Rh (RH) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter and Fiscal 2018 Earnings Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Ms. Cammeron McLaughlin, RH Investor Relations, you may begin your conference.

Thank you. Good afternoon, everyone. Thank you for joining us for RH's Fourth Quarter and Fiscal 2018 Q&A Conference Call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; Ryno Blignaut, President, Chief Financial and Administrative Officer; and Jack Preston, our incoming Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer, that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook for 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 opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results [Technical Difficulty] statements of new information or future events. Also during our call today, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our Web site at ir.rh.com. With that, I'll turn the call over to Gary for some brief opening remarks, and then we'll begin our Q&A session.

Thank you, Cammeron. Thank you for joining us today. Before we start, I’d like to congratulate Jack for his appointment to CFO, and welcome him to his first earnings call. Based on how the stock is trading in after hours, Jack has had a little baptism by fire, but he is up to the task. As you know, Jack has been in senior positions with RH for six years most recently, as our Senior Vice President of Finance and our Chief Strategy Officer. In reality, Jack and I have been working together for almost nine years now, as he was a key advisor to the company for I think three years prior in preparation for IPO. So it seems like it's almost 10 years. But in the six years that Jack has been with RH, he's had a seat at the table participating at the most senior levels, the entire time including many of our board meetings. And I believe I speak for the entire team that Jack was so proud of you and so excited to have you in this position, you have earned it. So welcome. I'd also like to thank Ryno for the past eight months and especially, for the past several weeks and he's work to ensure a seamless transition with Jack. Ryno and I we're dating for a long-long time, and probably longer than we got to work together. And so while it's unfortunate, I know it's really best for Ryno and his family, and I want to thank Ryno and wish you and your family nothing but the best from all of us on team RH.

Well, thank you, Gary. Thank you for the opportunity you gave me. Clearly, this was a very hard and unfortunate decision. But as you just said, it is the right one for me and for RH, you and the team deserve somebody who can give 150%. Unfortunately, I can't do that at the moment. But we're very fortunate to have somebody as experienced as Jack who can do that, and be able to step in for smooth transition. So with that, I think we'll hand it over to operator for questions.

[Operator instructions] And your first question comes from Steve Forbes with Guggenheim Securities.

So maybe Gary, I wanted to start with the change in the revenue growth outlook for '19. Obviously, a lot has transpired over the past three months, but it is a short three months. So maybe just help us understand your confidence in the renewed outlook. What could go wrong from here as you think about end demand for your consumer, and like have you got everything now right, because it appears to me that the implied comp would be very modest if you think about everything that’s building from the real estate transformation efforts and especially some outlook there?

Well, we're as confident as we can be with our outlook. We gave on our outlook on December 3rd, and the aftermarket closed and on December 4th as many of you know we launched a convert, our stock was I think trading after hours of the 1.60s and closed that day at 1.40 something. We started a conference call with the convertible debt. I think we had 40 people on the call. I gave a 20 minute presentation and asked for questions, and it was crickets. And the bankers asked for questions and it was crickets, and we found out in the 20 minutes we were talking to market dropped 400 points on its way to down 800 points and on its way to down 4,000 points in the month of December. And our businesses is to the high end consumer, it's really the top. We built the high end consumer that tied to the stock market, it shouldn't be any new news to anybody that like severe volatility in the stock market is going to sway a business like ours, especially a high ticket business like ours that can be pretty discretionary. So for what we can control, we're super confident. I mean, just step back for a minute and start with the fact that we guided 2018 for 9% to 10% operating margins, and many people thought we couldn't make it and thought we were too aggressive guiding 9% to 10%. We raised guidance 4 times during the year from an earnings point of view, and we beat guidance all 4 times after including the fourth quarter. And we told everybody we're going to manage the business with a bias for earnings versus revenue growth as we try to optimize this model and build the most differentiated and profitable business in our space. And so if we were playing the old game in the fourth quarter, our business were to drop 10 points, we would have pulled a bunch of promotional levers, and we've done a lot of things like everybody else does, and you would have seen a zillion emails, that are at the end of the day, downward spiral and it's detrimental to a brand and to your long term positioning. And we're just not playing that game anymore. So we took the hit on the top line. We think that the business remains tough all the way through January and into February. And we have seen our business now picking up. We feel confident about the outlook. But I can't control and none of us can, anybody on this call today forecast what was going to happen in December, I mean I sure couldn’t on December 3rd. So, we just have the best year in the company's history. We have $2.5 billion company making 12.1% operating margin, name another home furnishings company that's expanding operating margins like we are, that's building a model like we are. We feel great about where we are. I mean, if stock goes down we will buy more stock, I will buy more stock, that's okay. We will take advantage of this on both sides. So it is a great day for team resto, we're in different than this the stock is bouncing around, down 20 points. We're the best earnings in our sector by far. And so that's what we feel quite about. Do I feel bad that we took earnings guidance up on December 3rd? Not at all, the next week our business dropped 10 points and we had no control over that. But I would say one other thing that, the other thing. We could have been around the table here and say, do we still edit the unprofitable categories and holiday, which is not strategically important in respect of render to brand less valuable, all the promotions and stuff we've decided to do in the three points we're taking out of that business. Those are the right long-term decisions for the business. And so people who want to hold the stock, hold the stock, people who want to buy the stock, people that don't, don't buy the stock. We're going to build the best company in our space, and that what we're doing. We're couldn't be more excited about it, Steve.

Maybe a good follow up to that as I think about your transformation here, if you take a step back and think about everything you just said. How does it impact your willingness to proactively invest in the business given today's environment, whether it'd be in the brand extensions, whether it'd be in the real transformation initiatives. Does this impact your future investment plans, whether it'd be near-term or long-term?

You guys see the reports. I mean, if you look at the report and look at the top 5% of housing homes over $2 million, the chart doesn't look good right now. I mean, that should be no surprise to anybody. It completely matches up with 2015-16 when the high end housing went negative. And a lot of times, you don't see it in the broad numbers, because the housing -- the government numbers come out in account units. You have to sell a lot of units for one of our customers homes that we go do an installation on. So lot of people probably -- maybe don't track that, but it's slower. But our business is still going to be strong. I mean, we're taking operating margins up, name another company in our space that is, by almost 100 basis points at the midpoint. And again, if you just think about how many quarters in a row we've beaten earnings? I'd say, I mean you could look at the trends. We're going to continue to manage the business, the bias for earnings versus revenue growth. We're going to pivot the company back to growth this year. We've got, I think an exciting Beach House book that’s going to launch, ski house I think is going to be terrific. And then we're going to start continue to take the brand up. And you're going to see certain bespoke collections coming in that are at another level of quality that will further differentiate RH in the marketplace, no different than the galleries. Our product is going to continue to evolve and our service is going to continue to evolve. And we're going to continue to evolve, and we're going to run a smarter and better business. So I mean, I don't know like, I've never had a year like this. Someone has said, hey, you're going to, -- RH is going to hit 2.5 billion, you're going to make 12.1% operating margins, you're going to raise the earnings every quarter, beat earnings every quarter and some market volatility, and you took down a preliminary outlook and your stock goes 22 bucks. I don't even know how to deal with that. And I'm not going to let it distract our organization for one second or me.

And your next question comes from Oliver Chen with Cowen.

Our question was just about balancing merchandise margin against traffic in the quarter that we just had, and also thinking about merchandise margin versus comp in the year ahead. Another question we had just in your cash flow guidance. What are your thoughts or some sense behind networking capital and inventory management as you think about making sure that you're happy with your breadth and just steps and simplification of your assortment and supply chain. Thank you.

What is your question about MMU versus traffic, what is the question?

Merchandise margin in terms of like how you -- how merchandise margins trended this quarter, and also your outlook for merchandise margins next year, whether that'd be the costs of goods sold in terms of [indiscernible] versus markdown?

Well, our gross margins continue to expand and we feel very confident about where our margins are going. We're guiding gross margin up. And so I should tell you what you need to know. We wouldn't be guiding margins separate. We didn't think we -- we didn't have good trends in the key drivers of gross margin. So how do we think about it versus traffic, you mean like should we promote the business to get more traffic? Is that your question?

Balancing the two aspects, and are you seeing merchandise margin expansion on the basis of a lower inventory management…

We don't think about it this way, we don't think about it that way. I think if you want to think maybe get closer to how we think about the business, steady LVMH, steadier image, steady the people that we study and the brands that we aspire to be like. They don't junk up their business, because traffics offer. There's some slowing macro environments. They look for other opportunities to strengthen their business and strategies to drive long term value and to elevate the brand not deteriorate the brand. And so we're just playing the different game, maybe that's what most retailers are playing today that are bombarding you with emails, that’s just not the game we're playing anymore.

Let me just make a quick comment here on the free cash flow guidance. So obviously we're not providing direct color notes as to the drivers of free cash flow, but business from the operating platform speaks for itself. And the other thing I'll say that speaks for itself is how our inventory trended over time. So again, just from the phases of the financials that we report in from a historical financials from 2.5 in '17 to 2.8 this year. Again, that speaks to the power of the operating platform and the changes we've made and it's only natural to assume that we will continue to improve inventory turns as we take advantage of the platform.

Just lastly related to those questions is SKUs and breadth versus depth of the assortment, particularly as you think about new and some selling and interesting opportunities. What you think about the range and the customer choice, and preserving innovation yet also simplifying to amplify in the right manner?

It's all about editing the amplifier right, and elevating while expanding. And so that's things we assess about when we talk about, and you're going to see a lot of newness. We think we're more discerning than ever with the newness that we've got coming in and we really like what's on the horizon. I think beach house is going to be really exciting brand extension, and I think open up a market if you will and have customers see our brand in a new light. And sea house I think is going to do the same and we push color out and we thought it was logical that follows sea house assuming beach house as sea house in the same year and have that second home cadence. And also color is probably more complex than a bit riskier from an inventory point of view with all the fabrics and colors mentioned we thought let's make sure we understand where the economy is going before we launch a business that that’s complex. So there is multiple reasons why we shifted towards and changed our sequencing there. But we spent the last three years trying to rebuild the platform of the business, so we would have the best platform to go forward with. And I would say starting with me I am really excited to be shifting back on the product side of the business. And I mean all of us have worked so collaboratively to try to build an operating platform that doesn't exist, and we think we've got the key parts of it right, the foundations in place, the framings in place, the funding in place and some other pieces to finish here. And we've got another couple of years of work. But the architecture is there and the logic is there, and we feel like we've made a leapfrog move with our operating platforms. And that's why -- look we've got a business that's half the size of my former company and we've got an operating margin that's 50% higher. And it's not done going up. So we think the investment that we've made and maybe it costs us a couple points on the top line, that's okay. We're going to probably wind up with operating margins long term that are double what they would have been if we would have pursued just chasing sales. I mean, look, do I wish I had way there multiple? Sure, I do. Do I wish I had wait there operating platform? Not at all, we're 20 points ahead of them. It's not easy trying to make all that up. And I just think that it'll all shake out correctly at the end here. It always does at the end of the day. So you think what you're going to see from us from a product point of view and from a marketing point of view and innovation and inspiration, I think we've got a team that's the best in the business at all of that. But we have been focused on re-conceptualizing an operating platform from every dimension. And so, we needed all the brains in the game to do that. We needed all the creativity focused on that as opposed to bringing a consultant in, paying them several million dollars, having them give us a book and then having a supply chain and operating platform that looks like everybody else's built by people who really don't run businesses but just opine on them. So we run this business. We know this business. And the investment we've made to dig in and rebuild this operating platform. And we're going to be miles ahead of everybody for a long log time…

And your next question is from Michael Lasser with UBS.

Given the volatility that you saw in December and January as result of the stock market volatility and the high end housing market. Does it give you pause on the size of the addressable market for high end home furnishing, particularly at a time where you're accelerating to roll out the new concepts and new store opening?

Not at all, the exponential spending at the home at the top of the market is unbelievable, if you look at the numbers. I mean, the tip of the iceberg is where all the money is, I mean people spend exponentially more on their home. So I mean if you go down market, most people can't afford to furnish the house they buy. I'd love the market we're going after. So there's going to be volatility, there's going be cycles in the market. Again, those things we can't control. And we just have to be prepared to capitalize when housing markets are big tailwinds and when they are headwinds know how to capitalize them.

And then my follow-up question is as we model the course of the year, should we model your top line sales pretty consistently in the full year range, or should we expect more weakness at the beginning and more improvement at the end?

I think we've got -- when you think about the impact from some of the editing we're doing with the unprofitable businesses and free promotions and transitioning the right business, I think it's like just a one point hit in Q1, two point hit in Q2 -- Q3, two points in Q4.

Can you clarify that, is it two point hit...

So as we were talking about in the letter, there is a three point drag from the editing of the business. And the way we think about that as far as impact versus last year, two point drag in Q1, four point drag in Q2, two point drag in Q3 and four point drag in Q4. And that again reflects just the timing of some of the pieces and when they are coming up. Holiday, for example, has a bigger impact in Q4.

And in addition there's bigger impact in Q2.

And as a result that we should be modeling negative comps, right?

We're not going to guide comp anymore. We don't really look at comps here. So we decided we're not going to report comps going forward. And the only time we were preparing to know comps was like the two days before the earnings call, because you guys focus on it, we don't. We don't use that as a metric to run the business. We run the business as a total of channel neutral business. We look at our business more from a market point of view, and what we're investing in the market from a real estate, store investment, catalog investment, market investment. So we could care less which size or where they shop, or where they transact. We look at our total revenues and our margins.

Your next question is from Tami Zakaria with JPMorgan.

So with all that noise around tax refunds and your company's exposure to states like California that's facing the fall deduction impact. Have you seen any performance variability by geography in the past couple of months, or has performance been weak across the board?

Nothing that we can -- that's been consistent that we can determine. I mean LA has been a little soft in parts but then Orange County is looking okay. And so, we can't find any consistent thread. Our business is really strong in New York, obviously. We opened a store that we thought was going to take a couple of years to get to 100 million, and it's already at a run rate in excess of $100 million. So, right now it's hard for me, everything got hit when the market got hit but our businesses can be a little lumpy. We have a lot of big transactions and big design jobs that hit it different times. So, sure as we get farther into the year and we will have more clarity on is our business consistently different, but right now it's too early to tell.

And Tami its Jack, I would just add that it's something we're watching closely. I mean, we've heard anecdotes of people being surprised with the tax bills as they prepare their tax returns. But as Gary mentioned, we're just seeing some variability across, so it's not a clear trend just yet. I think given where we are with it's certainly some affluent people tend to go a little later on their tax returns too. So again it's another thing that we're watching closely as the results come in here.

And so my follow-up question would be with lower than expected cash flow in the fourth quarter. Could you remind us what the plan is with the convertible notes that mature this year, and whether you think there's room to take on additional debt in the near term?

As you know, we launched in and pull the convert in December. So one thing that we've said and that's clear is we're always opportunistically looking at our capital structure. Having said that we are comfortable with settling the 2019 convert in cash and borrowings on our credit facility as we mentioned in the letter.

Our next question is from Brad Thomas with KeyBanc Capital Markets.

I wanted to just ask about the 2019 guidance, just make sure I'm understanding, bridging the new guidance and the old guidance just to make sure we're clear on this. So looks like there's a $0.36 adjustment from the lease accounting changes, and then a lower run rate for sales based on what you're seeing from associated maybe deleverage from that or less margin expansion due to that. Am I interpreting this right? And are there any other changes to note in the outlook?

So, if we look at the tables in the 8-K, the midpoint of our revenue guidance range as we've talked about went from 10% to 4%. So we've spoken to the drivers of that. So the walkthrough on -- we're providing a new level of guidance just based on the flow through of that and our latest trends on the business. So if you look again page 28 of the tables that left side shows you and you can compare that with our prior guidance. And then the lease accounting is just that impact that we also note there. And so clearly, we're reporting results under the old accounting today, when fast forward to June, we're going to report results under new accounting. And so we didn't want to create any confusion by jumping into the new accounting just yet, but we're giving you all the pieces that you're going to need for you to build your models. And so come June when we report our results we'll be referring to the new guidance. So we want to make sure you had both pieces. And I think we described and you're getting right and it's just again impacts across the P&L. So you're seeing an 80 basis point impact in '19 to gross margin and to operating income -- 70 basis point impact to gross margin and operating income from the leased accounting.

And as a follow up on some of the adjustments you've made in your sourcing as tariffs were a concern, six to nine months ago, in particular. I guess, Gary, could you speak to your level of confidence and any changes that you've made with partners that you're working with over in Asia?

Well, I think the outlook has changed quite a bit right from the early threats to the recent outlook is I think optimistic that we're going to find out a happy settlement on both sides. So, I have said from the beginning, I think that there is more risk trying to run out of China and resource, and bring new factories up with big quantity. So where it makes sense, we've done that. But you really have to balance the rest right of taking programs out of factories and trying to resource them at the quality level we play out. It's probably a lot easier for lower level product and smaller products that can be manufactured in a lot of places. But we have directional understanding with all of our vendors that what if happen, if the 25% tariff comes, how we would handle that. We're comfortable with where our understandings are. We're comfortable we can navigate through this without a real meaningful hit if the worst happens. And if the worst happens, everybody's got to deal with it. I mean even the people that are rushing out of China, good luck, you are going to have disruption. There's just no way you move big quantities of your products into new factories and it goes smooth. So we like how our strategy looks and what our sourcing profile looks like today and what are our plans are if the worse case happens.

Your next question is from Seth Basham with Wedbush Securities.

My first question is just around the gross margin outlook. If you could provide a little more color Gary on the walk from 2017 to '18 relative to 2018 to '19. Just the key drivers in which things are bigger contributors to gross margin expansion that'd be really helpful?

I will hand it over to Jack. He's got the walk in front of him.

We don't comment in detail around the parts of gross margin. But I think we've talked about that the '17 to '18 pickup was largely related to the product margin improving due to anniversarying rationalization and outlet sales. And then going forward, with the guidance we've provided, it's probably in that two-thirds ZIP code of being related to product margins and then -- of that pickup and then the rest being some leverage or opportunities we're seeing in transportation and leverage in our occupancy. So, I'll just leave it at a high-level commentary there.

And just as a follow-up on that in terms of transportation, and do you see consolidation in reverse logistics efforts. How are those going progress report wise? And do you think that benefit will persist beyond 2019?

We're quite happy. I mean, that's why you see the operating margins you see in our company. And there's more to go and there is more to do with very early, early stage of re-conceptualizing the home delivery experience. And we've got a few tests in place and we like what we see. We think there is some really leapfrog opportunities here on multiple levels over multiple years. So you'll start to hear more about that probably in the back half of the year. So we have more data and information, and some of it is really good and will remain proprietary. We won’t be able to tell you. But the opportunity -- we think we've got several years ahead of us, probably three, four years of optimizing the entire integrated supply chain platform.

And just lastly the point of clarification in terms of the moving piece of gross margin and revenue in 2019. What is your assumption for the year, is it status quo at 10%, or is it different? Thank you very much.

Right now, it's status quo. I mean, unless anybody's got news we haven’t seen anything new. Our source is and who knows exactly what's going to happen? But our sources tell us that they're going to find a compromise. It's really not good for China right now. I mean, there's -- I mean, factory owners are leaving China and opening factories in Vietnam and Indonesia and other countries. And I don't think China can hang on that much longer, because the businesses are going to exit the country. You don't really have to -- soon it's going to be less dependent on the retailer resourcing the goods, because the manufacturer is going to resource the goods for you. So, they can't afford to lose the business. So they're moving quickly on the manufacturing side and so you it's going to all play out. I think if it goes up, if it doubles to 25%, it's going to 25% for everybody. Nobody can move and resource that quickly without taking great risk because unless they're making cheap products.

Your next question is from Anthony Chukumba with Loop Capital Markets.

So my question was just in terms of giving guidance. In other words, obviously, you came up with your preliminary guidance on December based on your current trends at the time. Obviously, these trends changed and so you had to reduce the guidance. I mean, could the argument be made that maybe, I don't want to call mistake. But could the argument made in retrospect maybe just shouldn't have given guidance at that time, and then just come out with your guidance now based on what you've seen over the last few months?

Thank you for that hindsight, much appreciated. But the firms have to be obvious, if we could have done that we would done up. But we were out there also raising capital. So you don't want to sell your company cheap when you're trying to raise capital. So we wanted to give the fullest view of where we thought that company was going to perform at. And when you go out and whether you're doing a convert or you're doing a transaction and you're selling a part of your company, I mean, we do want to go sell, put restaurant sale. So, we felt it was important to give the full view and where the business was where we thought it was headed at the time. I mean we can second guess all kinds of things on timing, you're right. I wish I did that.

Gary, I mean obviously hindsight is 2020, and I'm certainly not questioning your decision in hindsight. I mean you've done a great job running this business and creating shareholder value, there is no question about that. I guess what I'm -- it sounds like part of the reason that you gave the preliminary guidance is because you were doing the convert. Is that fair or I'm just trying to understand…

We gave preliminary guidance a year before too. But it is one thing if you're going out and you want to give a full view to investors. We've given preliminary guidance before, so we did in last year and prior year before so businesses as usual. But I don't know where you are going with this [Multiple Speakers] about it right now.

I get the point that I'm making it or the point that what I was trying to get to was that maybe if that wasn't the practice of giving guidance then you would stop when it reacted this way, because you're doing the right thing. You're not promoting, you're managing the business for lot term. I think you're doing the right things. It's just that you are somewhat tripped up a little bit, because trends change so quickly. So, it's not -- trust me, Gary, it's not…

No, I know but let's just play this out. Let's say we didn't give guidance. And we came out with guidance today. What it is? Is the stock going to be valued higher? I don’t know. I mean, people are doing math and probably multiple and how we guided, so the guidance would have been the same. Our outlook is not changing at all. We feel really confident about growing this business over the long-term at 8% to 12%. We feel really good at growing earnings 15% to 20%, nothing has changed except, look there was a blip. We had the worst stock market reaction that we've seen and it affected our market. And there is not a good comparable for us. So it's not that the people selling, the price point were selling, the high homes we're selling. And so I think that's what may be surprised people, there's not another good compare. I don't know who else you compare the selling price point than we are in the home. But for cheaper goods, you still have pretty full employment. So you've got the business at the lower end of the market, middle of the market, still will look better than our market right now. It's much more tied to the stock market and high end housing is this own little dataset, that gets missed a lot.

And our final question is from Zach Fadem with Wells Fargo.

Just a quick point of clarification on the 3% to 5% sales growth outlook, helpful color on the business exit, but maybe if you could talk a little bit more about just the impact from the core business, existing stores and then separately on your expectations for new galleries, and just the contribution there. And then second, could you also just give us some more color on how you expect New York to trend and how that compares versus your expectations maybe a quarter or two ago?

I mean, anything more about the sales outlook, nothing that we -- haven't been saying that in the letter or we gave you a little color earlier. I don't know if I've anything else to throw in…

No, I think we said it all. Again, the letter speaks for itself and the commentary we provided earlier…

Yes, we feel great about our new galleries. We think we have the most exciting new retail concepts out there with the best economics and return on invested capital. So we've got a whole new model. And I think I laid that out in detail in the last letter, I didn't carry that over but read the last letter. It's got the real estate model pretty well laid out. And we couldn't be more excited about the deals we're getting and locations we're getting, and the store designs and everything we've learned over the last several years. So we think the next generation of galleries can be highly productive on every metric that we measure. And then question of how do we expect New York to trend and how does that compare to what we expect in a quarter two ago. So, I think we said we did a meeting in New York, and we said what we thought is going to be $85 million year one and $100 million in year two, right. So, I mean, we're way ahead.

Okay, that's helpful. And then just quickly on the program and how that's trended with some of the new openings, like Nashville and New York and also with design services maybe you could comment on customer usage and any plans to tweak that offering?

Yes, membership program is working very well, very happy with it. So we're constantly doing little tweaks. When you're cycling skew rationalization, you're not going to have as much membership growth, because we were selling a lot more skews and then you're going to have -- if you go in promotion you have -- you're going year-over-year, you're selling more skews, you have more customers at lower ticket, you're going to have more memberships that when you have fewer bigger sales, you're going to have fewer memberships as far as new memberships. So, that's just simple math and if you look at how our -- the fact that we're cycling through that, but nothing new to report we're very happy with membership, is like one of the best moves we've ever made. And we never gotten to redesign and architect the operating platform if we're still running the business the way most of the rest of retail runs their business.

And as you know, we report the membership count on the 10-K, so you will see we're at 418,000 members as of the end of the fourth quarter.

Great, anymore questions?

No more questions.

Well, thank you everyone. I want to thank our team, and our people, and our partners all around the world that support our cause. And just congratulate everybody and this was a record year for our company. And we I don't think we in the early days ever had a vision of getting higher than 10% operating margins if we ever could get there. And so hitting 12%, we just couldn't be more proud. And as we look at vision and the vision we have in front of us and the strategy we have in front of us, we're just super excited about the future and this is a little blip. So all good we're excited. Thank you for your time.

Thank you. This does conclude today's conference call. You may now disconnect.