RH - Q2 2025

Transcript

Operator (participant)

Good day, everyone, and welcome to today's RH second quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison Malkin (Head of Investor Relations)

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal twenty twenty-four 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 G. Friedman (Chairman and CEO)

Great. Thank you, Allison. Good afternoon, everyone. Thank you for joining our call. I will start with our prepared comments and shareholder letter and then open the call to questions. To our people, partners, and shareholders, we are pleased to report that demand was up 7% in the second quarter and has continued to inflect positive, gaining momentum each month, with July finishing up 10%. Demand accelerated into the third quarter, with August up 12% and product margins inflecting positive despite operating in the most challenging housing market in three decades. Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America while building the foundation for our long-term global expansion across Europe, Australia, and the Middle East over the next decade.

While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry. Vectors are measured in magnitude and direction and can be more effective in forecasting strategic separation and future market share gains. It is now clear that our vector is increasing by both measures, as we are outperforming the industry by 15-25 points. We expect our performance will continue to gain momentum in the second half of 2024, fueled by our multi-year effort to elevate our product and multi-decade effort to elevate and expand our platform.

We are also pleased that results for the second quarter reflected our guidance with revenues of $830 million, up 3.6% versus a year ago, adjusted operating margin of 11.7%, and Adjusted EBITDA margin 17.2%. While aggressively investing into a downturn has put pressure on short-term results, it has also positioned RH to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. We believe our demand performance demonstrates we are the best-positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower, closing the affordability gap that has suppressed the market for the past several years. "Every act of creation is first an act of destruction," Pablo Picasso.

We've worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry. Our product transformation plan for the second half of twenty twenty-four includes the second mailing of our RH Interiors Sourcebook, which arrived in homes mid-July through mid-August and is fueling our industry-leading demand. With new collections and improved in-stocks, our demand should continue to build throughout the second half of 2024. Post-analysis of our circulation data, we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern books to optimize overall mailing depth and efficiency.

Mailing fewer, more meaningful books enables our brand to break through the compounding clutter across the consumer industry and is aligned with our gallery strategy of fewer, more immersive and brand-defining physical experiences. The second mailing of the new RH Modern Sourcebook is scheduled for November, with additional new collections and an expanded assortment, including the contemporary book consolidation. Again, we believe our expanded assortment and improved in-stock position will provide an additional lift to our business in the fourth quarter. The third mailing of the new RH Interiors Sourcebook is planned to be in homes early January through February, capitalizing on what is traditionally one of the largest selling seasons for furniture, post-holidays, consumers, and designers returning from holiday travel. This mailing should help generate a strong finish to 2024 and continue the momentum as we enter next year.

As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past eight years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of its revenues from the trade market, selling to architects, designers, developers, and builders. While RH has a meaningful trade business, the vast majority of our revenue is generated by consumers. We believe there's a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we have expanded other trade-focused businesses and brands over the years.

Our plan is to launch with a 3,000 sq ft Waterworks showroom in our largest new Design Gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid- to high-teens EBITDA margin that we believe has the potential to become a $1 billion global brand on our platform. Let me shift your attention to the elevation and expansion of our platform. We continue to open the most inspiring and immersive physical experiences in our industry, and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry, and perfect proportions. Spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality.

Spaces with garden courtyards, rooftop restaurants, wine and barista bars. Spaces that activate all of the senses and spaces that cannot be replicated online. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multibillion-dollar opportunity. Our platform expansion plans for the second half of 2024 includes RH Newport Beach, opening in November with over 90,000 sq ft of indoor and outdoor space spread over four floors with views of the Pacific Ocean, will be one of our most dramatic, immersive, and brand-defining physical locations to date, and will replace three legacy galleries in the region. With a 260-seat indoor-outdoor rooftop restaurant with uninterrupted views of the California coastline, two wine and barista bars, an interior design atelier, our first Waterworks showroom, and the most expansive luxury outdoor furniture assortment in our industry.

RH Newport Beach will be an inspiring destination in Southern California market and has the potential to become our second $100 million-plus gallery. RH Raleigh, also opening in November, features 50,000 sq ft of indoor and outdoor space over 3 levels with a rooftop restaurant, garden courtyards, a wine and barista bar, and an interior design atelier. RH Montecito, opening in early December, is a reimagination of the historic firehouse in the charming enclave, just above Santa Barbara, California, featuring an indoor-outdoor courtyard restaurant with fireplaces and fountains, a wine and barista bar, and an interior design atelier. The opening of our first RH interior design office in Palm Desert, California, this November. We believe there is an opportunity to address new markets locally by opening design offices in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation.

The Palm Desert location is a unique test of a consumer-facing professional interior design office, separate from a gallery. Our goal is to establish the RH brand as a leader in the world of professional interior design and enable us to attract the highest caliber of interior designers in the industry. As we look forward, we anticipate an inflection of our business in Europe as we begin to open in the important brand building markets of Paris and London in twenty twenty-five, and Milan in twenty twenty-six. It is then we will begin to have the scale to support the advertising investments necessary to build our business across Europe. We're looking forward to discussing our global expansion in further detail once we open those important markets.

We are also making meaningful investments to elevate and differentiate our online experience, and we'll be making meaningful upgrades to our website throughout the second half of 2024. Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market. We plan to file for design patents on several of the user interface and presentation designs, and we'll begin to discuss the new website strategy in more detail as we roll out the new functionality. Now, let me turn your attention to our outlook. Despite expectations for industry conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024 and into 2025. Due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately four to eight points....

until we read and react to the new collections, reduce back orders, and shorten special order lead times. Therefore, we'll be guiding and reporting both demand and revenue growth each quarter during fiscal 2024, so shareholders investors can accurately analyze the business. We believe that it's also important to note that we are now forecasting to end the year with an increased backlog of approximately $80-$100 million, due to revenue lag and demand throughout 2024, which will negatively impact adjusted operating and EBITDA margins by approximately 100 basis points for the year. Additionally, investments and startup costs to support our international expansion are now estimated to be approximately 230 basis points drag for 2024.

Due to our inflection ramping later than expected, we are adjusting our full-year forecast for fiscal 2024 as follows: on a 52-week versus 52-week basis, demand in the range of 8%-10%, revenue growth in the range of 5%-7%, Adjusted Operating Margin in the range of 11%-12%, and Adjusted EBITDA margin in the range of 17%-18%. For the third quarter of fiscal 2024, we are forecasting demand growth in the range of 12%-14%, revenue growth in the range of 7%-9%, Adjusted Operating Margin in the range of 15%-16%, and Adjusted EBITDA margin in the range of 21%-22%. Leaders have to be comfortable making others uncomfortable. Leadership is about pursuing a vision, something you've never seen, that's somewhere you've never been.

As creatures of habit, change is uncomfortable for humans, but for the people and partners of Team RH, a culture of leadership and innovation is at the core of who we are and reflected in everything we do. We've grown comfortable making ourselves and others uncomfortable for over two decades and plan to continue doing so for the foreseeable future. It's what leaders do and how we know we're on the right path. Whether it's launching the most prolific product transformation in the history of our industry, while others are hunkering down during the worst housing market in three decades, or opening the largest and most immersive physical retail experiences around the world, while others are shrinking or closing their stores and moving online.

By refusing to follow the herd into the anything but social world of social media, you won't find us on Instagram or paying a bunch of strangers, called influencers by some, to say they love our brand on TikTok. One thing you can be sure of is that place you will likely find us is on the road less traveled, one guided by our vision and values that will continue to ignite our spirit and inspire our customers. Over 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business that had a $20 million market cap and a box of Oxydol laundry detergent on the cover of its catalog into the leading luxury home brand in the world.

The lessons and learnings, insights and intricacies, the sacrifices made, and the scar tissue developed by getting knocked down ten times and getting up eleven, leads to the development of the mental and moral qualities that build character in individuals and form cultures in organizations. Lessons that can't be learned in a classroom or by managing a business. Lessons that must be learned by building one. In a world that rewards duplication and penalizes the inherent bumpy road of innovation, especially for companies in the public domain, we, the people and partners of Team RH, will continue to drive ourselves to destroy today's reality so we can create tomorrow's future, while remaining completely comfortable making ourselves and others uncomfortable. 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.

Operator, we'll now open the call to questions.

Operator (participant)

At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star two. And once more, that is star and one. In the interest of time, we ask that you limit yourself to one question and one follow-up question. You may recue for any additional questions. We'll take our first question from Curtis Nagle with Bank of America. Your line is open.

Curtis Nagle (Director - Senior US Business & Information Services equity analyst)

Great. Thanks so much for taking the question. Yeah, so just, you know, with the inflection demand trends driven by, you know, all these new product launches coming through, I'm feeling pretty good about the product margins. You know, I think you called that out in the press release, you know, stable, you know, hopefully up for the rest of the year, putting you, I guess, above the fray for, you know, a market that feels a little more promotional. What are your thoughts on that?

Gary G. Friedman (Chairman and CEO)

I'm sorry, you were kind of. We couldn't quite hear you.

Curtis Nagle (Director - Senior US Business & Information Services equity analyst)

Yeah, just with the inflection, you know, new products, right, at good margins, how are we feeling about the product margins for the rest of the year? That's the core of the question.

Gary G. Friedman (Chairman and CEO)

I think as I mentioned in the third quarter, they've inflected positive, and you know, we feel very good about the business right now. You know, the inflection happened a couple of quarters later. You know, when you're making big moves and big innovations like this, it's like I said, it's not as much about the timing as it is the vector, and you know, and the increasing magnitude and direction of that vector, and what that helps you kind of see down the road, and you know, we've now got you know, enough data you know, through the product introductions we've made over the last several seasons.

You know, now it's about refining, you know, and polishing and, you know, continuing to kind of learn and improvise and adapt. You know, we've got a lot more in the pipeline. You know, I sit here, and I think about, you know, the mix will begin to shift, you know, today, but, you know, we like where we are. We like, you know, the demand vector that's, you know, that's unveiling itself. We like that margins have inflected positive. We like that we've got, you know, multiple galleries, new galleries opening in front of us. One of them, you know, I mean, could be, you know, one of them's worth like three or four galleries in and of itself.

You know, when you think about the kind of value of our new Newport Beach is gonna be, I think it's gonna be a dominant and disruptive force throughout Southern California. You know, we're really excited about what's ahead of us. So, yeah, we're gonna continue to do what we're doing. We're gonna continue to learn, grow, improvise, adapt, and refine and elevate, continue to elevate our strategy. So, I couldn't be more happy about where we are. Would have liked it to happen a couple of quarters earlier, but that's not really the point, right? I said to somebody, "You know, how many times has Elon Musk been on time?" You know, when you're making big moves, it's really hard to be on time.

If you're really innovating, it's really hard to be on time. If you're just iterating, it's easy to do that and be on time. It's just that, you know, the size of the outcome is never that meaningful, you know, in a long-term strategic perspective. So, you know, if you think about where we started, you know, it's a $20 million market cap brand that was on the edge of bankruptcy with a box of Oxydol laundry detergent and selling, you know, nostalgic discovery knickknacks with 52% of our business.

To think that we made it out of that and built the brand that we built today, you know, I bring that up from time to time to help people think about if we could come from there and get to where we are today, what's the potential of where we can go next? You know, and, you know, so, you know, we couldn't be more excited, but we also couldn't be more focused. You know, we're very focused right now. You know, and, and we're gonna get more focused, and we're gonna continue to edit and get more clear and, and, allocate our time better, allocate our capital better. You know, so in many ways, yes, we're just kinda warming up with this thing, you know, since the beginning of the inflection. You know, so couldn't be happier.

Curtis Nagle (Director - Senior US Business & Information Services equity analyst)

Got it. And then just a, you know, quick follow-up,

Gary G. Friedman (Chairman and CEO)

Yes.

Curtis Nagle (Director - Senior US Business & Information Services equity analyst)

So in order to, you know, consolidation of the contemporary catalog, you know, totally understand the efficiencies. Do you think that maybe points to maybe the scope of the question being a, you know, a little bit smaller than anticipated, or is it, you know, maybe just more of a, I don't know, a timing thing, or it's selling a very high-priced, you know, set of products in a, you know, market that's still pretty choppy?

Gary G. Friedman (Chairman and CEO)

No, you know, the point about, you know, I went in late last year, and I talked about contemporary at some point and said that we, you know, we're kind of arrogant in pricing, you know, on the product. That was... Yeah, that's just a partial issue. It's more about as trends develop and evolve in any industry, right? There's an opportunity to kind of segment and focus on, you know, different looks, aesthetics, perspectives, you know, and we have been, you know, successful to this point at thinking about kind of taking assortments, focusing them, and getting them to break through the clutter. Yet all kind of still integrated as one brand with a singular point of view, but delivered to the consumer with more clarity than, you know, than shopping.

I mean, I don't know, like some online thing like Perigold or Wayfair, right? Where you just got to look at a lot of stuff, and you can't really find things. So the ability to, you know, to just focus our business and deliver the business with, in a really clear and compelling way is what we'll continue to do. You know, just in this case, there is a big, you know, a big trend movement and, you know, no different than the big movement that was made that, you know, led us to isolate versus integrate RH Modern. You know, I mean, that was a big discussion here years back. As we developed that assortment, you know, do we integrate it into our RH Interiors look, and evolve that look? Or, you know, do we isolate it and create a more f-...

focused message to the consumer. And, yeah, and so you got to think about what are the size of the trends, how do the trends develop, you know, how long the trends are, and, you know, you're constantly thinking about how to present in a clear and compelling way that's going to break through. So, you know, we've done a lot of things, you know, a lot of different books, you know, RH Beach House, RH Ski House, things like that, which you'll see come back, right? And continue to communicate the breadth and depth of the RH brand. And, you know, we've done Big Style, Small Spaces, all these kind of things, and you don't have to kind of keep doing them with regularity. You know, you got to kind of keep painting a picture, and breaking through and having people see you.

You know, we're in a world, you know, we have six senses, and out of our six senses, our dominant sense is our sight, and our sight drives 80% of our behavior, right? And so if you can't break through visually, the odds are you're just not going to be seen. And if you're not going to be seen, how can you inspire anybody? You know, how can you create any kind of a destination or reaction? Yeah, so we're always doing that. You'll always see us continue to think about how to be seen, how to break through, you know, how to communicate visually, in, you know, in this world. I mean, if people don't see what you're selling, nobody cares.

You know, if they don't care about the quality, you know, if they don't like the design or, you know, or the overall presentation doesn't break through the market, and they just don't see you. You know, so, you know, our business is all about kind of design, quality, and value in that order. You know, everything has to be in the right hierarchy, and you got to break through, so contemporary was kind of like modern. You know, there was- if you went back in history, you know, people ask me all the time, where do the trends come from? And I always tell them, "The dead." You know, and it sounds, you know, it catches people off guard. What do you mean? I say, "Well, look, generations pass away. Their belongings, you know, go into the estate sales. The estate sales feed the high-end antique markets.

The high-end antique markets feed the high-end interior design market and the high-end reproduction market, and then it trickles down from there," and it trickles through always in a unique and of-the-moment way, but you know, whether it's mid-century modern or, you know, and, you know, that came through, or that whole trend or, you know, the contemporary trend that followed that, you know, the next trend that is kind of going to start building. You know, if you just lump them on a website, which nobody can see, by the way, you know, it's an invisible store. It's like, it's a great platform if your position is kind of price and things like that, but if you're kind of leading an aesthetic business, if design is really critical to kind of your positioning, you know, launching online is very limited.

Nobody walks by you. Nobody sees you. You know, you have to spend a whole bunch of money, you know, buying words and names, and, you know, you're buying other brands' names. Like, what a kind of weird thing that is, right? Like, "Oh, let me buy their brand name, so I hope if somebody stumbles into my brand, you know, and maybe they'll see me," you know? Or, "Yeah, let me buy a bunch of words or things like, you know." Hey, you know, like, there's just so many kind of weird ways that people are trying to break through. I think there's... You know, I mean, we just go at it differently and uniquely, and we're very good at that. You know, so we're not perfect at it, right?

So contemporary, you know, we never thought it was gonna be, was a big trend, but but what it did is it became bigger than we thought, and it kind of blurred lines. And so, you know, the lines between the interiors book, the modern book, and the contemporary book were becoming too blurred. There wasn't the need to have all three. You know, it would be better to consolidate, make the other two more dominant, you know, make a more dominant book into the marketplace at greater depth, and get a better financial result. That's the key here. It's not like contemporary didn't work. The goods are out there. Did you know, did we have some stuff that was too, you know, too expensive?

You know, when we first did Italian upholstery and things like that, and we put, you know, $70 a yard, $80 a yard fabric on it, you know, not a $20 a yard fabric on it, and all of a sudden we had, you know, price points that were too high? Yeah! You know, but that's okay. You know, you know, mistakes are part of innovation. You know, these, you know, people who are afraid of mistakes never innovate, never take the risk. And mistakes for us are, you know, it's just another lesson, another learning. You know, it's just kind of what we do. So I don't, I don't think contemporary is a mistake. I think we priced some of that book incorrectly.

That was a mistake, but we learned a lot and, you know, our view based on the data and the numbers is consolidated and, you know, the, you know, it's just going to break through. The lines were too blurred. But you'll see us come out with other things in the future that may or may not, may or may not continue, you know to kind of, you know, the goods may blend in another way, but you've got to kind of continually break through, right? You know, not doing the same thing over and over again, you know, kind of expecting different results, you know, doesn't work. Not in a world that's constantly evolving, right?

But being consistent, right, and having consistent values and beliefs and, you know, a consistent approach and point of view is really important, right? So everything we do goes through our filters, and whether it's modern, it's an RH point of view on modern, whether it's interiors, whether it's, you know, classic, traditional, Big Style, Small Spaces, Beach House, Ski House. You know, all the things we do, I think are recognized out there, and people go, "Oh, that's, that's RH." I mean, some people still call us Restoration Hardware, so I just try not to do that. You know, because we're trying to hone the brand, you know, make it simpler, get us a breakthrough. So, anyway, that's, yep. It's what we do.

Curtis Nagle (Director - Senior US Business & Information Services equity analyst)

I really appreciate that. Understanding.

Gary G. Friedman (Chairman and CEO)

Okay.

Curtis Nagle (Director - Senior US Business & Information Services equity analyst)

Thanks, Gary.

Gary G. Friedman (Chairman and CEO)

All right. Thank you. Thanks, Curtis.

Operator (participant)

We'll move next to Steven Zaccone with Citi. Your line is open.

Steven Zaccone (Director of Equity Research)

Great. Good afternoon. Thanks for taking my questions. I wanted to talk about the product assortment, because there's been a lot of newness, and I think last year you gave this, this point that 80%-85% of the assortment would be new. So I'm curious, are we at that point now, or do you need more newness in the second half of the year? And, just with more product newness coming into the business, do you feel like you're at the right cadence now, or as we get into 2025, you'll have incremental newness, to present to the consumer? Thank you.

Gary G. Friedman (Chairman and CEO)

Sure. Thanks, Steven. Good question. So we have you know, a lot of newness coming in the second half and a lot of newness coming you know, throughout next year. I'd say you know, mid to late next year, we will start to be on a more predictable cadence, right? You know, so yeah, we will hit the 80-85% the first half of next year. You know, is when you know, because there's a lot coming in the second half and there's a lot coming in the first you know, first half of next year. I'd say by the second half of next year you know, we'll be on a on a new regular cadence, right? Since the business will be very different. And but we'll also you know, there'll also be other things, right?

Other categories we might address, like, you know, Waterworks. I mean, we've got a really small kind of bath business. I mean, we're taking the best bath, arguably the best bath brand on the planet, most desired and coveted bath brand on the planet. And, yeah, if, like, if you think about the industry, you know, the general trade industry is generally 80% of their business or a little more. But directionally, think about it, 80% of the business is to architects, designers, you know, builders, so on and so forth, right? It is a business to business, you know, kind of platform. And, and while we have a big trade business, you know, 80% of our business is to the consumer. You know, it's like, you know, a lot of trade showrooms and high-end things, they're not even open on weekends.

You know, they close at five or six o'clock. They're not open at night. They're not in places where consumers, you know, there's high traffic or so on and so forth. It's a completely different model. So what we've learned, you know, over our journey here is, you know, we took trade brands and businesses, you know, years ago. I mean, one example is Perennials, you know, one of the great brands in the high-end to the trade, you know, high-end outdoor fabric business and evolved into indoor fabrics and other textiles, etc. And, you know, convinced David and Ann to, you know, give us a whirl. You know, we were...

I think, you know, it was a long courtship, but, you know, we decided to partner and test, and it really worked out well for both of us. Their trade business is bigger today, and their business with us and other consumer businesses is very big. You know, I don't know their numbers, but it's worked out well for both of us. It's no different than why, you know, we made the acquisition of Waterworks, why we acquired Dmitriy & Co, you know, couture upholstery, Jeup, you know, kind of the bespoke furniture, you know, to-the-trade businesses, and, you know, great design and quality products, even more importantly, just remarkable people, you know, and talent.

You know, like, if you think about it, we bought Waterworks eight years ago. You know, it takes time to kind of, you know, kind of refine, polish, think about integration, do things really in an incredible way. I think you know, if you, if anybody on this call comes to the opening of Newport Beach, which I would say is a not to be missed RH experience, if you want to see how we can, you know, really disrupt the market, that's going to be a great example. You know, we're going to launch our first integrated Waterworks showroom, and the brand will be, you know, seen by so many more people. You know, as I said, sight is our dominant sense, right?

So, I mean, what do we have today? 14 Waterworks showrooms?

Steven Zaccone (Director of Equity Research)

That's right.

Gary G. Friedman (Chairman and CEO)

Yeah, yeah. You know, there's 14 Waterworks showrooms in the world, right?

Steven Zaccone (Director of Equity Research)

Yep.

Gary G. Friedman (Chairman and CEO)

I think the biggest one is, like, 10,000 sq ft, something like that. Some are 3,000 sq ft. But, you know, they're not in the most highest traffic areas. It's just most trade brands aren't. But when you, you know, put the best brand in the world in front of multiple times more people who have, you know, the financial ability to buy that, buy the best product in the market, why wouldn't they, right? Why, why wouldn't they do that? You know, you take, you know, the design and quality of Dmitriy & Co. You know, you put it in front of a massively bigger market, or Jeup, and put it in front of a massively better market at, at a greater value, because, you know, you work at building the platform to scale that level of quality.

I mean, I used to say way back when, when we were first kind of breaking through and, you know, building our model, that furniture of this quality, you know, wasn't sold in quantity, and we had to build kind of a, you know, like a new railroad, like a supply platform for this level of quality. I mean, people we worked with in the beginning, you know, the businesses were $1 million a year, $3 million a year, you know, $7 million a year companies. And those companies are all, like, $150-$200 million today, you know, selling that level of quality. It just wasn't available.

I mean, you kind of stopped at Pottery Barn, you know, you know, stopped at, you know, Crate & Barrel, and, you know, maybe throw Ethan Allen in that, but, you know, different kind of aesthetic and, you know, I don't want to say anything negative, but, you know, just, it wasn't what was kind of evolving in the market. And, you know, so we did that. We made a lot of investments. We invested in the company. We lent people money. We did whatever we could to help them help us, right? And create... That's why I say, you know, in every letter I write to our people, our partners, and our shareholders, in that order, that is the hierarchy, that is the order of success.

You know, we try to build incredible partnerships, and we try to take one plus one equal more than two, and sometimes it can equal ten. But it doesn't happen like that. So we kind of created, I think, a new market. You know, look, whenever you're a market leader, there's going to be followers, and there's followers, and people are coming, and you've got to keep innovating and reinventing and evolving, you know, faster than others. Competition's good. It makes you better. You know, so. But you know, our market ahead of us, you know, I mean, we're the kind of the biggest of our kind in the world. You know, the opportunity is massive ahead of us. You know, and yeah, but that takes a long time to see, too.

You don't see, you know, like, Steve Jobs never saw Apple like what it was. You know, he was trying not to go bankrupt, you know? You know, then he got fired, you know, then he came back, and he saved the company from bankruptcy. And then, you know, you keep looking around corners, you keep learning and growing, you know, listening and learning, testing and trying, improvising and adapting, and you grow, and that's what it's all about. But you can't become a manager of a business. You'll never great- you know, you'll never create or build a market-defining brand, you know? So I think that's what makes people uncomfortable with now and then, and makes us a little less predictable. You know? But that's what we do.

And if you look at our history, the last twenty-four years, you know, since we've been on this journey, you know, from where we were with no resources, no capabilities, you know, you know, edge of bankruptcy, you know, trying to... You know, number one goal, try to not go bankrupt while you're trying to evolve the business. You know, if we're able to get from where we were to where we are, you can only imagine where we can go next. And, but along the way, yep, we're gonna test and try things. We're gonna, at times, try to do too many things, and get a little unfocused as that happens, you know, and try to continue to just be maniacally focused.

You know, I think the last few years, you know, I think about the last five or seven years, I think we tried to do too much. It's, you know, it's not fun when you know, kind of only great at a few things, and maybe you're, you know, the outcome, you know, you're, you gotta be great at all things. If you wanna be the real market leader, you've got to, you know, have the best product, the best presentation, with the best brand, and you have to have the best financial results and the best shareholder returns and all those things, you know? So, you know, as we go forward, you know, think about cadence and newness and stuff like that, you're gonna see us continue to edit and focus.

You know, going what we just went through, we none of us here had ever done that. Like, I'd never led a team through a period like, you know, like we're going through right now. You know, and, you know, all the things you've got to kind of, you know, design, develop, you know, integrate, you know, present, it's, you know, it's a lot, you know? But the really, the best thing is how much we learned and how much better we are. You know, not just the brand that leapfrogs, it's the leaders that leapfrog. You know, so, you know, you don't build a business, right? You, you build a team, and the team builds the business. So the, the people here that have built this business, that's what you wanna focus on.

Like, if you didn't die trying along the way over the last, you know, eighteen, twenty-four months here, you are way better. You are way smarter, you know? And you have a capability now to go to on a whole new level. So yes, that's. You know, if you ask me what I'm really most excited about, you know, all the people that, you know, as I like to say at times, "Marched through hell for a heavenly cause," that got us here, that now have the ability to take us to a whole new level because, you know, what we've all learned together, how we've grown together, that's what's most important, and that's what's most exciting.

Great. Thanks for all that detail. I'll cede the floor, and I look forward to the invite to the Newport opening.

Steven Zaccone (Director of Equity Research)

Look forward to seeing you.

Operator (participant)

We'll move next to Steven Forbes with Guggenheim Securities. Your line is open.

Steven Paul Forbes (Senior Managing Director and Equity Research Analyst)

Good afternoon, Gary, Jack, Allison. Gary, last call, we briefly discussed, right, the idea of top, middle, bottom tiers of the assortment, you know, the new collections. So would love to hear you sort of talk through, you know, how you think the collections are mixing into those tiers today, as we all try to sit here and conceptualize, like, what the potential aggregate demand lift could be, you know, from the actions thus far into twenty-five and beyond.

Gary G. Friedman (Chairman and CEO)

Yeah, well, you know, it's how many, you know, how many of the new collections, you know, made it in the top third. Those will really move the business. You know, if they made it into the top middle third, they'll move the business up. You know, if they made it into the middle, you know, they're not gonna make that big of a difference, except when you get enough in the top third, it pulls the whole thing up, and the middle gets higher. So there's a new middle, right? When you think about this analogy and, you know, how I kinda describe it, and your bottom third is bigger, you know, it's a much more productive bottom third, but you've got to kinda keep getting things into the top third, right? That's the key.

'Cause the top third pulls everything up. It's like, it's like great people. It's like great leaders, right? They pull everybody up. They set a whole new, new expectation and a whole new bar, and all the people that are capable and, and have, you know, the desire and the capability reach a whole new level, and everything moves up. So, you know, the real key here today is like, you know, like if I just look at it and I go, "Okay, where are we versus the industry? Where are we? You know, where is our demand versus others? What does the vector look like? You know, what are we learning from the new top third?" Because you wouldn't have the inflection we have unless you redefined the top third, right?

And you redefine the top third, it's forever redefined, and then the middle third is forever redefined, and the bottom third is forever redefined, right? And it's no different as you think about the product is if you think about people, right? Somebody goes out, you know, take the Olympics as a point of reference, and breaks a record in the hundred meters or in some swimming race. It's a whole new standard. Everybody swims faster. Everybody runs faster. It's a whole new game. You know, you just keep redefining. So that's the way to think about it. It's like the whole three-thirds are moving up or moving down, right? If you throw too many things in the middle, you know, you're probably gonna fall behind because everybody's moving forward, right? The world's evolving.

If you're out there and you throw things into the bottom third, you know, and you're more weighted that way, you're going down. But you have to start with, generally in every market, somebody's doing a good job and moving a market forward, and they're gonna create a higher standard, and other people will follow. Other people will learn from them, whether they're there or not. If they're smart, they'll study the market leaders, not just to emulate them, maybe short term to emulate them, but if they want to be the new market leader, they have to conceptualize and conceive a vision that can leapfrog that market leader. It's really hard to take a market leader out. Takes sometimes decades. You know, how long was IBM at the top? How long was Microsoft at the top?

You know, Microsoft at one point was eight hundred times more valuable than Apple. Eight hundred times, and then Apple leapfrogged them. But Microsoft's coming back. You know, their new CEO, man, he's leading a crusade. If someone would have said Microsoft would bounce back like that, I'd say, "No way, they're dead." You know, once that vector starts, you leave people in the dust. And you know, I think there's probably a lot of people here, I mean, saw, was it BlackBerry, was the name of the movie, or was it BlackBerry movie, right?

Steven Paul Forbes (Senior Managing Director and Equity Research Analyst)

Yeah.

Gary G. Friedman (Chairman and CEO)

Great movie. If you want to think about vectors and market disruption and changing of the guard, watch the BlackBerry movie. They were so far ahead. They had so many things right, and they stopped inventing. You know, they got complacent, and the Apple iPhone comes, and, you know, that scene when they're, you know, it's like the guy's, you know, he's walking, the leader there, you know, walking down, and he's pissed, and he thinks he's gonna, you know, get, get it back, and he sees the people, and Steve Jobs is presenting the iPhone, you know, going through, you know, it's a phone, it's a music player, it's an internet, you know, device. It's a phone, it's a music platform, it's an internet device. And he goes, "Do you get it?

It's one thing, you know, it's the iPhone." And he changed everything, you know, and all his people are like, "Oh, shit, we're dead." You know, but then you saw in the later part of the movie, you know, the partner, I think, is pitching some of its partners, you know, on for the platform, and they're going, "Well, here's the line, here's the market, you know, here's how Apple is inflecting," and it was too late. You know, Apple ran away. But, hey, give the new CEO of Microsoft, that's the guy to me. I mean, I... That's like, wow, one of the great comebacks, you know, in American business history. You don't see that. You didn't see IBM come back. You know, you didn't see Xerox come back. You know, you didn't see all kinds...

You know, you can name a lot of them. It's like, you know, where's Ford? Where's Chevy? Where's this? Where's that? You know, they usually, if somebody starts to make a move and that inflection happens, it's hard to come back, you know? But, yeah, it's all about leadership. You know, it's all about innovation and invention and leading and not managing and, you know, being a newsmaker, not a newscaster. But if you're gonna do that, they're not all great days, 'cause you're gonna break some glass along the way while you're, you know, building something nobody's seen before. So there's this whole top third, middle third, bottom third, right? You've got to take big risks, you gotta place big bets, you know, you gotta do things. Like, it's not that contemporary didn't work. Contemporary is just a stepping stone.

You know, you're gonna see new things when you try new things. But, you know, I like where we are, but I'll tell you this, we're more focused than we've ever been. We are. You know, we are smarter than we've ever been, and we've got a big edge. You know, so, you know, we're gonna, you know, we're gonna make some really smart moves, you know, over the next several quarters and several years. And I think, you know, I think we're just gonna be a lot more focused. I mean, that's the thing Steve Jobs said, you know, you have to about saying no to a thousand things. We have to say no to more things. You know, it's like you, you always think it's...

In fact, you think as you've done some great things, you think, "Oh, I can do so much more. I can do so much more." You generally didn't get there by doing a lot. I mean, I took over RH. I eliminated 100% of the SKUs. You know, like, we don't have one thing. I eliminated 50% of SKUs in my first season, you know, and had to try to, you know, figure out how to navigate that. So you, you know, gotta make big moves, and you're not gonna get them all right. It's okay. I had to sell split duvets for 10 years. Did I like selling split duvets? Hell, no!

Did split duvets, you know, was that a stepping stone to get to Italian bedding and, you know, Belgian linen and Waterworks and all the things we're doing today? Yeah, of course. You know, so anyway, I'm not so pithy to you guys when you have questions. I've got hundreds, if not thousands, of our team members on this call, so I'm speaking to the three constituencies that are on that letter.

Steven Paul Forbes (Senior Managing Director and Equity Research Analyst)

It's great-

Gary G. Friedman (Chairman and CEO)

Yeah.

Steven Paul Forbes (Senior Managing Director and Equity Research Analyst)

It's great to hear about the focus. So, I'll also pass it on. Thanks, Gary.

Gary G. Friedman (Chairman and CEO)

All right. Thank you.

Operator (participant)

... We'll move next to Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Ari Gutman (Executive Director and Senior Equity Analyst)

Hey, everyone, it's Simeon. Hi, Gary, Jack, and Allison. I wanted to ask a twist on maybe what Steve was just asking, the confidence that this initial demand that you have here has durability. And I know, Gary, you mentioned the vectors and the market share spread. You know, I think you have a lot of newness, you have catalogs or Source Books, so you have reason to be stronger than them at this point, and you had this coming. So how do you look out several quarters? And then related to Steve's question, when you talked about the different tiers or tranches, do you have enough product out to see how some of the initial product is trending? How many of those top third categories might you already be sitting on? Thank you.

Gary G. Friedman (Chairman and CEO)

Yeah, you know, look, we've learned a ton. Yeah, we've got a lot of data, you know. And so, yeah, we're very confident in, you know, in our outlook and what's ahead of us. You know, despite whether we get interest rate cuts or not, interest rate cuts, right? You know, it's not as all of you know, like, I know, we came into this year, everybody expected it was I think, you know, the markets were betting for five to six interest rate cuts, and so far, we haven't had one.

You know, now they're saying, "Oh, it's time to do an interest rate cut." Well, those are the same people that said, "Oh, when inflation went from 2%-4%, you know, it was going back to 2% over the next few quarters, and then it went to 9%." You know, so you know, it's... And that's not a dig at those people, by the way. Leading and trying to look into the future is really hard, right? You guys do models on everybody, you have forecasts on everybody. My sense is almost every plan you have, every forecast you have is some degree of wrong, right? And so the key is, are you more right than wrong, and are you learning? You know, are you gathering more data? You know, are you sharpening your sword?

You know, and, you know, can you see around the next corner? So we have a lot of confidence. We have a lot of data. We've put a lot of product in the market. We've learned a lot. And we have a lot of news coming in, and, you know, and we're rebuilding everything here, every model, every part of our organization. You know, everything's kind of under inspection, under attack. You know, we're going to reinvent every way we do things. And then, you know, and then as we do, you know, the things we did best, you know, we'll optimize those, and we'll focus those, and those will be our, you know, our next round of habits, but and behaviors. But you got to be careful.

You can't stick with those things too long because other people, you know, will learn from you, and so you got to keep moving forward. So, you know, we have a lot of reasons that we'll be stronger than the competition for a long time right now. A lot of reasons. And, you know, a lot of reasons why we'll take a lot of market share. I mean, it's not an accident, right? I mean, we've been talking about this a long time. The question was, well, when will it happen?

I mean, you know, some guy that I know that used to work here as an analyst, you know, put out a report last week, never talked to me, I don't know, probably 15 years, and he said, "Oh, their product, you know, transformation is a complete dud." I don't know how he feels today, you know, but he's gonna feel worse in the coming quarters. You know, yeah, you don't learn anything by being a sideline critic. You know, you want to learn something, come here and ask us some questions, and you'll learn something. But you want to be a sideline critic, you're not going to learn a lot, and you're going to be wrong a lot more than you're right.

So, yeah, we look out over the next several quarters, over the next several years, you know, if you think about the real estate pipeline we've built, an incredible real estate pipeline coming. Incredible. You know, you feel, and we're just, I mean, you know, infants in Europe. You know, we're just barely, you know, we're learning, what do we do this, and we're, you know, we kind of opened some galleries in an order we didn't want to, but we couldn't have got the other galleries without taking those in a real estate deal and stuff. So, you know, we've launched, but not really in, you know, the way you'd launch if you want to build great market awareness.

You know, so when we open Paris and London and Milan, you know, there's going to be a significantly different awareness of RH. You know, so, you know, it's not that we don't love the ones we did, you know, but it's not necessarily in the order we would have picked as we were thinking about positioning and building the brand, but sometimes, you know, you got to take the opportunities as they come, and you've got to...

You know, it's not perfect when you know, we're not rolling out, like, formula mall stores or, you know, format, you know, 5 or 10 thousand sq ft things, or even 15 thousand sq ft things and going into a mall or going to, you know, somebody else's box and, you know, building a storefront and then, like, floating a couple of walls or something, you know, with a run-on sentence of shit on the floor. You know, it's like, not what we do. You know, we build things that are going to last generations. Like, you know, other people talk about their great showrooms. I mean, put one next to ours and tell me what's gonna stand the test of time. You know, it's, you know, what we're doing, I think, you know, long term is gonna be incomparable and massively durable.

I mean, we came from nothing, came from a bankrupt business selling tchotchkes, and we built, you know, the market leader, and you know, we went through a massive transformation. We're still in the middle of it. I've never done this before. No one's ever done it. The industry's never seen it, you know? But now you're gonna start to witness, you know, the potential of the RH brand and the team behind that brand, more importantly. So, you know, we just couldn't be more excited. Do we have enough product to see how the product tiers are trending? Oh, yeah. Oh, yeah, and we like what's in the pipeline, you know, because, you know, we've seen a lot, and, you know, we're gonna keep building it.

You know, we've got, you know, we've got too many ideas to execute right now. The key for us is focus and hierarchy, and, you know, hierarchy. What comes first? What comes second? What comes third? How do we allocate the human and financial capital, in, you know, the very best way? And how do we be smart? And how do we say no to a thousand things? That's gonna be the hardest part right now. What are we gonna say no to? What are we not gonna do, is gonna be as important, if not more important, than what we do right now.

We might decide to work on what is actually number one, but we also worked on number three and four and five at the same time, and we never gave number one the focus it needed to change everything, right? So, yeah, so that's. Yeah, that's how we're thinking right now. We've got a lot of edge, we've got a lot of focus, we've got a lot of energy. You know, we're very enlightened and very excited, but also we have a lot of edge. You know, so we're not taking anything for granted. You know, I couldn't be more excited about where we are and what's ahead of us.

Simeon Ari Gutman (Executive Director and Senior Equity Analyst)

Okay. Thank you. Good luck.

Operator (participant)

We'll move next to Max Rakhlenko with TD Cowen. Your line is open.

Maksim Rakhlenko (Director and Senior Equity Analyst)

Great. Thanks a lot. Gary, so you earlier walked through the importance of galleries. Can you provide an update on where you stand in resetting the in-store assortment? I think on the last call, you discussed being around 50%. So just curious, where is that now, and when do you think it'll get closer to or fully reset, just given the potential lift that it could have to the business?

Gary G. Friedman (Chairman and CEO)

Yeah, we're at the very early stages of that. Like, you know, again, you wanna think about, you know, we reset on the early data, then we get better data, and then you've got new newness, and then you've got to, you know. So you're gonna constantly read and react and refine. And, I mean, we're right now so excited about some stuff going, we're like, "Okay, how do we run to get that in the galleries? What do you do?" Like, you know, your life depended on it. How do you get the goods in the galleries now? Because they're gonna really massively lift. You know, I think, like, public, right, our mix, right? Yeah, everybody-

Simeon Ari Gutman (Executive Director and Senior Equity Analyst)

Which mix?

Gary G. Friedman (Chairman and CEO)

Yeah. 70/30, kinda.

Maksim Rakhlenko (Director and Senior Equity Analyst)

Yeah.

Gary G. Friedman (Chairman and CEO)

No, not really? Oh, no. Okay. No. Okay, now, right. Okay. I mean, you know, the game is get the goods in the gallery right now. To get the right goods in the gallery, on the floor, in the right place, that alone is a massive move, a massive move. But we gotta, you know, you gotta ramp up the production, you gotta get it, you gotta, you know, dimensionalize it, you gotta... You know, that's why we're running with a higher level of inventory right now. We've got so many things. You know, you gotta kinda these transitions are really tricky. You know, you, you're not gonna buy it right, so you've gotta kind of invest in kinda some downside protection, right?

And you've gotta carry heavier inventories for a while, while you're learning, and then you've gotta kinda edit and, you know, refine and go through it. But, no, that's, you know, what you're identifying is one of the next big moves. I would say, where are we on the galleries, you know, having all the right goods? I mean, Stef, what would you say?

Maksim Rakhlenko (Director and Senior Equity Analyst)

We have some work to do.

Gary G. Friedman (Chairman and CEO)

Yeah, but would we say we're 30%?

Maksim Rakhlenko (Director and Senior Equity Analyst)

I was gonna say thirty-five, forty.

Gary G. Friedman (Chairman and CEO)

Yeah, 35. Yeah, 35, 40%. Yeah, there's some big turns there, big moves.

Maksim Rakhlenko (Director and Senior Equity Analyst)

Got it. That's, that's helpful. And then maybe we can keep this one brief, and it might be rudimentary, but where do you stand now in the promotion in your promotions and sort of winding down the old discontinued product? Demand's picking up, so should we think that you're probably in the latter innings, or how should just we think about it? And then just the key drivers of the product margin inflecting here more recently.

Gary G. Friedman (Chairman and CEO)

Yeah, I'd say, you know, look, you're, we're in the middle of kind of this, these big moves in and out, right? So you're, you know, you're learning, you're transitioning, you're, you know, and you're kind of building the bridge to the next place. So I, I wouldn't really- I mean, you know, I think everybody's making that a bigger deal. And I read the report, "No, no, they've got to get rid of the clearance," or, you know, whatever. You've got to build a bridge to the future, you know? I, I don't know why everybody's so really focused on that. I just focus on, hey, is our demand growing, and is our margin inflecting positive? That's the game, right, right there.

And then, you know, and then, you know, how do we organize, you know, say, you know, the brand and the business, you know, all throughout, you know, build the platform and infrastructure, you know, and organize the company for where we are and where we're going next, you know, and make it really efficient. So we're in a very inefficient stage right now. Massively inefficient, you know, because we've been laser-focused, you know, on just kind of almost one thing. And so, you know, a lot of things, you know, we've got to kind of rethink this all up and put things in the right order and, you know. Yeah, so, yeah, but that's what we do. You know, so we've been doing this a long time. We love doing it. It's what we do.

We love big moves like this. We love these times. Yeah, this is what we live for, you know, figuring it all out, you know, doing it better than anybody else in the world, you know, leaving no doubt. You know, so but. You know, it's like, you know exactly how much, you know, we're marking down and what that is. I mean, the question is, what, you know, what does the vector look like? What does the vector look like in demand? What does, you know, you know, what does it look like in margin? You know, where eventually will the vector be? You know, as you think about leverage and costs, and what, what will the model become? You know, and what's the timing of the big things here?

You know, you've got this big thing, you know, Europe, you know, and, you know, we're just entering that. We had to, you know, make a lot of investments that honestly, not the greatest time, you know, under construction, you know, during COVID, post-COVID, one of the most expensive times to do things and try to, you know, and stuff like that. So, you know, but we got to get the big brand building markets and galleries open and, you know, and the brand will build, and then the demand will build there, and we'll get a vector going there on what is, what does Europe and international look like over X number of years? And, you know, what's the leverage and the cost structure there? And, you know, like, there's so many opportunities. You know, I mean, crazy amount of opportunities ahead of us.

But we got to stay focused. You know, we've got to be laser-focused, and we got to do first things first. You know, we cannot get distracted right now. That's the hardest thing, you know, so.

Maksim Rakhlenko (Director and Senior Equity Analyst)

Got it. Thanks a lot. I appreciate all the color, and good luck with all the new galleries.

Gary G. Friedman (Chairman and CEO)

All right, Max. See you soon.

Operator (participant)

We'll move next to Andrew Carter with Stifel. Your line is open.

William Andrew Carter (Vice President and Senior Equity Analyst)

Hey, thanks. Good evening. I wanted to ask a little bit about the I think you're going to hit with your guidance here, seven Design Galleries this year, plus the Design Studio. Are you in a position to hit that cadence every year? I know two international you've reiterated today, and I know you're talking a little more about prioritization. Where do the white space markets kind of fit in within that? And are the white space markets still in scope for all design gallery types? Thanks.

Gary G. Friedman (Chairman and CEO)

I'm just processing the multiple questions right now. So the first one is about, we're opening, you know, eight, eight galleries. How many are we doing this year? Seven galleries. You said seven to nine, but seven galleries, one Design Studio, so eight total. Okay, eight total. Okay. So, yeah, I didn't think we were doing nine. Okay, so, you know, are we in a position to hit that cadence each year? I think there'll be years we'll hit that cadence and do more, and there'll be years that we do less because, you know, our kind of pipeline is, you know, if you try to go, you know, force things in and, you know, if you screw up big real estate moves like we make, you can't. Getting unwinding from that is very expensive.

You know, so, you know, can we open eight a year? Yeah. You know, you know, we haven't released what we're doing next year, but I'd say it's kind of in that direction. Might be more, might be less, you know, like, the pipeline is really big. You know, like we've got a lot of things in the pipeline. So I think over the next four or five years, you know, there's going to be a lot more galleries than that we open than, you know, over the last five years. You know, think about it that way. But, you know, they're very big and complex projects. You know, when, you know, and if you come to see Newport Beach or something like, it's massive.

They had to knock down a whole part of the mall, you know, and, you know, open up, I don't know how many. Got rid of, like, four retailers, something like that, five, you know, and, you know, to give us the pad that we needed and the positioning that we wanted, and have views of the Pacific Ocean from three of the four floors, and you know, these are the most, probably the most incredible, you know, kind of rooftop restaurants in all of Southern California with the views we're gonna have. And you know, that's why we didn't even make it any, you know, outdoor furniture up there. I mean, the whole thing is at two hundred and sixty feet, beautifully designed indoor-outdoor eating experience. You know, it's about incredible weather, incredible views. You know, I don't know how many of you tried...

How many, how many restaurants now have the new menu? It's like four.

Jack M. Preston (CFO)

Four.

Gary G. Friedman (Chairman and CEO)

Four? So four or five. Yeah.

Jack M. Preston (CFO)

And New York-

Gary G. Friedman (Chairman and CEO)

Yeah.

Jack M. Preston (CFO)

The rest of them.

Gary G. Friedman (Chairman and CEO)

Yeah, we're, you know, rolling out and upgrading and transforming our, our menu. And in our galleries, it's a terrific new menu, and, yes, the menu for that, that gallery, you know, it's gonna be fantastic. I think you'll see, you know, yeah, some of our innovations happening there, you know, that have, you know, been previously working on for a long time. So, yeah, there's gonna be a lot. And, you know, where did, you know, like, the white space thing, what was that question? Where does the white space fit or something?

Jack M. Preston (CFO)

I mean, it's more of a transformation, Andrew, right? There are white space opportunities for Design Studios, of course, as Gary has talked about over the last quarters.

Gary G. Friedman (Chairman and CEO)

Different galleries, and multiple galleries. Yeah, we've got probably, like, ten markets. You know, we can open a mid-sized gallery, and a couple. We can open a big one in, you know, North America, right? Yeah.

Jack M. Preston (CFO)

Yeah, we do.

Gary G. Friedman (Chairman and CEO)

Yeah.

Jack M. Preston (CFO)

Montreal, Oklahoma City, there's a couple.

Gary G. Friedman (Chairman and CEO)

Yeah. I mean, what we're gonna do in Naples is unbelievable.

Jack M. Preston (CFO)

Yeah.

Gary G. Friedman (Chairman and CEO)

I haven't talked about that yet, have I?

Jack M. Preston (CFO)

Not yet.

Gary G. Friedman (Chairman and CEO)

Not yet.

Jack M. Preston (CFO)

Coming.

Gary G. Friedman (Chairman and CEO)

Hey, you got me excited. I'm debating right now, like, myself, do I talk about it? Do I not talk about it? Well, it's gonna probably be in the press soon. I mean, it's a whole new, you know, three-dimensional, you know, RH experience called the Compound, the RH Compound. And, you know, it's a multi-building, multi-building, kind of integrated experience with gardens and courtyards and connecting buildings, and, you know, it's like nothing anybody's ever seen. And, you know, we, you know, you know, partnered, you know, team in Naples, and we got the former Nordstrom pad that, you know, sits overlooking this beautiful pond.

Yes, and it's an incredible, you know, new idea, and it just, again, it's, you know, evolution of different ways to, you know, to have, you know, more cards you can play to kind of. You're gonna take a bigger site, how would you use the site? What would it be? And also, we think, you know, it might be able to build. It might be massively more efficient to build than, you know, than some of the galleries we're building today. And, you know, another innovative thing. So there's a lot of. You know, but I mean, there's. I think that generally, again, as you grow, you see more. You know, as your brand grows and, you know, does more, you know, dollars per location, and all of a sudden, you know, different markets look.

You know, they look a lot better than they looked when you were doing a lot less volume, right? And the cost of the materials look different, and everything looks different. So, you know, I remember when I was at Williams-Sonoma, you know, when I first joined, and, you know, Howard Lester and Chuck Williams telling me, "We can only have, you know, at the most, 75 Williams-Sonoma stores," you know? And, you know, the most in North America, like maybe only 50. And I think when I got there, there was, like, 35 or something. I don't know. Well, how many Williams-Sonoma stores are there? Like, 250 or something? Is it 200? I don't know, something like that, though.

But you know, you keep building a brand, and you know, it becomes more productive, becomes better, and you know, you get more market awareness, and you create markets. I mean, market leaders create markets. And so, you know, today, you know, in North America, what do we think is right? You know, like, you know, sixty to seventy. I don't know. It's like, will we be sitting here in five years, and that's eighty to a hundred? Maybe. I don't know. Yeah. So. But as we learn, you'll learn. So, well.

William Andrew Carter (Vice President and Senior Equity Analyst)

Great. Looking forward to Newport Beach. I'll pass it on.

Gary G. Friedman (Chairman and CEO)

All right. Thanks, Andrew.

Operator (participant)

We'll move next to Jonathan Matuszewski with Jefferies. Your line is open.

Jonathan Richard Matuszewski (Analyst)

Great. Good evening. Thanks for taking my questions. Gary, first one is just on housing. I think investors are trying to understand how the eventual recovery in housing will impact, furniture category spend, maybe across different income cohorts. So just wanted your perspective, you know, how you see luxury housing, reacting to the Fed rate cuts, maybe relative to, you know, homes at non-luxury price points. Do you see, you know, luxury housing reacting more quickly? And if so, why?

Gary G. Friedman (Chairman and CEO)

You know, I think it's a lot of it's about, again, the affordability gap. And you know, it. You know. You know, it's, are we getting. You know, do people see three rate cuts of 25% or three of 25 basis points or 50 basis points? You know, and you know, how far is. You know, how much are you gonna close the affordability gap? I mean, yeah, the average U.S. home, I think, is what? Up 50-something% versus pre-COVID. And you know, it's yeah, the prices of housing got too expensive, and then you know, the price of a mortgage got too expensive, and there's just a lot of people locked in at very low interest rates.

And you know, when does that affordability gap close enough that people that are... I mean, there's a lot of pent-up demand. I mean, people are waiting, really want a new house, really wanna move. That, you know, their family's expanded, they need more room. I mean, you know, it's a big build-up here. You know, so, but, you know, how does that affordability gap, you know, kind of, you know, just come together? You know, it's like, that's the key. You know, so I don't know exactly how it's gonna move or, you know, there's a lot of pent-up demand, so it may pop quicker, or it may take time to ease, and yeah, but it's gonna depend on kinda what the Fed does, and it's gonna depend on the homeowners.

You know, are they gonna lower their price, or are they gonna hold out? You know, I put a house on the market in Beverly Hills, and, you know, I got a lot of lowball prices, and I had it on the market for six months, and I didn't need to take the lower price, and I took it off the market. You know, so, you know, and there's a lot of that right now. There's a lot of, like, homes are coming on the market, and people are testing it out, and then the homes are coming off the market. And, you know, but there's more people testing today. But I do think... I mean, I knew I had to lower my price. I was, but I had a price I was gonna lower it to.

You know, there's a price I'd take, but I didn't get that offer, and I, you know, did the math, as you do, and say, "Okay, I get this super low mortgage rate, and if I hold for a year, I'm gonna have to pay this. But if interest rates, you know, a year from now, come down to where I think they might go, if we have inflation under control..." Look, they could do one or two twenty-five basis points cuts, and all of a sudden we can see inflation tick up, and then all of a sudden, like, whoops! You know, like I tell everybody here, we've got a chart that we all look at, and it's, you know, been taking the team through it for about four years now. Yeah.

Like, look at, you know, pull it up, but you know, the last sixty-something years of Federal Funds Rate, you know, and go to the 1970s and look at what happened. You know, inflation went up, they took rates up. They thought they had it, they took them down. They thought they had it, you know, then up and down, up and down, up and down, up and down, up and down. Until it got... The Federal Funds Rate was, like, 21%. You know, but they thought they, they had it. If you look at just, you know, zoom in on, you know, like an eight to ten-year period, I mean, you know, up and down, up and down, up and down, like maybe a hundred or something times. Like, like, you'd probably be good to really zoom in and just have the patience to count it.

You know, and who says that can't happen again? I hope not. I'd rather... Personally, I tell the team this all the time, I'd rather have them not cut the rates. You know, it's bad for our business. Do not cut the rates until you are absolutely have killed inflation. Leave no doubt, because if it starts going up and down, and so on and so forth, it hits it anywhere like that period. That, you know, I mean, it's like the worst ten-year economic period in American history, except for the Great Depression. You just don't want that to happen. I'd rather hang on and, you know, we're gonna inflect no matter what. You know, we're kind of indifferent. Will it be good when the housing market inflects? Yes. Will it inflect? Yes. Will the Fed get it right? Who knows.

Like, and I'm, again, not being critical of the Fed. I was critical of the Fed when, you know, they said, "Oh, inflation's going from 4% to 2%. It's transitory, and over the next few quarters, it's gonna go back to 2%." I'm like, "Do they talk to anybody in business?" You know, our ocean freight rates went up 120%. Price of, you know, wood was up 80%. Steel was up. Like, all the imports, all our prices were going up, and I'm like: They think it's going back to 2%? There's no way. You know, like, you know, I think, you know, what do they have? Some, like, four hundred PhD data scientists, you know, forecasters are saying, you know, more than anywhere in the world is, you know, in the Fed. Call some business people.

Find out what's really going on, 'cause I, you know, like, I don't know anybody who would have told them that inflation was going down. That, and again, I'm not, you know, like, yeah, I was critical, but what the hell? It's happened. I think Powell since then has done a really good job. I think he's got to hold his ground, and I... You know, for us, we're not gonna worry about that. If it comes, it comes, we'll be ready. You know, and we'll be in the best position of anybody, but I, I am totally indifferent. I am much more rooting for kill inflation. Leave no doubt. You know, even if we go into a recession for a while, and whatever, you know, it's just a recession. It's not a plague, you know?

Jonathan Richard Matuszewski (Analyst)

... That makes a lot of sense. And just a quick follow-up, Jack, just on the international investment this year, it looks like, the headwind picked up a little bit. Just if you could contextualize for that, is there kind of, any incremental investments, you know, that are being made in international, versus what was, previously planned?

Gary G. Friedman (Chairman and CEO)

Yeah. Yeah, good question, Jonathan. Yeah. Part of it was, you know, just refining the number of sales came down a little lower. And, you know, we had said approximately 200, and we were in that zip code, so we're just refining and giving you, giving you a number as the year plays out, and we see greater visibility than sales growth. So it's just sales coming down overall and, and the impact.

Jonathan Richard Matuszewski (Analyst)

Understood. Best of luck.

Gary G. Friedman (Chairman and CEO)

Thank you.

Operator (participant)

We'll move next to Brad Thomas with KeyBank Capital Markets. Your line is open.

Brad Thomas (Managing Director)

Great, thanks. Gary, you've touched on international a bit in some other comments that you've made in answers, but I was wondering if you could just give us an update on how you're feeling about the trajectory of that business and how some of the data points are coming in as you lap, you know, the one-year anniversary of some of these locations.

Gary G. Friedman (Chairman and CEO)

Yeah, I mean, look, they're all going to get better. Like, this- the real conversation happens. We open Paris next spring. We open London, you know, late next year. You know, as long as cross our fingers that, you know, it's a complex job stringing together four buildings, and hopefully, you know, that plays out. Yeah, and then we have Milan.

Brad Thomas (Managing Director)

It's the fall after that.

Gary G. Friedman (Chairman and CEO)

Spring or...

Brad Thomas (Managing Director)

Yeah.

Gary G. Friedman (Chairman and CEO)

Or spring after that.

Jonathan Richard Matuszewski (Analyst)

Spring 2026. Yeah. Fall after that.

Gary G. Friedman (Chairman and CEO)

Yeah. So, I think we've got to get open in the big markets. You know, I mean, people go like, "Oh, you're kind of in London." No, we're outside of London. We tried to do an inspiring, you know, unforgettable experience because, you know, we had a chance to... Like, here, we were introduced years ago, you know, selling a lot more totally different brand, and people still remember that. Like, so we still fight that perception a lot, you know? And, you know, Restoration Hardware, I, "Oh, that's where I buy my stocking stuffers." Like, okay, well, we haven't sold stocking stuffers in seven years, so like, you know, you don't. Don't lie to me.

But you know, but you, you know, perception and brands are, you know, it's really key, and we were able to open, you know, and kind of it's a whole new thing, and that's why we, yeah, we did, you know, what we did. And, you know, because we, you know, we said, "Look, let's, let's do something unforgettable and, you know, leave an impression." And, you know, as I said many times, that was, you know, that investment was about conversation, not necessarily about commerce. I wouldn't have opened out there to say, "Hey, let me show you what I can do in the UK," and, you know, an hour and fifty minutes outside of London, you know, without anybody walking by, you know, a few cars. So, you know, we've learned a lot. You know, business is inflecting.

It's all heading in the right direction. Our design business is growing. Our brand recognition is growing. But when we open in London, in Mayfair, you know, and, you know, stringing together the four buildings, when you see that, the consumer sees that gallery, like when they see that restaurant, I mean, it's, you know, unbelievable. You know, it's like, but the amount of people that will see it, not only in London, from all over the world, like, they'll walk around Mayfair and, you know, it's a global, wealthy global audience, you know. And, you know, so, and we're right in the heart of it. I love our position. You know, we're kind of almost like freestanding in this multiple intersection place.

you know, and we're not, you know, wedged in on, you know, one of the busy streets, and, you know, people, cars are, you know, blinking past by you or walk by you. I mean, we're like, you can't miss us, you know, and we're, you know, we're like, "Ooh, that's, that's a really nice place." And, and the restaurant that our teams designed, like I tell Kerstin on our team, you know, it's like, I can't, like, she's gonna die. I just told her yesterday how many...

Bella was telling her, "Do you know how many people he tells that we came up with this design for this restaurant?" If you gave me a hundred years to have conceptualized the design of this restaurant that we have, that's in, like, you know, like the original Bank of England or something like that, like, it's like, you know, incredible 30-foot-high ceilings with these columns and everything. And like, what she designed is just, I can't help, like, you know, like I, like, show everybody the pictures. I probably would just, you know, put them on Zoom and show you guys, but, like, I want to do it in the right way. I might bring back one of our videos. You know, it's like when I used to do those videos, and, you know, because it's such a visual business.

You know, I sit here and I talk, and I try to tell you how excited we are and stuff like that, but, you know, seeing is believing, right? You know, physical evidence is the key, and so, you know, maybe, maybe in a quarter or two, you know, we'll put together one of our videos with music, and you'll see the images come through. Because, you know, Paris, same thing, unbelievable, you know. Milan, I mean, those three galleries are so unique and different, but unreal. I mean, you know, but again, let's just think about it. RH England, incredible! Like, just not that many people go out there, you know? And so, yes, in the summer, you know, kind of picks up. In the winter, not so many people.

But when London opens, I think the business will go up in RH England, because the brand awareness is gonna go up, and all the people that go out there, you know, are gonna know about us. And, you know, and when we open in Paris, you know, Paris and London and Milan, you know, Milan's the center of the universe for design. It's the home of Salone, the biggest design show in the world. You know, 500,000 people go to Salone. You know, any, almost every great interior designer in the world, and brand in the world and, you know, aspiring designers and so on and so forth. And, I mean, there's nothing in Milan like what we're doing. Nothing close. You know, it's just incredible. I get goosebumps talking about it, you know?

All of them, I mean, Paris, it's unreal. It's just like this jewel box, you know, right in the heart of the world of luxury. You know, right by, you know, you-know-whose office and everybody else-

Maksim Rakhlenko (Director and Senior Equity Analyst)

Yeah.

Gary G. Friedman (Chairman and CEO)

It's all around there, and, you know. I mean, they're all gonna see... You know, we're gonna enter at a level that might be a step or two ahead of them. So, I mean, because what we're doing is just we're making investments into, you know, just brand statements, physical experiences that are gonna be like, just monuments. And, you know, like, I mean, anybody who goes to any of those towns, I guarantee you, I guarantee you, any, any high-end person that's going to London, that's going to Paris, that's going to Milan, and they say, like, "Hey, what should I do here?" Or like, "Where should I eat? Where should I go?" We will be on that list. Concierges, you know, influential people, not influencers, but really influential people, you know, at the high end, you know.

You know, it's like, I'm just super excited and, you know, and I'm kind of glad I'm giving Kristin global, you know, accolades here, 'cause she's like, you know, that was just one of the greatest, you know, designs I couldn't have imagined. If I had a hundred years to try to do it, I would have never came up with the idea. So, so it's just, yeah. The trajectory is the trajectory for now. The trajectory will be completely different over the next couple of years. So give it a little time. Things take time, you know, and, and then they go boom, you know, generally. You know, it's like there, there's really no overnight successes.

So, yeah, let us kind of really get going and kind of, you know, plant the foundation, and then I think everything around it, all the seeds we've, you know, you know, we planted and all the galleries, they'll all go up. The whole thing's gonna go up. But just hang on, be patient. I'm an impatient guy, but I have to be patient about this. Like, this has been a long-term investment, and we got to get those galleries built, and then Europe and the U.S. and the consumer, you know, they'll really know who we are. You know, you won't be able to miss us.

Maksim Rakhlenko (Director and Senior Equity Analyst)

I appreciate it. Thanks, Gary.

Gary G. Friedman (Chairman and CEO)

Okay, Brad, thank you.

Operator (participant)

We'll move next to Michael Lasser with UBS. Your line is open.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Good evening. Thank you so much for taking my question. Gary, if you look at the updated guidance, how much of the reduction was due to the markets just not being as strong as you expected, a slower ramp in demand in response to some of the introductions and changes that were introduced, or just everything executing a little slower than what was previously anticipated? And then as part of that, if demand is shaping up to be a little lower than you had expected, shouldn't there be a benefit to the spread between demand and sales?

Gary G. Friedman (Chairman and CEO)

Yeah, yeah, well, so, Michael, those, you know, all good questions. So, thanks. I'd say to the first, you know, one, which is kind of a lot of questions in one, right? Dealing with, like, what really caused the ramp to be slower. I think a little bit of all of it, right? You know, so, no, I would say, no, I'd say this. So let me say this, the first one, no, not relevant. You know, the market is not as strong as we expected. I don't think that was relevant. I think it's more, you know, just the time it takes to marinate with the consumer, you know, to see it, you know, the time, you know, like, the time it takes for the books to kind of get in home and, you know, might have get in home.

You know, ours, ours are big books, right? You got to really intentionally throw it out, you know, you got to, like, boom, it's out. But, you know, a lot of people get our book and, you know, it sits on the kitchen counter, or the coffee table, on their desk, next to their bed, and all of a sudden, they might open it, you know? And then you have a certain amount of people that Yeah, they're in the home process. They've moved, they did buy a home. I mean, look, the housing market's not at zero, right? Just down comparatively. I mean, we're doing a lot of volume. But yeah, it's just trying to say what, you know, when did, you know, the amount we're doing?

You know, it's like take the amount we're doing and say, like, you know, how long does that take to digest? How right or wrong are you? You know, what's the quality of our execution? You know, and what can be the quality of the execution in such a massive move, right? So it's hard to be critical, you know, really, you know, the organization when you're doing so much. You know, it's hard to have the points of reference to measure. And, you know, it's hard to know what the ramp is. You know, how fast will it ramp? How... You know, what's the consumer's, you know, consumer reaction, acceptance, you know, like when does it tip and really get going? But I'd say it's, you know, we're seeing the data, right?

That's why I say it's. I don't spend a lot of time really on that question, Michael. It's like why I wrote it in the letter. It's not so much about the timing, it's more, you know, about the vector. It is happening. That is, you know, indisputable, like it's happening. And we have real points of reference, right? You know, we've reported a little later than others, so you've got all these points of reference and demand. That's why I actually kind of gave you months and builds so you can have more comparability. You know, I put some more breadcrumbs out there. And so, you know, it's indisputable. Nobody has our demand right now. Nobody's close to our demand right now. You know, so now it's just...

You know, and so that's how I think about that. You know, it's like if we're still waiting, you know, and we're like bouncing around at -3% or, you know, fine -3%, you know, looks like a good number, right? I mean, my former company came out a week or two ago and said, "Hey, the industry is down 10%." I don't know what industry. I don't know if that's the furniture industry or that's the home furnishings industry or the tabletop industry. You know, they're in a much broader category, but they characterized it as down 10%. And, you know, so I'm sure that included all the businesses they have.

They were down three, and they said, "We are taking market share." You know, so we're doing a lot better than that, and we are more of a furniture-based business, right? And so if you kind of anchor us around, you know, furniture kind of people versus, you know, heavy mix of home furnishings, like, we are not in a tabletop. We don't have a big accessories business. We don't celebrate any of the holidays, right? We got no Halloween stuff. We got no Thanksgiving stuff. We got no Valentine's Day stuff. You know, we don't have any Christmas, any Hanukkah stuff, you know, and we used to sell that stuff. You know, it just cluttered up the furniture, right? And we don't even sell any décor. And look, I'm not saying we'll never sell any of that again.

I don't know. You know, you learn, you might do a little, maybe we have some giftable things. I, you know, I don't know, but right now I like where we're at. But the important thing is, who are you anchoring us against? You know, you could look at our book and count the products on the pages and the space that things get, and you could make an estimate of what percent of our business. I'm sure you can get an estimate or do an industry analysis, right? If you looked at furniture and other categories, of what percent of a home spend at the high end are all of those categories. The important thing is, you know, anchoring us against people.

Don't anchor us against people selling a lot of accessories or a lot of holiday stuff or, you know, tabletop and all this. We're not in that business. We're not in any, you know, very little of those businesses. We don't have any dining tables piled with stuff on them. You know, you see a beautiful dining table with maybe a centerpiece or something like that. You know, but if you really compare us to how, you know, the industry, you know, it's like we have a massive inflection point. Massive. And so, you know, if you really kind of look at a home and walk through a high-end home, and if you took a pad of paper and pencil and you walked room to room and you say, "How much, like, in this dining room, how much was the table?

How much was the chairs? How much was the sideboard or cabinet? You know, do they have a rug under the table? How much was the rug? How much was the chandelier? Okay, let me open this sideboard or cabinets. How much were the dishes and flatware and the placemats and napkins?" You know, you go do that in every room... and you'd realize that the amount of business in the categories we're dominant in is the biggest amounts of business. It's not, well, we won't maybe try tabletop again. It's just not the big percentage, you know? It doesn't get anywhere close to the businesses we decided to be in and the business we decided to dominate. And that's like, you know, kind of what I was saying earlier on the call about what you have to say no to. I mean, we've said no.

We've edited so many businesses. We might have, you know, we've probably edited $700 million-$1 billion out of business today. But the furniture, lighting, rugs, you know, big textiles, but, you know, the outdoor furniture, those businesses would be a lot smaller if our stores were cluttered with all that. I mean, I call it crap, but it's not crap, you need it. You know, like, we, you know, it's like we have a little bit of it, but it's just what do you say no to? What are you trying to be best in the world at? You know, but the spreads, you know, you got to look at the spreads right here.

And when the home business comes back, when housing lifts, you know, the people that are selling Halloween stuff and Christmas stuff and all that stuff, those businesses don't go up or down that much. You know, I mean, do your kids not go trick-or-treating? You know, when, you know, the business is tough for somebody. No, everybody goes trick-or-treating. Does Santa always come? You know, does everybody celebrate Hanukkah? You know, people give Valentine's gifts. Yeah, they do. You know, those businesses don't really go way up or down. So if you've got a bunch of those businesses, you're gonna be less cyclical. You're also not gonna benefit as much as we do from a housing market bounce back, right? That's why I like us better than everybody else. I like us better than everybody else because we have the inflection on, you know, demand and margin.

We have incredible pipeline coming. We have an incredible platform that's only gonna become better and more dominant. And when they really start buying furniture, and chandeliers, and rugs, and, you know, all the big-ticket stuff, measure our inflection then, compared to all those people selling Halloween crap. You know, 'cause you can't even see their dining table during Halloween. It's covered with all kinds of goofball things. You know, so, like, but it's still. But I'm not saying those businesses are horrible businesses. It's just saying, what are you gonna own? What are you gonna be best in the world at? It's hard to be best in the world at all those things. And, like, we've learned that, we've got scar tissue now. We've made recent mistakes, and we're gonna continue to edit and focus and get more focused, you know.

But that's how I think about them, you know.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Maybe I could reframe the second part of the question is: when do you expect demand and revenue, the growth rates to converge?

Gary G. Friedman (Chairman and CEO)

Oh, well, I don't know. Like, you know, you actually made a really good point, right? If demand comes down, like, you know, we lower demand, that gap will come down and also, the backlog-

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Yeah.

Gary G. Friedman (Chairman and CEO)

You know, projected backlog, right? So we kind of modified, you know, some of those numbers. We kept the four to eight because it's a quarterly bounce. It could be, you know, bouncy, but it could gap narrower, right, depending on timing of things. So, but, yeah, it'll all converge. When do I think it'll be? I don't know, like, end of next year, you know, like, when we've slightly... You know, we're kind of, you know, we start to regulate more, right, as far as the cadence, you know, and the books and the newness and, you know, then, you know, those gaps will not be as important. Like, we won't have many back orders, we won't have, you know, imbalances in special demand. You know, lead times won't be as long from our partners.

You know, like, think about our partners, you know, trying to react to what we just did. I mean, you know, everybody, it's, it's a big... You know, it's a big chaotic for everybody, but it's a, it's a beautiful chaos. And the great thing is when you create order out of that chaos, you know, and it's a beautiful chaos, it becomes a really focused, powerful, you know, beam that can, that's just gonna break through. So, but, you know, like, I don't know. Like, I- look, I wouldn't-- Your, your job's really hard right now. You're trying to build this model. I can't build the model very good, right? Like, I, you know, we were off, you know, on the inflection stuff, and, you know, but, you know, we'll give you the data. Like, that's why, you know, we never guided demand before.

We didn't give, we didn't give anybody demand. And, you know, but we thought, hey, you know what? Right now, we, you know, you're not- no one's gonna be able to analyze our business with what we're going through. We need to give demand. And so, you know, we're trying to be transparent and give you the important data and be completely honest about what's working and what's not working, and, you know, what's gonna take more time, you know. And so, yeah. But it's all... You know, we're, we're strategically right, we're directionally right. The vector is there, you know, it's growing in magnitude and direction, and it's, you know, it's. I mean, I do I see the vector closing? I mean, man, I've never seen anything like that in my career. I've been doing this a long time.

Once you get this right, and you get this directionally right, you're generally off to the races. You know, that's how you go from a brand that was at a $20 million market cap selling Oxydol laundry detergent and tchotchkes to where we are today. You know, it's big moves. Big, big moves, and getting, being directionally right, and then building on that and, you know, refining that, and, you know, that's just what we do, and we're pretty good at it. We're not, you know, we're not perfect. You know, we're gonna miss some things, we're gonna get timing wrong. We're not generally wrong completely about the idea, except for what I call sideshows.

You know, like, you know, it got us into the contemporary art business, and I thought it would, you know, yep, there's more square footage on walls than there is floors. And, you know, then I realized, like, oh, God, you get a best seller, and you can only sell one of them. This is a shitty business. What do you mean? I got a best seller, I can only, you know, sell one? Like, oh, no. You know, it's like, yeah, it's like I don't even know how to... You know, so I was like, this, this was dumb, you know? And, I mean, again, really good for someone else who's mastered that business, like, totally more or less. Like, okay, you, you get the wall business. I'm gonna do a different wall business.

I think what we're doing with Portia de Rossi in General Public and, you know, yeah, yeah, doing like the, Synograph, like printing, like almost like a 3D printed, beautiful reproductions. You know, and her whole philosophy on art is just fantastic, and her and Ellen are, you know, incredible art collectors, but they wanna make art more accessible. And, you know, she says, "Look, you know, what if the world, you know, what if there was a great book and there was only one of them, and you couldn't print the book?" Like, think about that for a second. Oh, I have the only Catcher in the Rye. You know, who's gonna pay? What are you gonna pay now? $7 million, $10 million, $100 million for that book? You know, and then someone has the only whatever, you know.

Like, what a silly business that is, right? And so she's trying to, you know, bring more democracy to that and make it more accessible, and she's got, you know, really good artists that, you know, they've negotiated, her and team, an ability to reproduce, you know, at, at a high quality level. I mean, you look at it, you think it's the real thing, and it's great. You know, I've got it up in my, my house. So it's good stuff. And, you know, that's, that's a really good business that, that we're in, you know, building. But, you know, I thought, oh, yeah, really cool, we'll reinvent the contemporary art business. Like, we're gonna swing and miss at things like that. You know, it's like, got it, it's- so you learn and grow. But, you know, all good stuff.

Anyway, I don't want to keep you guys too long. I could talk about this forever.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Thank you. Thank you very much. Much appreciated, and good luck.

Gary G. Friedman (Chairman and CEO)

Thanks so much. Come see us someday.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Will do, for sure.

Gary G. Friedman (Chairman and CEO)

Okay.

Operator (participant)

We'll move next to Seth Basham with Wedbush Securities. Your line is open.

Steven Paul Forbes (Senior Managing Director and Equity Research Analyst)

Thanks a lot, and good afternoon. I have one question, one follow-up. First, you mentioned in your 10-Q that your contract business is growing. I was hoping you'd provide a little bit more color on the size of that and the momentum there, and whether that's going to become more meaningful to the overall company at any point in the near future.

Gary G. Friedman (Chairman and CEO)

Yeah, well, look, you know, everything begins and ends with the core RH brand, right? That business. And, if that business gets stronger and more powerful, then the contract business will get stronger and more powerful. You know, yeah, everything will... You know, the hospitality business is gonna be better, you know, if more people are coming to our galleries and buying things and, you know, and so on, so forth. And so, you know, and, and, you know, we've got great teams and, you know, contracts, and, I mean, we even think about our outlet business, right? If demand's up, you know, and sales are up, you're gonna have more returns. You have more returns, you have more inventory for the outlet business, you know, and the outlet business grow. Like, all those businesses generally trail the core business, right?

Like, you know, it's like the, you know, it's like the lead, you know, lead sled dog or something, you know, like, right? You know, that clearing the path and, you know, creating, you know, you know, the, the geese that fly in formation and stuff like that. The core business is at the front, and everything else will benefit from the core business. And so, you know, is the core business demand stronger than all the other demands? Sure. You know, is that right there an opportunity as the other businesses benefit from what's happening in the core? Yes. That's a coming tailwind, right? And so, you know, we're not breaking that all out right now.

You know, maybe I think it's a firm grasp on the obvious, but maybe it's not and, you know, but yeah, there. The core brand makes it possible to have a contract business, you know, makes it possible to have an outlet business, makes it, you know, possible to have, you know, any other kind of business we're in. You know, our restaurant is possible through the great galleries and spaces we build and, you know, our baby and child business. You know, if there wasn't an RH brand, would there be an RH Baby & Child? No.

You know, but, you know, all the lessons and all the things you'll see, you know, you're starting to see. I don't know if you saw the last, you know, the book we just mailed recently for Baby & Child and Teen. It looks incredible, you know, and it's, you know, it's emulating kind of aesthetically what's happening in the core, right? So, so there's so many reasons we're so excited right now, because the collection and the core, everything else, you know, it, it will create, you know, it'll clear the path for everything else to follow, and it'll bring everything with it. You know, it's just a matter of timing. You know, so, but the core is gonna lead it all, right?

So you could expect, I would say, almost with certainty, but, you know, I could be wrong, something could pop here or there, but, you know, the core will... the core business demand growth, you know, will be higher than everything else, but they'll all catch up, and it'll all kind of come back into harmony.

Seth Basham (Managing Director and Director of Research)

Got you. And then my second question is on inventory, which increased more than 20 percentage points faster than sales this quarter. You talked about some of the reasons why, but can you provide any more color as to how much of this is your gallery floor models, and other things? That would be helpful. And relatedly, should we expect this outsized inventory growth versus sales growth to persist, for at least the next few quarters?

Gary G. Friedman (Chairman and CEO)

Yeah, you know, it's a lot of it is a kind of insurance, right? Of like, how do you make the transition from here to there? How do you not things, you know, like, drop out and, you know, run out of this before you built a bridge to there, and all of a sudden you've lost, you know, you lost business. You know, you just, that's where we're coming for this. And, you know, so, and you're learning every time, you know, in a big transition like this, never done this before, you know? So, you know, we're doing all our math and saying, "How do we get from here to there?" And then, you know, we had early learnings and like, "Ooh, gosh, we're getting out of that too fast.

Hold on." You know, like, how do you, you know, how do you optimize? So, you know, we're learning. But, you know, there's like an insurance policy, call it inventory, to kind of get from where we are to where we're going. And exactly where we're going, we know directionally where we're going. We don't know exactly what that, you know, the makeup or the pieces and the percentages and the, you know, like, what's optimal now? We're gonna learn new things, and, you know, so, you know, as we learn, you know, you'll learn, like say. You know, so we're... I mean, wish I had, you know, I mean, maybe I don't, I don't really wish I had a, you know, really precise answer, because then I'd be a manager.

You know, I'd be arranging and organizing the status quo, and I'd be really accurate telling you what's gonna happen next quarter and, you know, next year, you know, but that's just not what we do. We would never got here if we were managers. You know, we're, we have a leadership culture. We don't have a title of manager anywhere in this company, in this brand. There are no managers here. We don't have meetings here. We have adventures, you know, pursuit of better ways and brighter days. So, you know, different, you know, it's a different culture, we do different things.

We have, you know, different vocabulary, you know, and you need a different vocabulary, otherwise, people will just go to meetings, you know, and people will do a nice little PowerPoint, and people will go, "Oh, really good," and, you know, shake hands and kiss babies, and, you know, can't wait to get to lunch. Not usually what we do. Kind of an adventure, you know, and you're kind of learning a lot, and sometimes, you know, it's difficult, sometimes you trip and fall, and you get up, and you've learned. And, yeah, like we tell the team here, like, if you want to know what's possible, you have to go to the edge of impossible, right? And you have to look out and, you know, try to see what's possible. And we say, "Just don't fall off. Don't die.

If you don't die, you're gonna learn, and you're gonna grow." You know, and so, you know, that's where we kind of go, and that's where we play, and that's how we learn, and that's how we grow. You know, I'm sorry I can't give you, like, so buttoned-up answers here, and I kind of, you know, sometimes give these longer-winded, conceptual, you know, directional answers, but that's what we do here. You know, like, it's, we're figuring it out, and we're learning. I can tell you right now, we've just learned a lot, and boy, we've got some really good data that, you know, helping us, like, move faster and more accurately towards the direction we want to go. You know, so-

Seth Basham (Managing Director and Director of Research)

I appreciate that. Thank you.

Operator (participant)

Ladies, ladies and gentlemen, this does conclude our question and answer session. I would now like to turn it back to Chairman and CEO, Gary Friedman, for any closing remarks.

Gary G. Friedman (Chairman and CEO)

Great. Thank you, everyone. Thanks for your time and your interest, and you know, hopefully, you've learned just like we've learned, and I, yeah, so I just, you know, as we do here, just, you know, thank our, you know, our people and partners around the world, you know, it's, it's just a great time to be on team RH, and at all levels.

I think, you know, we're all learning so much, we're just getting going, you know, we're getting stronger every day, and, you know, our culture here is because, you know, all the brains in the game and the egos out of the room, and none of us are smarter than all of us, and we're learning together, and we're growing together, and, you know, we're gonna build something incredible together. And it takes a lot of energy, and it takes, you know, a lot of effort, a lot of courage, and a lot of commitment. So thank you, everyone, you know, on the team, you know, internally and externally, you've, you know, brought this to life, and it's gonna be a fun ride from here.

It's gonna be a really fun ride. So, look forward to speaking with everybody soon, and, you know, heart-