Earnings call: RH outlines growth strategy amid housing market challenges

RH (NYSE: NYSE:RH), a luxury home furnishings retailer, reported solid demand trends in the first quarter of fiscal 2024, with revenues reaching $727 million, despite a challenging housing market backdrop. The company highlighted its expansion plans and new collection launches, which are expected to drive growth throughout the fiscal year.

RH anticipates the constantly shifting monetary policy to affect the housing market into 2025, but remains optimistic about its business trends, forecasting demand growth of 12% to 14% and revenue growth of 8% to 10%. Adjusted operating margins are projected to be between 13% and 14%, with adjusted EBITDA margins ranging from 18% to 19%.

Key Takeaways

• RH reported first-quarter revenues of $727 million with an adjusted operating margin of 6.5%.
• The company forecasts demand growth of 12% to 14% and revenue growth of 8% to 10% on a 52-week basis.
• RH is launching new collections and expanding the Waterworks brand, along with opening new Design Galleries.
• The company is venturing into bespoke experiences, including luxury hotels and private jets, aiming for a global market share.
• CEO Gary Friedman emphasized the importance of a curated shopping experience and addressed past pricing strategies.
• Gross margins are expected to be relatively stable, with potential variability due to new product launches.
• The Aspen ecosystem is progressing, with the Mountain House gallery set to open next year.

Company Outlook

• RH expects the changing monetary policy landscape to impact the housing market through the second half of 2024 and into 2025.
• Plans to build an ecosystem of Products, Places, Services, and Spaces to establish RH as a global thought leader in home furnishings.
• Anticipates minimal impact on margins in Q1 due to lower Sourcebook mailing costs and is confident in the business transformation.

Bearish Highlights

• CEO Friedman expressed a slightly negative view on the luxury home sales market, citing high interest rates and affordability issues.
• The company is cautious due to the uncertainty in the housing market and has experienced delays in the Aspen ecosystem development.

Bullish Highlights

• RH plans to double its Sourcebook circulation and customer contacts with new collection launches.
• The company is confident in their investments in Aspen and expects to see a compounding effect from brand awareness.
• Expansion into new markets, like Paris and London, is expected to significantly raise brand awareness and contribute to future growth.

Misses

• Challenges in meeting demand have led to product delivery delays and a backlog of backorders and special order lead times.
• External issues, such as the Red Sea situation, have caused further delays in product delivery.

Q&A Highlights

• Friedman acknowledged the need to carefully analyze varying data on luxury home sales for credibility.
• The CFO noted that quarterly revenue variability should be considered in the context of gross margin stability.
• The company is delaying the launch of a new book to enhance its appeal, drawing comparisons to Apple (NASDAQ:AAPL)'s strategy with product releases.

RH remains focused on curating an integrated customer experience and is adapting its pricing and product offerings to maintain design, quality, and value. With a track record of success, RH is poised to navigate the challenges of the current market and capitalize on future growth opportunities.

InvestingPro Insights

RH (NYSE: RH) has demonstrated resilience amidst a challenging economic landscape, backed by strategic initiatives that have bolstered its market position. As the company navigates through the complexities of the housing market, it's essential to consider key financial metrics and management strategies that could impact its performance.

InvestingPro Data metrics reveal that RH is operating with a market capitalization of $5.08 billion and a high P/E ratio of 43.21, which adjusts to 35.47 for the last twelve months as of Q4 2024. This elevated earnings multiple may reflect investor confidence in the company's growth prospects or its premium positioning in the market. Additionally, RH has managed to maintain a robust gross profit margin of 45.86% over the same period, underscoring its ability to generate significant profits from its revenues.

Turning to InvestingPro Tips, it's noteworthy that RH operates with a significant debt burden, which could be a factor for investors to monitor, especially in an environment of shifting monetary policy. However, the company's management has been proactive in returning value to shareholders, as evidenced by aggressive share buybacks and a high shareholder yield. These actions suggest a strong belief in the intrinsic value of the company and a commitment to enhancing shareholder wealth. Moreover, analysts' predictions of profitability for the current year, coupled with a profitable track record over the last twelve months, provide a positive outlook for the company's financial health.

For readers looking to delve deeper into RH's financials and strategic positioning, InvestingPro offers additional insights and tips that could prove invaluable. There are 8 more InvestingPro Tips available, which can be accessed at https://www.investing.com/pro/RH. To further enhance your investment research, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, offering you a comprehensive toolset for informed decision-making.

Full transcript - Rstrtn Hrdwr Hld (RH) Q1 2024:

Operator: Good day, everyone, and welcome to today's RH First Quarter Fiscal 2024 Earnings Q&A Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note that this call is being recorded and I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to Allison Malkin. Please go ahead.

Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2024 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call and we undertake no obligation to revive 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 the 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: Great. Thank you, Allison. Good afternoon, everyone. We're actually calling you live from New York at our guest house as we just got back from our opening at RH Madrid last night. I'm going to start with our letter to our people, partners and shareholders and then we'll open the call to your questions. To our people, partners and shareholders, we are pleased to report that our demand trends inflected positive in the first quarter and continue to build momentum despite operating in the most challenging housing market in three decades. We believe our investments in the most prolific product transformation and platform expansion in our history has positioned RH to gain significant market share in North America, while building the foundation for our long-term global expansion across the United Kingdom, Europe, Australia and the Middle East over the next several years. Our results for the first quarter largely reflected expectations with revenues of $727 million adjusted operating margin of 6.5% and adjusted EBITDA margin of 12.3%. Demand was up 3% in the quarter, slightly below our guidance as growth softened when interest rates once again exceeded 7% post the hawkish Fed commentary throughout April. While aggressively investing during 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. Those opportunities are beginning to materialize as a growing number of online furniture brands have ceased operations as the vast majority have demonstrated difficulty reaching profitability. We do expect the constantly changing outlook regarding monetary policy will continue to weigh on the housing market through the second half of 2024 and possibly into 2025. Nonetheless, we remain confident that our continued investments towards transforming our product and expanding our platform will generate significant long-term value for our shareholders. Every act of creation is first an act of destruction, Pablo Picasso. We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry. Our product transformation plans for 2024 include, the launch of our new RH Outdoor Sourcebook, the most dominant collection of luxury outdoor furniture in the market arrived in homes in the first quarter with 14 new collections. Outdoor trends continue to remain strong and we expect to gain significant market share in fiscal 2024. The unveiling of our new RH Modern Sourcebook arrived in homes throughout early June with 30 new collections across living, dining, bedroom and bathroom. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of fiscal 2024. The second mailing of our new RH Interiors Sourcebook is now planned to be in home starting in July with new collections and improved in-stocks, which should also provide an additional lift to demand in the third quarter and continue to build through the remainder of the year. We will be mailing an updated RH Contemporary Sourcebook in 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 Sourcebook and third mailing of our RH Interiors Sourcebook 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 Sourcebook 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. As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past eight years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of their revenues from the trade market, selling to architects, designers, developers, and builders. While RH has a meaningful 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 other trade focused businesses and brands over the years. Our plan is to launch with a 3,500 square foot Waterworks Showroom in our largest new Design Gallery in Newport Beach, California opening in the fourth quarter of 2024. We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid-to-high teens EBITDA margin that we believe has the potential 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 multi-billion-dollar opportunity. Our platform expansion plans for 2024 include, the opening of five North American Design Galleries, including Cleveland and Palo Alto, which are now open, plus Raleigh, Newport Beach, and Montecito, all with integrated RH Interior Design Offices, Restaurants and Wine Bars. The opening of two international galleries in Brussels, which opened in the first quarter and in Madrid where we hosted a well-attended opening event last night. Both galleries are located in beautiful historic buildings that elevate our product and render our brand more valuable. The opening of our first RH Interior Design Studio in Palm Desert, California. We believe there is 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 we've done in East Hampton and the Napa Valley as well as augmenting some of our Design Galleries in larger markets with additional design services and standalone Design Studios. Outlook. While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our business trends to accelerate throughout fiscal 2024. As previously communicated, due to the extensive transformation of our assortment, we expect revenue to lack demand during the year by approximately four to eight points until we read and react to the new collections, reduce backorders 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 our 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 to $130 million due to revenue lagging demand throughout fiscal 2024, which will negatively impact operating margin and adjusted EBITDA margin by approximately 140 basis points. Additionally, investments in start-up costs to support our international expansion are estimated to be an approximately 200 basis point drag for fiscal 2024. We continue to expect demand growth in the range of 12% to 14% and revenue growth of 8% to 10% on a 52 versus 52 week basis. We are forecasting adjusted operating margin to be in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%. For the second quarter of fiscal 2024, we are forecasting demand growth in the range of 9% to 10% and revenue growth of 3% to 4%. We are forecasting adjusted operating margin to be in the range of 11% to 12% and adjusted EBITDA margin of 17% to 18%. RH Business Vision and Ecosystem, the Long View. We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade. Our plan to open immersive Design Galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion and 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 place maker. Our products are elevated and rendered more valuable by our architecturally inspiring Galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 and RH2, our private jets, and RH3, 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 to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $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 there is no one 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, and for the past 23 years we've failed to listen. We avoided bankruptcy while 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 were in the Center of Innovation working on rebuilding our new home, and it's almost ready for primetime. 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, guesthouses. 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. Now, operator, we'll open up the call to questions.

Operator: Thank you. [Operator Instructions] Our first question will come from Steven Forbes with Guggenheim Securities. Please go ahead.

Steven Forbes: Hey, Gary, Jack, Allison. Obviously, Gary, nice to see the business returning to growth here. So I was curious if you maybe can help us contextualize the success of the new collections as you see it today realizing it's early. But can you speak to sort of how many collections are showing signs of resonating with the consumer? And what maybe some of the early learnings are around the designs themselves as it relates to sort of product expansion opportunities or sort of broadening out the exposure right of the designs to different pieces?

Gary Friedman: Sure, Steve. As it relates to, resonate, one, we have a lot of new collections being introduced. And so we are reading and responding to all those and trying to put those into context. And we have many more coming just in the modern book alone, which is just now getting into homes and we're getting some early reach on that. I think the best news is we have a few collections that are new number one collections, big broad collections. And I tell the team here, you get a new number one collection generally once every 7 to 12 years. Something that really is a market mover that resonates broadly across the entire platform. And those things permanently move the business. The way we think about our business and think about our assortments, we talk a lot here about the thirds. We talk about the top third in assortment or the top third -- the top third in any part of our assortment, not just overall, but if you're looking in the dining business, the living room business, the bedroom business, the outdoor business, the lighting business, the rug business etcetera, etcetera. And if you think about our business or any retail business and we try to simplify it down to what's in the top third, what's in the middle third, and what's in the bottom third, and how to think about those thirds. If you can introduce newness in the top third that will lift the entire company, right? It will lift the entire category. It will lift the entire company. If you introduce newness in the middle third, you're going to mostly be neutral unless it's in the top portion of that middle third. And we also talk about the top half and the bottom half, but the third is really the way we mostly focus on this. And if you introduce anything in the bottom third, you're going to likely pull down the company's business. The great news is we have the majority of the newness the vast majority of the newness is in the top half and a big percentage is in the top third. And in some cases, there's the top collections in the top third and that's what's really going to pull the business forward. So, we really like the early reads of the business, but you're always going to have a top third, middle third and bottom third. So, you've got to be disciplined out of -- if you have 90 new collections, 30, well, not necessarily the way to think about it. But if you have 90 total collections, you're going to have 30, 30 and 30. So you have to kind of recalibrate and recalculate it. But our initial reach are really quite good. We're really excited about the vast majority of what we're introducing. And then as we think about how do you dimensionalize the best collection, the key is like how do you optimize it? You optimize it by one, moving from just the books and online into the galleries that gives us the biggest lift factor. And then you look at things like how do you dimensionalize? Is the collection fully dimensionalized? Is it in all the finishes it could be? Is it in all the silhouettes and functions it can be? Are there other variations you can create within that collection. Or even if you have key items, it's the same kind of questions. How many finishes? How many fabrics? How are we presenting it? How many times are we presenting it? How many sizes is it in? So on and so forth. So there's a lot of work to do. The work doesn't stop with just launching new product. Actually, one of the biggest ways to grow the business is dimensionalizing that product and optimizing that product. And so we've been going through since our new book started really meaningfully hitting the market and the new collections last year reacting to dimensionalizing and optimizing the assortment and getting the stock in those things. That's a meaningful lift factor. So lots of things as you think about it. So we're not here just watching it. It's really think about it as we're analyzing and then we're reprioritizing and we're reacting to it from the sense of how do we dimensionalize and optimize the best work and anything in the top half, which will move the business.

Steven Forbes: That's helpful. And then maybe just a quick follow up, right? There's so many different contributors to demand this year and the idea of sort of scaling it as we move throughout the year. I don't know if you can maybe, like, help us digest, you know, the visibility into demand scaling into the back half. Like how many sort of factors do you have a large degree of confidence around? How many are -- how many factors or what percentage of the demand scaling is still sort of a large sort of forecast? You think about like RH Modern's contributions to demand scaling like any way to sort of just shore up the confidence in the demand revenue build into the back half for investors here?

Gary Friedman: Of course. Yeah, no, really good question. First, I'd say it's -- you've got to really think about kind of like what's year-over-year or kind of season-over-season, first half versus second half, and how do you think about the lift factor. So there's seven significant lift factors that we're focused on. And those factors have kind of multiple some have multiple dimensions. So the first is that just the books year-over-year, right? So and the circulation year-over-year. So we have more than doubling of the circulation and contacts year-over-year. That's meaningful. You don't have that many times in the growth of the business. Usually you only see that at the very early stages of business development when brands are in the early stages. The way to think about it is you relate it to RH because you say, well, we're not really in the early stages of this brand, but we're in the early stages of the product transformation and the platform expansion, right? So you want to think about what's happening here. Because we were we had kind of pulled back during COVID and we had very little newness and we had little circulation in contacts. Now we're past the midpoint or at the two-thirds point of the product transformation. And you're going to see a past the halfway point is just with Modern we're kind of now past the halfway point heading to the one-third point. So we still have, yeah, you're looking into the second half here. Modern's really going to impact the second half. You also have the outdoor book right that we had 14 new collections in. That's going to be meaningful in the second half. A lot of people think about outdoor as just a first half business. Yes, it's got a peak season, but we're a year round outdoor business. We're very different than anybody else in the outdoor business, because of our new Design Galleries, which have anywhere from 24 to 36 collections presented year round. So we're a true destination for outdoors. So for us, you have to think about the outdoor business not as a seasonal business. Some companies, they bring out a collection or two on the floor and then they take them off or they set up some umbrellas and folding chairs and then they take them off. We're a year round outdoor business in a good portion of our galleries and that portion of the galleries are growing. So you have the Modern book, which is one of the seven significant lift factors. You've got the interiors book that's going to be mailed, significant list factor in newness and contacts, right? You've got the contemporary book in newness and contacts. You've got the second mailing of the Modern book that will happen in the second half. The second mailing of the interiors book that will happen in the second half. Then you've got this factor of more than doubling the circulation and contacts in the second half. And then you've got the seventh one, which is really the increase in store months in the second half versus a year ago. So we have 48 new store months in the second half of this year versus 12 new store months in the second half of last year, which is a 4x factor in new store months year-over-year. So this is really unusual, right? It's like I'd say if you took anybody else any other furniture retailer or furniture and home furnishings retailer or home furnishings retailer, any of the mature ones, they may say, hey, we have two new collections year-over-year, you know, furniture collection. We might have three. Somebody might have one. We have a massive amount. I don't have that data right in front of me, but it's like 40. And we had -- they're going to have maybe they're going to have a little bit of circulation year-over-year. We're going to have a doubling circulation in contacts year-over-year. They may have -- so you're looking at circulation, you're looking at contacts, you're looking at circulated pages. And then the other one that I didn't mention is a significant lift factor, but it is really what are in-stocks year-over-year, right? So we've had a lot of newness introduced. And I'd like to say every plan we have in this company, whether it's new products, new every plan we have is some degree of wrong, right? When you're looking into the future, it's a plan. It's your best educated and informed guess. I've never seen anybody take the dart and hit the exact middle of the dartboard, okay? But the key is are you directionally right? Are the darts in the dartboard, are they moving towards the center? And how are you optimizing it? So we just have quite a lot of collections. I mean, when just like I've told you we have a few things that are at the very top. When you get anything in the top third, you're generally not going to have enough inventory. I mean, unless you're -- you just take a lot of risk upfront. That's why we don't introduce a lot of newness in our galleries, because it's expensive to transform our galleries to change other galleries, expensive to change out all the product. And we test everything in the books and online first. And we get a read and when you get a read and something is a hit, you generally don't have enough inventory to move into the galleries right away or you might have in our case, with, you know, take the biggest collection. We have a new biggest collection in the history of the company probably by a factor of 40%. And it might be more than 40% or 50%, because we're in the process of dimensionalizing that and optimizing that, right? So it's moving into different big finishes, configurations, different materials and so on and so forth. And then we'll ride those things. So it's no different than think about the cloud sofa. The cloud sofa is by far the best selling sofa. It's the higher end of the market, the better end of the market by a factor of three probably of anything in the world. And the cloud sofa will move the market. We have what we believe is likely the cloud sofa of the wood furniture business. And the cloud sofa we introduced it and we had it in one fabric and then we had however many fabrics in special order. And then we dimensionalized the cloud sofa. So if you looked at the history of our Sourcebooks once we introduced it, then we moved it. We dimensionalized it to multiple sizes. We had we put it from the lex fit to the we did the classic fit. We then put it in 16 inches top fabrics, right, and moved the business greatly. We dimensionalized it into different arm configurations. We did instead of a wide track, we did a thin track, we did a slope, so on and so forth. So all of those kind of moves are moves you make. And what's different and what might be hard for people to wrap their head around is, god, this is a mature business and how do you move a mature business in a big way, you make big moves. The only way you can do this is making big moves. So that's really the key. We're -- I don't know anybody who's attempted a product transformation of this size and scale in a business at scale. I never have. I feel fortunate that I have years of experience in this category and I've got a team that has years of experience in this category doing this. But this is it's like a new company again and is what we're unveiling. And so when you think it's just a little different to scale, if we were building this in early, early stages, we might see a doubling of our business. But we're doing it at scale, so we think it's going to build into the 20 point range in demand build. And it could be bigger depending on how quickly we move, how well we dimensionalize and optimize the business and opportunities and then put the right aggressive marketing behind it, meaning store presentation, finishes we're presenting it in, where in our galleries, how in our galleries, how much space we're giving it in our Sourcebooks, the amount of circulation it's going to get, what's going into advertising campaigns, email campaigns, so on and so forth. So that's how to think about it. So this is something I've never been through at scale. I moved this big and I'm sure you guys have never seen it scale. So but when you just do the math, which we spend a lot of time doing and you dimensionalize the math just like you dimensionalize the ideas, you can kind of build into these lift factors and say the business should be here. And you've got some things that are more concrete. Yes, the real target, you've got some super concrete things like store months year-over-year, 48 over 12 in the second half. We know what happens when we take a legacy gallery to a design gallery. We know what happens when we open a new gallery in a market. We're pretty close. We're within points of that. We've got a lot of data and we're not doing a lot of really different things there. But we also have I would point out all the galleries this year that are new all have hospitality. So hospitality gives you an added layer of business also.

Steven Forbes: Thank you.

Gary Friedman: Sure.

Operator: And our next question will come from Steven Zaccone with Citi. Please go ahead.

Steven Zaccone: Great. Good afternoon. Thank you for taking my question. Maybe to follow up on Steve's question, I was curious for commentary on pricing. Gary, you've talked about it in the past that pricing had gotten too high and more broadly, the industry has gotten promotional. How do you feel about pricing now on the new product? Where are you seeing some customer adoption? And do you feel like some of the pricing challenges for the business are in the rearview mirror?

Gary Friedman: Yes. Hi, Steve. Good questions. We've been doing a lot of work about around value. Right? You know, the way we think about our business and the way we think about how consumers respond is, we're not in a -- in a portion of the market that consumes the first thing on the consumer's mind is price. Right? No one walks into our galleries or looks at anything in our Sourcebook that they think the design is ugly and they buy it because of price. I don't think any of our customers say, hey, I don't mind how the product looks. At that price I'll buy it. I think people come to RH because we are a design driven business. We are a curation driven business and we're an integrator of business. We sell you the end result. We sell you the whole not the drill. And so we look through a lens of design, quality and value in that order. What is, yeah, is the design great? That's what consumers are responding to. If the design is not great, nobody walks up to it or nobody gets clicks closer to its online to try to perceive the quality. Right? If they love the design and they, you know, think it's really good quality, they make an equation in their mind for this design at this quality, what price is a good value to me. Right? The consumer will then make that calculation. And so value is really the pricing is a result of design and quality. And so if the design is great and people love the design and they think the quality is at the level they expect or above the level they expect, you've got a lot of room in pricing there. Now, of course, there's price elasticity, there's if you price things lower and lower and lower, you can appeal to a bigger and bigger market, right? And with pricing higher and higher and higher, we might have appealed to a smaller market, but you've also got a margin lever you're using in there. Like what margin, where do I optimize size of business, profitability of business and so on and so forth. So we've done a lot of work. We feel like we're in a really good place. We feel for our design and our quality, we're at really good values. And in some cases, we're at disruptive values, if you look at it. You're always going to have some today's world, I don't know, if I just read some famous designer just not just made a dupe of his own product, because he knew the product was going to get copied. We're in a world where the copies happen so fast, almost instantly you can look at anybody's product. I don't care, you know, what, you know, what excuse me. I've lost my voice from the Madrid party last night. I had to talk to -- talk -- I didn't have to talk to a lot of people. I did talk to a lot of people. I don't know if you think I was not happy talking to them, but I talked to quite a few people. So my voice is going a little bit. But the key here is how do you create an optimal model. And we're constantly testing those things, but the idea we could do is we, Kenneth, I think it was Tom Dixon, maybe it was. Right? He designed something, a light or something, and then he immediately did a dupe of his own light at a cheaper price. And he said he wasn't going to waste, but I don't care at what level the market is. You're going to see it. If Chanel does something today, I mean, in a very short amount of time, you know, you can go on Alibaba (NYSE:BABA) and see copies of almost anything in the world. You know, you can see things online. I mean, they're just so fast. So, but you can't always perceive the quality, you know, with the fast followers and knockoffs and, but we kind of look at the most of the market that's most relevant. Where's our customer going? I don't think our customer is waking up searching the Internet for the best price. I think their time is really valuable to them. And they're shopping at higher end customers are shopping at places that are editing and integrating for them, that are selling them the end result. It's no different than just participation at restaurants, right? If you look at the wealthier people get somebody else is making their food, they're either going to really nice restaurants or they might have a home chef, right, because time becomes more valuable to them. So they're not unless they're real a foodie and someone who that's their hobby is cooking for themselves, but generally higher demographics are eating out more. And they're and they might be eating at home, but it's being delivered or they have a chef at home and somebody else is cooking for them. I think at the higher ends of apparel and home goods and other categories, people pay more when you do more work for them, when you create time value for them. And I think that's what we do. I think we're -- we are curators, we are integrators for the consumer and we're selling them as close to an end product as you can. And in many ways, sometimes it's a complete end product. If they're engaging our interior design teams, we're doing their whole house in a beautifully integrated way. We're coming in and we're organizing the install and organizing lights being hunted by on ceilings and pictures putting being put on walls and so on and so forth. And a lot of our customers come home to a fully furnished detailed home and we'll go as far as they want us to go. In some cases, we're buying antiques for them and so on and so forth. So when you're doing that kind of work, people pay for it, right? But in a general sense, I'd say, I think our pricing is in a really good spot. Newness, you never know. You may think this is so good, it's so unique, nobody else has it, I'm going to price it here and you might have priced it too low you know and it blows out too fast. You know, you could have got a higher margin. You might take prices up. You might have priced it a bit too high and it's a little under what you thought and you adjust the pricing. So you're always kind of trying to fine tune and optimize. So I wouldn't let like I made comments about the contemporary book. I don't know. What was that? A year and a half ago. I mean, it's quite a long time ago. And I thought, yeah, I thought we were overpriced. We just didn't pay close enough attention and challenge enough about, you know, fabrics on the sofas, things like that. We just had some things that were that just kind of went to a level where, it's not that the product wasn't worth it. The product at that price created a smaller market than we would have liked. It's not that we're not going to sell product at that price. It's just you want to not make sure that's like, we had some sofas that were introduced in a Holland and Sherry fabric. They were only available in that fabric when we launched. It was in-stock in that fabric. Well, that made a sectional in our Sourcebook $24,000. That was made in Italy. It was the highest quality. It's highest quality you can make it in the world with Holland and Sherry fabrics. So if you would have made that same sofa to the trade and you would have made it in a workshop, it would have probably been $36,000, $40,000. We had it for $22,000. It was a good value. It was just a smaller market than we generally address. And so I thought we kind of jumped too far. We still have many of those products. We may have maybe shown them in a different fabric. May have optimized them as far as how we're buying them and have better values. And some of them we may not have went forward with that. But for the most part, I mean, when I think about the main things, I think we still have them all. They're just smaller volume than we anticipated. And we wouldn't have made them like the very front of the Sourcebook. It's like we would have teased those things throughout, presented them as really, really unique items and communicating what we're capable of as far as design and quality and use them in that sense, but not to drive the business. So we made some mistakes. A year and a half ago, we learned from them. We've now evolved and we have that data. We won't make that mistake again.

Steven Zaccone: Okay. I appreciate all the detail. Hopefully, a quick follow-up here. But from a macro perspective, what are you most focused on here? The engagement in the category return? We've seen somewhat of an inflection in luxury priced homes turnover. I mean is that the key metric you're looking for here? Anything else you could steer on the macro would be helpful.

Gary Friedman: It's funny, I don't know what metric everybody is looking at because they vary greatly, right? There's association of retailers that have some number that luxury homes inflected up and other numbers say it was 2%. And so, I don't know whose data is right. I don't think that there's been a meaningfully a meaningful move and sustained move in the luxury home sales. It might be a little ticking up and that's because some of the pricing is starting to come down in some cases and it's starting to come down because of holding power, especially if you had a developer, someone who is building homes to sell them or if you've got a home flipper who bought something to remodel and fix up and then they go to sell it. And in a market like this where you've got high interest rates, your consumer base shrunk meaningfully and you've got a you've got a burn rate depending on how long you hold it. But I don't think that there is a meaningful sustained move in the home market. I think you've got little ticks up here and there and it's kind of bouncing around the bottom. And I think it will be until we have a meaningful move in interest rates. I think we began this year, everybody expected six interest rate cuts. I think that was the number that if you looked at how the market was betting, I think the Fed was pointing to kind of four cuts and the market priced in six cuts, because they figured that is always very conservative, right? And I think that where are we now today, the map says I think there's a 90 something percent chance based on yesterday's comments that we're going to have one interest rate cut. That's like way off. That's only in a few months, right? Like not that many months, like way off. If you think about the Fed's forecast of going from four to one and I mean think about last quarter, Powell went on, I think he shocked the world. He said for the first time in his commentary in a while, I don't think we'll need to hike rates. Everybody is listening to him talk about or waiting for him to say how many rate cuts we would have and he says, I don't think we'll need to hike rates. And then you got Jamie Dimon out there saying you should not be cutting interest rates, you should not be cutting interest rates. I mean as much as the Fed is supposed to be independent, if the best banker at the world, if the best bank in the world is on TV multiple times saying you should not cut rates, I think that has a little influence on what the Fed thinks. They may not may not listen to Gary Friedman's point of view, because I put it out there when I told them they were behind the curve on inflation. I said they should call some business people and we saw massive inflation and they thought, oh, it's what they call it?

Jack Preston: Transitory.

Gary Friedman: Transitory and interest rates will go from four back to two in a couple of months and they went to nine. So we saw that coming, but I just think that there's a lot of noise out there right now. I think there's a lot of pressure on the Fed. I think the Fed is going to be massively data dependent, which means the Fed will be behind the curve, right? And so they were behind the curve on seeing inflation. I think they'll be behind the curve as it relates to assessing is inflation under control. And I think they'll be behind the curve as it relates to it's time to cut interest rates. So our view is probably a little bit more negative than it was a quarter ago. I think a quarter ago, we were feeling a little bit more optimistic that there'd be rate cuts to the housing market, would begin to meaningfully move in a sustained manner. I think it may not be until 25% or second quarter 25% maybe. So I think I don't think there's going to be a sustained inflection in luxury home sales at these interest rates. So, yes, not with interest rates like the balance. It's just an affordability factor. You've got home prices up 50% or more 50%, 60% in post COVID. Home prices went up 42% in the two years of COVID and then they've continued to compound the last two years. So home prices are up roughly 50%, 60%. And now you've got interest rates seven points 7% or higher when they were 2.6% to 3.3%. I mean, it's just simple affordability now. Yes, there's some silly things to buy a home at any price they can, but the other thing you can't trust by the way that's wrong in the data externally is when they talk about cash sales. It's such a stupid number to focus on. And they say, oh, like there's more cash homebuyers. You know, there's people wealthy paying cash on homes. I don't care how wealthy you are. No, not a lot of people own their homes that don't have a mortgage on them. I'm relatively wealthy. I mean The New York Times just reported I bought a couple of homes in Malibu. Did I pay cash for them? Yes. Did I pay cash for my Beverly Hills home? Yes. Did I get mortgages put on them? Yes. But does the Association of Real Estate Brokers who reports on any of this stuff? They record me as a cash buyer. No one's going to really pay cash. You're going to have a mortgage on your homes because you think your money can generally make more money somewhere else. Right? And so, that data is never right either. So, you know, you always get a parse out the data and say what is real credibility. I mean because the data we get on luxury homes were up 2%. And some of them another report said luxury homes were roughly 30%. I don't know which one's right.

Steven Zaccone: I appreciate all the color. Thank you.

Operator: Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman: Thank you. It's Simeon Gutman. Guys, I want to ask about the gross margin outlook. And if I can segment it into two pieces, first, the new product lines and launches and then everything else. Curious if gross margins are roughly stable and then thinking about the guidance and the torque in the back half, is it simply better sales and then better expense leverage? Or is there some variability that could still happen with gross margin of the business? Thank you.

Gary Friedman: I said gross margins are relatively stable. We do have a lot of new goods coming in. You're going to be right on some. You're going to be wrong in others. And you're in one of the worst housing markets in 30 years. The worst one I've had seen in my career. And so there's always going to be just a higher promotional environment than across the industry. And you're going to have to react to some of that stuff. So you're always going to carry a higher percentage of promotional mix during market times like this, right? Because you've got to kind of keep the inventory moving. And so -- but I think we're pretty confident about what our margin mix is going to look like unless something happens. Meaningfully -- we're meaningfully wrong on demand, margins likely go down a little bit. We're meaningfully right on-demand margins go up a little. No different than buying a product that really performs well. You're going to have higher margins, then it performs poorly. So -- but I'd say I don't think we have a lot of risk in margins in the second half.

Jack Preston: Simeon just, obviously, as you guys build your models and look at our margins, just note that there's -- we're growing variability in our quarterly revenue. So it can only remain stable to the extent the revenues are the same in a sense. I think there's a different nuance here when you're talking about product margins versus gross margins which have fixed occupancy. I know it's a firm grasp the obvious, but obviously, when a quarter is lower, for example, like Q1, again, if I'm building a model, I'm not taking Q1's gross margin saying that's flat. I don't think that's what Gary saying. We're going to have growing revenue throughout the year. You know our trends to just build your models to make sure you're looking at fixed occupancy.

Simeon Gutman: Yes. That's helpful. So I guess, just related to that, and I'll include the follow-up. I guess I meant that there isn't some piece of clearance that has to occur with older legacy lines. Like we're through that part and now the normal cadence of the business app and the variability will be based on the mix of promotions with current product, but we're through the worst of whatever clearance that you were trying to do to clean up the portfolio ahead of all these new launches and then.

Gary Friedman: But we're going through the biggest product transformation in our history. We're in the middle of that. I wouldn't say -- I don't know why you think we're through the worst of it, like we're in the middle of the product transformation, we're just kind of going on the second half of it. So, yes, the clearance doesn't just go away in a business like ours as selling T-shirts and sweaters where put it on a clearance table and it flies off. The home business, when you're transforming it like we are and you're making big moves, you put things on clearance, but it's limited. People don't buy a new bed if they don't need a new bed. People will buy a new sweater if they don't need a new sweater, it's on sale. I'll have another sweater. You don't buy another bed just because it's on sale. So sale and clearance in categories like ours are very different than other categories. So it takes a longer time to move through and cycle through.

Simeon Gutman: Okay. I'll leave it at there. Thank you.

Operator: Our next question will come from Max Rakhlenko with TD Cowen. Please go ahead.

Max Rakhlenko: Great. Thanks a lot guys. So first, just curious, how much of the assortment in galleries today comes from the new launches over the past year versus the legacy product? And then when will we get more of the Outdoor and the Modern products inside the galleries? And then just how should we think about the evolution over the years as far as the new products being shown in the galleries ?

Gary Friedman: But we're in a level of new today on about 60% new in the bigger galleries, 50% new? Yes, about 50% new in the bigger galleries and the legacy galleries probably about the same amount. So think about something like Outdoor, we're generally not buying newness to put in galleries unless we think that it is a sure winner because that's how you can really negatively impact margins, right? If you buy something upfront really big and you think you're going to buy all the display quantity and you're going to buy it to that level of volume and you're wrong, you're going to be really wrong. So we're constantly, for the most part, we're buying newness. And we may buy it bigger and anticipate they want to be somewhat heavier that if we're right, it's going to be big, we're going to move it out to the galleries more quickly than less quickly. But we're reading, I mean, Modern is just kind of getting out there, right? If the books complete. It's all in home this week, complete? Yes. So it started mailing first week of the month, and it takes a couple of weeks to get in and get out there. And then we're kind of reading it, reading the online and response to the books. And then we're probably about mix or something. We're -- we have a pretty good sense of the early reads as consumers – again with this, you got to think about a lot of our business is kind of already booked. A lot of our demand is already -- it's already kind of been decided. We've got projects that are in the pipeline that are designers are working on over three weeks to three month periods. And so they're building those orders. They've got all those quotes. And you may get -- consumer sees the newness and says, oh, change that or change this or designer may change this or change that. Most part that's work that's already done. So a big part of our demand is kind of already in the pipeline, and it takes you like about six weeks to kind of see what those early trends look like versus the early trends of other things. And then you start to kind of see it build. It usually takes us about three months to get the full run rate. And but we're making kind of early bets probably by weeks 6 to 12. Do we think that's going in the galleries and then we'll start to write new orders and those new orders will take four months to five months to get depending on how big we're buying, right? If it's like some of the questions that I said were just huge collection, those -- the vendors capacity may take a while to ramp up on the one big collection that we think is the new redefining collection for us. That vendor had to open two additional buildings, two additional factories to ramp up to make the kind of demand that we're seeing. So that takes you a much longer time. There's a lot of factors to it. But I'd say we're about 50% newness on the gallery floors today. And then your -- generally so much newness coming in, you're going to have other newness that comes in, that might be better than the first newness you put out there, so you might transition that as you're going. So there's going to be a lot of data. Will there be something in the new Modern book that displaces something that we just put into the galleries maybe, so the math will kind of tell us what to do.

Max Rakhlenko: Got it. And maybe just a follow-up to that, but some of the books are being delayed or not delayed, but coming out a little bit later than you initially thought? And then 1Q was -- 1Q demand was a little bit softer than what you thought. So just given how the business does remain somewhat choppy and there's been a little bit maybe demand pushed out just given the timing of the Sourcebooks, curious to your level of confidence that you'll be able to maintain the full year demand guide? And then just separately, it doesn't look like you stop releasing the outlet revenue. So if you could share what that revenue was in the first quarter, that would be great?

Gary Friedman: Well, yes, we usually don't do one-off.

Jack Preston: Yes, we don't do one-off

Gary Friedman: We're not reporting it like we're not generally doing one-off things like that. But let's see the books kind of booked slightly later and level of confidence. Well I think I talked a lot based on Steve's first question about how we think about the lift factors in the business, and the lift factors all look good. And the key is going to be what is the consumer response to the newness and to the additional contacts. So we've got -- we have a lot of data on that. We don't have a lot of data on the newness. But we're generally taking a kind of down the middle view of kind of what it should be. So we feel confident that the numbers we're putting out there are achievable numbers. And if we get any kind of tailwind behind us if for some reason, we see some interest rate cuts or other things that prices dropping meaningfully in the housing market and the housing market picking up, that can be some tailwind. Can we have more headwind macro wise ? I don't know, maybe. It looked a little worrisome when inflation about a couple of months ago was ticking up, would they have to raise interest rates. But right now, the latest report says no, but we feel generally confident about what we're doing. And we've been here -- we've all been here a long time, building this company and building this business. So we have a lot of experience doing it. But at the same time, I do say it's the first time we've been through a transformation this large. So it's unlike -- and it's not unlike anything else you do that's new and different and innovative and inventive. There's the greater level of reward and a greater level of risk. So this is our best view today.

Max Rakhlenko: Got it. That's helpful. Thanks a lot and safe travels.

Gary Friedman: Thank you.

Operator: Our next question will come from Curtis Nagle with Bank of America. Please go ahead.

Curtis Nagle: Great. Thanks very much for taking the question. So maybe just changing gears slightly, Gary. Just curious if we can get an update, I guess, on the progression and the timing of the Aspen ecosystem? And then the concept more generally, I don't think that's something we've talked about on the call in a little bit.

Gary Friedman: I mean, what, Aspen ecosystem?

Curtis Nagle: And more generally the concept, yes.

Gary Friedman: Yes, yes. It's going slower than we anticipated. Our development partner likes to say, probably easier to develop on the moon than it is in Aspen and things are taking more time. Aspen, it's a small town and during COVID, they had a lot of disruption and it backed up everything, and we really slowed down because of that. And then they had a lot of turnover in their whole planning group and that's kind of slowed us down a bit. But we're up and moving our Mountain House is kind of on track. Our Mountain House is that the name for the big gallery we're building there. It's on the best corner in Aspen. It will be a three-level experience and two levels of retail. And we're going to, I think, get a whole world of RH kind of concept there because you get such a global customer coming into Aspen, wealthy and affluent global customer. And we've got a great restaurant, hospitality experience. So that's on track for next year, right? So that will open next year. We're kind of a standoff at the city on the guesthouse and some arguments on if the wall that they want us to keep as historic or not historic, and we believe it's not historic and proof of that. That slowed us down versus what we want to build. And then we are getting into process of the plans on the homes and things like that. We slowed some of it down just because of the uncertainty in the market right now like do you want to build homes and put them in the market when the interest rates should decide? So but it will be progressing. It's all kind of going a lot slower than I think we thought, but COVID happened and you're in a small town and difficult to build and develop there and things are taking longer. And you also have an interest rate move. When you're a developer, we're now a developer, so your cost of capital is going to be higher and things like that for us and for our partner. So it's time usually on some of the homes and things like that, we're taking our time a little bit. We don't think that there there's long-term value issue with anything in Aspen. If anything, we've had a great timing, we invested before the COVID boom, I mean, that's to kind of before anybody had clarity on that. So we believe our portfolio and investment. We've made probably made two or three times our money already. So if we wanted to liquidate our portfolio today, everything we have is worth a heck of a lot more. But we didn't just do it for that. I mean we did see what we can learn about. The idea to face in some places and so on and so forth. But we're excited about it. We'd like to go a little faster. But the Mountain House is taking shape and moving quickly now finally. And we hope the guesthouse will resume construction soon.

Curtis Nagle: Okay. Great to hear. And then just a quick follow-up. I just want to make sure I caught your comment correctly. It sounded like -- I think you said, Gary, that in terms of just new products alone that could grow the business, I think, 20 points or more also or maybe 2x. So just would you be able to clarify just, I guess, kind of the range or just maybe I just misheard?

Gary Friedman: You mean as far as how we think of lift factors, Curtis?

Curtis Nagle: Yes, exactly.

Gary Friedman: Yes. I think when you start to take it all into account, right, we can see lift factors getting us lifting the business in the 20 point range, right? And as we move through the second half and all the circulation hits and I was just going to be a lot more people that are going to be aware of the business. And we have 48 store months versus 12 just in the second half. And we have a lot of new restaurants that they don't do zero, right? Where they may not do as much volume as the new galleries, they're not bad. And so even things that you might think are small, we're opening Waterworks, I think, what our highest volume showroom is -- L.A. New York and L.A.

Jack Preston: New York and L.A. and Long Beach.

Gary Friedman: I think L.A. is the center point. I'm pretty sure.

Jack Preston: In totality with Modern, yes.

Gary Friedman: Yeah, and so we're opening a kind of a Waterworks gallery within our Newport Beach Galleries. The Newport Beach Galleries is the biggest gallery we've ever built. And we're going to have 90,000 square feet. It's got like 40 collections of outdoor furniture. We've got, I think, 22,000 feet of Outdoor furniture space and probably the best Outdoor furniture market. So we have 3,500 feet of Waterworks and Waterworks doesn't have a footprint in Orange County. So it's like opening of Orange County generally for a lot of brands, you do about as much business as Los Angeles, right? And so Orange County is going to be big, but Waterworks even that if it does anywhere near what the Waterworks brand does in Los Angeles, it's a meaningful number. So they're really excited about it, and we're really excited about it. We're excited to launch everything it's going to be a good validation. But there's just a lot, right? You've got the Modern book, Interiors book, a Temporary book. The second mailing a Modern, second mailing of Interiors, there's a lot of newness when you count all that up, but there's a lot of also getting in-stock and all that stuff, the cycling, all those first round collections. We now have read it, we're reacting to. We're ordering in the newness, some might have missed and we're marking it down and cycling it out. And then we've got a doubling of circulation and 4x into new store months. And it's just -- there's a lot of lift factors. So as many as you have ever seen, as many as I've ever seen in this stage of the business like this. So it's just -- it's different. I know it looks different. It should be different. So appreciate all the questions. And none of them surprised me. You asked the same questions if I was you guys.

Curtis Nagle: Okay. Thanks, Gary.

Gary Friedman: Thank you.

Operator: Our next question comes from Michael Lasser with UBS. Please go ahead.

Michael Lasser: Good evening. Thank you so much for taking my question. Gary, are you getting as much of a lift from the newness and innovation that you've been introducing as you might have in the past? And does it make sense to delay further some of the introduction in light of how challenging the market is because maybe you would not get as much credit now or recognition now from your customer given what's going on?

Gary Friedman: Let's see to make sure I get that right, Michael. Thanks for the question. Let's see here. Mike, we are getting as much of a lift from the newness as you did in the past? Yes, in fact, in some cases, we're getting better lift, like I said, you get a new -- in a business that's kind of our size and maturity, you don't get new bestsellers very often. You get a new one probably every seven or 12 years like a big furniture collection or a big upholstery collection, right? So we're getting, I think, we're getting as much right as we kind of ever have. We always get a certain amount right and a certain amount wrong. So I think we're probably similar to how we've been in the past, maybe we're a little better because when you get a new all-time number one you kind of go like that kind of changes everything. So and then does it make sense to further delay some of the new introductions, I think, was the question right, in light of the challenging market, we're not really trying to delay anything. Usually, when we -- like we pushed the Modern book by a month, which then kind of pushes the next book by a month. We didn't push Contemporary just pushed Modern and Interiors. We want to have a certain amount of spacing between those two. So we didn't overwhelm the customer with too many pages and too much product. But the reason we delayed Modern is because some dots connected while we were working on it. It's a whole new design. It's a whole new format. And we're working with an exciting graphic designer from Madrid, who spent a couple of months living with us two or three months. And you saw him last night at the party. But some dots connected and we figured out how we could make it, we thought significantly better. And we said, look, you do the math. Is it worth doing this and changing this and we're going to take a four-week delay and we believe it was worth it. And I think it's -- I think the most exciting new book we've put out there ever in our history. I think it elevates the RH brand. I think it's going to track a higher level of consumer and interior designers. And I think merchandise beautifully, it's graphically presented beautifully. So that's where we spend more time. I mean I don't think like we usually don't like go, oh, yes, let's just kind of delay it. Like we want to get our work done as we can. I think when you're innovating and inventing, you're going to see new things all the time. You're working on new things, you've got new data. You turn -- can look around another corner and you see a new opportunity and you're dividing a page, do we pursue that, do we integrate that in. Is that how important is it and we thought it was important enough to take or more and more weeks and work on the book and take it to this new level and actualize the vision we had. And that's it. I'm sure that's no different than anybody that's working on new products. I don't know if Apple knows exactly when the new iPhone is coming. There's not usually a schedule. We're introducing the iPhone on this date or we're introducing this iPod or iPhone on this date, you -- while you might think it's just a book, it's a book with a lot of newness, we're trying to present it in a newest compelling way and you're kind of building and learning and making decisions. That's why we just took more time we got. We thought we could see a way to make it significantly better. And we said, let's keep going. Let's take the time. It's going to be worth it because it's going to be how the consumer now sees it, how it's presented, what's presented which way for the whole life of the book. So the book is just four weeks later, okay, there's a little bit of demand move from one month and does it move forward? If you thought it was worth zero, you wouldn't have done it, right? Like if you thought, hey, this is going to be x and we're going to move things around and take four more weeks and it's going to still be worth x. You wouldn't do it. But if you think it's now going to be worthwhile and over the life of that book where those collections and how they're presented that way, you pick the one that you think is going to give you a better return. So that's how we make decisions like that. I mean, look, I almost -- I mean I love what Elon Musk is doing and he's doing incredible things to change our world and change, you know, carbon footprint, the energy, and, you know, make this world much more sustainable going and doing all kinds of nutty things, right, creating places to live on Mars and ways to change the satellite networks and tunnelling and all those things. But I was going to order that when the Roadster came out, right, I was all excited. I wanted the Tesla (NASDAQ:TSLA) Roadster. Right? You know, they wanted you to put to get the founders one. I don't know. I think you had to put $250,000 down or something like that. And I almost did, you know, it's not hot, you know, but I got to wait, like, a year. Well, I don't know what is it, in seven years, it had been the Tesla Roadster. Now I'm happy I didn't give my money, but I'm being like that now that's a real delay. And I don't know why it delayed it that long. Maybe it's going to come out and be rocket propelled, and it's going to be worthwhile. But usually, we don't have like massive delays on things, but you don't want to you don't want rigidity to get into the way of evolution and innovation and better ways. You just want to do the math and say, okay, if I think about this, let's say we have a new product and comes down the pipe and we're working on a book and a season and we're going to either going to launch that product and it's not going to come in for, I don't know, three months and you say, gosh, wait for the next book. Say, yes, wait for the next book or you can put it in that book and you can give consumer the consumer can see it, they can order it, and it's going to get in if the next book's a year later, it's going to get in 26 weeks early, not really three months late or something. It's all kind of simple math, the way we look at it. So we made a decision to make the book better. It took us four weeks longer. We think it's going to be better forever or it would have been not as good forever. So that's the lens we're looking through.

Michael Lasser: Got you. My follow up question is, it sounded like earlier in our conversation this evening that you mentioned the consumer is buying more on promotion. So a) is that right and b) is that persists, does that change how you think about the path to RH's long-term margin aspiration?

Gary Friedman: Well, I think it's yeah, I think it's massively down housing markets like this or down it's like if we're in a recession in any category or entire, right now, we're in a massive housing recession and anything that's tied to housing, right? Apparel is benefiting based on that. Like instead of people buying homes and they're saving a lot of money not buying a new home, so it's easy to go spend some money on apparel. Hey, honey, we didn't buy that new home, but heck, do you want to buy a new purse? Sure. Yes, but it's an easy trade off. But it's you always are going to have a higher degree of sale goods in a down market always. And because just demand's slower, you're going to have more markdowns. You got to keep inventory moving so on and so forth. So that's all factored into the margin guidance short-term, but it doesn't change the margin guidance long-term. It's just based on the demand environment, how strong is the demand environment. I mean, as an example, the demand environment for our category in the COVID years was unbelievable. Margins went way up. The demand environment post COVID, not so good because up against those numbers. So margins go down. Then on top of that, you compound that you're in the worst housing market in 30 years and margins are going to go down again. So it's all relative to demand, nothing more than that. I hope that makes sense.

Michael Lasser: Totally. Thank you very much.

Gary Friedman: Okay. Thanks, Michael.

Operator: Our next question will come from Jonathan Matuszewski with Jefferies. Please go ahead.

Jonathan Matuszewski: Hey, good evening, and thanks for taking my question. Gary, can we get an update on how the brand is resonating with the end consumer in Europe? I think on the last call, you mentioned satisfaction with some of the momentum with trade customers, so acknowledge a bit slower progress with the end consumer. So anything you could share in terms of maybe what your customer insights group is seen as it relates to brand awareness or intent to purchase or overall perception would be helpful? Thank you.

Gary Friedman: You're talking to the consumer insights. We're all sitting around the table. Yes, what's great is we just got back before we went to RH England, RH Madrid for the event, we were in RH England for a visit there and we sat with the team there for several hours, just trying to listen and learn and just kind of we just celebrated our one year anniversary in RH England and just identifying opportunities and we think that, look, we've never done this before, right? So we didn't know exactly, I don't know what it would look like. We could have guess at what it's going to look like, but we don't know. We're opening in new countries. We've never sold there. You couldn't even buy direct from our brand in any of those countries. So why would anybody know RH. And so we're just learning a lot about consumer awareness there, how do we build it, what are the right ways to market the brand? We always believe that the fastest way to build the brand, we think, is through a physical presence and people can see it, touch it, respond to it, be served in a way have interior design services, all kinds of things. And so I'd say after a year of being opened in RH England, we're kind of where we thought we'd be. We're trending at a level for opening a gallery in the middle of the country side that we said we're opening through a lens of conversation versus commerce. It's not where you would have started if you're trying to optimize commerce, right? London is where you start, but we knew London was going to be several years later. And we thought like let's do something inspiring and elevating and something that would create an incredible first impression and to the brand in that. And we cited to open in a 17th century estate on 73 acres with the deer park and architecture design library, three restaurants, wine lounge and a tea salon and a juicery and what else do we have there? Yes. we've got. Yes, yes. Stone exhibit, Sir John Stone exhibit, one of the greatest English architects ever lived. And but there's a lot of wealthy people that are go to the Cotswolds and weekends out there and weeks out there and especially during summertime. And we want to create conversation and we think we've created a really great first conversation. And the business trend in this first year now is kind of where we thought. I would say Munich and Dusseldorf, Brussels were not really going to be first on our list, but we had an opportunity to get some good locations and a deal where Abercrombie was closing some of their flagships and we thought they were good locations. And we opened those. They wouldn't have been strategically in the order. We would have liked to probably be in Paris and London first, build the brand awareness. But they were convenient and we could get into them for not a lot of investment as a lot of the infrastructure and stuff is done by Abercrombie. And we've gotten open in those places, but not knowing really what to expect. I think that for us, the real key is get open in Paris and London and Milan and even Madrid. Madrid is one of the biggest cities in Europe and the biggest city in Spain. So I think we're going to learn more. Just from our conversations yesterday with the team, we had some great feedback and great ideas on how to build the business and get more people to the gallery and so on and so forth. And some of them, we think and work across the entire -- not only entire Europe, but actually across the entire US market. So that was really great. And an incredible investment of our time and great insights from our people and some of the people in our design team. And so then just even things like products and having the right kind of products for the right markets, right sizes, right delivery times. What are we stocking in the UK versus what we're stocking in the US and what sizes, what shapes, what things and how do we shift faster on certain things and supply chain lead times to different countries. So there's a lot to learn. But I'd say I feel better and better about it as we go because we're learning more and more and we've got some really great people on the team, really smart, intelligent, passionate people on the team. We've got a lot of great feedback yesterday. The teams and all the galleries, I think, are just outstanding. I think the galleries look great. I mean we are in Madrid and may have been the best work we've ever done from a presentation point of view and interior design and styling and stuff like that. I mean just breathtaking. And I think Madrid like set a new standard in our company and gave us a vision of where to take all the galleries and how to execute at that level everywhere and we think it will impact the whole company. So look we're opening, we're learning. Our business is building. Every one of our galleries, the design pipeline is building. And we're in kind of spring summer period now. So we're going to start learning a lot more in England because once people really start going out there again. And we're learning across the platform. So I'd say all good. And hopefully, as we get Paris and London, open in Paris a little bit next year in spring and London, hopefully, at the end of next year, that was a little complex. We're stringing together four buildings and different work places and stuff like that. But right now, we believe it looks like next year. And I think those are going to really raise the brand awareness massively for us. And then Milan after that.

Jonathan Matuszewski: That's really helpful. Thanks, Gary. And then just a quick follow-up. In the prepared remarks, you mentioned a growing number of online furniture brands that ceased operations. We've witnessed this trend as well. Based on our observations, it felt like disruption was more concentrated at the mid-tier price points. So are you seeing super premium online brands in your space vanishing? Or was that comment more so foreshadowing disruption that you see on the horizon for upscale competitors? Thanks.

Gary Friedman: Yes. I think there's a lot of, I think, mid-tier is kind of like, I don't know what's your definition of mid-tier. I think there's more online players that are going to, what I'd call, a higher-end market, may not be luxury market, but there's a lot of overlap. A lot of people doing a lot of look-alike things at price points that are overlapping ours that we've seen. There's some from one of the ones that is having a lot of disruption, a lot of press is a lot of it's targeted to the trade and stuff like that. So many of the ones like we are referencing what I call, higher-end brands that are targeting trade customers and higher-end consumers. But there's a lot of them like I added probably 100, I don't know, about 25% kind of 20% or probably blown up now or teetering not blowing up. But I think there's a market like this, especially when you have the compounding nature of really tough housing market with a really difficult credit market or capital market, they just can't get easy money anymore. So there's no free money to kind of just grow brand and not make money. In a market like this, you got to figure out how to get to profitability real quick because there's -- the odds that someone else gives you money is very low. And that's why I think a lot -- there's just going to be a lot kind of floating. And even in the non-online spaces, you've got furniture retailers, regional people blowing up. You've got higher end people like Mitchell Gold didn't make it through the last management changes that they went through in their business in a market like this. So it's -- and I think we're going to see more disruption. It doesn't look like that the housing market is going to snap back anytime soon. So I think there's a lot of businesses that are undercapitalized, not making money that you're going to see more and more disruption, and that's going to all the opportunity. Yes. And we've got -- we're just so much better positioned today from a value point of view, the value of our product and the disruptive nature of kind of how we're attacking the market in some cases that we're going to be able to get some of that share.

Jonathan Matuszewski: That's helpful. Thanks, Gary.

Operator: Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham: Thanks a lot and good evening. Just to clarify, Gary, you've seen a little bit more negative on the macro than a quarter ago, but it didn't reduce the outlook for the year financially. Is that just because you see more benefits from some of your initiatives? Or is there something else?

Gary Friedman: Yes, I think we haven't really put a lot of factors, the macro steps can bounces around a little bit, but I don't think it's going to -- unless there's a real another step down. I don't think it's going to move us off our list factors or builds in our business. So there may be some shorter-term noise within quarters, things might move a little bit, housing market might be a little tougher or not tougher. If you look at mortgage applications and things like that, those can fluctuate a bit in there. So there's some macro noise within a year. But I just don't think that we didn't really think that the macro is going to get a lot better. And so I think we're more right than that than wrong about what the macro is going to do. And I mean even if we get one interest rate cut this year, if they go a quarter or even 50 basis points, it's not going to move the needle. And so but it's interesting. We might get a point everybody thinks we're going to get a 95% chance for one cut, I don't know. There was a 95% chance for five or six cuts, not too long ago. So we'll give you our view on the macro, but we -- and we take it into account on our business. But we're not -- when you're bouncing around the bottom like we are in the housing market today. We kind of think we're going to probably bounce around the bottom for a while. We hope the bottom doesn't go lower. I mean could it, it could. We're not really macro experts. We're kind of try to interpret what we see and look at the trends and take all the data in and use our best views on just directionally. Is it going to get worse? Is it going to get better? Right now, we don't think it's going to get worse, and we don't think it's going to get better. I think it's going to stay about the same through probably Q1 of next year.

Seth Basham: Got it. That's helpful. And just a related clarifying question. You previously talked to peak inflection, our peak year-over-year growth first in Q2 this year. Now I'm not sure if it's back half of '24, whether you actually see the peak sometime in early 2025?

Gary Friedman: Yes. I think the -- I mean it's interesting when we're kind of seen that. We see a lot more now. And we can connect a lot more dots now. We can -- we've got some real product winners and things that are emerging, and we can see how to dimensionalize and optimize those now. So that's, yes, that's kind of when I say peak, well, let's first, let's define peak inflection. I'm talking about kind of peak inflection of RH sans the macro, right? We get the macro like when like our product peak will look like what. So I'd say I think it's likely for us looking like late '24, early '25, I think. It's -- but then again, you could say, oh, well, the peak is going to be 10 years from now because we're going to keep getting better, right? So it's not like we stop. But I'm talking about like the big moves. The big moves we're making, I'd say, yes, there's more we can see today and I'd say it looks more like kind of late '24, early '25 just because we can see more newness like we've got a big development pipeline from a new product point of view, and we've got a really, a pretty big development pipeline from a platform point of view, right? And probably in the next quarter or two, we'll give you some updates on like just new galleries and how many we can do. We're feeling more optimistic than less optimistic about what that pipeline looks like. And that will give us some more lifts and things like that. And at some point here, we'll get Paris and London, and we just got Madrid open, we'll have Milan open and we'll start I think that business will all start to reflect. You'll get -- there's a compounding effect of consumer awareness that happens with the brand. Like once you start to really acquire customers to get more customers, you're doing a good job. It's like you open a restaurant and certain amount of people coming with you and opening night, the next night, next night, and then they tell more friends and they tell more friends and pretty soon you've got a full restaurant, right? It becomes a compounding factor. And I think we're going to have a compounding factor in Europe, where -- when Europe starts to inflect from that compounding factor of awareness, I think, it will grow faster than the core business. It will grow significantly faster. It's no different than kind of the compounding factor that's happening in our guesthouse. Our guesthouse, we ran it at relatively lower occupancy rates in the beginning because we only sent out one e-mail and we wanted to be about privacy and luxury and we didn't want to -- wasn't about filling it up. It was about having it be full of the right people at the wrong time and a level of our ability to it and even accessibility to it, right, not making it too accessible. And now we've got the who's who of people staying here because you get someone stays here and they tell four friends and then you get two of those friends that stay and they tell four friends, it just compounds and pretty soon something is doing significantly better. And I think that's an important thing about building a brand like ours. You got to build the right way. Like the investments we're making now into physical locations in Europe, even in the US and especially Europe because Europe is -- US is really hard to compare to Europe because everybody knows us in every market. There's no market we have in the US that we don't have customers. We have customers in every market. And so when we open in a new market, we kind of know exactly what's going to happen within 10% variance. When you're opening in a new country where no one knows you there's -- you don't know if you're going to exactly do, but that awareness build is going to be exponential versus the builds in the US. Once it gets going, it's like that tipping point the people talk about like what is it Simon Sinek talks about it, the conversion point, the brand starts to get x percent of the market and it tips and your awareness starts to exponentially grow. So, yes, directionally, that late '24, early '25 is what we see today, but I might be telling you '26, '27, because we see more and we're dimensionalizing more opportunities and optimizing more of the things and it's worth more.

Seth Basham: Helpful. Makes sense. Thanks for the color. And if I may, one last quick one for Jack. With the delay in the Modern Sourcebook, what was the impact on margin in the first quarter from lower Sourcebook mailing costs? And will there be any negative impact in the second quarter from the delay relative to your prior expectations?

Jack Preston: Yes, we had a minimal impact.

Gary Friedman: Yes, nothing because we were going to -- it was going to start to get in the last week, I think.

Jack Preston: In the last week of the quarter. Minimal part -- minimal of the expense would have been

Gary Friedman: Minimal, yes. It was most of the ad cost almost all of it was in Q2.

Seth Basham: Thank you.

Gary Friedman: Okay. Any other questions?

Operator: And our final question will come from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: Hey, guys. Good evening. So I have a couple of really quick questions. It should be quick. So one, just -- and again, this is a follow-up, too. But Gary, you talked a lot about the tone of the business and your leverage. You mentioned the strength in Europe. Should we interpret the better trends lately is a direct reflection of the new products you have in the stores? Is that -- that's what's happening. And then the second question I have, just what explains the, I guess, the widening gap between sales growth and demand growth.

Gary Friedman: Yes. No, I think that's -- you're right. It's -- I mean, the new product is creating the inflection point, right? And whether it's a new product that's just in the books and online or it's new products that we've also now put in the stores that is creating a bigger lift. And then the other piece I'd say, not to minimize is just getting in-stock in the new product, right? You're just not going to buy it right, and you're not going to really buy it for all stores right up front. And so even if you decided to take an early bet and say, hey, I'm going to buy this one for half the galleries upfront, but your demand hits and you're selling way more than you thought, it doesn't even get to those galleries. It gets to those galleries six months later. And then it doesn't get to all galleries until six months after that. And even if -- once you get it into the galleries, your lift might be bigger and then you're out of stock again. So it takes a while in a business like this to kind of get ramped up because the factories can't move that fast against big numbers. I mean, we're a big -- we're the biggest business at the high end. So it was easier when we're smaller to move more quickly, I'd say. It's harder to move more quickly when you start to have our scale as no one makes scale. Like I said one of the collections that we did that became out of the gate, you could kind of forecast it just dimensionalize it based on the early demand trends that, wow, this is going to be our best collection. I mean the manufacturer had a triple building, like they had opened two more buildings of the same size that they were manufacturing it. They have to go one to three factories. So that just takes a while. So you got to really think about in-stocks. Like when we look at some of our lift factors, one of the biggest is, god, when we get in stock in that, when backorders come down, our backorders are record highs right now. And so that's really the gap between demand and sales is backorders and special order lead times and wait times and then you got some permanent, that permanent, but like the issues in the Red Sea that caused us to go around the tip of Africa and to put almost two weeks 10 days on the product, basically two weeks. That just creates a backlog itself. So a lot of our goods are going that way. And so you take two weeks and that demand that doesn't turn into revenue and it doesn't turn into revenue. You don't ever catch up on that until we can access the Red Sea again, right? And so it's the manufacturers catching up and it's getting in-stock and it's shortening lead times and shortening special order turnaround times on new product, you're just going to create a big delta. It's kind of no different really then kind of COVID, right? Like you had a lot of demand happened and people can't ramp fast enough, and then you've got kind of a hangover for a while. We're going to have some of that kind of noise here until we kind of catch up and then go on a regular cadence of 15% to 20% newness.

Brian Nagel: That's very helpful. I appreciate it. Thank you.

Gary Friedman: Thank you. Thanks, Brian. That was our last question, right? Okay. Well, thank you, everyone, for your time and attention today. We're really excited about this transformation in our business and the evolution of the brand and the platform. We think we're doing some of the best work we've ever done and there are people that are just doing an incredible job bringing this new vision to life. And we think very soon our shareholders will feel really rewarded for this work that we're doing and we appreciate all of your support. So thank you and we will talk to you next quarter.

Operator: And this will conclude today's conference. Thank you for your participation and you may now disconnect.

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