Ladies and gentlemen, thank you for standing by, and welcome to Restoration Hardware's First Quarter 2020 Q&A Call. [Operator Instructions] Now I would like to turn the call over to your speaker today, Allison Malkin with ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2020 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook 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 of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q&A session. Operator, we're ready for questions.

[Operator Instructions] And your first question comes from Michael Lasser with UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. Gary, what are the building blocks for this year to get you to positive operating margin expansion? And as part of that, can you describe what assumption is being made about your sales outlook, particularly in light of all the uncertainties in the world? Maybe a way to frame it is what – under what sales environment would generating positive operating margin expansion just not be possible.

Well, I think I'd point you to if you look at our record – when we reported the kind of 2019 results, I think we – that was before COVID, when we laid out kind of a bridge to expanding operating margins, nothing's really changed about the bridge. Just there's modifications based on a lower rate of sales than we had anticipated. And then we've made some modifications organizationally, as you would expect and as we articulated to our expense structure and our spending structure. And we've really tried to reimagine the business again. If you look at our history, our DNA is really kind of built for difficult times, right? We've had to kind of, from the very beginning, dig ourself out of a hole of a business that was Restoration Hardware that was selling completely different products that was basically on the edge bankruptcy and raised money three times in the first year to try to stay alive. We had to reimagine ourselves again in 2008 and 2009. And when everybody else was kind of yelling value, value, value and taking quality down and so they could take prices down, we went the other way and reimagined the business completely and pointed higher and moved faster. And this is kind of another time, right? So – but at the base, so if you just think about the foundation of where we started coming into this, we said we had at least 200 basis points of operating margin expansion. So the key word there is, "at least." So if you start there and you think about – I don't know. Take Q1, we reported 10% against, what, 11.8% last year, right? So we hit a pretty tough Q1. Half of our stores were – all of our stores were…

Why don't you try it?

Yes. But you know what I mean? Like – so – but it's laid out, right? It's in that

It's in the Q3, Michael. Q3 2019 letter that we released in December. There's $4 billion of upside there. And as Gary said, we – at that point, we were talking about 200 basis points of upside.

At least.

At least. And Gary has alluded to, obviously, when we say that, there's – in our…

We're not going to say at least if we had 200 basis points, right?

Yes.

Sure. Understood. Let me ask a quick follow-up. The results that you've seen in May and quarter-to-date in June have been very notable. Has that been driven by the reopening? So your sales have grown by just more design galleries reopening? Or are you seeing increasing and accelerating growth inside of the design galleries that have been open for a long period of time?

Yes. I mean it's a combination of both. The – even as all stores were closed and galleries were closed, our business was building week over week as we started opening galleries incrementally, a few this week, a few that week. I don't know what our biggest week was. Maybe 10 or something in a week. Clearly, our business is way better with a gallery, with a retail store. I mean the people that think retail stores are going to go away because of the pandemic like are brain dead. So I mean is that – as everybody's pointed to, like, well, look, nobody needs a store anymore. So the retailers that use this opportunity to actually shrink their store base are going to shrink the company. It's an impossible move. So it's – I mean, to me, it's a very interesting time to just sit back and watch because people are asking – I've had people ask me, "So are you going to still open galleries? Are you going to still open your stores? Are you going to stop? Look what's happening with Amazon or Instacart or this or that." Like I got it. Yes, essential goods, ordering toilet paper, things like that. Yes, I think retailing that takes taste, and style and presentation and imagination and so on and so forth, humans – I don't know about anybody on this call. Did anybody like being home the last three months every day?

It certainly has been interesting.

Is anybody dying to get out of your house and go somewhere, see something, see some people? Is anybody like waiting to not have to wear a mask? Like everybody is. Like you see it on the TV, the reports. It's like they barely open certain places, and beaches are flooded. Bars are flooded with people and so on and so forth. So we're really optimistic about our business, our model. We've got a huge direct business. We're – we think we're very capable direct retailers, digital retailers, whatever you want to call it, web retailers. Everybody's got a different name for it. It's just another channel. And we're going to get better and better with that channel. We've got some exciting announcements that are coming as far as how we're going to reimagine our entire web platform. And part of it was in my annual shareholder, which parts of that are repeated here because you got to kind of keep saying the same thing a lot of times for people to get it. But you're going to hear soon about the world of RH, which is a portal that will take you into the products, places, services and spaces of RH. And we're just going to keep getting better at what we do. And so we think that there's – the galleries are going to tend to be strong. I think the biggest question we have, and I think probably every retailer has, is as you reopen – I mean two things. One, as you reopen, how much pent-up demand is snapping back? And how much comes back? And how long does that last? And what does that look like? And then the second one is what are the seismic shifts in spending? I mean clearly, Wayfair goes from…

Thank you very.

Thank you.

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

Good evening, just good afternoon. Thanks so much for taking the question. Gary, maybe I just want to touch quickly on – or maybe not quickly, on the RH Residence business. And just maybe go into a little bit more detail in terms of kind of why now, how long you've been developing the concept. What are the economics? Are you partnering, I don't know, I guess, with homebuilders to do it? I would just love to hear a little bit more about, I guess, the vision for, I guess, what you think looks to be a pretty big opportunity.

Yes. It's really – what we try to do is put out there our kind of big, long-term vision for the business, right? One that will outlive me. So I think we have a vision for this brand and this company that is going to be multigenerational, right? When you sit here and think about the – if you sit and think about what we wrote, yes, it's probably – throws a lot of people back. But if you think about it, it's all kind of connected in a very simple way. And if you start with the idea that there's those with taste and no scale and those with scale and no taste, the idea of scale and taste, we believe, is very large and far reaching. And everything that we're going to do here is not in a silo, right? So it's all – it all amplifies and elevates and renders the core brand more valuable. So Residences is just that – it's just a space, right? If you think about spaces, we already do spaces. We build some of the most inspiring spaces in the world. If you think about what those spaces look like, we're obsessed with great architecture. We either find historical-grade architecture and readapt it or we build great architecture. And that great architecture amplifies the product. And we do great architecture. We have great interior design. We – if you look at our rooftops or our gardens, we have great landscape architecture. If you think about those categories because – let me step into it for a second. If you think about those businesses, there are – none of them are consumer-facing businesses. Where do you find an architect? Do they have an office that's reflective of great architecture? Not really. You don't…

That's a lot to chew on, and appreciate. Yes, a lot to think about. I'll pass it on to someone else, but yes, thanks for, I guess, extrapolating on the vision, Gary.

Sure.

Your next question comes from Adrienne Yih with Barclays. Please go ahead.

Hi, afternoon. Gary, I'm going to keep on this theme because I think it really is revolutionary. It reminds me of Baccarat Hotel, right, taking that luxury brand and then turning it into a new business. I guess my question is, did you not have a test of this back in 2016 in Crystal Cove? It was at Newport Beach. How is that different? Were you only doing the interiors? And what did you learn from that? And then secondly, like what's the sort of timing of the launch of services to not necessarily this piece of the business, which seems far longer term, but the services that you talked about earlier? Thank you very much.

Sure. Sure. Yes, the Newport Beach Crystal Cove project was a project that our contract division – Contract and Hospitality division partnered with a builder. We were really hired to kind of do the interiors. And so there was a partnership. Kind of there wasn't really – we didn't control the architecture, the design of the homes and so on and so forth. So it's really more of an interior job. And they wanted to use the brand. And I'm always a little careful about that. We kind of let them use the brand a bit. It's like – I usually – and I hope the guys at Crystal Cove aren't on, but like there's not too much stuff that other people do in this kind of niche of architecture, interior design, landscape architecture that we believe people can do better than us. And so – and that's why we think it will work. When you think about the timing of the launch of services that will be unveiled. Right now, we're highly focused on elevating the interior design business and investing heavily in interior design. You saw in our press release where we swung the investment pendulum back the other way. And we're going to continue to invest aggressively into our future. And interior design, we think we can take it to another level of professionalism and capability. We will probably test sooner than later in a market. Maybe it's here in the Bay Area, somewhere where we test architecture and landscape architecture. Thinking about – like right now in San Francisco, we've got a big new gallery opening. We've got a real opening here in Marin. They're right here. Do we test it in those two galleries? Do we take our old San Francisco gallery? I don't know…

He's not on the speaker line. He asked.

He's not on the speaker line. Okay. Dave can't talk. He's like – he asked to be. Okay. He has like – he probably is talking right now. You guys can't hear it. We didn't give him a line to talk into. But Dave has really laid out an incredible beginning strategy in Europe for the brand. I think we're just going to – it's going to be incredible. I mean we – it's mind blowing for us. So I can only imagine what it's going to be like for consumers. But the first gallery could be open in 2021, in the summer of 2021. We've got to move relatively quickly. And it's – the latest will be spring of 2022, but it could be 2021 x that we'll open to RH England. That will be followed by – unless something goes wrong with the deal in the last minute, but they're just basically done, but followed by RH Paris, RH London. We've got multiple other ones that I won't go any further. I don't want to jinx anything. I probably went too far. But those will – the next two will be 2022 or 2023. The complexity of the architecture on RH London is – depends on how far we go with it. It's kind of three buildings we're integrating with a beautiful rooftop and a restaurant and all kinds of things. It will be incredible. It will be one of the most exciting stores in all of London. The thing we're doing in England, which is kind of right outside London, mind blowing. The most exciting – I mean, both of those would be the most exciting retail experiences we've ever done that – it's good or better than New York in their own ways. And one is just – you can't even imagine it. So at some point, one of the next decisions – I know we're going to hit the timing. We'll – I – we'll probably do it an Investor/Analyst Day. We'll lay the stuff out, and we'll show you all the pictures. So everybody can kind of really, really understand it. But no one's ever introduced themselves into Europe like this. Ever. It will be the most incredible first impression a brand has ever made. And so we're just extremely excited about that opportunity. And that – you think about that, like, 75% of our business should be outside of the United States. I mean that's what the model should look like. That's what the wealth model is. That's what LVMH and Kering and everybody else and Hermes' business looks like. So that's really the big, the – as you think about those pieces and how we go. But yes, it's all going to start happening, and that's why we put it out there. And we thought, yes, it's a really good time to be – try to be visionary and inspiring and so – for no one else but ourselves.

No, I mean, it’s very inspiring. So first walk on that we will be watching. Thank you.

Thank you.

Your next question comes from Chuck Grom from Gordon Haskett. Please go ahead.

Thanks. Good afternoon. Can you guys speak to the pace of foot traffic within some of your channels, maybe the galleries, outlet stores and restaurants since they've been reopened? And then can you remind us, just – you talked about this just now, but your expectations for gallery openings in the balance of 2020 and also into 2021? Thank you.

Sure, sure. So yes, we don't have high foot traffic at retail stores, if you just start there, right? We're relatively low-traffic business, except for when we have restaurants. And right now, the restaurants are – we have four of them open, only half of them open. And they've been open a week or two. And they're operating in limited capacity and about only, I think, 50% capacity. So yes, we're not really a traffic-counting company. And we – our business is just – we'd like to say – we don't really care about mall traffic. It seems like the people that have time to walk the mall, the only thing they have to spend is the day, right? So we generally talk about creating our own destination and having fewer of the right customers inside our galleries. It's one of the reasons why you'll see some changes that we're making in New York even from a hospitality experience, a bit guided by COVID and not having – having to operate with social distancing. But just the fact that in New York, our kind of our barista bar and wine bar kind of became kind of the – we started to become the best free WeWork, the free Soho House, the free – a way better Starbucks, and we are serving a lot of people coffee and stuff like that. And they're sitting around in our furniture all day and making it hard to sell. So we're going to – we're modifying things to actually have less traffic because it's not so much about traffic. It's really the right traffic, right, in our business. That's what we focus on. And we don't even talk about traffic. We really talk about the right customers. So we don't really – we look…

Okay. That’s helpful Gary. And then can you talk a little bit about the progression of your demand curve on the core part of your business? I think you guys said down 11 in 1Q, up 11 so far in June. Could you maybe amplify a little bit on what you're seeing by product, by region? Just any color would be helpful. Thanks.

Yes. It's a general lift. I mean there's some of the things that you're reading broadly about the outdoor business, things like that, that have bigger lifts and other things, which completely makes sense. People aren't going on vacations. They probably buy outdoor furniture. They're going be spending time outside. So we're having a strong outdoor season. And then other parts of the business, nothing that's surprising. Our bestsellers are still our bestsellers. And I think what will be interesting, and I kind of mentioned it in the letter, I don't know if everybody picked it up, but we are now going to mail a spring interiors book. I guess they're going to be a summer interiors book in the summer, modern book. So we had initially pulled back all circulation. We killed the books. And that's how we were able to – what was it, $50 million of ad costs we took out, right, because we killed the books in the first half. And then we saw the demand coming back. Difficult thing is our offices were closed. So we couldn't shoot all the newness that we had. So we're pushing the newness to fall, but we did kind of repaginate the books. We had a couple of new things that we've gotten shot and we got into the books. But you never want to mail books, you never want to advertise into a massive headwind like we had, right? Those first several weeks, I guess, three to four weeks, we're – you couldn't do anything to get the demand to change much. Even businesses that were running 10 or 15 points ahead of other businesses, all of sudden, everything went down. Yes, they didn't stay up. So that's why you never want to be a mail a book…

Thanks, Gary. Good luck.

Thank you.

You next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon. Thank you for taking question. So Gary, maybe a bit of a follow-up to that prior question. But clearly, a really nice rebound trajectory here. It's really held up well through Q1, your core business, and here into the second fiscal quarter. To what extent – as you look at the trends in your stores, to what extent are you seeing, within this crisis, new customers – reaching a new customer and that customer helping to drive this improving trajectory in sales?

I haven’t seen – or if you look at our – I mean the best way to kind of look at that is through membership. And so the numbers in membership don't look that different: new member growth, renewals, et cetera and so on and so forth. So I think it's kind of a different business when you think about our business. We're an event-driven business. People either bought a new home, remodeling a home or redesigning their home. And that only happens – it happens very infrequently. So you might get a new customer, and they might come in and spend a lot of money and do a design job, and you might not see them again for another 10 years. Or they might just come in and get some bedding or some towels and stuff like that. But our business is very much an event-driven business, and so it's not like a lot of people bought new homes. We know that data, right? So yes. And so I've always thought about this. As we've debated it here, we got shut down. We were running up eight. Our business in the core business went down 40. So we lost 48 points of business. Do all those people now not need furniture? No. Do they not get people – like we inspire a lot of people to buy furniture? But most of our business is – a good part of our business, I'd say, is a need-based business, right? So when you're in a need-based business, if you have a disruption and that disruption – if you have a fine – we – so this is an interesting thing that happened to us. And we didn't just like – in 2008 and 2009, we had a financial disruption that was permanent. When I say permanent, like for 1.5 years, right, like the whole thing melted down. It was – the market went down. It was a very a different kind of impact. And this – how permanent is this? Like yes, we can talk about – I mean what's the unemployment now? 40 million? Is it 30 million, 20 million?

40 million in total.

40 million. Like look, they're coming back. I mean we've now brought back 75% of our furloughs, almost 80%, yes. And they're all coming back next week or the week after. We'll be 100% back. And everybody we furloughed is coming back. And in many of the businesses, you're going to have a lot of people coming back. So to me, there's – how much of this is now pent-up demand? And then you might have some new customers for outdoor furniture. But were they just going to buy six months later or next year? And now you've pulled them forward. Like how much is pulling forward? How much is sustainable? Like look, I would not – like I'm not picking on Wayfair. Some people think I'm picking on Wayfair. I just think it's really interesting that they have a market cap that's like 4 times bigger than ours, and we make so much more money. We have – our operating margins were like 20-something points higher than theirs. Like if they catch up to us in this lifetime, it will be a miracle, but the point is I'm glad I'm not Wayfair. If someone wants to take a bet on is Wayfair going to be able to comp next year, no way. They're going to go up against 90 comp and they're going to be down 40. They're a 30. Or it's going to be a big change. So that's why we like a membership model, not a promotional model, right? You have all these kind of episodic things going on, and it's harder. Your business is more complicated and you got to comp it. And Wayfair's got to sit there and think about how do we comp 90 – up 90 when we were really only running up…

Appreciate the color. Thank you.

Thank you.

Your next question comes from Oliver Chen with Cowen and Company. Please go ahead.

Hey, this is Maksim for Oliver. Thanks a lot for taking our question. So first, you noted product margins are significantly higher quarter-to-date. Can you maybe touch on what's driving that? And then secondly, more broadly, as you are thinking about future gallery real estate developments, does the current environment affect that? It's full of store closures. Does that put you in a more advantageous position as you look to continue to negotiate these capital-light models? Thank you.

Yes. The product margins, that's kind of, again, all laid out in that – was it the third quarter press release, Jack, all the bridge to the operating margins? A lot of it has do with product margins, cycling the outlet business, the accelerated burn down of inventory a year ago. So outlet sales are going to be down but margins are going to be way up, right? Because we closed that DC in the fourth quarter of 2018, and we pushed all the outlet inventory out and sold in an accelerated way. So you've got an impact there. You've got an impact from going from a single-source rug manufacturing relationship to a direct sourcing relationship that's kind of laid out in that bridge. And then you've got just various other things where the businesses were expanding, the things we've done, the price changes, price increases we've taken, the new collections. If you bring new collections in that are more differentiated and higher margin and they work well, they lift the whole thing. We think about the business as the top third, the middle third and the bottom third, right? And if you bring in goods that are in the top third, it lifts everything up, whether it's sales or margin. But if you bring in things and they kind of perform like the middle, nothing happens. Bring in things that are in the bottom third, it drags everything down, whether it's sales or margins. So we've been – I think we've been just doing better work making smarter investments from an inventory point of view and a product point of view that are lifting margins and things like that. And we're just also just – like, for instance, we – like everybody else, right, whether this pandemic happened –…

Got it. Thanks a lot.

Your next question comes from Steven Forbes with Guggenheim Securities. Please go ahead.

Good afternoon. So Gary, I wanted to touch on two topics. The first is Waterworks and then the second sort of being what you noted on the spread between demand and revenue growth and really just the manufacturing network. So maybe to start with Waterworks. Can you just give us an update on the business there? And less about how it performed and more about what you're thinking about the potential integration in that offering in the time line behind that.

Yes. So look, Waterworks was an opportunistic acquisition at the time, right? It wasn't – we had so many big things we were focused on, but Waterworks was marketing themselves and made themselves available. We – it was always on our list as something, as a brand, we'd love to partner with and integrate on the platform that we're building. And – but it was an opportunistic acquisition, and we did the deal when we did, and quite frankly, haven't focused a lot on it. We've tried to enable them to focus on their business and build the best business they can. And we're getting to a point where it will be the right time to kind of think about how to amplify Waterworks on this platform. And so not a real time line yet. We've been all distracted and busy trying to get through this time. But sometime probably later this year, we'll talk about what that could look like. And it's not that we've never talked about it. It's just deciding exactly how and when you do that. So it's a long-term opportunity. I think – look, I think the business on our platform can be multiple times the size that it is today. So – and then the spread between demand and revenue really has to do with the dislocation of the supply chain. Kind of really three or four things, so we're very aggressive to cut inventory and cancel orders when the pandemic hit. And that looked like a smart thing for the first three weeks. And then by week four, things looked a little better. And then it started to get traction, right? So we – it's hard when you cancel those orders and shut down. Factories pulled back. Factories laid people off. And then…

And then just a quick one, if I think back to 2016 and some of the RH Modern disruption, right, there was customer combinations in order to provide people at some window of time, right. I mean, are you feeling that from the customer today? Or are you sort of explaining the issue, and do you feel like there's a general understanding and appreciation out there?

Yes. Right now, there's, I'd say, for the most part, a general understanding and appreciation. Everybody knows the whole world stops, right? It's not like it was our fault, like with Modern. We're – we could try to blame the factory. But to the customer, in their mind, it's our factory, right? So we just had to be able to communicate with the customers. I think everybody has the same – some form of the same issue. I think every retailer cut orders everywhere. And if you're in a business that runs back orders, many retailers don't have a back order business. Furniture businesses tend to. So I don't think we're the only one that's going to be in this boat. Ours is probably bigger because we've got maybe better performance in certain categories in our business. And because of our really strong kind of direct business, online business, we probably, at least from the bigger product furniture side of the business, lighting side of the business, stuff like that, take away the kind of housewares, kitchenware, those kind of businesses that are creating really big lift for a lot of people, if you kind of isolate more furniture-based retailers. And right now, right, we don't have any of those other ancillary businesses at all. We're super clean. We got rid of holiday and everything. So, I think when you compare us to people in our category, furniture, we're probably going to have the best numbers in furniture. So we'll probably have a kind of bigger gap between demand and shipped sales because of that. So – but we've got a lot of history having gaps like this. It generally – you might lose a little bit of it. Depends on how we execute through it. If we can – if – the biggest issue you have is if you have to push the orders one or two more times, right? So that's where you start to get cancellations.

Thank you, Gary.

Yes.

Your next question comes from John Baugh with Stifel. Please go ahead.

Thanks for taking my question. It's very quick. Obviously, if you're going to expand operating margins over time to 20%, I would expect your return on invested capital to go up. But I'm just curious, with all the various RH Residence and Guesthouse sort of things, how the capital piece sort of weighs in. Will that be capital-light relative to the margin expansion? Thank you.

Yes. That’s a really good question – really good question. So the answer is yes. The first guesthouse is no. And so – but we've kind of already spent most of that capital. So that's in the rearview mirror. But any new thing on test, you've got some investment. There's – you've got to have something to sell and something to partner with people on. Our guesthouse model is going to be unlike some of the other people that are doing branded hotels that are really doing it with a flag, doing it with another hotel company and doing a Baccarat Hotel with a hotel group or a Bvlgari Hotel with some hotel group. We're going to control the whole thing. But it doesn't mean we won't have a development partner. But we could be doing deals in the future. Like if we're the developer, and we think that's the right way to do a deal, we'll be the developer. If – for instance, in Aspen, we have kind of a JV deal, right, with profits, interest and stuff. And so we've got different kind of deals in different places. Aspen is going to be capital-light. New York is the first one capital-heavy. Why were we able to get capital-light in Aspen? Because we designed something in New York, we had something to sell. And we also – you think about – if we can bring the value of our business to a property and it helps the developer create value for themselves, we're in a position where we can share that value. So I think it's all going to depend on how well the first few do and how excited people are about them. And I think the first few are really important that way and get a second…

And Gary, as a follow-up on that note, and I know the deals aren't even complete, and you don't want to get into weeds in the details, but London and Paris aren't free. Are they – would you rate those as capital-light, capital-moderate, capital-heavy. Any lead there?

Yes. I'd say two capital-light. The first three, two capital-light, one – no, no, capital – well, one of them, we're working with Foster and Partners, and they're so good. Like really it's like maybe the best architect in the world. And they did the Apple campus. They do so many – I mean they just are so good. Their offices are so inspiring. And they – their first pass at kind of weaving these four buildings together in London and what it could be, I'm like, yes, we're going to have to do that. And so it's going to be – I'd say that's going to be more like a New York investment, but you should be making a New York investment in London, right? You should be making a New York investment in London. And by the way, New York, two – less than two year payback. That's really good. So – and I think London will be like that. I think we will open up an entirely new market. Think about London like – it's like opening in New York and not having any store in New Jersey or Connecticut or anywhere near. Like, we've got all these stores around there doing it. If I took all that volume, and I mushed it all into New York, man, I mean, it makes a lot of money then. So you might argue, well, you won't get the whole market. Well, I don't know. Like if you build something that's incredible and you have a great direct business and a great platform and you have – there's nothing like us. We have way more competition in North America than we are going to have in Europe. Way more competition in North America. So might take us a little bit…

I appreciate the details. Good luck. Thanks.

Yes, thank you.

Your next question comes from Tami Zakaria with JPMorgan. Please go ahead.

Hi, thank you so much for taking my question. I have a really quick one. So can you talk a little bit about how much of the announced $150 million of cost savings did you recognize in the first quarter. And do you expect any more savings in the second quarter. And also, how much of this is actually permanent given you eliminated some positions back in April.

Good question. I don't know, Jack, if we can kind of break that out, how would we think about exactly that…

As Gary mentioned, we are reinvesting some of those savings back, right, $90 million. I don't have the breakout, Tami, at my fingertips. So maybe we can follow-up.

Yes. You've got a chunk in the first quarter and then you've got a chunk in the second quarter. Most of it was first half.

Yes, because if you think about the compensation savings related to furloughs, obviously, you have those upfront. And as Gary mentioned, all furloughed employees will be back in the next few weeks. So those were front end.

And then the ad costs we put back in, just kind of a little later, right? And then we had some ad cost savings in the second half. We're putting that back in. Yes. So yes, it's a good question. Let us – maybe we'll do some work around that. And maybe in the next quarter, we'll lay it out a little bit. So we can disclose it in a way that everybody knows the answer. So let's figure that out. Good question. We don't have the detail with us. Yes.

Got it. Thank you so much, and best of luck.

Thank you, Tami.

Your next question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Hi, good afternoon. I also have two quick ones. One, can you bridge us how to pay the convert in July, the $300 million relative to the $70 million in cash at the end of the quarter? Is that mostly just from free cash flow coming here in the second quarter? And then a little bit bigger picture question. In retail, we've seen definitely a shift towards digital. It might be less so in your business, but you've also rolled out virtual design consultations in the quarter. So maybe just your thoughts on technology and consumer spending – or consumer habit shift, how that could impact your business. Thank you.

So I'll start with the first question, Cristina. As we've said, we're going to repay it in cash, which means cash both that we've generated and cash borrowed on our asset baseline. So what you are going to see in the 10-Q that's going to be filed tomorrow is our availability on the line. And if you were to consider us repaying the debt as of today, for example, or as of, I guess, May 29th, is what we had noted, we still have availability of $170 million on the line. And so we will, obviously, with the business trends we have, continue to generate free cash flow from there. So…

$170 million on the line at the low point after you pay.

Assume if we had to – have repaid it by last Friday that is that – so basically, it's – I would think of that as a low point. That is what would have been available. If we had repaid from the cash we have on hand with the remainder from the ABL. And so again, we will generate free cash flow from here, and that will look a little different by July 15.

Yes, because cash flow negative in Q1 becomes – our expectation is it becomes positive in all the next three quarters. Significantly positive.

Correct.

And then the shift towards digital, I mean we're going to – we're making a lot of big investments. This year, we just hired a new chief kind of digital experience officer, who's someone we've been trying to hire for years. I think he's one of the most creative, smartest people in the space, we – consulted with us about 10 years ago, Eri? Yes. And will be joining us soon. And we're going to make some significant investments in completely reimagining the whole website, and it will kind of move from a website to a portal. And we've got some visions for it, and I'm sure it's going to change 100 times. And the gentleman that's joined the team is going to have, I'm sure, a huge impact. And we're also going to bring in other talent. We're going to try to bring collection of the world's best thinkers, best designers, best – just with internally and external resources to kind of create a leapfrog experience. Something that has never been done. That's equal to the strategic separation we have in the physical world today. So – and I think that's going to be harder to do, right, because the screen size is the same size. You're more in a democratic platform. But we've got a lot of good ideas that we've been thinking about for a long time, and now we're going to make meaningful investment, and we think we've got the right talent lined up. So the shift in habits, thoughts about technology or the shift in habits. I think that the shift to – it probably got accelerated. If you think about e-commerce world, I mean, you've got – clearly, you've got a forced shift in habits. And so I think we probably accelerated the shift…

There are currently no further questions at this time. I'll turn the call back to Gary for any closing remarks.

Great. Well, thank you, everyone. I do want to say to our team who has just done a remarkable job through this time, to our furloughed teammates, welcome back, and to the few that haven't come back, we'll all be – our center of innovation in headquarters, where the majority of the people that are not completely back, we're going to be able to open next week. And we'll be able to welcome everyone back to the team. And two, I'd just say in this time of civil unrest, too, just every person of color and every black person in America, this is a very difficult time. And to the African-American community and the people that work for us, they know how we feel. And we've communicated that, and we don't need to broadcast that to the world. We don't need the platform necessarily to grandstand for us. We're going to do our work and set our example inside our company. But let's say what we've said internally, we stand with you. We – you just have to have a lot of empathy for what's going on in the world and just a lot of leftover, really shitty bad habits of judgment and discrimination. And I just hope that the unrest we're going through, which I think is just needed, it's just needed, we've got to wipe it clean. And yes, is it messy? It is. Is it scary? It is. But it's also needed because sometimes you got to have fear in this world to get people to change. And you've got to fight for what you truly believe in. And there'll be people on the fringe that take advantage of it, whether it's the looting or the burning of things. That's not what this is about. That's unfortunately…

This concludes today's conference call. Thank you for joining. You may now disconnect.