RH - Q4 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter 2023 Q&A call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like 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 fourth quarter fiscal year 2023 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

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

Gary Friedman (Chairman and CEO)

Thank you, Allison, and good afternoon, everyone. I'm gonna start with our prepared comments, which are included in our press release, and shareholder letter. To our people, partners, and shareholders, fiscal 2023 was a year of diversity, innovation, and investment for Team RH as we faced the most challenging housing market in three decades while investing in the most compelling product transformation and platform expansion in our history. We have positioned the RH brand to gain significant market share in 2024 and beyond, while building the foundation for our global expansion across the United Kingdom, Europe, Australia, and the Middle East over the next several years. While aggressively investing in a downturn has put pressure on short-term results, it also positions us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation.

We've demonstrated our confidence in our strategy by repurchasing 7.6 million shares of our stock during fiscal 2022 and 2023, representing approximately 35% of the shares outstanding, and believe that investment will create meaningful long-term value for our shareholders. Turning to our fourth quarter and full year results. Revenue was negatively impacted by $40 million in the fourth quarter due to the severe January weather and shipping delays related to the ongoing conflict in the Red Sea. We do expect the majority of the deferred revenue will be realized in 2024 when transit times normalize.

Adjusted operating margin was 9.1% and 13%, and adjusted EBITDA margin was 15.3% and 18.2% for the fourth quarter and the full year, respectively, reflecting deleverage from lower revenues, increased markdowns to support our product transformation, and investments in international expansion. "Every act of creation is first an act of destruction," Pablo Picasso. We have spent the past 18 months destroying 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 plans for 2024 include the launch of our new RH Outdoor Source Book, the most dominant and disruptive collection of luxury Outdoor furniture in the market, arrived in homes late February through mid-March with 14 new collections. The initial response has been exceptional, and we expect to gain significant market share in this important category in fiscal 2024. The unveiling of our new RH Modern Source Book is scheduled to be in-home late April through early May, with 30 new collections across living, dining, bedroom, and bathroom, including original designs from the Harvey Probber estate, one of the most influential Modern designers of the past century. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of 2024.

The second mailing of our new RH Interiors Source Book is planned to be in-home late May through early June, with new collections and improved in-stocks, which should also provide an additional lift to the demand in the second quarter and continue to build through the second half of 2024. We will be mailing an updated RH Contemporary Source Book in late July through early August, with new collections and a compelling value proposition, which we believe will also accelerate demand trends. A second mailing of the RH Modern Source Book and third mailing of the RH Interiors Source Book are expected in the second half of 2024, with additional new collections, refreshed galleries, and improved in-stocks. These mailings will result in a doubling of our source Book circulation and customer contacts in 2024 versus 2023.

Our data would suggest the increased number of contacts alone should provide another lift factor for our business. We are also increasing print and digital advertising across major home design publications in 2024. You will see our ads in Architectural Digest, Elle Decor, Veranda, Galerie, World of Interiors, Luxe Interiors and Design, Business of Home, the Financial Times, plus The Wall Street Journal and T Magazine design issues. 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 seven 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 their revenues from the trade market, selling to architects, designers, developers, and builders.

While RH has a significant trade business, the vast majority of our revenues are generated by consumers. We believe there is 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've expanded both other mostly trade-focused businesses and brands over the years. Our plan is to launch with a 3,500 sq ft Waterworks showroom in our newest and largest design gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks Source Book with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business, with mid- to high-teens EBITDA, that we believe has the potential to become a billion-dollar global brand on our platform.

Let me shift your attention to the expansion of our platform. 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 2024 include the opening of five North American design galleries, including Cleveland, which opened last week, Palo Alto, Raleigh, Newport Beach, and Montecito, all with integrated RH interior design offices, restaurants, and wine bars. The opening of our first RH Interior Design Studio in Palm Desert, California. We believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation, as well as augmenting some of our design galleries in larger markets with additional design services in standalone design studios.

We will also be opening 2 international galleries, one in Brussels, which opened last week, and Madrid, opening this summer. Both galleries are located in beautiful historical buildings that elevate our product and render our brand more valuable. Unfortunately, RH Paris has been delayed until spring of 2025 due to construction restrictions relating to preparations for the Olympic Games this summer. We are also pleased to announce RH Sydney, the gallery in Double Bay, a five story development with a rooftop restaurant and wine bar, received council approval last month with plans to open in fall of 2026, in what we believe is the most vibrant and desirable location in Australia. Now let me turn you to our outlook. While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024.

Due to the extensive transformation of our assortment, we do expect revenue to lack demand during the year by approximately 4-8 points until we read and react to new collections, reduce back orders, and shorten special order lead times. Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024, so shareholders and investors can accurately analyze the business. We believe it's also important to note that we are forecasting to end the year with an increased backlog of approximately $110 million-$130 million, due to revenue lagging demand throughout 2024, which will negatively impact operating margin, adjusted EBITDA margin by approximately 140 basis points for the year.

Additionally, investments and startup costs to support our international expansion are estimated to be approximately 200 basis point drag for 2024. For fiscal 2024, we are forecasting demand growth of 12%-14% and revenue growth of 8%-10% on a 52-week vs. 52-week basis. We are forecasting adjusted operating margin in the range of 13%-14% and adjusted EBITDA margin in the range of 18%-19%. For the first quarter of fiscal 2024, we are forecasting demand growth of positive mid- to single digits and revenues of negative low single digits. We are forecasting adjusted operating margin in the range of 6%-7% and adjusted EBITDA margin in the range of 12%-13%. Now let me turn you to the RH business vision and ecosystem, the long view.

We believe there are those with taste and no scale, and those with scale and no taste. The idea of scaling taste is large and far-reaching.... Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade.

Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5billion-$6 billion in North America and $20billion-$25 billion globally. Our strategy is to move the brand beyond curating and selling product, to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste and placemaker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.

Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art, and design in the Napa Valley. RH One and RH Two are private jets, and RH Three, our luxury yacht, that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture.

This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning, time-starved consumers. The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion-$10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70billion-$100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.

Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. Never underestimate the power of a few good people who don't know what can't be done. For the past 23 years, we've heard others tell us what can't be done. For the past 23 years, we've failed to listen. We avoided bankruptcy by being accused of lunacy. While others have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world. When Wall Street didn't think our stock was worth buying, we bought 60% of it ourselves. When everyone told us we should be working from home, we're in the center of innovation, working on rebuilding our new home, and it's almost ready for prime time.

From the largest product transformation in our history to the most inspiring retail experiences in the world, from couches to caviar, beds to Bellinis, architecture to airplanes, homes to hotels, guest houses. From Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich, and San Francisco to Sydney. Soon, the world will be within our reach. 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. And now we'll open the call to questions.

Operator (participant)

Thank you. The floor is now open for your questions. To ask a question this time, please press star followed by the number one on your telephone keypad. You'll be provided the opportunity to ask one question and one further follow-up question. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Hey, good afternoon, Gary and Jack. I think the most important element of the outlook is the sales guide, because, you know, it hasn't been growing, and now we're flipping to growth. So I wanted to see if we can approach it from two sides, and I'd love to hear your perspective. First, on one side, if you end up meeting or beating this outlook that you've given us, if we look back, I mean, it's clearly could be the products resonating more than you thought, or should we look at it as, you know, you gave us more of a conservative trajectory than what even the business is implying today?

On the other side of that, if you end up falling short of it, was it, you know, either product didn't resonate or maybe there was more pent-up demand and you're, you know, overreading that curve? Curious how you think about both sides of it.

Gary Friedman (Chairman and CEO)

I think you just covered the answer, in, in many ways. I would say, look, we, we have visibility trends in our business that, that can help us connect the dots. I mean, if you read the letter a few times and you look at the kind of pieces that will... That add up to directionally where we're going, we feel very confident in, you know, the, the plan we've laid out, the guidance we've laid out. And this is what we've been working on for the past, you know, 18, almost 24 months. So, it's been a lot of thought, a, a great attention to detail.

You know, we've been flying at the highest levels, and we've been into the lowest levels of detail inside the company and the organization to rebuild the brand from the bottom up. You know, I think this is the best work we've done. I think this is the best team we've ever had. I think what we're about to do is gonna create another leapfrog for our age, just as we've done, you know, every seven or eight years, if you looked at our history, when we've done transformations like this. Yeah, we're highly confident. We think we have enough data and information to read.

If you were in our center of innovation right now, you'd be looking at all the whiteboards that I'm looking at, that have every category of our, every category of our business laid out every month with demand this year, last year, yeah, two years ago, percentages, trends, book drops, collection newness. I mean, this is built up at a very detailed level. No one has a crystal ball. You know, we're gonna, you know, I always tell the team as we buy inventory or do anything, you know, every plan we have is some degree wrong. The question is, is it more right than wrong? And is it directionally right? And have you identified the risks in the plan and the things that maybe you haven't seen as you've been building something up from a, you know, an optimistic vision perspective, you know?

And, we believe we've done that. You know, we've been here with, you know, all of the key leaders, all the key team members at every level, you know, building this, again, for a long time. Talking about, you know, how many trips to Asia, how many trips to Europe, how many... We don't have meetings in our company. We have adventures. We say, you know, because we say meetings is about arranging or organizing the status quo, and, you know, adventures is about, you know, leading people somewhere they've never been, doing things they've never done, and, in search of better ways and brighter days. So, you know, we've been through countless adventures. We've, you know, I think we've looked at all the data that's available and created new data.

So I personally feel great. I think the team feels great. I think if, you know, if you came here and you spoke to the people really doing the work, I think they'd all feel great. Our competition might not feel great over the next couple of years, but that's not really our problem.

Simeon Gutman (Executive Director and Senior Equity Analyst)

As a follow-up, if I can ask about Europe, if you can share, you know, how much of Europe sales is in this guide? And if, I guess, you'll ever get comfortable sharing the Europe forecast. I don't know, every gallery may be different and there's a wide range. And then I guess the 200 basis points, that's, I think, the first time maybe we've gotten explicit quantification. Does that taper quickly or slowly? And is that like the peak or call it international investment, and now that, you know, revenues build, even as you add more galleries, we don't step back from that level further? Thanks.

Gary Friedman (Chairman and CEO)

It's a long question, so let me maybe take the same amount of time and process it. Look, Europe, I'd say is, there's a few points. If you kind of motor up and think about, you know, what we're in the very early process of doing. Like, yeah, first stand back and say, what—what have we done so far? Last year, in mid-June or so, we opened an extraordinary, you know, never seen before, multidimensional experience in the English countryside, that we opened through a lens of conversation, not commerce. And the why that we've articulated between that was, we fortunately and unfortunately, we did a package real estate deal that enabled us to get two irreplaceable locations in London and Paris, but also required us to take other locations we had to open sooner.

As a result, these smaller markets, you know, are not benefiting as we first opened. We didn't think they would from the brand awareness, although the key markets would provide, right, and will provide. So RH England was, you know, born out of that kinda conundrum of not really opening in the places we'd want to open first. You know, there was a big expense if we didn't do that, and other lease requirements and other hurdles that we, you know, that would have been a little messy. So that's what drove us, you know, because we weren't gonna be able to open London and Paris first, that drove us to say: What can we do? You know, what would we do?

What kind of investment would we make, that would introduce RH to Europe and the broader United Kingdom in an inspiring and unforgettable fashion? And why is that important? I think it's important because just about every luxury brand in the world is from Europe and the U.K., except for a couple. You know, you can argue that we have Ralph Lauren and Tiffany. You know, Ralph isn't pure luxury, right? So there's a bigger, broader distribution strategy there that's a big part of that business. So if you said pure luxury, what are the pure luxury brands in the U.S. that are really top of mind internationally, you know, and have been, you know, for a long time? I'd say it's Tiffany, and the French just bought it, like a couple of years ago.

So I start with, first and foremost, I wouldn't say Americans are described internationally as tastemakers, you know, of as, you know, architectural thought leaders and so on and so forth. You know, you look at the beautiful historical architecture, you know, across Europe and the U.K., and then you look at the U.S. and you go, okay, if you start on the East Coast, you've got some, you know, and you start moving west and it kind of falls off a cliff pretty quickly, right? And so as an American brand that hasn't really been doing what it's been doing for very long, and, you know, looks like we did, you know, 15-20 years ago, you know, a kind of tchotchke little shop with back scratchers, selling back scratchers and moon pies, you know, and things. That it's, you know...

How do you want to introduce yourself if you wanna earn the respect of the tastemakers, of the placemakers, of the people that, you know, kind of not only set the standard, but set the direction for consumers broadly around the world? And that's how we came up with the idea for RH England. You know, and opened in Aynhoe Park, you know, in a historic seventeenth-century estate, you know, 73 acres. You know, that's why we invested in probably, you know, among the best architecture and design libraries that's not an institutional location, but a private collection, you know, in the world. That's why we have three restaurants, the third one opening this spring. It's we wanted to introduce ourselves in a way that no brand has introduced itself to Europe and the United Kingdom.

Did we think we were gonna do a lot of volume out there? No, not initially. You know, did we think we're gonna open the market to the internet? Yes, and we've learned from that, and we've learned, likely from, you know, how the design trade profited from... You know, that came to us and connected with us and interacted. And we also knew that we're opening somewhere where, in the kind of winter months, you know, in the late fall and early spring months, you know, it gets dark as early as 3:30 P.M. out there, and it's really cold and not a lot of people are going out there. I mean, they might have been going out there more during COVID because there's nowhere to go.

The last thing you want to do is be in a big, big city. So, you know, so we did something very unusual, and that's why if you go to that gallery or if you've been there, the first thing you see when you walk into the entry is a unicorn. And it talks about how, you know, unusual and inspiring we believe the place is. And I think we've introduced ourselves in a way that's captured people's attention and imagination. And I think the conversation is the right conversation, and I think that conversation will build as we're open for a full spring, summer, and we have all three restaurants open. And we'll really learn a lot more. But that's why we did that, right? And the next galleries we've opened have been open weeks.

You know, we opened in November, what, mid-November or something?

Jack Preston (CFO)

18-20 weeks for the German galleries.

Gary Friedman (Chairman and CEO)

Yeah. Okay. So, yeah, you know, so, you know, you know, months and, and, and so in places we've never been, and not necessarily what I'd say, you know, like Paris and London are two of the most famous cities in the world. They're two cities anchored in fashion and style and, and so on and so forth. And I'd throw Milan in there, too, 'cause we also have, you know, we're making—I think you're doing something extraordinary in Milan. But those all were gonna take longer. Right? And so we're not opening in the order that we wanted to open in. You know, but, you know, it was always our intention to open in Paris and London first, in iconic locations from a brand awareness point of view.

But what we've learned so far, and, you know, let me tell you, like, you know, there's a higher mix of trade than we anticipated or have seen anywhere. And trade is exterior, interior designers and more of a B2B business, you know, hospitality, contract kind of design. So, it's a much higher mix of trade right out of the gate. And what is—Did that surprise us? Not really, 'cause the consumer doesn't really know us yet. But if you're someone who's aware of the home, if you're aware of design, if you're an interior designer, you know, if you're doing commercial projects or residential projects, you know RH. You know, and you may have likely shopped from us in the U.S. or you've been to our key galleries.

And so what I like about that is it's really the right people and the most influenced people who are out indexing today. We didn't anticipate that. You know, we didn't think about that, but when I do think about that, I think I'm very, very happy about that. I, I think it, it wouldn't be good if it indexed the other way. You know, 'cause you wanna get the right people, especially where it's if you think about where we're trying to take this brand. So the right people, the people most interested in, you know, architecture, interior design, and, you know, taste and style, are coming to us at a, you know, higher mix. And that deals with building our book of business, which is an important part of this business.

Building the pipeline of design projects, both in our trade business and in our own internal interior design business. And so when we look at the book of business for RH England, and we look at the trends now that we've been open, that business from a retail point of view, you know, like a gallery point of view, is gonna be right about where I think we thought it'd be directionally for, you know, opening in such an unusual location and thinking about what might happen. What surprised us the most, I'd say, is the direct web business is slower than expected. You know, we thought that the web was going to be a much larger mix of the total since we were opening an entire country. Right?

And so when we stand back and reflect on that and say, "Okay, what, you know, what didn't we think about? You know, what did we miss in that analysis?" I think it's just the overall time it might take to build the brand and ramp the brand to a consumer, and also the first gallery in the U.K., kind of not being by anybody. I mean, what's the population of Aynhoe Park? A few hundred people?

Jack Preston (CFO)

300 people.

Gary Friedman (Chairman and CEO)

300 people, right? Like, we opened in a town of 300 people. And, yeah, and there's nothing really that close. It's, you know, we're 30 minutes to Oxford, you know, so we had some major things where a few other places. But it is a place that people aspire to go to, spend time with, especially in the late spring, summer, you know, early fall periods. And also we have plans, you know, once we get our feet on the ground, you know, to think about long-term doing events and other things on that property to bring the right people in.

We're also have some partnerships happening that actually have sourced us to do different events dealing with whether it's beautiful high-end car brands or, you know, the racing and things that happen, and, you know, a lot of the prestigious things that happen out in the English countryside. And then I think the other thing I'd say, you know, just think, like I'm just giving you a kind of context of how we think of Europe right now, is we didn't open with the full assortment.

And, and I think when we go back and we're analyzing that, we go, "That's that part of the assortment that we didn't open with is probably really important to consumers and the web business." So, you know, building awareness, you know, that opens up the internet and the web business to get that to move more quickly is gonna be important. But I think a lot of it, it's gonna take opening the key iconic galleries in London and Paris and, you know, Milan and so on and so forth. You know, these big ones with restaurants and champagne and caviar bars and wine bars and barista bars and, you know, architectural and design libraries, and all the-...

All the really incredible experiential things that, you know, people are going to discover the brand and say, "What, what is this?" But right now, the only one with those experiences is in a very unpopulated part of England, and it's going to take longer to be discovered. But when people discover it, it is the right people, and it is the right conversation. So we're super happy about that. But I say we're still so early, right? Like, we got to let the book of business build. You know, we've got to kind of get our feet on the ground and, you know, and I'm massively optimistic long term, and, and I'm massively optimistic because I think there's no one like us in the market. I think, you know, we've got to open these big galleries. That's what's gonna build the brand.

We've got to open in the big key cities that, you know, define fashion and taste and style, and, you know, be in that conversation. And, but I like that the trade business is over-indexing because those are the right people. You know, they're the influential ones. But it's going to take a while. You know, we're like, just out of the gate, and we're not out of the gate with, you know, in the order that we would have liked to. But nonetheless, we're out of the gates, and we're learning, you know, and that's the important thing. So, and, you know, and all of these things are going to benefit from the product transformation that we're going through and all the things we, you know, we're doing that we have in the pipeline.

And look, I only, I only listed out what we're doing in 2024. Like, what we're doing beyond that, and what we have coming for 2025, and there's some things I can't even put in the, in the big long view because I don't want to be too specific and, and give any information, you know, you know, to the broader industry, how to set. But, you know, like, next year, I think we're going to launch something that's really big. And so, and, you know, it's like going back and forth. Do I put it in this letter or not? But, you know, we've got enough in this letter. When I look back and look at this letter, I go like, "Okay, it's kind of ridiculous. This is very exciting.

We don't need to tell everybody what's in the pipeline." But we're, you know—look, we're feeling really, really great about where the brand is, where it's going, and I think, yeah, Europe's gonna take a while. You know, like, building great brands and, you know, it—you've got to, you've got to be very, very strategic. You've got to be very smart. You've got to be patient. Yeah, you know, you don't, you don't go rushing and build one of the great brands in the world, you know, rushing to the finish line. You know, it's like we say fast as and slow as we go, but we also say we have to do less and think more so we can do more.

So it's spent a lot of time thinking, get deep in the data, really analyze things right, do the next thing, do the next thing, do the next thing. And, but I really like where we are. I like where we're going. I like everything that's unfolding. And I especially like how we're positioned for the other side of this kind of difficult housing market, right? We, you have, you know, the worst home sales in 30 years. That's a long time, you know, and how we're positioned for that rebound, I think, is better than anyone on multiple levels too.

You know, like, when I look at the whole assortment, whether I'm looking kind of at the level we're at, if I try to look at people above us and I look at people below us, I just think we're going to be holistically disruptive across a pretty big size of the market we're trying to hit. You know, it's like, I think we've opened up the aperture a bit without compromising the most important tenets of what we're trying to build. So long, rambling answer. Hopefully, it gave you a few data points that were important.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Yeah. Thank you. Good luck.

Gary Friedman (Chairman and CEO)

It looks for rabbits, but

Operator (participant)

Our next question comes from the line of Steven Forbes with Guggenheim Securities. Your line is open.

Steven Forbes (Senior Managing Director of Equity Research)

Good evening, Gary, Jack. Gary, given the spread between the first quarter demand guidance in the full year, I was just curious if you could maybe help us better think about how the business is rescaling or ramping on the back of the recent store resets. And then how should we think about the cadence of resets on a go-forward basis, you know, married together with the cadence of source mailings that you talked about in the letter?

Gary Friedman (Chairman and CEO)

The spread between Q1 and full year. I mean, it's just the building... Again, you know, everything, if you just, you know, read the letter carefully and, I mean, those are all meaningful things we're doing, right? Those are all meaningful books that we're unveiling, that we're, you know, completely remerchandised and, you know, have a lot of, you know, a lot of revenue. You know, and, and if you just look at the contacts that we're making year-over-year, I don't know, what, what if every, if every company doubled their customer contacts and circulation, I don't know what might happen? It's, it's going to be, you know, it's going to be meaningful. We don't, you know, we don't introduce new product and get zero. We don't introduce—we don't mail Source Books and get zero.

you know, we just, I think, you know, post-COVID, you know, because we took a little over a year off because we're trying to catch, you know, catch up on backlogs. you know, we lost our muscle and it atrophied, and we tried to get restart, you know, what I call the engine here or the machine. you know, the machine sputtered a bit, and it took us a while to get back into our groove and, you know, with new product and, you know, Source Books and, you know, just all the things you've got to do. and it's probably one of the bigger mistakes I've made in my career, you know, but now we've rebuilt the machines. We've, you know, we have better muscles than we had before.

You know, we're way more intelligent. We've went to a much deeper level, and the quality of the work is just the best work we've ever done, you know. And so, and we've got enough internal data, right? When you see your business and how you're rebuilding it from, you know, down mid-teens to where we are, and you look at the mix of business and the categories, and you come out of the gate, you look at what Outdoor is doing. I mean, you know, at Outdoors, it's just exceptional right now. And it's I think that the design and quality and value equation is so unmatched in the industry, you know, that we're gonna take tremendous market share.

And it's just setting up what we're gonna do with Outdoor in 2025, 2026, 2027, because when you see what we're gonna do from a physical perspective with that business and how we're gonna exploit it, I think we're gonna own it. And, you know, so, you know, like, there's real numbers here in Outdoor. Outdoor is a meaningful part of our business, and the work and learnings that we did in Outdoor, that's also applied to every kind of category. You know, you can just trace it all and see how it's gonna come together. And we have enough data and numbers from, you know, the RH Interiors and the new collections and, you know, RH Contemporary and, yeah, the new collections and the adjustments we've made, and the adjustments we've made to kind of the value equation perspective.

And we—you know, I think when we're back to, you know, just having more edge, like, you know, the edge that it took to build this brand and business, we have, I think, has returned. And like I think I said a few calls before, I don't know, it's widely quoted. I kind of got to be careful what things I say. I think I said we were arrogant about pricing because of all through the period of, you know, tariffs and supply chain disruptions, you know, from COVID and, raw material prices escalating and, you know, that forced price increases and, you know, drove inflation. I think, I, you know, I don't think we had our value edge and hats on, as, you know, as we kept climbing the luxury mountain.

I think, you know, being a great luxury brand doesn't mean that price doesn't matter. You know, like, everything has to have a value equation. Everything has to go through a lens of design, quality, value, you know, in that order. If somebody doesn't love the design, they don't even look at the quality nor the price. But if you have, you win on design, you know, then you're through kind of door number one, and then you've got to win on quality, because then the customer will get closer to it, and they'll read about it, touch it, and interact with it, and they'll make their own perceptions about quality. And you can influence that with what you say and how you communicate.

But, you know, at the end of the day, the consumer is gonna make the decision about how great is that design, how great is that quality? And for that design and that quality, what is the value? Like, how do I think about the price that you're asking for that, and is that a lousy value? Is that a decent value? Is that a good value, or is that a great value? And, you know, I think we are highly focused on having a great value, a disruptive value, you know, with clear comparisons of anything that might resemble or be like things we sell in the market. And so, you know, we're laser-focused. We're into, you know, the greatest amount of detail.

You know, I think that, you know, the design quality value and, you know, that if you took that lens against Outdoor, which you guys have visibility to, if you really take the time to go through that book and go through the collections and look at the quality of the, you know, just the extraordinary design and the extraordinary presentation of that design. You know, then you, you know, do some work on the quality, whether it's the materials it's made of, how it's made, you know, where it's from, all the different things, and then put it through a value lens. Like, try to find, you know, any product similar, you know, find the most similar product from other places, put them up all on a wall and compare them to ours. Then you might understand...

Why I'm saying Outdoor is exceptional out of the gate, 'cause it's, it wins. It, you know, yeah, door number one, we win. Door number two, we win, and door number three, we really win. And, you know, and because of our size of our platform and our scale, and because, you know, at the most senior levels of, you know, this company, you know, we're in the factories. We're with our partners. You know, we're helping to conceptualize and, and put the same creativity, you know, to how we source and how we buy and how we, you know, the scale we have and, you know, and, you know, negotiating the price. And, you know, it's not really a negotiation where one person wins, one person loses.

It's how do you get all the brains in the game and think about it and figure out how everybody wins? And that's how we're able to, I think, have extraordinary value. You know, it's like you can't delegate greatness. And so all of us here, at the most senior levels, are leading the work. You know, we're learning together, you know, we're listening together, we're learning together, and we're leading based on that. And I think the work that's coming is, I think, the best work in the history of my career, you know, and I've been in this industry a long time, and I think it's the best work in the industry. And I think it's gonna be disruptive, and it's gonna create strategic separation, and it's gonna...

You know, I think we're gonna gain a lot of market share. So I, I don't know how to give you a more specific thing, but it's like, that's, that's what we're doing. And so, you know, if you wanna build a ramp, you know, like, look, you could take... You know, where Q1 is gonna be, you know, and you know what that demand looks like, and you can take, you know, like, where we think we're gonna end the year, to build your own little graph. You know, I'd give you guys all one, but, you know, if everybody gets too myopically focused on that, like, it's just got to be directionally right. Like, you know, if we have it a little wrong, like, "Well, how, why wasn't that exactly right?" Well, it's not gonna be exactly right when you're building something and transforming something.

You know, you've just got to be directionally right, and we believe we're directionally right. We believe, you know, we're gonna deliver these numbers or more, and we're very confident about that.

Jack Preston (CFO)

Steve, you asked about the floor sets as a piece of that. That's, as Gary's talked about, that's one piece of the puzzle, right? You have the new product from the evolution of the product. You have better availability of that product. You have Source Book contacts. Again, all things Gary has said. And floor sets, another, you know, one of these factors that drives the business. And we as-

Gary Friedman (Chairman and CEO)

In-stocks-

Jack Preston (CFO)

In-stock.

Gary Friedman (Chairman and CEO)

So on and so forth. Yeah.

Jack Preston (CFO)

We've been doing the floor sets, they're continuing, and you know, we have one particular collection that we talked about in the last call that, you know, that's still coming in, will be in all galleries, you know? In the second quarter.

Gary Friedman (Chairman and CEO)

Yeah. Throughout the year, we'll be reading-

Jack Preston (CFO)

Right.

Gary Friedman (Chairman and CEO)

Like, the floors will continue to evolve. You know, the galleries will continue to evolve all year, right?

Jack Preston (CFO)

Yep.

Gary Friedman (Chairman and CEO)

So there's a lot of new coming in. There's gonna be, you know, you know, several cycles and adjustments that we'll make. So, you know, there's just. We're gonna have a lot of choices and a lot of optionality. That's what else I like. You know, like, when I look at the bigger picture, and I stand back and I go, whether it's, you know, whether it's Source Books or advertising or contacts or floor sets or in-stocks or, placing bets here, reacting to this, dimensionalizing, you know, different parts of the business, I mean, we just have a lot of things in play and a lot of opportunities, and you can mathematically take all the pieces and build it up, and we're not, you know... Look, we're not new at this.

You know, done this a long time. And I'd say, I think I'd say put it in context is, yeah, how are we thinking about the guidance in the context of the market? We're guiding with a, in a kind, you know, looking at it through a lens of market neutral. The housing market doesn't get meaningfully worse or meaningfully better, right? So we're saying neutral market. Yes, there will be interest rate cuts. They're probably gonna be quarter point cuts. They're gonna come later in the second half of the year. You know, a quarter point cut isn't gonna massively move mortgage rates.

If you look at the delta between, you know, where people are locked in on mortgages and where they'd have to, you know, step up to, you really need two things happening: You need home prices to come down, and you need interest, interest rates to come down. And that gap, I think, is gonna take longer than 0.75-point interest rate cuts. You know, but hopefully, those happen and, you know, you put some more interest rate cuts on the other side, you know, 25, and, and, you know, people can't hang on as long from a pricing point of view and some of that giant inflation that filled the housing market, which really one of the biggest impacts of the market.

Think about how home prices in America went up 42% in two years, the two years of COVID, and then they've been stubbornly high because there's been no inventory. There's been no inventory because people had record low interest rates, and they, and they'd have to trade up to a, a higher interest rate. Like, so, you know, the, the data, like, it's all super logical why we're in this freeze and where we are. The key is, you know, what really has to, has to happen for the thaw, and for everything to get moving again, and, and it's interest rates and housing prices. And, and it, you know... I mean, it's, it's, it's a combination. We believe it's a combination of both, both.

Unless interest rates go down really quickly, mortgage rates get readjusted, and you get a big move down there, then maybe housing prices hold up. My sense is that you've got a lot of people just holding on as long as they can. You know, a lot of people have to move. They got a new job somewhere. You know, there's gonna be. You know, and some people have, like, they've grown their families, they've had more children, you know, they've gotten married, they need to buy a house. And you know, so there's pent-up demand, and I think that's a good thing when you look at it. But I still think you gotta have movement. We gotta have real movement in the interest rate market, and we have to have some movement in the pricing market.

When those things start to converge, I think we're gonna see a snapback. I think no one's gonna be better positioned for that snapback than us. Like, we're gonna be in the absolute best position. So that's what we're super excited about. Like, right now, we're looking at market neutral. Not gonna get meaningfully worse, not gonna get meaningfully better. If it gets a little better, do we feel better about the guidance? Of course, we do. You know, of course, we do. We're gonna feel a lot better. So, you know, but I just think at all ways we look at it, it's all some form of good to great, and you know, let time unfold and we'll keep doing what we're doing and playing our game.

Steven Forbes (Senior Managing Director of Equity Research)

Thanks for that. I'll pass it over.

Operator (participant)

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

Curtis Nagle (Managing Director and Senior Equity Research Analyst)

So Gary, maybe I'll just start with what, you know, is kind of a small piece of business right now, but sounds like it's getting a bit bigger over time. Waterworks, I think it's the first time you've called out a long-term outlook at $1 billion, you know, so implying it would effectively quintuple. I guess just, you know, at this point, where you've had it, I think, since 2016, you know, what gives you, you know, I guess the confidence to put out, you know, a pretty bold, pretty impressive, you know, target? And I guess kind of, you know, why now? What's driving the excitement? Maybe ask you more simply.

Gary Friedman (Chairman and CEO)

Sure, sure. Good question. Yeah, we said back when... I don't know if we said this publicly, but it's that, you know, we said it internally, that, you know, Waterworks was one of two businesses I had on a strategic framework map when I came here 24 years ago. Like, when I walked in the door, I said, "Okay, here's the long-term vision. Here's where we're going." And I had two acquisitions, Waterworks and Dean & DeLuca. I thought Waterworks was the best brand in high-end, you know, bath and kitchen, you know, mostly bath back then, now kitchen, too.

And I thought Dean & DeLuca had a really interesting brand with more of a food focus, some hard business, but it wasn't merchandised well to make money, and I, you know, knew enough about the Williams-Sonoma model that I thought, like, we could create a really cool next generation kind of Williams-Sonoma with a different kind of sensibility, aesthetically and taste and style, and, and maybe integrate a, a little bit of fresh food focus, although that's... You know, that's the reason why Dean & DeLuca never could scale and, and make money. It's, you know, too focused on fresh food, and they didn't have the hard goods part, you know. And, so, Dean & DeLuca didn't make it, you know, got passed around a couple of times. So we, we looked at buying it multiple times.

We almost got it, and Waterworks came along. It was the right brand at the wrong time. Meaning that, but it might not come available again. So if you think about when we bought it, you know, we were in the middle of membership, supply chain transformation, you know, all kinds of things. You know, the just launched Modern, and we said, "Look, we may not have another chance to partner with a brand like this." We thought it was a great strategic fit. So we did that. But the business, you know, was always relatively small, right? It was. I think we bought it with just north of $100 million.

You know, you had to think about, you know, when you had to learn that part of the business. We had to kind of build the relationships with the team. We had to get, you know, strategically aligned and without using a lot of time, because it was the wrong time. So we spent very little time in the first few years, and how do you kind of build the business model and, you know, the assortment logic to support the business model and a lot of things? You know, so we, you know, through the years, we've spent, you know, a little bit of time and got aligned, and the team's done an outstanding job. I think almost doubling the business, more than doubling the EBITDA.

Now it's, I think, a business that's positioned to grow, and I think we have a platform that is the perfect platform to scale the business on. You know, the direct customer component, we have a consumer part of the business that, you know, even though they have 14 showrooms, they're not in places that consumers really shop, you know. We have experience taking mostly trade-focused businesses and brands over our years and putting those brands on our platform, putting their assortments on our platform, and doing multiple times the business, right? Just because it's now the best products are in front of the consumer. But most of these products are not in front of the consumer. Consumers don't really go into Waterworks showroom or something.

They stumble in, you know, but they're in design districts or, you know, to the trade. They're set up for business to business. They're not really set up for consumer, even though they have a showroom. You know, no different than, you know, any of the furniture brands like that, so on and so forth. And then there's, you have some distribution and, third-party distribution, you know, they're in there with other brands and, you know, where they, you know, don't have total control of the brand. But I think when you look at the platform we're building and, you know, the stage we're building for the, you know, best products in the most important categories, you know, this is a perfect fit. I mean, it couldn't be more aligned, and it's also a really hard business. I mean, we've been in the business.

We sell water delivery and faucets and fittings, and we sell bath, you know, hardware and stuff like that, but we're not experts. I mean, they've got 45 years, more than that, experience, you know, family business. You know, Peter Sallick, I think is the CEO and leader there, you know, been there most of his life, and he has some other time in the business, and Rob Bennett has been CEO for, I don't know, 15 years. Like, you know, it's like, like, you know, it's like, you know, the leadership team there is really smart, you know, has a great view and grasp of the high-end market, that we're benefiting from and learning from.

And, you know, we think we're pretty smart, and we have a great view of the consumer market, but what we're trying to do is merge both of those markets. And, we think that's where we think long term, the world's only going to be more transparent. And, you know, a long time that, you know, the best products not facing the consumer in these categories. And, you know, that's what RH has been trying to do for our entire journey, you know, since I've been here. As slow going in the beginning, you know, we were on the edge of bankruptcy for, you know, almost my first 10 years. And, you know, so we made it through that, and now, you know, we're doing what we've always wanted to do, and we're getting smarter and better.

And Waterworks is just a, you know, great synergies and, you know, no different than... You know, you'll hear us talk at some point, later about, you know, Dmitriy and kind of couture upholstery brand we bought and, you know, Joseph Jeup, you know, kind of bespoke, you know, furniture brand. And, you know, just having these people and the talent inside our organization, learning from them, them leading us to higher quality, better taste, how to think about the trade market, and, you know, so on and so forth. It's just so much synergies. You know, it's like, you know, a lot of times you take one plus one, you know, you know, you get less than one, right? If you create, every time there's another thing or another person involved, there's more complexity.

You know, Einstein said, "The only way to battle complexity is, you know, through simplicity." But once in a while, you got one plus one equals more than two, right? And I think we've found that with Waterworks. We found that with Dmitriy, we found that with Joseph Jeup. And you know, and other things that we're doing sometimes, you know, maybe not, you know, it's not necessarily an acquisition, but it's a, you know, it's a deep partnership and relationship. And I think that's what we're really good at. You know, with Waterworks, again, like, I mean, it's really funny. I could pull out, you know, the PowerPoint from 24 years ago, and there's Waterworks in this, you know, little grid. It looks so amateur hour when I look at it back then, you know, how, what we were thinking.

But, yeah, but it's always been on our radar, and we think it's just a great fit. And, you know, RH was Restoration Hardware. It had hardware. It had, you know, bath. I mean, it didn't have faucets and fittings when I came here. You know, I added that, but it had towel bars and hooks and, you know, a few things like that. And then when I added faucets and fittings, you know, the model was, you know, looking at, you know, Waterworks as the best. So, you know, obviously inspired by them, but we were never gonna be Waterworks, right? And so it's much better to just partner with and, you know, integrate with Waterworks. And I think it's gonna be. I think it's gonna be unbelievable. I really do. You know, and I think it's gonna bring...

Yeah, I think the other benefits is it's gonna bring the highest quality trade customers to RH that maybe not are frequent, frequenting us yet. And you get into the business at an earlier point in the design stage. We sometimes get interact with the, the consumer at a much later stage. The home is done, they're ready to furnish it, so on and so forth. Interact with Waterworks consumer, you're at the front end, you're at the architectural point, you know, you're at the, you know, the plumbing point and all this other stuff. So, you know, you have opportunity to get access to that customer, integrate that customer, be building the design holistically, you know, all the categories that we're in and the categories that we'll, you know, continue to expand into and become more dominant in.

I think it's, I mean, it's really like if you could ever say there's a match made in heaven, I think it's a match made in heaven. Like, it's just, it was supposed to be. So we're really excited. I think they're really excited, and I think it's gonna be big, you know?

Curtis Nagle (Managing Director and Senior Equity Research Analyst)

... Got it. Thanks. And then just a really quick one, Gary, just in terms of the mid outlook. I think on the last call, you said something to the effect of you'd expected a peak or an inflection, peak demand or something like that in Q2 or spring. Any changes there? Obviously, you know, the outlook's, you know, strong for the year, but just-

Gary Friedman (Chairman and CEO)

Yeah, I think it's gonna keep, gonna keep peaking because we've done more work since then. You know, like, there's more things. We can see more things. So yeah, I think, you know, like, phase I. So when I think about that, Curtis, like, kind of phase, there's multiple phases of this transformation, right? As we'll be unveiling, but kind of phase I will kind of hit peak, I think, in late Q2. But then there's the whole phase II now that we've got coming that will be unfolding, right? And I think we've got phase III. I mean, there's just a lot of, a lot of excitement, you know, a lot of great work that's being done. And, you know, the debate around here is: How do you sequence it?

You know, how should it all unfold? Over what period of time? And, so I'd say that's peak inflection on, like, phase I, you know, RH Interiors, RH Contemporary and, Outdoor and Modern, right? Like, we knew Modern would be coming in. That's, like, the next of the big books, and I think it, it looks incredible. Like, I'm glad we actually delayed it a bit and took a little bit more time because it, it took a leapfrog. I mean, it's, it's stunning. And, you know, it's just... I think it's, it's so fresh and cool and, you know, people just see the images and, you know, it's all laid out, you feel like, "Wow, okay." You know, this, that it's, it's not a walk-on by, I guarantee you.

It's, you know, it's, it's not an Aretha Franklin, you know, walking by. But, you know, it's—but it's, it's, you know, so that's coming, that's gonna, that's gonna, you know, create a big kind of move in Q2. And, you know, in Outdoor, you know, it's gonna be hitting peak, you know, March, April, May, June, and, you know, and you've got the, the, you know, learnings and Interiors, and that's cycling through. And, and then we've got in-stocks that are gonna get meaningfully better. Backorder rates are gonna go down, which means demand goes up when backorder rates go down. You know, there's all kinds of metrics here that, you know, you, you can just add them up, and, and it tells you what to do. And, you know, and, you know, all the adjustments we make.

So yes, I think at phase I you know, you'll kind of get kind of peak inflection. You know, might peak a little later than that, but, you know, you're gonna kinda know... You know, like the arrow, like, when I talk about inflection, it doesn't mean that the outcome, right? Like the curve, the line will be pointed in that peak direction. How high does it go? You know, that might take to Q3 or Q4, but, like, the inflection point will, you know, angle up, right? And we'll see that in Q2. So that hasn't changed. Maybe it's changed a little because we've pushed Modern out a little, but you still, you know, Modern's gonna get in there in Q2. You'll get enough of a read, you'll see where that's going.

And then you got like, you know, just phase II and phase III and things that are coming through the pipeline, and I think it just all keeps building, you know? So, yeah, you know, so we're directionally, you know, directionally correct. Try to give you a little bit more color there. Hopefully it's helpful.

Curtis Nagle (Managing Director and Senior Equity Research Analyst)

Yeah, very helpful. Thanks, Gary.

Gary Friedman (Chairman and CEO)

Yep.

Operator (participant)

Next question comes from the line of Christopher Horvers with JPMorgan. Your line is open.

Christopher Horvers (Senior Analyst)

So I'm just gonna put my two questions out there. So my first question is: The $40 million that was deferred of January, that, why wouldn't it come back much sooner if it was a lot of domestic? And we're hearing from other retailers that the Red Sea is just adding weeks of delivery. And then my second question is, you know, if you look at non-occupancy gross margin pressure, it looks like it got a little bit worse. I guess, how far... Is that all clearance? And how long before we get through all the clearance, and do you expect to recapture all that pressure? Thank you very much.

Gary Friedman (Chairman and CEO)

Yeah, I mean, well, look, the, for one, we're a... You gotta think about, like, there's a lot of people in home furnishings or myself, home goods, and you gotta say, like: "Okay, what's their furniture content, and what's their special order content?" You know, and when you think about those goods, you know, and then what's coming from, you know, Asia and coming around the pipeline. So, you know, now that it's coming, it's coming around Africa and not through the, you know, Red Sea and the canal. So we probably have the highest content, right? We have a significantly bigger Outdoor business, I think, than anyone. I don't think anyone, you know, holds a candle to us in that category.

And so, you know, that's all had to travel and take a, you know, a couple of extra weeks, and so that's a meaningful number. You know, our special order business, you know, or any of our other businesses, all our newness, you know, all our things attach to back orders, right? That got delayed. So you've got that delay. And then you're delaying kind of everything looking out. Like, when does, you know, when do the shipping lanes reopen? That's the question. How long, you know, is this two-week delay built in? You're not gonna catch up with it until the shipping lanes opened or, you know, like, it's just kind of permanently deferred for two weeks, if that makes sense.

And then, you know, the piece with the weather and, you know, the ice storms that hit, yeah, that piece comes back now and is coming back. Yeah, so you generally have a delay with that. But, you know, it's not like it comes back tomorrow, because they're maybe design projects. So if the design projects, it's special orders, you know, that they're doing, this Outdoor furniture that they were gonna buy. If they bought anything that has the two week delay, you know, that's, you know, delaying it more. So, you know, it'll all cycle back. It's just, you know, what's the timing? Like, if you're selling things that are cash and carry, got it. Yeah.

You know, like, if you look at the product mix of people that, you know, had Christmas product or especially all the Christmas stuff that was on sale, you know, in December, and, January and stuff like it, of course, all that stuff comes back, you know? Like, yeah, no, no problem. You know, if you're selling, you know, any home furnishings categories and, you know, if you're selling tabletop, food-related products, accessories, cookware, you know, name all the categories that are attached to home, you know, there's all cash and carry kind of businesses or, you know, just domestically shipped, you know, from a DC. You know, we've got a very different product mix and model than anyone else. I'd say we probably have the highest furniture content, you know, of anybody that you might compare us with.

Jack Preston (CFO)

Chris, on the gross margin side, there was a continuing impact on the product margin.

Operator (participant)

Next question comes from the line of Max Rakhlenko with TD Cowen. Your line is open.

Max Rakhlenko (Managing Director)

Gary, Jack, congratulations on strong demand that you're seeing, as well as the recent openings. I was curious, given all the new galleries that are coming online in the U.S., can you provide an update to the new gallery economics as you convert a legacy gallery to a design gallery? You provided color in the past, but just curious how that has evolved over time.

Gary Friedman (Chairman and CEO)

Do they have hospitality or not? So yeah, it has been a while since I think about it. So, that's good. Let's pull that together in the right way and make sure we distribute it in the right way so everybody's got the same data. Yep.

Max Rakhlenko (Managing Director)

Got it. Sorry. Could you repeat that? Yeah, it went blank for a little bit.

Gary Friedman (Chairman and CEO)

Oh, okay. I would say, I'd say it is a good question. It has been a while, you know, as you said that, and, you know, there's been a lot of things, you know, that have changed. We have restaurants and galleries now, hospitality aspects. You know, it depends where they are in the cycle, how many sq ft you're expanding into. There's a lot of things to consider, when you look at these. And so I think what we ought to do, is update, you know, that data set and create a framework and, you know, let us distribute that, you know, next quarter in a fashion that everybody has the same information at the same time, and it's all accurate.

Jack Preston (CFO)

Max, can you hear us? We might be having audio issues. Max, can you hear us?

Max Rakhlenko (Managing Director)

Yes.

Operator (participant)

Yes, we can hear you.

Max Rakhlenko (Managing Director)

Okay, great. And then my follow-up question is, can you speak to how you're balancing the sharp price points with maintaining elevated product margins? And then just how much are your vendors stepping up, and then the opportunity to expand product margins over time from the current level?

Gary Friedman (Chairman and CEO)

One second. Repeat the question, because we're just, we were just recognizing that the, the line was—sounded like it had gone dead for a bit. So repeat the question for, for both me and Gary, please.

Max Rakhlenko (Managing Director)

... Okay. Yeah, no problem. Just can you speak to how you're balancing the sharp price points with maintaining elevated product margins? How much are your vendors stepping up, just directionally, and then the opportunity to expand product margins over time from the current levels?

Gary Friedman (Chairman and CEO)

Yeah. You know, again, I wouldn't— You know, we're not a price, kind of, focused, price-first business, right? I think I spent a lot of time earlier in the call talking about design, quality, and value in that order. And we think about those things, you know, from those three dimensions always, and we try to look at the bigger picture and say, what's going to be a compelling value? And we don't have vendors, we have partners, right? So that's why my letter is addressed to our people, our partners and our shareholders. And, you know, and so we try to work with people as partners, and it's not necessarily so much as, you know, are they stepping up? You know, it's more, are we together thinking about how to win the market, right?

Like, you know, if you, you know, if it's one person that wins and one person that loses, that's not a partnership, you know, and that never works long term. So we try to take a real strategic view with our partners. We spend a lot of time with them. We talk to them directly about how we're thinking. We try to understand their business deeply and where their leverage is and opportunities are, and we try to stand back and say, "Hey, look, you know, you know, we're you're, you're manufacturers without stores, and we're shopkeepers without factories, you know? So how do we partner, and how do we win?" You know, so, but we have no intention in taking margins down.

You know, margins have to be looked at holistically, you know, not just at the product level, and I think that's probably what your point is. We're going through a massive transformation, re-architecting, you know, the assortments and positioning things. And I think as you see things unfold here, you know, we believe if you're thinking about operating margins and so on and so forth, that operating margins, you know, over the next few years, can return to the 20% range, and you know, that our model is going to be a great model. But from a timing point of view, we're going through a product transformation, and we're, you know, building an international business from scratch.

So there's investments, and there's going to be margin pressure and, you know, based on investments we're making on both of those pieces. And, you know, that, it will create, you know, some different periods of, you know, higher or lower margins and... But I wouldn't say there's anything different strategically at all. I think, you know, it's how we've built the company, and, you know, keep on that path, you know. But it's not about like, hey, you know, getting the next nickel out of a vendor. I mean, maybe people that have vendors do that. You know, to us, it's about the next idea. Let's get the next big idea, whether that's product idea, positioning idea, market idea.

If you can get all the brains in the game and the egos out of the room, you know, if you truly believe that none of us are smarter than all of us, you know, you're gonna work in a partnership, and one plus one is gonna equal a lot more than two if you, if you do it that way. That's how we work with everyone. You know, we just try to share all the best information and perspective, and we try to listen to them, and we try to really think about: How do we win in the market? That's it. And so I wouldn't say, "Hey, long term, do we think there's lower margins at RH?" No, not at all.

Max Rakhlenko (Managing Director)

Super helpful. Thanks a lot, guys. Speak soon.

Gary Friedman (Chairman and CEO)

Sure. Thank you.

Operator (participant)

Our next question comes from the line of Seth Basham with Wedbush Securities. Your line is open.

Seth Basham (Managing Director and Director of Research)

Thanks a lot, and good evening. My question is just thinking about your comment earlier about opening your aperture a bit more without compromising what you're trying to build. Can you elaborate on this, Gary? Are you trying to win back customers that you, quote, unquote, "fired" during the pandemic? And are you dipping lower in terms of the customer income demographics that you're targeting?

Gary Friedman (Chairman and CEO)

Yeah, we've never fired customers, so I don't know, maybe those are your words, not our... Nothing I've ever said. You know, I've said, look, you're gonna-- Like, you know, if you think about where we started and the journey we've been on for 24 years, yeah, like, we shed customers and transitioned to other customers. Yes, you know, of course, like, you know, best-selling sofa in this company used to be a $999 chenille green sofa. You know, we don't have $999 chenille green sofas, you know, not even if you attach inflation to it. You know, maybe you have $2,000 chenille green sofa. We don't have those. You know, we don't have a lot of things that we used to sell. So, you know, of course, you know, when you're building something...

When you're trying to become something that you never were, you know, and you're, you're gonna, you're gonna evolve and acquire new customers, and some customers might come with you, and some might not. But there's no intentional firing, but there is an awareness that, you know, in, as we're heading in certain directions with certain categories, things will evolve and change. Through that journey, we're always gonna get data, and we're gonna learn, and we're gonna adjust and improvise and adapt and, you know, always, always in a state of change, right? And we're in an evolutionary world, you know. So the world's evolving, and you're either evolving faster than the world and gaining, you know, acquiring knowledge and capabilities and market share, however you want to think about it, or you're evolving slower and getting behind.

You know, so I would just say, I think-

Seth Basham (Managing Director and Director of Research)

Are you still there, Gary?

Jack Preston (CFO)

I'm getting texts.

Gary Friedman (Chairman and CEO)

People are texting, saying, "We can't hear.

Jack Preston (CFO)

We're out. Yes, we're out.

Gary Friedman (Chairman and CEO)

That's right, honey.

Jack Preston (CFO)

Redialing.

Gary Friedman (Chairman and CEO)

Okay, can somebody call separately the conference call operator?

Jack Preston (CFO)

Yeah.

Gary Friedman (Chairman and CEO)

Seth, can you hear us now? Rebecca?

Seth Basham (Managing Director and Director of Research)

I can hear you now. Yeah. I think, I think I got most of your answer. I appreciate that.

Gary Friedman (Chairman and CEO)

Okay.

Seth Basham (Managing Director and Director of Research)

And just a follow-up question. Along the same lines, you know, you're sharpening your value edge, as you've referenced. You know, to ask the question differently than it's been asked before, I assume you're not taking quality out to lower price. And if not, why should merchandise margins, excluding freight, be the same or better on new products now versus the product you were selling in 2022?

Gary Friedman (Chairman and CEO)

Sorry, I don't know if I get that. Give me that question again, towards the end, that why would or what would the product margins be or something? Say that again.

Seth Basham (Managing Director and Director of Research)

Yeah. If you're not taking quality out, to be more sharp on price, you know, as you sharpen your value edge, as you call it, why should the merchandise margins, excluding freight, be the same or better on a new product relative to what you were selling and you know, earning in 2022?

Gary Friedman (Chairman and CEO)

Sure. Well, it's about how you buy it and the commitments you make and the long-term view you take and, you know, working in a partnership with your manufacturers, and, you know, figuring things out together. But yeah, so it's... Yeah, it's just when you do that well, you can have a better feel. When you have a platform as large as ours, you have the scale and you control the platform, you can be really disruptive. You know, so, yeah, it's-- we didn't just take pricing down on things we have, right? It's... If you think about it, it's all the new products that's coming in, the value equation that's coming in, and, you know, so there's no intention to ever take quality out. Not at all.

Not at all, ever. So yeah, that's not part of our strategy. That's nowhere in that one-pager, right? You know, in the long view. And I think you've ever heard us talk about that at all in my 24 years here. It's about taking the, you know, elevating the design, quality, and value of the product. That's all we focus on. It takes, yeah, it takes thinking and, you know, creativity and partnerships and being smart about what you're investing in and what you're leveraging and what you're buying. And, yes, that's, that's how we got here. I think, you know, like, I think, look, my, my prior comments were through a period of multiple cost increases because of China tariffs, and we had a pretty big content back then coming out of China, much smaller now.

You know, those price increases that we needed to take and then the price increases we needed to take through the COVID period and through the COVID period for a two-year period. You know, I mean, everybody had leverage, right? Like, meaning that there's only so much product. You know, when you have more demand than you have supply, prices can go up, and margins can go up. And when you have lower demand and supply, if you want to move your inventory, prices are going to come down. You know, it's no different. And it's no different than during this period, right? It's down housing market, and we're doing the same thing we're doing with investments.

So, you know, you're looking at gross margin. Well, you know, inside the gross margin, there's a lot of investments that aren't necessarily just product, right? And, you know, so, but yeah, there's no, there's no intention here, to be crystal clear, about taking quality down to take price down. Never been uttered in our company. And just the opposite. Yeah, so, so if that's what people are thinking, they're, they're just dead wrong. There's no value engineering. Yeah. Okay.

Seth Basham (Managing Director and Director of Research)

Thanks, Gary.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

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

Jonathan Matuszewski (Senior Equity Research Analyst)

Hey, good evening, and thanks for taking my questions. First one was on gross margin for 2024. Imagine you may have some elevated clearance lingering early this year, but then you should have some good margins with all this newness that you mentioned. So how does that all net out for the year? And does the year-over-year trend in gross margin sequentially improve each quarter as product launches build upon each other? Thanks.

Gary Friedman (Chairman and CEO)

Yeah, we're not guiding to, you know, gross margins quarter by quarter. But, you know, you can-

Jack Preston (CFO)

And we're not, we don't, we no longer guide gross margin on the year.

Gary Friedman (Chairman and CEO)

Yeah.

Jack Preston (CFO)

So, you know, we'll talk about it as results in full. But the guidance is, you know, through operating income.

Gary Friedman (Chairman and CEO)

Yeah, it's all implied in the operating margin and EBITDA, you know, guidance.

Jonathan Matuszewski (Senior Equity Research Analyst)

Got it. And then, Gary, you recently hired a new Chief Real Estate Officer. How should we think about changes to the real estate approach going forward with Jared on board? And should we expect any changes to other development-related aspects in the company, like food and beverage or anything like that? Thanks.

Gary Friedman (Chairman and CEO)

Jared, how long you been here now?

Jack Preston (CFO)

Eight weeks.

Gary Friedman (Chairman and CEO)

Yeah. Jared's been here eight weeks, and so, he's, you know, he's very bright guy, very creative guy, strong point of view, learning the business, and, you know, we're excited and happy to have him here. I think, you know, why don't we all give him a little bit of time to, you know, really assess the situation and the opportunities, and at some point, you'll likely meet him, and, you know, and he can kind of share his thoughts. But I think it's gonna be a, you know, big step up for us. Like, I think he's, you know, gonna prove to be the best leader we've ever had in this part of the business, you know, on multiple levels. So we're very excited about him being on the team.

Yeah, that's about it for now.

Jonathan Matuszewski (Senior Equity Research Analyst)

Best of luck.

Operator (participant)

Next question comes from the line of-

Gary Friedman (Chairman and CEO)

Okay.

Operator (participant)

Next question comes from the line of 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. A cursory view of the communication that RH had during the fourth quarter would suggest that it was more aggressive cleaning out inventory, messaging on price, and that was also evident from the gross margin compression that was experienced during the quarter. Yet, if we adjust the sales growth in the fourth quarter for a like number of weeks, your sales growth trailed behind some of the peers in this space. So, A, how much do you think you saw from in terms of sales from some of the pricing actions that you took in the fourth quarter? And B, why do you think you might be losing share to some of your key competitors in the sector? Thank you.

Gary Friedman (Chairman and CEO)

I don't know if I got that question. What do we... One second, Michael, we're trying to kind of break down your question.

Jack Preston (CFO)

I mean, I think the first part is that we underperformed peers in the fourth quarter, with it being down 11 on a 52-week basis, so.

Gary Friedman (Chairman and CEO)

Yeah, that’s, I don't know, like, is there specific people you're talking about? There's a lot of... I don't know who you're calling a peer and who you're not. You know, if you look at people that are heavy content furniture business, I think we've performed relatively in line, some better, maybe, you know, some were a little better, some were a little worse. But, when you say we broadly underperformed peers, huh? But, you know, I don't know.

But I'd say, you know, like, I don't think there's anything different that happened in the fourth quarter than what we expected, except, you know, for the major storms that I think has impacted everybody, and it again will impact furniture people who have longer lead times and deliveries, you know, more and that, you know, people that are more exposed to, you know, sourcing and specifically, if you think about, you know, the size of our Outdoor business and the amount of that comes out of Indonesia, you know, which is the capital of teak, you know, it affected us. So I'm not... Again, do you wanna be more specific or like, I, you know, so I'm not sure where you're going.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

If we look at some of the competitors out there, they were down 6%-7% in the fourth quarter versus down 11% for RH. And that's even with a more aggressive posture on clearing out inventory. But

Gary Friedman (Chairman and CEO)

Like, what's their product mix? You know, are you talking about people that sell tabletop and cookware and, you know, seasonal businesses and Christmas ornaments and all kinds of things that we don't sell? Yeah, those are gonna get hit less in a housing market downturn than furniture. Okay, if you want to talk about furniture-related people that, you know, compare us to furniture-related people, but don't compare us to Home Depot, don't compare us to Pottery Barn, don't compare us to Williams Sonoma. Don't say, you know, you're talking about apples and oranges.

Jack Preston (CFO)

And compare us to people with the same, you know, fiscal year-end or quarter-

Gary Friedman (Chairman and CEO)

Yeah.

Jack Preston (CFO)

Fiscal quarter.

Gary Friedman (Chairman and CEO)

Year-end, yeah. If you don't, yeah-

Jack Preston (CFO)

If you don't end in January, it's not even up for you to say.

Gary Friedman (Chairman and CEO)

Yeah, they didn't end in January. They didn't get hit by the canal, and they didn't get hit by the ice storms. So that's why I say, you want to be more specific. You know, like, I'll try to answer your question, but, you know, in a broad sense like that, like, you know, it's not as relevant.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Okay. My, my follow-up question is: If we add back some of the margin drags that you highlighted this year, it would put RH on, on pace to have a 16% operating margin in 2025. Is that the right way to think about the basis for how we should be modeling over the next few years? Or would you expect the investment cycle that is gonna happen this year is gonna persist for multiple years, which will pressure profitability for an extended period of time? Thank you very much.

Gary Friedman (Chairman and CEO)

Yeah, we're not guiding to 2025. You know, we're guiding to 2024, and we're giving you all the data as it relates to that. You know, like, I think I just said a couple questions ago that, you know, we feel very good about getting back to 20% operating margins over the next several years. You know, so, we're still in a challenging market, you know, with the housing market at record lows. You know, so, I don't think anybody's guiding 2025 yet, are they?

Michael Lasser (Managing Director and Senior Equity Research Analyst)

No, no.

Gary Friedman (Chairman and CEO)

Yeah, I mean, so-

Michael Lasser (Managing Director and Senior Equity Research Analyst)

I guess I was more so asking about the persistence of the investment cycle and how long that might impact your profitability, rather than looking for specific guidance for the out years.

Gary Friedman (Chairman and CEO)

Is anybody, is anybody guiding on that in 2025 yet? Because that would be guidance, right?

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Yeah.

Gary Friedman (Chairman and CEO)

I mean, yeah, you know, so you know, we're not guiding to 2025 yet. You know, we never have. But we have a long-term view, you know, that, you know, we get returned to 20% operating margins, and yet we have some investment cycles that will, you know, have to roll through. And, you know, I would say, you know, to all the people on the phone that are trying to build a model, you know, that's beyond where our guidance is, you're gonna have to connect the dots and come up with your own assumptions. I can't do your work. You know, I mean, I'm not asking you to do my work. Don't ask me to do your work.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Understood. Thank you very much, and good luck.

Gary Friedman (Chairman and CEO)

You're welcome.

Operator (participant)

Next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.

Brad Thomas (Brad Thomas is a Managing Director and Senior Equity Research Analyst)

Hi, good afternoon, Gary and Jack. Thanks for taking the question. Just in light of you wanting to focus a little bit more on the demand trends this year, given some of the timing nuances, I was wondering if you could just share a little bit more with us about perhaps how demand has trended quarter to date. You did reference this exceptional reaction to the Outdoor catalog. Curious what you've been seeing of late and maybe just as we think about the comparisons you're up against from a demand standpoint, are there any quarters that you'd call out where something had been unusual and not lining up with sales?

Gary Friedman (Chairman and CEO)

Look, we're pretty close to, you know, pretty far down the first quarter, right? So you can probably come up with some kind of a, you know, demand.

Jack Preston (CFO)

Well, we gave them first quarter demand.

Gary Friedman (Chairman and CEO)

Yeah, so-

Jack Preston (CFO)

Mid-single digits, so.

Gary Friedman (Chairman and CEO)

Yeah, mid-single digits, you know, is where we think demand is gonna be in Q1, you know, for total-

Jack Preston (CFO)

We're not providing any quarter guidance or, you know-

Gary Friedman (Chairman and CEO)

Yeah.

Jack Preston (CFO)

Monthly breakdowns or anything like that.

Gary Friedman (Chairman and CEO)

Yeah. I would say our demand trends are building, you know, and they're gonna build through the whole year. So that we expect are... Yeah, let me give you a couple more breadcrumbs. The Outdoor business is off to, you know, an extraordinary start. And its biggest part of the year is coming up, right? So we have a lot of confidence as we look at the next quarter or two. You know, and we have a lot of confidence in the whole year, but we have a lot of visibility if you think about that, right? Like the Outdoor business, you know, you can again just think about when people are buying Outdoor furniture.

They're buying a lot less in February, and they're buying a lot more in March, and they're buying even more in April, you know. And so you can—you know, if that business is off to a great start. That's really easy to connect those dots and forecast, because we've—you know, those goods have been out there now for several weeks, and we've got real, real data.

Brad Thomas (Brad Thomas is a Managing Director and Senior Equity Research Analyst)

Yeah, that's great, Gary. I appreciate the breadcrumbs. And if I could add a follow-up on supply chain and sourcing, I guess, you know, for one, are you contemplating any sort of disruptions relative to the closure of the Baltimore port right now? And then, can you talk about, you know, kind of your confidence in your sourcing partners, your suppliers, you know, ramping up with all this new product that you're gonna have this year? And, I presume that's partly why you're assuming you end the year with a greater degree of backlog, but just any more color on your kind of confidence in executing with all this new product would be great. Thanks.

Gary Friedman (Chairman and CEO)

Yeah, look, yeah, unfortunate and devastating, you know, you know, accident that happened in Baltimore is, is, you know, super recent. We obviously have, you know, a big facility and center in Maryland. Fernando is here right in the room right now, and he's shaking his head like we don't think there's any major disruptions.

Jack Preston (CFO)

And here, let me add, maybe just 'cause it's Jack. But on an inbound perspective, you know, some of our, much of our goods are actually offloaded in New York. You know, we do the cost-benefit analysis of getting the product out earlier in New York before the boat then comes down to Baltimore. For example, the boat that was in the accident had 4 containers on it, but that we unloaded, you know, in New York as per our practice, so that we don't have any containers, you know, stuck on that particular boat and other boats are getting rerouted. So minimal impact from that disruption.

Gary Friedman (Chairman and CEO)

Yeah, and, and I think your, your second, part of the question is what confidence we have in our partners ramping with our, new product. We have great confidence, but it's now with, with new product ramping, so you're never gonna forecast the new product exactly right. You never sold it before. You're gonna be some degree wrong. Some things you're gonna be more right, and some things you're gonna be more wrong. And, the things that you're more right on and, you know, overperform your expectations, there's gonna be a period that's gonna take, you know, for our partners to scale that product and respond to the trends and so on and so forth. So, but yeah, so far so good. I mean, we've had, you know, very minimal issues. Like, it's, it's more-- it has to do with...

I think the biggest issues are just being able to forecast the newness. And, you know, so but once we start getting the data, you know, then we're improvising and adapting and, you know, let's say we got the direction, you know, got it directionally right on the orders, but we get the finishes wrong. Well, you know, then we're reacting to and changing the finishes if they're still in the factory. And, you know, the last phase of that is the finish. And, you know, we're shifting from one collection to another collection and, you know, as we get data and all those kind of things. And so, you know, and we have, you know, like we always do, we always have, you know, develop new partnerships and so on and so forth.

Yeah, sometimes some of the newer partnerships haven't maybe they haven't worked at this scale yet. But, you know, we try to anticipate that. But every once in a while, someone new gets one of the big collections. And so, you know, that, that maybe is a new experience for them, but we, we have really great people, you know, inside the organization and in country to partner and help and working with, try to work as partners and, you know, get to the right outcome, you know, once we have, have the data. So I'd say there's no, you know, there's, there's nothing lurking out there right now. We, we don't have anything other than, you know, some, you know, kind of ramp-up issues that you expect doing anything at this kind of a scale.

And, but, you know, I wouldn't say anything unique. I don't know if you guys have any other... No. Okay. I mean, we, everybody's in, in the room here, the team, and everybody's shaking their head like, "No, no, no problem." So we're good. You know, 'cause we, nothing new came up so far today that we haven't heard.

Brad Thomas (Brad Thomas is a Managing Director and Senior Equity Research Analyst)

Good to hear. Very helpful. Thanks so much, Gary and Jack.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

We do have our last question, comes from the line of Steve McManus with BNP Paribas. Your line is open.

Steve McManus (Vice President and Equity Research Analyst)

Great, thanks. So clearly very upbeat about the Outdoor collection. You've got the data there. Just was hoping you could speak to what the customer's reception's been and how demand's ramping for, you know, the Interiors and the Contemporary collection versus, you know, what you were expecting. That'd be helpful. Thanks.

Gary Friedman (Chairman and CEO)

Yeah, all, you know, responding as, you know, from our, you know, latest expectations, all, you know, responding as we'd expect. And we have, you know, the next, big book is, Modern, and we feel very optimistic about that. And then we have, you know, remails of Interiors and, Contemporary and, you know, new refreshed with new collections and, new creative and, you know, better data and information, better in-stocks and so on and so forth.... You know, more of the product because we've had a chance to read and react to it in the galleries, which then, you know, you know, gives us a lift. And so we, you know, feel really good, really optimistic. And so, I, you know, I, I don't think there's any other commentary that, that I've got.

Steve McManus (Vice President and Equity Research Analyst)

All right. Thanks. If I could squeeze one more in. On the commentary to leaning into, like, digital and print advertising, I don't think that's something you've really done in the past. Like, what drove the pivot? And piecing that together with Source Book graphics, how do we think about, you know, the right run rate for ad in the business?

Gary Friedman (Chairman and CEO)

Yeah, it's kind of what we always do. There's nothing really new. It's what we generally do when we're in launch mode like this. And, you know, so we're generally marketing, you know, print and digital with all those, kind of key publications. You know, that's where the consumer... You know, generally, if you talk to anybody or see anyone who's building a home or furnishing a home, remodeling a home, so on and so forth, they're, you know, they're kind of fishing where the fish are, right? They're looking for inspiration in home magazines and, you know, and, you know, design magazines and so on and so forth. And, you know, those websites, you know, get a lot of traffic with real people with a purpose, right?

So, we tend to, you know, invest in that way. You know, they're different than our, you know, direct mail business, you know, and thinking about our, you know, the list customer files we've built up and how we prospect and where we get new names from and so on and so forth. So I wouldn't say anything's different. I think you see a ramp-up in the investment, and you see that, you know, based on our confidence of, you know, what we've learned thus far, and you know, that's given us indications of what the right investment cadence is, investment cadence and contact cadences. So, yeah, I wouldn't say anything's changed.

Jack Preston (CFO)

It's not a pivot. I mean, it may have sounded like that, but like, as Gary said, it's what we do around launches.

Gary Friedman (Chairman and CEO)

Yeah.

Steve McManus (Vice President and Equity Research Analyst)

All right. That's helpful, helpful context. Thanks, guys. Appreciate it.

Gary Friedman (Chairman and CEO)

Sure.

Operator (participant)

There are no further questions at this time. Mr. Friedman, I turn the call back over to you.

Gary Friedman (Chairman and CEO)

Okay. Well, thank you everyone for your participation, and, you know, I'd say thank you to the RH team. Your efforts and leadership have been extraordinary. It has, you know, been a tremendous amount of work, I know, for everyone, but, you know, I think I feel so proud and excited about what this team has accomplished. And I think, you know, our partners and teammates all through the country, you know, especially our teams in the galleries and interior design, you know, we're gonna be handing you off the baton, you know, as all these products unfold. And, you know, the teams across our supply chain and distribution and everybody's hard work and support and our teams in Asia and other countries around the world.

You know, I think this is gonna be our finest moment, and it really is a result of your commitment and courage and, you know, and your leadership. So we just wanna thank you for that, and we'll speak to everyone next quarter. Thank you.

Operator (participant)

This concludes today's conference call. You may now- goodbye.