. We, you know, look at a lot of things, and we've, you know, got a lot of data that we study. The key for us is, you know, it's like if you're, you know, if we think about the balance sheet, which we do, and, you know, we, you know, deployed a lot of capital. We have a lot of confidence in the model. You know, we're in the middle of a transformation.

It's not, you know, this is not by any means the first time we've done it. It's the biggest thing we've ever done. But, you know, our experience in making moves like this is deeper than anyone in this industry. And, you know, and, you know, we're laser focused on it, and, you know, we understand our balance sheet really well, and, you know, what our cash flow is gonna be like, and, you know, the timing of capital and, you know, outflows and, you know, and projected inflows, and we, you know, all kinds of downside models and know how to operate in any kind of environment, you know, any kind of difficult environment.

I mean, you know, so, you know, we, we don't, we don't, you know, fear the leverage, and we've had a lot more leverage on this business, and people have seen us navigate through, you know, those situations, you know, in, in a relatively uninterrupted, uninterrupted way, except for the, you know, the real depths of 2008, 2009, or, you know, something like that. So we, we feel great. And, you know, but I think the key headline, I'd say, you know, I, I just would be really... It would be shocking if we don't outperform whatever macro might happen in the first half of next year, unless it is so severe, you know, that it, it becomes some kind of a crippling thing across the economy. And I, I just don't think, think that's gonna happen.

I think the, you know, Fed's gonna do the things that the Fed, you know, usually does. And if we get any kind of stabilization or uptick in the market, like, we'll have an incredible year. So I think we're set up better than we've ever been set up in the history of the business. And I think we'll have, you know, the biggest inflection point we've ever had, is my view. By, you know, by Q2 of next year, you know, like it'll... There'll be an inflection point before that, but I think we'll peak when I look at all, you know, all the lines and, you know, I think about production and in-stocks and floor sets and all the, you know, all the transition moves we have to make.

I think that, you know, in the second cycle of the books, I think, you know, it will start to peak then, and then I think we're gonna have an incredible run.

Jack M. Preston (CFO)

Yep.

Operator (participant)

Your next question comes from the line of Steven Zaccone from Citi. Please go ahead.

Steven Zaccone (Senior Analyst)

Good afternoon. Thanks for taking my question. So I wanted to shift to the RH England opening. It sounds like it's, you know, a good, successful opening event, but it'll take some time to maturity. Do you expect the rest of your international openings to resemble this maturity curve, or is this the longest one since it's kind of your first? And then similarly, the letter confirmed nine international openings by 2025. Can you talk a bit more about the pace of annual openings for international going forward? Is three kind of the right number? Thanks.

Gary Friedman (Chairman and CEO)

Yeah. Let's start with the first thing. Well, one, RH England is unlike anything we've ever opened, not just because of an international perspective, but really, you know, the kind of location and our view of how we wanted to introduce the brand, you know, and when we wanted to introduce the brand, you know, when we wanted to introduce the brand in a very unique and unforgettable fashion. You know, just because the, you know, the US, you know, isn't really seen from a European perspective, when you think about design, taste, and style, luxury markets, so on and so forth, you know, that's not really the game we play really well.

I think I made the comment before, you know, the only true, you know, luxury brand, you know, we've had, I think, in the United States, you know, is Tiffany, and now the French own it, right? And all the luxury brands are from Europe. So how are we gonna go into that world and introduce ourselves? We thought that was really important. And so, and we also thought the timing, like, how do we kind of get the name known and establish ourselves in a unique way? And, you know, we could have waited and opened, you know, Paris first, or we could have waited and opened London first. We would have had to wait longer, and we came across this opportunity at this property, and we thought this could be something remarkable.

It could be a really great introduction for the brand. And, you know, I've always said that we've made the decision on RH England because of its location. You know, it's an hour and 45 minutes outside of London. It's in the Cotswolds. It's, you know, it's around, you know, wealthy and affluent people, but it's not around density. You don't have anybody kind of walking by this gallery, you know? Like, it's not... It is a true destination, and it's, and it's, you know, you kind of got to go out of your way, you know, but you're going to something that's spectacular that you've never seen before. So the impression of it is like nothing else.

You know, I don't want to make the wrong comparison here, but if you just think about kind of things that have went into the, you know, what I call the middle of nowhere and changed everything, you know, you think about Disneyland. Disneyland opened in the middle of nowhere. If you went back to when they opened, that's the middle of an orange orchard, and there was no one around, you know, no one, there was no population density anywhere near it, and it changed everything. If you think about, you know, Las Vegas, you know, Las Vegas didn't exist. You know, it was created. And I don't, I'm not trying to make a correlation that's, you know, exactly right.

What I'm trying to say is we're trying to create a brand, you know, at a level of the market that hasn't been created before. You know, and our view was that this was a decision that was more to drive a conversation than it was to drive commerce. We never thought this was gonna be a high-volume gallery, you know, but we didn't think it'd be no volume. You know, I think it's gonna be fine. I think it would take much longer. If you took anything like this and put it in London, I mean, it's gonna do multiple times, immediately, multiple times faster.

You know, it's a little inconvenient, but it's extraordinary, you know, and a lot of really extraordinary things in the world started as being inconvenient, right? It was inconvenient to get an iPhone, inconvenient to get a Tesla. You know, how long did people wait to get a Tesla? How long did people wait... You know, how long did they wait to get the new Roadster or the Cybertruck, you know? I mean, so, you know, it's, you've got to kind of think about, you know, what are the long-term things you're trying to do. You know, we're trying to, you know, shape the brand in a way that's, you know, brand has never been shaped before.

Introduce the brand to Europe, where the luxury brands are, and create the right conversation with the right people and create that right high halo for this whole thing, to then, as you introduce it in the other places, there's an excitement about it. They've heard about it. It's coming. They've seen, they've seen it posted. They've seen it written about. I mean, the press we've got on it was, is just incredible. It's multiple times higher than any gallery we've ever opened because it's something nobody's seen before, and it's given the world something to talk about. And we have really interesting and high-profile people showing up there, setting up appointments there, you know, and you know, wanting to do collaborations with us.

Some of the highest-end car brands in the world want to do car shows on our property and things like that. I mean, so, you know, I think it's just gonna open up all kinds of new opportunities and new conversations and new perceptions and possibilities for the RH brand. But it's not, it's not the gallery I would use to kind of say, "Oh, let me extrapolate what happens here." We don't have anything like this in America. You know, we don't have any kind of location like this, that's similar to this at all, you know? So, and that's why I think it's, it's getting so much conversation, but it's not the most convenient place to shop. We knew that going in.

You know, so this is really to kind of introduce the brand, create the right conversation, let it build, let's go through a winter, you know, let's go through, you know, a cycle. Let's see what we have to do. And remember, we haven't mailed a book yet in the UK, you know? So, you know, we've got very little advertising. We've got all the press that everybody's written about, and then we've, we've run a few ads in, you know, in some magazines and stuff like that. And so, I think in all the other locations we're opening are highly visible in, you know, in the major markets, lots of traffic in around them, you know, more what I'd call typical from a, a location point of view, not typical from, you know, a competitive or market point of view.

They're gonna be extraordinary galleries, you know, some more extraordinary than others. Some of the markets are more important. In some locations we took, you know, we took some of the Abercrombie locations that we might not have taken to get London and Paris because they were such incredible locations. And so, you know, there's some things that are smaller that we're not investing much capital to, but, you know, we're gonna open them and we're gonna learn. You know, but I say, you know, you can't use this as a proxy. It's not there. And I don't know if we'll ever build something like this again. We may, you know, but it's not what anybody would typically do.

But that's why everybody's so interested in it, and that's why they're writing about it, and that's why they're talking about it. And that's why the quality of people that are going there are people you just probably wouldn't—you might not have had them come as you open something ordinary, you know, but they're coming because it's extraordinary. But it's just, it's just one small piece of a much bigger, you know, much bigger composition and puzzle we're putting together to, to, you know, build the RH into, into a, you know, truly, you know, dominant, successful luxury design brand.

Steven Zaccone (Senior Analyst)

Second part.

Gary Friedman (Chairman and CEO)

Oh, the international opening cadence. Yeah, I think this is a start from the opening cadence. You know, I like our start. I think, you know, it's moderately aggressive, I think. So we, we've got... You know, we're planting a lot of flags in important places and, you know, really dominant, fantastic real estate, and we're super excited about it, you know. So, but I think we're gonna learn a lot in the next three years.

Steven Zaccone (Senior Analyst)

Thank you very much.

Gary Friedman (Chairman and CEO)

Sure.

Operator (participant)

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Brian William Nagel (Managing Director and Senior Analyst)

Hi, good afternoon.

Gary Friedman (Chairman and CEO)

Hi, Brian.

Brian William Nagel (Managing Director and Senior Analyst)

So my question, with regard to the buyback, you know, so you know, clearly stepped up the buyback significantly here in the quarter. So the question I have is, how should we be thinking about this? Was this, you know, more or less a kind of a one-time adjustment, or is it... Should we expect the buyback, you know, the buyback to stay aggressive here, you know, going into future quarters?

Gary Friedman (Chairman and CEO)

Yeah, what we had... You know, we communicate our intentions, you know, with every kind of, you know, buyback. We still have open-to-buy on the buyback, I think a few hundred million, $700 million. And so, I think we made a relatively aggressive move here. And it's, and, you know, we think we bought the, you know, we bought the, 17% of the business at a really attractive price. And I think our, you know, our shareholders are gonna benefit from that. And, you know, if we're right with our view of, you know, the next couple of years, it's gonna look like a really great investment. You know, how aggressive we'll be in future quarters? I don't, you know, I think you've, you know, you've looked at us historically.

You know, we're, we're kind of optimistic. We're not, you know, like a big corporation that sets up a, you know, regular buyback every quarter and stuff like that. I mean, I, you know, if that was so smart to do, Warren Buffett would do it, right? You know, Warren Buffett is a very opportunistic, you know, repurchaser for their stock, you know, and, you know, we're try to be opportunistic, investors, you know, whether it's in our stock, whether it's in anything that we do. So, so we think this was a great time, to deploy capital and buy back a meaningful, position in our company. And, you know, it depends what the market does, depends on what we see and how we feel, you know, what we'll do in the future.

Brian William Nagel (Managing Director and Senior Analyst)

I appreciate it. Thanks, Gary.

Gary Friedman (Chairman and CEO)

Sure. Thank you, Brian.

Operator (participant)

Your next question comes from the line of Curtis Nagle from Bank of America. Please go ahead.

Gary Friedman (Chairman and CEO)

Hi, Curtis.

Curtis Nagle (Director)

Great. Hey, Gary, how are you doing? Thanks for taking the question. So I just wanted to go back on the point you mentioned the shareholder letter just about, you know, some of these early signals that, you know, we're reading pretty positive from the Source Book launch, right? Like you said, still early, but can you just elaborate just a little bit in terms of, you know, what you meant? You know, are we seeing more people come back to the brand? Are we seeing conversion rates go up and a larger order size? Would just love to, you know, hear a little bit more about yeah, some of those findings in detail, if you could.

Gary Friedman (Chairman and CEO)

Yeah, well, we, you know, look, the new collections that we think are the meaningful collections are acting like they're gonna be meaningful collections. And, you know, the markets that, you know, the books are getting into, you know, look good. You know, the responses look good. And so, you know, you just got to see it over a period of time. You know, our business isn't... Our business is a, you know, it's driven mostly by events. It's driven by people buying a new home, remodeling a home, or deciding to redecorate a home, all of which don't happen very often, right? So it's a, you know, it's a very high transaction value in business.

So if you look at our customers over a period of several years and take their peak day, they spend roughly, you know, 80%-85% of what they spend with us in a kind of a 90-day period, right? And then they spend very little, if you look out the next couple of years on the end. So, you know, you've got to kind of get them when they're buying, and that's why, you know, the business will get us impacted more than others during a, you know, a cyclical down market like this. And look, we know when we exited, you know, the holiday businesses, you know, and all the, you know, whether it's the Halloween business and the Christmas business and the accessories business, you know, we're not very dominant in those businesses.

We used to be and, you know, in a down cycle, we wouldn't take as big of a hit because people are still buying the small things. You know, we don't sell really much in small things, and we don't sell any kind of seasonal holiday stuff, right? So, you know, we'll take bigger hits than other people in these down cycles, but we'll have bigger ups in the up cycles and, you know, because of the mix and stuff like that. So, but you're not gonna see people, you know, right away, you know, like the books won't hit, and you're not gonna see the full potential. You need to let these books kind of get in and, you know, usually we get ramped in a book by three months.

You know, we hit kind of ramp rate, and that's if in-stocks, you know, happen well and so on and so forth, and things, you know, build and so on and so forth. Well, but we like everything we see. You know, I mean, we really do. I mean, the early signals are good, and we just want more time, and we wanna, you know, transition and set a few stores with some of the new goods. We want in-stocks to build. You know, we've got a lot of new things that, you know, some look like they're gonna be runaways, and so, you know, you got to say: Okay, how do I get in front of that? And how do you reallocate production time? And so on and so forth.

You have some things that are... You know, you're always gonna have the things that outperform what you think and underperform what you think. So, you know, you take all the pluses, minuses, and aggregate those, but then focus your efforts to optimize, you know, your real winners and, you know, but everything, real early, everything looks, I'd say, real good for only 40%. So just keep that into context. I'll have a lot more to say next quarter, and if something really is meaningful enough, maybe, you know, we talk to everybody or do something sooner. You know, we'll see. You know, I mean, this is... You know, we're very early, and, you know, we're very positive, but we're still in a, you know, not so positive housing market and environment.

So, you know, it's gonna be a, you know, conservative tone to a degree, but we'll be a lot smarter, you know, in another eight weeks, and then, you know, we'll have enough information to make moves to kind of, you know, think about, you know, investments in the first half of next year from a mailing perspective and, you know, how big, how deep do we go? How right are we? And how big do we go? But we're gonna be some degree of right here. This is not – this is not gonna be a swing and a miss. I mean, I don't want to jinx anything, but, like, we've been doing this a long time and, you know, we're good at reading the data.

I think it's to the, you know, what degree of really good to great is the outcome? You know, and then what's that worth as a reset, and then, you know, and then how do you compound on kind of that reset?

Curtis Nagle (Director)

Got it. And if I may, just a follow-up, international. So you've got, Munich and Düsseldorf coming up, right, I think, you know, technically within four months, just, you know, looking at the, newsletter. How are you feeling about those openings? I guess, just curious, why lead with those two cities?

Gary Friedman (Chairman and CEO)

Yeah, those are just-

Curtis Nagle (Director)

Yeah.

Gary Friedman (Chairman and CEO)

Smaller ones. Yeah, smaller ones that don't have a lot of capital, you know, like, you know, the-

Curtis Nagle (Director)

No hospitality.

Gary Friedman (Chairman and CEO)

No hospitality or anything, right? So those are, you know, some locations that we thought, you know, the locations were decent. It'll give us some, you know, without putting a lot of capital in, just give us some feedback, get the brand out there. I mean, look, I mean, Abercrombie didn't have any bad locations. These were just, you know, but, you know, we think we're gonna get-- we're gonna learn and get information, right? And then we'll decide, you know, how long might we stay in these locations, you know, because we've acquired some leases and, you know, are there bigger, better places to go, and, you know, what do we do? But I think one of the key things is just kind of get the brand out there and, you know, in a good way.

But the real key was: What did we do first? You know, when people met us or heard about us, what did they hear? What did they get pointed to? How did they think? You know, so now we've kind of done that. You know, I don't think people will think Munich and Düsseldorf aren't beautiful galleries. They're just not gonna be at the level of London and Paris and Milan and, you know, some of the other ones we're doing, you know. So, but you know, like, you know, there are locations that we were required to take to get some of the really key locations that we really wanted, and that was central London and the Paris location.

So, we think these are fine, you know, kind of, let's get going. Let's learn. Let's see how the business builds. Let's, you know, quickly learn how to operate in these different countries at a relatively low investment and much, much lower effort than doing, you know, the really big ones with a lot of work that take multiple years and that have hospitality and other, you know, other levels of complexity. So.

Curtis Nagle (Director)

Got it. All right. Thanks, I appreciate the thoughts.

Gary Friedman (Chairman and CEO)

Sure.

Operator (participant)

Your next question comes from the line of Seth Basham from Wedbush Securities. Please go ahead.

Seth Basham (Managing Director and Director of Research)

Thanks a lot, and good afternoon. My question is around margins. How should we think about the product margins on the new product line, if you plan to be much sharper on pricing? So are you thinking about consolidated gross margins in the mid-40% on a run rate basis going forward?

Gary Friedman (Chairman and CEO)

I think we'll, you know, we'll have more to say. I think we believe long-term emergence can, you know, can be at our historical highs. I think we've got to, you know, we've got to kind of win some share, you know, some share here, and we got to play a little offense and just, you know, be sharper. So, you know, there's some, you know, there's a few points of investment we're making there, but, you know, we'll, we'll, we also have places where, you know, we're playing aggressively, but our margins are at historical highs, you know. So it all tends like, you know, what we're targeting, how we're targeting, you know, certain categories. Yeah, so-

Seth Basham (Managing Director and Director of Research)

So, more to say that-

Gary Friedman (Chairman and CEO)

More to say. Yeah-

Seth Basham (Managing Director and Director of Research)

Yeah.

Gary Friedman (Chairman and CEO)

Let's, you know, let's see how these books do when they get in. Let's see what's performing. Let's see what, you know, what we're responding to. You know, there's gonna probably be places where, you know, we're, you know, we've taken pricing that's really sharp. There may be places we're gonna take pricing up, right? We've already got one collection that's, you know, kind of through the roof. Looks like our best collection ever, and we're gonna probably take prices up this week. So, you know, just because we've got so much demand, and we, we think we can, you know, the product is still gonna be positioned at a, at a disruptive value. We've probably just swung the pendulum a little too far, you know, on some.

But, you know, it's, you know, this is, you know, the business we're in, you know, it's, you know, it's day to day, week to week. You're learning, you're getting data, you're, you know, rethinking things. You're, you know, you know, everything you do when you buy, you know, new product is speculative, you know, based on backwards-looking data, you know, so you're never... You know, everything we buy, you know, is 100% wrong. You know, we've never bought anything, and we go: That's exactly how it's selling. That's exactly right. You know, so you're always adjusting, right? You're getting real data, real information, and then you're learning from that, and you're extrapolating that, and you're making the next best decision.

So, you know, I wouldn't jump to any conclusions just because of our, you know, what I call more short-term view of, you know, just trying to transition, you know, the, you know, from the, from the current kind of products to the, you know, the, the new, you know, the next generation products and, and, and, you know, and playing offense from a, a disruptive value equation point of view. It's how we got here. You know, I just think, you know, it's probably we should have, you know, kept that edge the way we did and, and...

But, you know, you go through a period where you're in COVID and, you know, your business is running at 40% and, you know, your prices are going up, and, you know, you went through, we went through multiple rounds of tariff increases and price increases and supply chain increases and, you know, COVID increases and ocean freight increases and, you know, and, you know, and I think, you know, it. That's why, you know, I made the comments I did at the end of my letter, you know. Like I think we're finally at the point of everything that kind of like made everything go up with COVID is one, the kind of the backside of the cycle of everything going down and everybody's...

Everything washing through, and I think if you just, like, kind of take those years and say: Okay, what are the best things I learned? Let's now get them out of the way. And you got to kind of rethink about, you know, your business. But you know, I think you know, I just wouldn't make any long-term assumptions based on anything that's happening, you know, on a short-term basis right now, you know, in this transitionary period. I think I think you'll see us return to a really good model. If we get the, the, you know, the inflection that we believe is gonna happen in the top line, especially, you know, where we think it'll peak as we get into kind of the first half of next year, you'll see our whole business model snap back.

Seth Basham (Managing Director and Director of Research)

Right. But just to be clear, Gary, so the margins, the product margins on the new product that you guys are launching over the next, say, six to nine months, it's gonna be lower by a few points than what you are earning on products during the pandemic. And then the real benefit to gross margins could be from volume, improved volumes?

Gary Friedman (Chairman and CEO)

You know, that's not necessarily, you know, so,

Jack M. Preston (CFO)

We were in that specific-

Gary Friedman (Chairman and CEO)

Yeah, yeah.

Jack M. Preston (CFO)

We don't guide gross margin, as you know, we don't disclose product margins. So we're trying to tell you just a directional flavor. And I think just to recap a little what Gary said, you know, some products are going to be higher, some products are going to be lower. We're not making a general statement. You know, I, I'll just, you know, you can roll back the tape on what Gary said as far as the investment we're going to make. That's right. But as far as, like, what the future is going to look like, let's just let that play out and, you know, we're going to make margin commentary, especially gross margin commentary, after each quarter's results, because, again, we don't guide that particular line.

Seth Basham (Managing Director and Director of Research)

Understood. Thank you, guys.

Jack M. Preston (CFO)

Thank you, Seth.

Operator (participant)

Your next question comes from the line of Max Rakhlenko from TD Cowen. Please go ahead.

Maksim Rakhlenko (Managing Director)

Great. Thanks a lot. If we were to bucket your initiatives over the next 12 months into U.S. gallery openings, European openings, and then new product introductions, how would you rank order their magnitude? Then, just for clarification, how much of a refresh inside the gallery should we expect, both over the next 1-2 quarters and then a year from now, both in terms of new products as well as the number of galleries that the new products will hit? Thanks a lot.

Gary Friedman (Chairman and CEO)

Sure. You know, like, take the product, and the product is by far the most important thing we're doing, right? And, you know, the new openings and building out the platform, those are, it's the platform for the product. So what we're doing with the product is gonna make the most meaningful impact, you know, over the next several years. So, you know, when you think about the investment in gallery floor sets, we just began setting RH Marin next to our headquarters. And, you know, we'll all see it, you know, over the next... You know, as it gets fine-tuned over the next couple of weeks, as kind of a phase one move of it.

We have kind of, right now, phase one and phase two, and then we'll have a phase three. I think you'll see, you know, the majority of the galleries reset, by Q1, you know, of next year. And as we-

Jack M. Preston (CFO)

All the galleries.

Gary Friedman (Chairman and CEO)

Yeah. Yeah, all the galleries, yeah, you know, reset. And then, you know, you'll have some winners and some losers in kind of the product mix. And, and as we nail, nail the, you know, the Modern books going in in January, I mean, you're going to find out there's some things in Modern that are probably really good and you-- better than some things we might have just rolled out into the galleries, and you'll make some adjustments. But I'd say we'll be, you know, by Q2 of next year, we'll be really educated. You know, you know, especially by the late Q2, we'll have had two cycles of drops. We will have a lot of newness.

We'll have kind of first phase, a major phase, second phase, still. I, you know, not as major as the first phase, but, but still more meaningful than normal. And, you know, we'll have had a good period of time to measure and have seen phase one of the product transformation and, you know, first drops, and then, you know, we'll have some data on this second cycle, and we'll be fully ready for the second half of next year. But, you know, and to kind of keep optimizing it, right? Because we're going to just get a lot of data, a lot of information, be making a lot of adjustments. And, you know, we'll keep doing things that kind of, what I'd say, build the trend. When you go through a big move like this, it's...

You know, you're going to get some of it really right, and you're going to get some of it wrong. You know, you know, it's—as long as you're, you know, throwing more things above the line than below the line, you know, then you're going to learn, and then you, you're going to make adjustments, and those adjustments will move the business higher, right? So I'd say, you know, we'll hit max inflection in Q2. Doesn't mean we'll hit max run rate. When I talk about the inflection, I talk about the early inflection, then we'll build on that, right? So, you know, I would assume that the first half of next year will be very good, and the second half of next year will be better than the first half. Yeah.

Operator (participant)

Your next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Brad Thomas (Managing Director)

Hi, good afternoon. I was hoping to follow up on the topic of operating margins and just hoping we could maybe frame up, you know, some of the puts and takes. You know, obviously, the full year implies kind of this mid-teens level for the operating margin. Can you help us think about maybe your latest thoughts on structurally, what the operating margins look like, in this world where you're opening up stores internationally, in this world where, you know, you have new product coming out, there's more Source Books. You know, what do you think sort of normalized margins start looking like as you get back to revenue growth again? Thanks.

Jack M. Preston (CFO)

You know, I don't think, Brad, we're ready to talk about that. You know, I think, you know, we're talking about some, you know, short-term changes, near-term impacts to the margin, and, you know, and especially moves related to, you know, and making some investments due to competitive reasons, you know, as Gary had talked about. So, you know, what the other side of that looks like, you know, we have our discussion with you about each year's guidance in March, so we'll do that, and give you a better look then.

But as far as, as we sit here at the end of Q2 and, you know, the many sort of changes and levers we're planning forward with, we just don't have that visibility or that ability to tell you what the steady state looks like, other than, you know, as revenue grows and we get leverage in the business, we expect margin to increase from here. I mean, that, you know, where that baseline level is, you know, I, you know... I'll let Gary chime in here, but.

Gary Friedman (Chairman and CEO)

No, I think that's correct. You know, again, I think, you know, we're, we're giving you colors today, you know, maybe slightly more different or a different angle on the color than, than what's written in the letter. But, you know, we, we don't want to kind of talk about things that we don't, that we haven't really released, right? And, you know, we're not really releasing kind of that far out. But, you know, all of us on this call are gonna, you know, know a lot more next quarter and the next quarter, and, and, you know, we're either gonna be, you know, more right or more wrong. We think we're gonna be more right than wrong, and we'll you know, everything that we said, we believe in.

And it's, you know, it's, you know, it's, you know, there's some level of speculation, of course, but there's, you know, there's a lot of data, you know, that we have based on doing what we're doing, you know, introducing newness, nailing, you know, nailing Source Books, resetting floors. We know all the lift factors and what will happen if we do this, that, and we're directionally usually right on those things, you know? And so we've, you know, we've been rusty, we've been somewhat out of the game, and we're gonna come back into the game in a very impactful way. So, yeah, we're looking forward to kind of, you know, getting the data. But the look, the good news is the early data doesn't look bad. It looks good. So, so far, so good. That's as much as we know right now.

Brad Thomas (Managing Director)

Well, Gary, maybe if I could ask you another way. When you did some significant share purchase back in, I think it was 2017, you later described that time as a period where, you know, you'd kind of taken your car off the racetrack and done a lot of surgery on it. Does it feel like it's that significant of a time for you, as you think about how you're positioning the company?

Gary Friedman (Chairman and CEO)

Yeah, bigger than that. We've redesigned the whole fleet of cars. So it's really the biggest repositioning of the business we've ever went through. And you know, I think the best work we've ever done. You know, so it's much bigger. I think it's gonna be much more significant than that. And look, we've just bought back a lot of stock. We've played it... You know, we've put our money where our mouth is, right? We took a really big position in the stock, and you know, we've allocated $2 billion. That's twice as big, I think, as the buyback back then, you know.

So, so we wouldn't have done that if we weren't confident, you know, and our, and our board wouldn't have let us do that unless they were confident, right? So this, you know, this is a fully informed kind of position we're taking from a, you know, an investment perspective on, on inventory, on, you know, share repurchases. But, you know, we're not a new team. You know, it's, it's an experienced team, it's an experienced board. Like you said, we've, we've done this at, you know, just, you know, at a smaller magnitude. We were a smaller company, too, you know, so we're a bigger company taking, you know, placing a bigger bet. So, you know, I kind of like where things are. I think, look, there's... Everybody's speculating, right?

Like, if you just, like, just look at what's happened in this quarter. You know, we, our stock started this quarter, you know, the day after earnings, $274 a share.

Jack M. Preston (CFO)

Two forty-seven.

Gary Friedman (Chairman and CEO)

Yeah, 247. Yeah, $247 a share. You know, at the end of Q2, it, you know, ended today at 369. It peaked at 402. You know, it went up 49%, and it peaked at 63% up within a quarter, with the only information and disclosures was we bought back 17% of the shares. So everybody could do the math, you know, about how many shares we bought back. And because there's new disclosures that have to be made every time my ownership goes up by 1%, you know, there's a lot of disclosures. It's, there's a lot of, lot of, lot of filings. And, so, you know, you would thought, "Hey, you know, they're buying back, you know, this, the stock, stock go up 17%, does it go up 20%?

Does it go up 14%?" I mean, it went all the way up 63%, you know, and, you know, at the end of today, it was up 49%.... and after hours, you know, it's still up 36%, even though it's down, I don't know, 28. What's it now? 28 points down, something like that. You know, they just flashed it, you know, over here a second ago. So, you know, and, and, you know, and yeah, people are like, "Wow!" You know, it's like, wow, is it a bad day now? Was it a bad day? I don't know. We've had a million good days and a million bad days within a quarter here. Not a million, but, you know, like so many, so much volatility in the market, because so many people are guessing, you know, like, what's next? What's this?

When, when's the Fed gonna ease? What... Oh, they're buying back stock. What does this mean? You know, and, I would just say, you know, stay focused on what we write. You know, you want to know what we mean? Reread the letter. You know, that's why I write these letters. You know, so it's on there. You know, it's not random, you know, comments from a conference call that can sometimes be less focused and, you know, you know, you know, just, you know, everything... I spent a lot of time writing those letters, and, you know, and, you know, the team and I spent a lot of time together, you know, saying, like, crafting what we believe is the best version of the truth and what we believe is going to happen with the business.

We're not going to always be right, but yeah, we have a pretty good track record over a long time. And so, but it's a lot, you know, it's just a lot of volatility. It's a time of speculation, right? When, you know, are the, is the Fed going to ease, or are they going to tighten? Is, you know, the housing market bottoming? Is, you know, is the pent-up demand, is there going to be more inventory? Is, you know, as it relates to, you know, to our market, you know, and, you know, and, you know, is RH's new books going to work, or if the goods are going to be, you know, is the customer going to accept the goods? You know, where are the margins going to be at? All kinds of stuff.

We just put out a release today that confirmed the year's numbers, confirmed them, and the stock's down $30 in after hours. I don't think any of it made sense going up. I don't think it makes sense right now going down, but maybe, maybe it does, just to kind of say, "Hey, where should it be?" but, yeah, but we're all kind of, you know, looking at the same information. I mean, that's the funny thing. you know, so I'd say, you know, you know, it's like one of the things you learn if you, you really study Warren Buffett, there's a real long-term, consistent view about how they operate and what they do. And, you know, we try to learn from people like that or Bernard Arnault and, you know, and how he's built LVMH and, you know, how people have built things.

Even if you look at, like, a lot of people think that there's so much inconsistency with Elon Musk. See, I see consistency. He consistently innovates. He consistently keeps innovating, and so has he ever hit a, you know, a launch target on anything or an intra target? No, he consistently doesn't, because he doesn't manage the business. He leads the business, and he innovates consistently. And so there's always gonna be kind of more fluctuation short term, but long term, he's building one of the most incredible businesses the world's ever seen. And so I, I always just kind of stand back and look at the long term. I, you know, I hear people snipe at Elon Musk. "Oh, he bought Twitter, and that's stupid. He turned it into X," like, whatever. Those are little sideshows.

The guy is building one of the great companies in the world, you know, like, you know, people say: "Oh, he lost his head of HR, or he lost this." Like, now, if you look at it over a number of years, he's building one of the best things in the world, and anybody that's bet against him has lost a lot of money. And I think, you know, we're, we're just trying to build one of those great things. And so we, you know, this, you know, we... Again, we just try to stay focused on the long term, learn from all the short-term data, you know, but don't overreact.

We know we made some mistakes, you know, and we know we were arrogant in pricing, and we know we kind of, you know, our muscle atrophied a bit in new product introductions and, you know, and trying to ramp back up, you know, wasn't our best work. You know, we learned from that. We're going to snap back from that, and you will see us not only snap back, you'll see us better than you've ever seen us. And I feel real confident, like. So we'll see how it plays out. We'll see how, how right we are.

Operator (participant)

Your next question comes from the line of Jonathan Matuszewski from Jefferies. Please go ahead.

Jonathan Richard Matuszewski (SVP of Equity Research)

Great. Good evening, Gary, Jack, and thanks for taking my question. It's on the Contemporary business. In the past, you referenced a billion-dollar milestone over three years. Just hoping to see if we could get an update on how that business is looking today as more product has been rolled out across the galleries, and, and how we should maybe think about the run rate of that business, maybe by the time of, you know, early next year, which would be a couple of months after the October Source Book mailing. Thanks so much.

Gary Friedman (Chairman and CEO)

Yeah, I think about the totality of what we're doing here. I wouldn't just isolate Contemporary, right? Contemporary is a new book. Do we think it's going to be a billion dollars? Yes, we do. You really gotta, you know, you just gotta look at this whole thing in concert, right? The biggest book is our Interiors book. It will continue to be Contemporary, Modern be number two, Contemporary number three. Contemporary might ramp bigger than Modern. We may make decisions like... You know, a lot of times, you know, what exactly goes in Contemporary versus what goes in Modern versus what goes in Interiors can be somewhat subjective.

You know, like there's sometimes some blurred lines that are gonna be there. You know, I'd say, you know, I wouldn't go kind of micro like that right now. I think you'll miss the bigger, the bigger idea. The bigger idea is the totality of the product transformation we're making, and I think about it is, you know, we're gonna mail about 1,200-1,300 pages of product, and across that, 70%-80% newness. I think the next biggest book that competes with us is 228 pages. We haven't mailed anywhere near this number of pages in a long time.

And we've never had this much new product hit a market like this at the, you know, the design quality, you know, the quality of the make and the, what we believe, the value equation. Anytime we've done anything like this, we've moved the business meaningfully, you know, and so this is the biggest thing we've done. I think it will be the biggest... The most meaningful thing that we've ever done strategically. It will reset the company for the next five years.

Jonathan Richard Matuszewski (SVP of Equity Research)

Appreciate the color, and best of luck.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Stephen McManus from BNP Paribas. Please go ahead.

Stephen McManus (VP of Equity Research)

Hey, afternoon. Thanks for taking the question. So I had a question on, on suppliers. We're seeing more and more suppliers go out of business here, a pretty big one on the high-end side last week. So just curious what you're seeing, you know, with respect to the financial health of some of your key suppliers. Any, any challenges that you're facing right now that's worth calling out?

Gary Friedman (Chairman and CEO)

Yeah, I mean, you're probably referencing one of our suppliers that, you know, filed for bankruptcy, Mitchell Gold + Bob Williams. Really terrific people. It's just an unfortunate thing. I think, you know, they, you know, went through some private equity hands and, you know, there's some. You know, they stepped back from the business and, you know, had some wrong leadership, made some bad decisions, and it kind of goofed up the company. And, you know, there's, you know, there's, I don't know, probably 30-40 million of, you know, demand with them. We can resource it all pretty easily. We don't, we don't see any meaningful interruptions or anything. You know, they're, they're not one of our big suppliers.

So, you know, I think it just goes to show, you know, how hard it is to do every part of the business, right? When, you know, they were typically a furniture manufacturing company. They, you know, really great aesthetic, great marketing, great style. They got into the retail business, too, and, you know, that added a lot of complications. You know, it's hard when you try to do both. You try to be a wholesale business, a retail business, you know, manufacturing business. You know, you're kind of in, you know, three kind of complex businesses right there. So, you know, I think, you know, there's always gonna be some people that, you know, that kind of don't make it through different down cycles like this.

You know, could there be more? There could. There could be more on the retail side. There probably will be. But, yeah, we, we don't see any real fundamental, fundamental risk to our business that's, that is gonna be meaningful. Otherwise, we would've talked about it in disclosure.

Stephen McManus (VP of Equity Research)

Got it. Appreciate the color. Thanks, Gary. Best of luck.

Gary Friedman (Chairman and CEO)

Sure. Thank you.

Operator (participant)

Your next question comes from the line of Michael Lasser from UBS. Please go ahead.

Michael Lasser (Equity Research Analyst)

Good evening. Thanks a lot for taking my question. Gary, is it right to interpret your statement that you expect the business to inflect in the first half of next year, to mean that it's going to flatten out in the first half of next year, before resuming a growth trajectory in the second half of next year? And my follow-up question is: Would you expect, based on everything that you know today, that your totality of investment spend, independent of it's gonna be in the gross margin or in the SG&A, is gonna be greater than, equal to, or less than what you're spending this year? Thank you so much.

Gary Friedman (Chairman and CEO)

Sure, sure. So, yeah, let me, you know, just try to be real clear and direct that, we expect the business to inflect in the second half of this year, right? Meaning, and when I talk about inflection, what does that mean? That means a meaningful move in trend, and this means to the upside, right? So we think our business will inflect and our trend will change to the upside. Vis-a-vis where we've been trending, where, how the rest of the market's performing, we think we'll have an inflection that will make a meaningful move against all those metrics, right? We'll inflect up against our trends, we'll inflect up against the market trends, we'll inflect up against the competitive trends. We think we will reach kind of a peak of that inflection, of this first phase in, you know, from these books.

We think we will hit that in the first half of next year. So I'd say think about an inflection happening here, you know, over the rest of this year, we'll inflect up. And then in the first half of next year, there'll be another kind of inflection above whatever that run rate is, right? And that's against our trends, against the industry's trends, against our competitors' trends. And then as we cycle and get into the second half of next year, I think we will build on that trend, but it may not be as big of an inflection, but it will be a building of momentum.

Again, kind of disregarding any kind of meaningful, you know, meaningful thing that happens in the economy and whatever happens in the economy, I would be surprised if it's more dramatic than our positive inflection, right? So if the market goes down, some step down, our inflection point will be bigger than that step down. Does that make sense? Is that more clear?

Michael Lasser (Equity Research Analyst)

I think I catch your drift. If you've been trending down high teens, low 20% range, the inflection is: Look, we're not gonna be trending down at this range. The counterargument would be, well, you know, it... You're gonna be facing easier comparisons. It's hard, it's harder for us to dissect how much is due to-

Gary Friedman (Chairman and CEO)

Yeah.

Michael Lasser (Equity Research Analyst)

Just the market getting better. You go.

Gary Friedman (Chairman and CEO)

Yeah, yeah. No, no, you, you just got to think about, think about all those things I just said. What's the industry doing? What are the key competitors doing? What are we doing? We're gonna inflect against all of that, right?

Michael Lasser (Equity Research Analyst)

I-

Gary Friedman (Chairman and CEO)

It's not just our trend.

Michael Lasser (Equity Research Analyst)

I-

Gary Friedman (Chairman and CEO)

Our trend will be one of those-

Michael Lasser (Equity Research Analyst)

Got it.

Gary Friedman (Chairman and CEO)

elements, but we're gonna inflect against the industry, we're gonna inflect against the key competitors. That's, that's how to think about it.

Michael Lasser (Equity Research Analyst)

Okay. And, and then on the,

Gary Friedman (Chairman and CEO)

But what I would say, just let me-

Michael Lasser (Equity Research Analyst)

Twenty four.

Gary Friedman (Chairman and CEO)

Let me just finish that. Which means we'll be taking market share, right? So, right. So I, I think we've been giving market share. We will go from giving market share to taking market share.

Michael Lasser (Equity Research Analyst)

That's clear. And then as you think about 2024, will the magnitude of the investment that you're making be larger than, smaller than, or equal to this year?

Gary Friedman (Chairman and CEO)

We haven't guided to that yet, so yeah, we're not prepared to kind of talk about that.

Michael Lasser (Equity Research Analyst)

Okay. Thank you very much and good luck.

Gary Friedman (Chairman and CEO)

Great. Thank you, Michael.

Operator (participant)

Your next question comes from the line of Cristina Fernández from Telsey Advisory Group. Please go ahead.

Cristina Fernández (Managing Director and Senior Research Analyst)

Yeah, hi, good afternoon, everyone. I wanted to go back to the advertising spend and the shift you're making to the you know, twice-a-year cycle. Like, does this mean you go back to you know, 4% of sales spent on advertising? I know you know, the last couple of years was very low. Or with the product introductions you're making and the new store openings in Europe, does it make sense for that spend to be you know, to be at a higher level? Just want to get a sense of directionally, where that spending goes.

Gary Friedman (Chairman and CEO)

I don't know yet. We'll know a lot more when we see the inflection in the business.

Operator (participant)

We have no further questions in the queue at this time. Gary Friedman, I'll turn the call back over to you for closing remarks.

Gary Friedman (Chairman and CEO)

Great. Thank you, operator. Thank you everyone for your time and interest. You know, thank you to Team RH for your leadership and efforts. Your hard work is gonna pay off. And thank you to all our partners around the world who are, you know, part of this team. Your support and efforts mean the world to us. I can tell you all, all three constituencies that are all probably listening in to this call. I think share the sentiment that we shared with you today. I don't think we've ever been more excited about the future, and I believe we'll demonstrate that to the other constituencies, and that's the shareholders that are on this call. So, thank you everyone for your time and attention today.

We look forward to the next few quarters. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for your participation, and you may now disconnect.