Ladies and gentlemen, thank you for standing by, and welcome to the RH Fourth Quarter 2020 Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Allison Malkin of ICR.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2020 Q&A conference call. Joining me today are Gary Friedman, Chairman and CEO; and Jack Preston, CFO. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, as well as our press release issued today, for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our 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 released. 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 for opening remarks.

Great, thank you. Good afternoon, everyone and thank you for joining us. We're going to get to try a different format for this call. It's been recommended to us and many of you sometimes are scrambling and don't necessarily get a chance to read the letter before the call starts since there's only an hour between we put out the release and we've had a suggestion to start with the letter and read the letter. And then that way everybody's grounded and what we just said and it might just elevate and improve the quality of the dialogue as we go forward. So I'm going to start with reading the shareholder letter that we just released. To our people, partners and shareholders, as we anniversary what has been one of the most difficult years in recent history and as we begin to see the light at the end of the dark tunnel of this deadly and disruptive virus, we do so with a greater appreciation for our freedom and the simple gestures in life like a handshake or a hug. We also turn this corner knowing that we used our time wisely to reimagine and reinvent ourselves once again. In times of turmoil, humans tend to move in herds hunkering down and finding comfort and conformity. Even those who analyze and report the news seem to find reassurance in replication, trying to fit everything into a predictable pandemic piles of headlines we've all been reading. We for example have been put into this there's no place like home pile. Others have been placed into the e-commerce is everything pile. Both are actually good piles because every one of those you were looked upon favorably whether you're on the top or the bottom of the pile. I believe many on Wall…

[Operator Instructions] And your first question comes from the line of Steven Zaccone from Citigroup. Your line is open.

Congrats on the strong results and happy to be a new addition to the earnings call. Gary you have a lot of momentum in the business right now and significant amount of product newness, you're growing the hospitality offerings and the margin profile significantly outpacing your early outlooks for the business. With all of this momentum in mind and thinking about how the world has changed from a global pandemic standpoint, where have you gained more confidence in the long-term growth potential of this business?

I don't know if anything's really changed for us based on the pandemic. In fact, I don't think as much has changed as most people think or believe. I mean, look you just start with the fact that our business is basically 100% direct to customer platform. So we've been channel neutral our entire existence here. We don't really care where anybody places an order and whether it was through the pandemic when order shifted from stores to online or virtually with our people. As soon as our galleries reopened, our business looked pretty normal and I know there's a lot of talk about well this is going to accelerate the growth of the Internet by 10 points over the next several years. That may or may not be true. I would say we're indifferent to that. We're really indifferent with the inherent channel shift that is going to happen over the next several decades. We've anticipated that. We knew that was going to happen. We're indifferent to that happening. People are kind of reframing their models and closing stores in an accelerated rate due to the fact that there's been this channel shifts and that may be true because their model within architected with the view across - independent view across all channels strategically or financially. It might have been an old model that was architected just for a retail business and they've more recently got into a direct customer business and had a rush online without strategically thinking about all the implications of it. We built this business beginning 20 years ago as a channel-neutral business and it's a platform looking ahead at the next 20, 30, 40 years and saying, we could see the world going there. So whether it gets there - whether it goes 5%…

Great. That's very helpful detail. Just a question on the margin outlook for the 100 basis points to 200 basis points expansion, how should we think about that from a gross versus OpEx leverage standpoint? And specifically on the growth side you've had two strong years of your product margin expansion. Do you expect that strength to continue this year? Thanks very much.

I'll let Jack take that one. Go ahead, Jack.

Yes. Well, like you said, in the last couple of years our margin expansion has been primarily driven on the gross margin line. So for fiscal '20 of the 750 basis points increase, three quarters is nearly where gross margin. And so I think on balance you're going to see that - the quality of that margin increasing continue. And so while we're not guiding specifically to say what exact portion of the 100 basis points to 200 basis points is going to come from gross margin, I would characterize it as at least half if not more.

Yes. And let me build on Jack's point. I think - as you asked that it makes me think about probably what is probably not obvious if you're in the outside of this business, because people have seen us reposition products. It tends to take pricing. But I think it's probably not clear that as we evolve this brand and as we continue our climb up the luxury mountain, the product quality is going to continue to move substantially. And the pricing will move with the product naturally. But the value equation will get stronger, not weaker as we get smarter here and we develop better and deeper relationships with our key manufacturing partners. So what might not be clear is as you take the prices up and you get product margin in that equation, you also get leverage throughout the supply chain, right? And so - and that's probably a simple mathematical equation that maybe not everybody is connecting the dots on. But it's relatively simple if you think about it. And if you just kind of try to capture the essence of Bernard Arnault's quote that only in luxury products can you have the ability to make luxury margins. There's a simplicity and a truth to that. This would be - it would be very hard to build a model like ours if you're playing in the middle of the market.

And due to time constraints, we do ask that you please limit yourself to one question and one follow-up. Your next question comes to line of Adrienne Yih from Barclays. Your line is open.

Wonderful news on the momentum continuing. Gary, we've spoken before about demand creation, how it's not no longer a single number on the P&L like a percent of sales but a confluence of the investments you're making in Aspen, London, RH3, etc. It seems RH is building more of desire creation and a pipeline of future customers. So who wants the RH lifestyle, right, and everything that comes with it. So how should we think about that advertising demand creation line in and of itself going forward? Thank you very much.

It's a really good question. And so the right way to think about it. Building one of most admired brands in the world, desired brands in the world whichever adds to it you want to use really it takes a different path, it takes a different way to communicate and I think we're in a world where it's harder and harder to get your message out because there's so much information out there. I read a study and I think it's about a year ago that humans are consuming 700% - 7 times the information than they were 20 years ago and it's an astonishing number if you think about that from 20 years ago we're consuming 7 times more information because of these devices we have and the amount of information, the amount of platforms we're communicating on and the ease of communicating to us. So the way to kind of breakthrough, right? Steve Jobs said something if you watch his original kind of YouTube presentation when he's on his shorts and flip flops on a little Apple stage when he came back to Apple and he was talking about he was reintroducing to think - reintroducing Apple and introducing the think different campaign. And he said we live in a really noisy world and it's going to be really hard for anyone to remember anything about any of us and that it is so important to - that he talked about marketing and about values, right? About those things you deeply believe in and connecting with people about values and he talks about some of the great brands. He talked about Nike being one of the great brands in the world. And he said if you think about Nike they're selling a commodity, they're selling tennis shoes, right?…

Gary, that's very helpful.

I consider it one of the best questions I got in a long time.

Your philosophy is always welcome. Jack, a really quick one. Actually this one is 73% and 96% demand growth translate. And then we have - we're now in the part where the stores were closed. What - to at least 50% revenue growth, is that due to poor congestion or lack of inventory? It seems like the spread between those two numbers would be tighter.

Yes. Well look, you're going to see the same dynamics in terms of the supply chain constraints. And for the same reasons that the demand growth exceeded revenue growth in Q3 and Q4 were with the strength and business you're going to continue to see that in Q1 and the potential acceleration given the strength and acceleration in demand.

Yes. And again, the key word is at least, is at least, right? So we give you at least how many times over the last few years, at least this, at least 18% operating margins, then it's at least 20%. Then it's - so we tend to kind of give you at - we want to make sure whatever happens, we're going to hit the at least. But we generally beat the at least pretty handedly. And - but yes, there's a lot of things to kind of consider but at least means that we have more than that.

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

Gary, perhaps a bit of a piggyback question on Adrienne's, perhaps just a little bit more specific just thinking about the ecosystem that you guys are - you must have rolling out. I just go two questions. How meaningful do you think that could be as a brand enhancer for RH over, say, the next three to five years? And as a standalone business, how important that - as a revenue and profit contributor or as - I guess kind of the former points more important, how should we think about that?

Yes. Well, I think it's going to be a meaningful brand enhancer. And I think if - it's funny I - if you would ask me five or seven years ago, we started work upon this, I would have told you it's going to be a meaningful brand enhancer. Now, I look back, and I go, that wasn't even any good at all. We were working five, seven years ago because we keep - tend to keep making things better. And that's the great thing about kind of only having a vision about something versus kind of start working on something, right? You really learn when you start doing. And that's when you can really start accelerating your education and connect more dots to see around more corners. I think what we're about to unveil in New York and Aspen - I don't think anybody has any idea what it is. I really - I don't. It's - I've been fortunate enough in my life that - I've been traveling since I was a relatively young man and traveling all over the world. And I've been in a design business whether it be at my former - the former company I worked at or today where we search the world for the best stuff, the best design, the best hotels, the best places, where are we going to get inspired, what are we going to see? So I've seen a lot, right. I've been to most of the Aman Resorts in the world. I've been to so many so many places both personally and professionally. And someone asked me, how long have you been working on the Guesthouse? And I told them about 30 years because that's how long you've been thinking about it. That's how long you've been traveling…

Yes. Clearly and thank you for the very thoughtful answer and hopefully come fall we can start to see some of us in person. So good luck for the rest of the year and thanks.

Yes. We'll figure out how to kind of do a little - like we're thinking. We don't know - how do you do a launch party in a 10 room hotel, right? You can't have just people like walk around the hallways, right? And so like we - then we thought, like I thought I'm going to do it like I might do a week of sleepovers, right? Where you get invited for a sleepover but I can only do like can we get two people in a room times 10 rooms, so we have 20 people a night but it's still 100 people. We get the right influencers and the right people and we're going to try to - we're going to try to open this. We think coincide with Fashion Week and we think Fashion Week will come back and everybody in New York will be back in the Hamptons. We think people be traveling again in September. It could be like the greatest coming out party in the world and some of the who's who maybe want to come for a sleepover and get to see something no one's ever seen. And yes, we start the right conversation. But I think what we'll do is probably during that week we'll stay there for a while and maybe it's a good time to do an investor meeting in New York and bring everybody up to speed and do a tour of the guest house probably right before we really open it to the public because once it's open you can't tour anybody through it, right? Because privacy it can't be taken. Hey, these are bunch of Wall Street guys taking through here. Sorry, sorry, excuse us. Yes, we know this is about privacy but not today. And so there's going to be one shot to kind of really see it and we'd like to kind of do that before it opens.

Your next question comes from the line of Max Rakhlenko from Cowen & Company. Your line is open.

Thanks a lot guys and congrats on the incredible quarter. So as we think ahead about the 100 basis points to 200 basis points of EBIT margin expansion in 2021, what do you see as the biggest buckets of opportunity is? And then longer term as we look ahead to the 25% plus, what do you see as additional opportunities beyond 2021?

Yes. Well - look, the - we've kind of said a 100 basis points to 200 basis points, we also kind of put some dots out for you, right? We said, hey, of that $150 million had shift this year. We would've been at 23 to start with. We're kind of 23. And so, then we - then we got another 100 basis points to get you to 24 which is 200 basis points higher than 2018, right, 2,200. So, you can get there pretty easily. It's not a lot of moves. And some of it will depend to just how much - where is the revenues really go here. We don't need a lot of revenues to kind of get to where we're pointing you. If for some reason these revenue trends continue - like, I mean it's really interesting. I've never - this is - I've never seen anything like this. I mean, I've been through the Great Recession and I've been through multiple recessions in my career. I've been in the home category now like how many years, 34 years. Just like Jack reminded me the other day it was my 20th year anniversary here, not to get to everybody that wished me happy anniversary, but I don't even know that. He goes, Oh, God I'm sorry. And I missed your anniversary. He didn't even know it's my anniversary. So, yes, I've been here 20 years, at Williams-Sonoma, 14 years. I've been 34 years in the home business. And I've seen a lot of cycles during that time. And I've never seen anything quite like this. I tend to - when there's really good news like this, I tend to be the pessimist in the company. I tend to be the one with just - whatever demand…

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

Gary, you mentioned getting more control right in the business and I was hoping you can maybe expand on that theme, right? Where your mind is at? What other aspects of the business are you looking at, gain more control over whether it be manufacturing, whether it be the whole design process, right, I think RH In-Your-Home experience? Would love to just hear your thought process on some of the ideas around control.

Yes. So Steve, this is a good question. As we think about it strategically, right, like our models is going to throw up lot of cash here. And what are we going to do with that cash? I mean, clearly, there's - you can invest it into the business. You could buy back your stock. You can pay dividends or so on and so forth. But if you look at our model look at it over the next five years, you got to kind of get out in front of it and say, what should we do and where do we see the biggest opportunities are to create more value. And what are the biggest ones we’re discussing is this idea of controlling more of the brand and I think we’re realizing as we scale the luxury mountain. There’s so much fragmentation and I always like to say products to this quality is never been made in these quantities. And I think taking more control of the product pipeline whatever that might mean whether it's the manufacturing, whether it's the sourcing whether it's - there's so many aspects of it whether it's raw material procurement and like do we take like most of our furniture is made with four species of wood, right? I don't know. Do we take positions in certain woods to give us a competitive advantage meaning like one - like is one is just sometimes getting the raw materials. If you're as big of a platform as we are in outdoor furniture securing teak is one of the challenges and should we own outdoor furniture manufacturing, so we have access to have more control and more access to raw materials that could give us a massive competitive advantage. Other parts of the business we've done we…

Thank you for that. And then - sorry, Gary.

Yes. I was just saying with those - with some of the things I can’t tell you about yet but you’ll hear about soon.

We anxiously await them. The - maybe just a quick follow-up, right, given the unsolicited proposals for the residences out in Aspen. It sounds like it has you thinking right that the idea is bigger maybe not bigger than you originally thought. But curious if those proposals indicate something bigger about the opportunity maybe a quicker maturation behind it or where the mindset is on just the residences as a whole?

Yes. I don't think we've got to kind of rush here. I think we've got to kind of rush to learn and kind of conceptualize the right model. I don't think it's going to be hard for us to build beautiful homes and sell them. I think that we can do. Like what is the right model? How do you do it? Where you go like - is it is this one where we're, let's say, we decide to really, to really do this. Let's say we have some tests and we're like wow, this really works and we've also had strategic inbounds, people that want to partner with us and people that have read the Aspen press release. I've had CEOs of companies that are reaching out want to know would we want to partner and build RH homes together and do a JV. And there may be opportunities like that, right. There may be people that have what we don't have today, the ability to procure and secure land, know how to build homes at scale but don’t have our creativity, our taste, our style. Don’t have our brand so to speak. And - so there could be opportunities where you see us partner with major home brand or acquire one. I don’t know like if we get really good at it. So, there’s not - there’s lot of optionality here. I think the gist - I think the great thing I have said for years here to the team that, we're only in the 10% of the business. And sometimes people - new people say to me, what do you mean we're only in the 10% of the business? We’re in the 10% of the business on average at the high end. People spend about 10% on…

Your next question comes from the line of Anthony Chukumba from Loop Capital Markets. Your line is open.

Thank you so much for taking my question. And, Gary, I'd just like to say as a sell-side analyst whose had a buy rating on the stock left 300 points, I don't want you spending your time thinking about what you're going to Tweet later today either. So I just wanted to kind of get that sense.

Thanks, Anthony. That’s good.

No worries. So these are more just kind of housekeeping questions. Probably more so Jack than Gary. But specifically, I just wanted to see if we could get a little bit of color in terms specifically the gross margin drivers, the SG&A leverage drivers and then just what your CapEx expectations are for 2021. Thank you.

Yes, Anthony. So, I think historically we've talked about very strong results as far as product on the product margin side as it relates to gross margin. And so Q4 is no different than what we talked about in Q3. It's about three quarters of the pickup is in our product margin which had a number of things that we talked about the decline in luxury mountain, the increase in the quality of product, cycling the rug business, operating the rug business at a higher margin among other things, outlet business as we talked about in MD&A and our filings. Obviously, it’s a lower promotional level. So that's where you're seeing the predominant amount of it. And then as far as CapEx for the year is concerned, you'll see in the 10-K when it's filed next week, the range that we're getting is $250 million to $300 million. That is a little higher than - this year, we ended up with sort of adjusted CapEx, you need to look at because a portion of it ends up putting it - is in op section of the cash flow. But this year we ended up at $180 million. So, then what I'll say about the elevation of the CapEx is there's a number of sort of development hills hat are happening this year that that will monetize in a future period. And then just finishing one of those stores we're opening was on a land lease. So there's just a number of factors that are just driving a higher CapEx this year including starting to spend money internationally.

The next question comes from the line of Michael Lasser from UBS. Your line is open.

Thanks a lot for taking my question. Gary, there’s been a sharp increase in the profitability of many of the players in the home furnishings industry. So do you think that the sector is now just structurally earning higher margin? And how does varying form how to think about our itches profitability in the second half of the year where when you talk about the two or two half and the second half that you will be facing some unique factors and much more difficult comparisons?

Sure. Yes. Good question. I think to answer that question you really got to look at what's the revenue growth that the businesses experienced in 2020, right? And that's why I made the point and I kind of repeated the point in the letter that we hit 21.8% operating margin on 8% revenue growth, right? So we had 750 basis points of margin expansion on 8% revenue growth. So that's the first part of it, right? So you can kind of book that, right? That's not going away because that's got nothing to do with the pandemic. That's got nothing to do with home furnishings tailwinds, 8% revenue growth nothing to do with that. So that's all structural and we would have - by the way it's about what we thought we were going to earn before the pandemic, okay? Our model was about 22% what we thought we'd make and then the pandemic hit. And with the pandemic hit, I mean, what it did is he just turned it into two halves. Now did we optimize a little bit here and there? We did but our plan was to have revenue growth slightly higher. So - but what we came out right about there. So if you've got people that have grown faster in 2020 than they had historically, there - you got to kind of say how much of that sticks? How much of the leverage sticks? And then there's a really important one to kind of figure out where everybody's going to land here is what - what the price structure and the promotional structure of the business, right? So we didn't get less promotional. We are - we don't have promotions, right? The only thing we have is we have things that we're discontinuing out of…

Yes.

The total on the year we still see in the 10-K is $49 million less in advertising that was…

Yes. $40 million.

Yes, 40 - yes. So $49 million less. So you’ve got - what is that? About - a little less than a point and a half?

Right.

So you say, hey, Gary. Can you guys sustain this? You’ve got to put that advertising back into the model. And that’s a good question. I’m not sure yet. I’m not sure. But that’s something that, like, we think about. Like, do we need to go back to mailing a book twice a year? Do - can we mail less books? Our big galleries and our investments in restaurants is driving more traffic. And what do we need there? But I'd say those - the revenue, the promotional structure and margin structure based on promotions, and then the advertising piece of it. And then, of course, if people got a big lift that - they're going to get occupancy leverage and some things like that that might come back. So I don't know how sustainable - if I look across our industry, the margin structure is as of today, I - everybody wants you to believe it is. That's why I made the point - and I was like - I'm kind of really happy. We only had 8% revenue growth because - nobody can be snow-blind here including us, right? So I like - like, hey, do we have roughly 22% operating margin business today? Without a pandemic, that's what we got. And how much pandemic boost are we going to have in 2021? If our revenues are up 15%, maybe a little, right, because we’re going to start growing internationally. And then when we start growing globally, we're going to open countries. We're going to open in Europe and be able to take online orders and ship to all of Europe. So it's not like we're opening and - in a market like Sacramento or we're opening a new store in Vancouver, Montreal or something. And we're opening…

That's helpful. My follow-up question is I guess we're all trying to figure out what sustainable demand is and when will we know what sustainable demand is. So can you replay the clock or the calendar for it last year and this year February demand I would assume that was core demand and it’s like 73% --

February last year was up 8%, yes, February last year was 8%, up 8%.

And how did March in full to give us some…

March, March, the store is - March, yes. So February last year was 8%, we told everybody it was up 8%, I think before the world fell apart. And so February is up 8% and it was kind of like right where we thought it should be. And we're up 73% in the core business on top of 8% last year. In the first two weeks of March, I think we were up 4% for one week and down 3% the other week. So we were kind of flat or up 1% in those two weeks, so against the flat first two weeks of March, we're up 96%, okay? So the way to think about it if you said, okay, if you've neutralized the 8% on February, you'd add 8 points to the 73%, you'd be up 81% and 96%. And so if you want to kind of stabilize the two months.

Very helpful.

And so they were up against all the closed galleries and closed restaurants and closed outlets. And remember, our outlet business, when it closed, it doesn't have a website. So we went to zero on the outlet, we went to zero on the restaurants and in our core business, RH core business and in our contract business, we could still take orders and stuff. Obviously the contract business, the longer we got into the pandemic and people realized that hotels and everything we're going to be closed for a long time, that business really took a hit and then our outlet business for a period time went to zero and the restaurant, right, went into zero. So big - think about big pickups in a restaurant business year-over-year, big pickup by in our outlet business year-over-year and a big pickup in our contract business year-over-year because the hospitality is now starting to spend again like they're now betting for the comeback cycle, right? So hotels are reinvesting, buying new outdoor furniture, things like that.

Michael. It’s Jack.

I think it'll…

Go ahead.

Do you think it'll be kind of May, June economy will be reopened, you’ll have some reasonable comparisons and then you'll get a sense for what the run rate of the business is?

Yes, I think you're going to - it might take longer than that, Michael. We started comping up pretty good in May and June. We kind of in the fall season, we peaked I think August, September, Jack, 45, 47 or something like that in the core business.

47 in August.

47 in August.

46 in September were the core number.

Okay, yes. So we kind of peaked in there and then we had a bit of a slowdown in the Q4 period and some of that in Q4 we had more kind of clearance merchandise that we were moving through last year. So that that probably brought our growth rates down a bit year-over-year. We just had more stuff. We were transitioning some of our floors and other things. So we had some things that we were moving through that gave us a little extra revenue. But yes, I think that the real question Michael is this kind of accelerated lift that started the last two weeks of January, right? The last two weeks of January, we started to see an acceleration up into the 50s and 60s. And then it went into the 70s in February and a then the first two weeks of March into the 90s. And that's kind of unexplainable, right? But this is how we think about it. We think about it more, for instance, percentage lift, we look at the dollar trend of the business. So we got a dollar trend of the business and the dollar trend of the business unless there’s a real economic move here like if nothing happens, my sense is the dollar trend of the business could soften in the second half but I don’t think it’s going to collapse, right? And I think that that’s probably other people in the home business are looking at that and saying like, yes, the dollar the trend might swing 10, 15 points maybe up to 20. So, I sit here and if I - we roll this dollar trend out, we think it's the year could be unbelievable, right? But we think there's going to be some kind of slowdown. It's…

That’s very helpful. Thank you.

And, Michael, it’s Jack. I did want to add just one point when you asked about H2 profitability just not giving specific direction here. But if you think about advertising, I just want to clarify. In 2020, we mailed books in the spring but not in the fall. So most of the spend happened in H1 versus H2. Obviously, the opposite is going to happen this year. We'll clearly mail outdoor book. But the books - the main books are going to be mailed in the fall. So you are going to have a flip flop of advertising…

Yes. It’s a big shift of advertising that we should probably - yes. We should probably kind of map that out for people so they can get their models right.

Yes.

Yes.

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

Gary, I was hoping you could tell us a little more about the world of RH. And is this going to be a redesign of the RH website? Is this separate? How do you think about making your Web presence better as a transactional site and the importance of that? And just any more color on the world of RH.

Yes. Yes. It's just - it's really a rebuild of the entire website and kind of digital platform of the business. So it's just starting from scratch thinking about it across all the dimensions of these kind of new aspects of our business and brand. And think about it beyond just a website. But we think about it as a - it's a portal into the world of RH, right, that can take you through to our products, our places, our services, our spaces. Right. And so it's you know all the products and categories. Right. We have RH Interiors, RH Modern, we have RH Contemporary come in. We have RH Baby on trial. We have RH teen. We've got RH Outdoor. We have RH Rugs, RH Beach House, RH Ski House, RH Colors coming in. RH Couture is coming. RH Bespoke is coming in. So when we look out and we think about just the product world of RH, how do you architect that? How do you have someone navigate through that? How do you get credit for all of that on a flat screen? Right. And then we think about our places. It's really are our galleries, our guest houses, our restaurants and our residences. Right. And so those are all our places. So thinking about how someone can navigate through those areas, how do you get a reservation in one of our restaurants? How do you connect to the guest house? How do you learn about the residences that were either selling right now or we have in development? How do you look at our galleries, and what are the aspects of the different galleries and explore galleries online and maybe in a three dimensional way? Walk through a gallery like walk through the New York gallery…

That's great. Thank you, Gary. And a model in question for Jack just as we think about rising raw material prices and freight prices that many in the industry are seeing. Could you give us any sense of how we might think about that impacting the model? Obviously you all have pricing power, you've demonstrated that but does that have any impact on how we should be thinking about the models here?

Let me just jump in for a second. Again, I'd point you to the fundamental point that our goods are a lot more expensive, right? So as a percentage of our sales those factors are going to be a lot less, right? So start with we sell a cloud sofa $10,000 to $12,000 - $10,000 to $14,000. The freight on a $10,000 to $14,000 sofa is a lot lower than the freight on a $2,000 sofa as a percent as a percent to sales, right? So you got to start with - will we be impacted? Sure. Will it be to a much smaller degree than if you’re CB2 or to or West Dalmar something like that or Pottery Barn or Crate & Barrel or places like that, yes, like you have to look at the price structure of the goods that - again, if we’re using about the same amount of wood but ours product is just designed much better and it's a higher quality product and yes, it's going to be a smaller percentage. So that's why you don't hear us talking about it as much because the impact at this point is less and it’s in our model.

Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open.

Thank you so much for taking my questions and congrats to the team on the very strong results. I do have two quick questions. The first one is could you share some details on the distribution center that's coming on live in terms of what would be the incremental rent or incremental operating expense to run it or the incremental CapEx to build it? Any details around that would be helpful.

Yes, it's all in our model. I don't know if we're disclosing individual rents of DCs and stuff like that but it’s all in our models. It’s all in our projection. It’s all in our plan. So…

And the CapEx is modest as it relates to the 250 to 300…

Yes. Yes, nothing…

…I gave you. It’s a non-event. Like anytime you have a DC, there's a little step up here. So we’re in a step up here but we're absorbing that cost. And so we'll - it’s probably in the first year it's a bit of a drag on occupancy. But by year two, year three, we'll start getting leverage on the property, right, versus the step-up.

But it’s - so it’s in our model and in our projections.

So that’s a great segue to my second question. I did want to go back to the comment that you saw 750 basis points of operating margin expansion in 2020 on 8% of revenue growth. So for this year you’re guiding to 100 basis points to 200 basis points on top-line growth of 15% to 20%. So are you being conservative because there should be - I would think there should be natural leverage from all the results of sales going through? So is that just for being conservative, or are there any onetime expenses that are pressing this year and should go away next year and the years to come to help us sort of understand why operating margin expansion would only be 100 basis points to 200 basis points on 15 to 200 - 15% to 20% sales growth?

Yes. I would just kind of look at the history here and ask yourself, are we generally conservative, are we generally aggressive on our projections, right? So you can draw that conclusion, right? And with the comments I made earlier, I mean we wouldn't say a minimum of 15% to 20% growth and 100 basis points to 200 basis points unless - like I said, obviously, history would tell you here is look at the last - I don't know X number of years that we're relatively conservative in how we guide. And we generally outperformed our expectations, especially the ones we give at the beginning of the year. The question here is will there be a big economic change? Like, nobody knows that. Like, will there be a recession, will there something else happen? Nobody knows that. But if not, we've - we feel more optimistic than pessimistic about things right now. But we tend to under promise and over deliver, so.

Got it. That's super helpful. So, there's really nothing onetime or sort of unnatural something impacting this are, it's just being conservative - prudently conservative.

You can frame it that way. Yes, essentially.

Got it. Great. Thank you so much.

I wouldn't say that was wrong.

Your next question comes from the line of Cristina Fernández from Telsey Advisory Group. Your line is open. Cristina Fernández: Two questions and hopefully a quicker one. The RH In Your Home which you commented a couple of times, you've been testing it for some time now only in California. I guess, what do you think you still need to improve to be able to roll that out across the U.S.?

Yes. I think we've only been testing RH In Your Home for how long, Fernando, a year?

Three months.

Three months. So now full tests, three months. Yes. So, like this is a whole another level of kind of, yes, we've been talking about it for year, testing for three months. Yes. We've never really talked - I don't think we really talked to you in a detailed way about RH In Your Home and furniture ambassadors and then anything the Teslas or anything other?

No, no.

No, no. Yes. But we'll soon have - you’re going to have this gray RH truck and furniture ambassador in a separate Tesla car, gray car. Yes. And they don't have a Teslas yet, I thought they might have the Tesla. But I got him an order. But it's a whole different experience, right. It's like sending a highly trained furniture ambassador into the home with our delivery team, right. That is managing the whole process with the customer that is upselling in the home, that is doing all kinds of things if there's a problem, we solve it immediately, the stress for the customer goes down, it’s a completely different experience. It’s a different investment so we're testing it. It’s obviously you're putting another person on the road and another person and a relatively high paid person we're sending in the home, right, so kind of it almost an interior designer quality person furniture ambassador in the home. Cristina Fernández: Okay. Thanks. And then the other question was some of the new businesses, RH Couture and RH Bespoke, I feel like today's the first time you've talked about those. Can you give us some detail sort of what your vision for those businesses are?

It's all I'm giving you. I would just take the words themselves and use your imagination.

Your next question comes from the line of Peter Benedict from Baird. Your line is open.

Listen most of my questions have been asked and answered. I just wanted to wish Gary a Happy Anniversary.

Thanks, Peter.

Well, let me just take one in Gary, just very quickly. The new DC in Southern Cal, I know you guys are closed a few years ago. I just don't know if this is just - this is now getting bigger so you need it now. Is there anything different you're doing with that DC versus what may have not yet previously that's my only question? Thanks so much.

Yes. It’s really kind of an investment. I think about it as an investment into the outdoor furniture and special order business. So it’s architected for those two businesses, design for those two businesses, and building to leverage those two business and run them in a more focused way to kind of get better customer experience, grow those businesses, and services business is better. So before we just had a full DC in Southern California with kind of redundant DCs in Northern and Southern California, yes. But each have things like for example all that - most of our outdoor furniture is coming out of - teak is coming out of Indonesia and metal furniture coming out of different parts of Asia, Vietnam, China and things like that. So every major container ship that's coming in is first stopping in Southern California and then going up to Oakland - the port of Oakland. So you pick up seven days immediately right there and then just the way we're going to handle and process thought crosstalk businesses, this is speed to the consumer and then if you think about the outdoor furniture business Southern California is our largest outdoor furniture market by far. And then the southern states are a lot of our strongest very, very logical. So the ability to get the goods delivers faster in the biggest markets and hit the southern states faster and think about the trucking lines and our businesses - the reason we can do this not everybody can do this is our businesses are really big, right? I think these are - like, our outdoor furniture businesses are real businesses - I mean I think our outdoor furniture business is bigger than some of our biggest competitors today at the high end, right? I think some of the - by far but they’re just outdoor against their entire business. That’s it. Like, we’re having an internal conversation here. I think about, like - you might think about, like, a higher quality national brand or something like that. So it’s a real business, right? That’s the great thing about starting to have scale like this. You can - it allow you to kind of segment and focus on businesses in a very unique way and optimize businesses like you only ran that business. And then if you think about the special order business, it’s a completely different business, got a different model. And how do we run that business at a much more efficient way, better customer service, faster delivery, things like that? So it's really an investment. We've been talking about this internally for a long time, investing into those two businesses.

Your next question comes from the line of Zach Fadem from Wells Fargo. Your line is open.

Quick one. One thing you haven't mentioned today is the art curation initiative with General Public. Just curious if you can talk about this a little bit, and how you see fine art as a potential opportunity for your business.

Yes. Well, this is an idea that Portia de Rossi came to us with and she's really the entrepreneur behind it. She figured out the technology and the 3D printing or - what does she call it? It’s called [xenograft] yes, xenograft. It's like a 3D printing. Like - you can look at a beautiful textured hand painted piece of art. And this - it replicates it perfectly. Like, you'd need a real art expert to be able to tell the difference. And her and her partner, Ellen, Ellen DeGeneres, they’re big art collectors. They've got great taste and style. Their homes are fantastic. And they just have incredible taste in art. And I think Portia is art history major. It was one of the things she studied. And she's just very, very smart entrepreneur. And she had a big idea about this. And she kind of came through some friends, made a connection to talk to me about, here's my idea and it’s what I'm doing. She just kind of got it started. And we loved the idea. We loved her taste and style. And we said look, we think we can be the platform that can amplify your idea. We can be your best partner. And that's what we've done. And she's working on ramping production and expanding the assortment. And the great thing about Portia like you just always know like what she's going to show you, you're going to want to buy because she's got such incredible taste. Except I'd say, she's probably listening to this conference call, there’s dog pacing but she came to me a few years ago. I know, I was joking around. So it's better actually, now I really like them and we're going to probably ask them. But I’m just joking…

And there are no further questions at this time. I will turn the call back over to management for some closing remarks.

Great. Thank you very much everybody for your time and attention today and your interest in our business and brand. We know it’s been a crazy and difficult year and we just want to thank all of you, thank all of our customers, thank all of our people around the world that not only just work for our company that work on behalf of our company and making the products and delivery in the products and making the supply chain work. This is just a year like none of us could have imagined and a lot of people made a lot of sacrifices to the lot of risk to kind of keep everything going in this world and we sure are thankful and we couldn't be more excited about the future and about the opportunity. So thank you, everyone, and we look forward to talking to you at the end of the first quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.