Rh (RH) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the RH First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Allison Malkin. Please, go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2022 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer, that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that, these forward-looking statements reflect our 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 Gary.

Great. Thank you, Allison, and good afternoon, everyone. Thank you for joining us. As we do, we'll start with the shareholder letter. To our people, partners and shareholders, we are pleased to report another quarter of record results, as revenue increased 11% to $957 million versus $861 million a year ago and up 98% versus 2020, representing one of the highest two-year growth rates in our industry. Gross margin expanded 480 basis points in the first quarter, driven by 390 basis points increase in product margins and our resistance to promote the business, as demand trends began to slow. While there has been a widespread return to discounting across our industry, as they have been inspired by the barrage of sale e-mail filling our inboxes, and there may be short-term risk of market share loss by choosing not to promote. We believe there is certain long-term risk of brand erosion and model destruction once you begin down that path. It's that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry, and our results now reflect those of the leading luxury brands as first quarter adjusted operating margin reached 24.7% versus 22.6% a year ago. Our results are inclusive of investments related to the opening of RH San Francisco and the RH Guesthouse, the development of RH International and the rollout of our RH In-Your-Home, which led to approximately 200 of the 270 basis points of base SG&A deleverage in the quarter. We are now forecasting SG&A as a percentage of revenue to peak in the second and third quarters as we return to mailing Source Books after a two-year hiatus. By the fourth quarter, we expect SG&A as a percentage of revenue to be in line with last year. We generated $107 million of free cash flow in Q1, ending the quarter with net debt of $166 million, $2.24 billion of cash on our balance sheet and trailing 12 months adjusted EBITDA of $1.13 billion. We spent $481 million in cash to repurchase $180 million of our outstanding affordable notes, terminate all of the 3.4 million outstanding warrants and unwind the remaining bond hedges. Following these transactions, we have $101 million of convertible notes outstanding. Fiscal 2022 outlook, despite our record financial performance in the first quarter, we've experienced softening demand trends, which began at the time of the Russian invasion of Ukraine and have further slowed during market disruption over the past several months. Based on our current trends and the uncertain macro environment, we are providing the following revised outlook for the second quarter and fiscal 2022. Second quarter net revenue in the range of minus 1 to minus 3 versus up 39% last year, with adjusted operating margin in the range of 23% to 23.5% versus 26.6% a year ago. Fiscal 2022 net revenue growth in the range of 0% to 2% versus up 32% last year, with adjusted operating margin in the range of 23% to 24% versus 25.6% a year ago. While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift, shed less valuable market share as we continue to raise our quality and navigate through the multiple macro headwinds, we believe our long-term investments will enable us to continue driving industry-leading performance. 2022, the year of the new, as we've mentioned, while many of our plans were delayed by the virus, we were not disrupted by it. We believe 2022 will mark the beginning of the next chapter of growth and innovation for the RH brand. 2022, the year of the new includes the May opening of RH San Francisco, the Gallery At The Historic Bethlehem Steel Building, our most extraordinary new bespoke gallery to date. The launch of RH Contemporary, the most compelling and potentially disruptive product introduction in our history, the elevation of RH Interiors and RH Modern, inclusive the new collections and an enhanced quality introducing this fall; the unveiling of our first RH Guesthouse in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market; the introduction of an elevated new Live Fire restaurant at RH San Francisco, with plans to open in RH England and the New York Guesthouse; the debut of a Champagne and Caviar concept, the opening of the New York Guesthouse, with plans to expand to our future galleries in Paris, London, Milan and Aspen; the premier of the World of RH, which launched today, if you haven't been online yet on our website. It's an incredible visual experience that takes you into the products, places and spaces of our brand. The lift off of RH1 and RH2, our customized G650 and G550 that will be available for charter later this year. The christening of RH3, our luxury yacht that will be available for Charter in the Mediterranean, Caribbean where the wealthy and affluent visit on vacation. The rollout of RH In-Your-Home, a unique and memorable experience with brand investors guiding every detail of the delivery and extending the selling experience into the home. The expansion of the RH Brand globally. Beginning with the opening of RH England, The Gallery at the Historic Aynho Park, a magical 17th century, 73 Interstate in the English countryside that will introduce RH to the UK in a dramatic and unforgettable fashion. The opening of RH Palo Alto, the Gallery at Stanford Shopping Center, which will represent the next evolution of our highly productive prototype galleries. The RH business vision and ecosystem, the long view. We believe there are those with taste and no scale, and those with scale and no taste. And the idea of scaling taste is large and far-reaching. Our goal is to position RH as the arbiter of case for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling selection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introduction of RH Contemporary, RH Mature, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Artillery and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally. Our strategy is to move the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that establishes the RH brand as a global thought leader, taste and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouse, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industries. Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art and design in the Napa Valley. RH1 and RH2, our private jets, and our RH3, our luxury yacht that is available for charter, the Caribbean and Mediterranean, where the wealth and affluent visit and vacation. These immersive experiences expose new and existing customers through our evolving authority and architecture, interior design and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams, while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments, with integrated services that deliver taste and time value to discerning and serve consumers. The entirety of our strategy will come to life digitally as we launch the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plans to expand RH ecosystem globally multiplies the market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. Taste can be elusive and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive. And by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand from Chanel to Cartier, Aston Martin to Amen [ph], LOUIS VUITTON to [indiscernible] Perry Winston to [indiscernible] was born at the top of the luxury mountain. Never before in a brand attempted to make the climb to the top, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We do understand that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this time is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box-to-box laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required and the scar tissue developed by getting knocked down 10 times and getting up 11, leads to the development of the mental and moral strength that builds character in the individuals and forms cultures and organizations. Lessons that can't be learned in a classroom or by managing the business, they must be earned by building one or by reaching the top of the mountain, onward Team RH, carpe diem. So, at this point, operator, we'll open the call for questions.

Thank you. [Operator Instructions] Our first of line of Simeon Gutman from Morgan Stanley. You may begin.

Hi everyone, it's Simeon Gutman. Gary, my first question is on promotional environment and the discipline that you spoke to. Can you give us -- I guess, on the annuity to this, can you give me maybe a sense of the tolerance you will take in terms of market share loss, is it steadfast, or will you adapt to the market if you have to if it continued along a more promotional path? That was my first question.

I think it depends on how you define if you ask you. I think we are really well-positioned with the best operating model in our industry by far. A really strong balance sheet and lots of optionality to create, capitalize on opportunities in kind of any environment. So, I think the last thing you want to do when you're trying to build a brand like ours and trying to scale, as we say, the luxury mountain is you have to remain disciplined about brand perception, desirability, and you just can't fall into a discounting phase. Now, if for some cataclysmic reason, the world was ending and we needed to stay liquid, would we make decisions to move inventory and turn it into cash? Of course, we would. We're not going to let the company go bankrupt. But the path we're on, the road we're on is a long road, right? It is a very long journey. It's not a short journey. It's not a year-to-year or quarter-to-quarter journey. It's a decade to get decade journey and it’s trying to build a brand with no peer and trying to build something that's truly sustainable in this world. And there's not a lot of brands that have done that. Its way less than 1% of the retail businesses that ever gets introduced. And I joke around some times when I say, a retail mall is like a graveyard for short-lived ideas, because most retail brands don't live out the life of their lease. And if you went back 10 years and walked the mall, you'd be surprised how much is not there. Generally 65% to 70% of a retail shopping center turns over. And there's a handful of businesses that continue on. And that's what we're trying to build here. So we're prepared to make the good finishings for long run. It's served us well thus far, and I believe it will serve us well in the future.

Thanks for that. And the follow-up, the buyback question, you've been pretty exact or exacting in terms of your timing in the past. Is there anything you can share on how we should think about using the cash to your advantage?

Yes. Well, we raised the capital to have optionality. And there's a lot of different choices we can make during uncertain times, and there's going to be a lot of opportunities to see things in a new life. Well, they will look much more valuable than they may have looked in the past. So whether that means returning capital to our shareholders through share repurchases to create value, whether it means there's opportune times to do real estate deals and be -- and capitalize on what is certain to be, I think a difficult real estate market over the next year or two, more acquisitions or other forms of accretive decisions that we can make that will create long-term value for our shareholders. So as Warren Buffett says, when others agree to be fearful and others are careful, be greedy. So we're trying to prepare ourselves to have the optionality to make decisions that will put the company in a place to benefit long term. S0 --

Thank you. And our next question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Good afternoon, Gary and Jack. Hey, Gary, I was curious if you could just provide some color around the assumed contributions of RH Contemporary and RH England during the remainder of the year and any thoughts or updated thoughts on the potential year one sales of RH England, as we approach the opening?

Sure. That's a good question. So when we think about contemporary, while it's clearly the best work we've ever done, and I think the most dramatic evolution of our brand towards where we want to go, whether you're looking at all made in Italy sofas and the highest quality fabrics in the world with the introduction of Holland & Sherry, the travertine collection that you've seen, these are all bespoke collections, bespoke furniture and the designers in our company that have had an early look and the ones that especially got to travel to RH San Francisco to help set up the gallery, I mean, they've never been more excited. And they believe our consumers going to just love this, and we're getting we're going to also open-up an entire main market. And that's really the feedback we've gotten, too, from other really high-end interior designers, people we've had through RH San Francisco and given a tour and shown them even the broader collection. So we couldn't be more excited about contemporary. But remember, our business is – to optimize our business, it's really dependent on the goods being seen at retail. There's only so much business you can do in an online business. And it's interesting, over the last, I don't know, it's probably been 8 or 10 years where everybody thought we were the crazy ones because we are opening retail stores. And people have been shrinking stores and closing stores and we've been building the biggest specialty stores probably in the history of our industry for sure, the history of the world in all industries in retail. And that has proven very beneficial and very accretive to our business growth and to our operating model. As people are finding out, it's probably the lowest cost of customer acquisition, any form you can take. And that's why we see a direct opening retail stores. So in concert into retail will be critical to understand the potential of contemporary. We'll get early read. We obviously have all the math and we can extrapolate how something does when it's presented online and in our Source Books, and translating that into what it would be worth. And so we actually like launching goods in our Source Books, in online because we then do a much better job of projecting inventory in placing bets. But this is when we'll move pretty quickly. We've already got inventory kind of on order. And of course, that's been difficult over the last several months. But we've got inventory on order to get the goods into – right now, they're in RH San Francisco, but to get the goods into New York, into Chicago, West Palm, some of our biggest most important galleries and markets. Because a lot of the times, our customers will travel regionally, right? They'll be working with the designer in Greenwich, Connecticut or in New Jersey or somewhere places where you might have a legacy store and the plan matrix and take consumers to see the goods in persons. So getting the goods out there regionally and see we getting the goods into all the galleries, I think, is going to be transformational. So first, you have to kind of stand back and say, what's the bigger picture? And essentially as it relates to, where is our demand versus others? How are we performing? And so on and so forth. What does the external market look like? You have to remember that, we made some critical choices at the beginning of COVID. And we believe COVID was going to be temporal. I had people tell me, it's the decade of home. It's going to be always like this. And I said, look, I've been in this industry a long time, nothing's always like anything. Everything is always changing. And our view is the COVID lift was going to probably last a year, and it got extended by another year, because of all the variants. And we were in and out of offices, store growth we closing restaurants were closed and then they were 25% and 50% occupancy. We've had a very chaotic couple of years. And what we did was very different, I think, than many other people. We decided not to try to optimize the period of COVID. We decided not to chase revenues and chase demand during that period. We said, look, there's already more demand than we could fulfill. Why don't we use this time in a much more strategic way and focus on moving some really big rocks that will set up the next decade of growth at our age? And that's what we did. We focused all our energy on kind of taking contemporary to another level. We actually did email a Source Books over the last two years and had no newness over the last few years. And I think about that. Basically, no marketing and no newness, yet we outperformed everybody in our sector, right? We had 42% 2-year growth over COVID. Besides Wayfair, that is not exactly a similar business model, right? Wayfair was selling all kinds of things that were related to the pandemic. All kinds of categories that were greatly benefited, no different than an Etsy or people. If you're selling masks, you're selling a lot of things that people needed during a pandemic, you're going to probably outperform. But if you look at the home furnishings retailers, any of those brands, we outperformed anybody with no newness and no books. So what did that mean? It meant we probably left demand on the table, because if we would have had newness during that period, we would have had incremental demand. We would have incremental revenues, but we might have built up a bigger backlog. I would assume that. But what we did instead is we took contemporary to a place we couldn't even imagine. We rearchitected the way we did product internally. We rearchitected parts of our center of innovation to work and collaborate in a new way to integrate the product in a new way. And I think we've created I would say, RH Contemporary, it's like almost a new company within the company. If you look at the assortment, if you go online and you page through the Source Books, and you tell me, okay, think of all the home brands that might have launched in the last 5 or 10 years. All these -- there's all kinds of ones that started online. They have a catalog. They might have a couple of stores. And you take a look at that assortment and you compare it with contemporary which by the way is only 70% of the collection because the vendors just we didn't want to put things in the book and online that weren't going to be shipped for six months because the supply chain is still somewhat backed up. But we believe Contemporary is like almost a new company within the company. We think it's going to be bigger than Modern. Modern today is roughly a $1 billion business. So, you think about that we introduced Modern at the end of 2015 and if you really attribute all the correct sales to Modern, right when you take parts of our textile assortment, our rug assortment and things like that, not just the furniture and the lighting, even some of the lighting, Modern really moved the business massively and kind of changed the game for our age and opened up the aperture of the market for us. Consumers so entirely different. I think contemporary will have a bigger impact on this company than modern -- and I think it -- and not just from a design point of view, but from a quality point of view. People have taken digs on us over the years because they believe product made in China is not as good as product made in America, which is not true, by the way, the iPhones made in China. It's the best piece of technology in the world. A lot of great things are made in China there, very industrious and hard-working people. And -- but you can make a lot of cheap shift there, if you want to excuse my language, but that's not what we do. And our people will be at it's made in Vietnam, some of the best furniture manufacturers and artisans in the world out of the UK and Europe went to Vietnam years ago to make super high-end furniture. Is their chief furniture made in Vietnam? Sure there is. There's also a cheap furniture made in the United States, by the way. And there's cheap things made everywhere. The key is to know where to go and where to make high-quality things. But when all of a sudden, you take a category like we have with upholstery and say, hey, we're going to make it all in Italy. The Italians have extensive design in detail, that is probably better than anyone in the world. It's the home DaVinci and Michael Angelo and so many people that have done some of the most extraordinary architectural work, art work in the world, design in the world. so on and so forth. So, I think I communicated something entirely new. When you -- I think it's I don't know of the fourth swipe or the source flip and it said made in Italy, and you've got to two families, two companies, Italian families, generations of making the highest-quality product sitting on our sales estimate an article about them. I think it communicates something new. When you swipe a little further and you get to the spread, the kind of the article online and sharing and it says the noble fiber subscriber road. And you see that fabric on a suites form being made where the highest quality suites are in the world. This is arguably the best fabric house in the world. It is the favored fabric house and fabric and the highest end of interior design, the very best designers. I think a lot of people eyes are going to go wide open when they swipe through either online or in our source book and see that we're carrying Holland and share fabrics. And no different than it's probably 10 years ago now when we started sharing perennials, right? And what's interesting, what happened to Print why people thought you're going to kill the brand business to the trade and actually go we became a massive part of that business. I think the same thing is going to happen with online share, but contemporary sets a whole new standard. Now, what -- how does it roll out into demand? There'll only be so much demand we can do online and in our Source Books. Although I would tell you, I've never seen our designers and our teams in our galleries such huge advocates of anything we've done. So we've got an incredible, incredible -- we don't have a marketing department of the company. We have a true group, but we've got an incredible root of truth advocates that are going to talk about our work, right, and what we're doing. And so I think we'll get a pretty good response. But the goods also have to kind of keep trickling in, and there's still -- it's going to take a month or two for all the goods to be in stock. But our business generally ramps the course of a few months. By month three, you start to really understand the trends, because consumers working on projects, not just buying products. And then despite all, Eri, when do we think we'll be in a position to start to roll it out of September, we should think about…?

Yes.

Yes, since probably September. We're not only going to rollout contemporary to the company and it will probably become, I'd say, the first-third of every gallery. So whether it's the legacy gallery at 6,000 square feet, the first 2,000 square feet or more will be contemporary. If it's a new design gallery, it's the entire first floor, I'd say, we'll flip to contemporary. That's how confident we are in this product line. And by Q3, you're really going to understand the demand. The other thing we're going to do is, you remember, its in 2010 or 2011, when we modeled all the stores, we've done it several times. But if you remember when our galleries weren’t too great, right? We got rid of all the light fixtures on the wall. We got rid of the silver stage and white paint. We stained the floors and we made everything look new again. Well, you're going to see us evolve in a very dramatic way in even our legacy galleries. I mean, it's going to look like an entirely new company in Q3. And even some of our newest galleries are going to transform pretty dramatically. Even New York right now where one is been repainted and --

In the progress there and we’ll have contemporary there by end of June.

So by end of June, you'll see contemporary on the first floor of New York. Yes, I think, you've already finished the first floor in New York. But we kind of have a little strategy inside the company to kind of get the grade out, but not entirely just a grade out, but you don't see a lot of grades in contemporary, right? So this is kind of like, to me, 2009, 2010, 2011, when we really transformed the entire company and the entire business. It is like one of those massively transformational times. So you're just going to see the brand, not evolve but it will be kind of a huge evolution revolution by the second half of the year. And so, I'd say, Q3, you'll really understand the demand. Q4 contemporary will start to impact our revenues, because as we ramp and when we're shipping, it will be smaller stuff, but it will start to impact Q4. And by next year, contemporary will be a force in our industry, not just in RH, in our industry, a transformational force. And then turning to RH England, and I won't be as long with England, but it is our first. Internally, I might be a little excited about contemporary. But RH England is -- if I think about it, is way bit more than a gallery, right? It's really opening a country and in many ways, the continent. And I think, the way we're opening in this truly inspiring magical way, I mean, no one's ever opened a retail store in 17th century, 73 acre state in the English countryside. And while some people will say, "well, gosh, how do you know it will work? I don't know. We have a pretty good history with these things that have never been done before. So -- and if anybody is on the West Coast go see RH San Francisco, because nobody thought we should have done that one either out in a part of San Francisco nobody ever ventured into – and I think we've begun the transformation of the entire waterfront. And we signed that lease before Chase Stadium was ever – anybody knew who was going to be built. And we just knew that we thought we could redefine that part of San Francisco do something extraordinary and that people would come. And I'd say RH San Francisco today is the most extraordinary gallery we have in the company. The most inspiring one and has an incredible new hospitality concept, our new Live Fire restaurant. We love it. I mean like – and so far, I think the reviews on it or -- we have 4.5, 4.8 on Yelp and other things, it's a whole new level for the brand from a hospitality point of view. In new wine bars, so on and so forth. But England is like nothing the world has ever seen. And it's a multi-dimensional experience we have three full hospitality concepts, two minor hospitality experiences on the property – of the three major ones, two will open when we open the third restaurant takes a little longer. When you're dealing with this building, because it's built on 2016, 2015 and so it's an important building. It seemed a Grade-I Heritage building in England. And just to put it in perspective, Buckingham Palace is a Grade-I listed building. So when you try to do anything in a Grade-I listed building, you almost need the queen to sign-off on it. So it's been going a little slower than normal and also because there is COVID and nobody was working or everybody wanted to do things on Zoom. And by the way, the companies they want to run their business on Zoom in the future. Good luck with that. I think that Elon Musk send that no doubt. Like yeah, you're just going to phone it in like anybody who thinks the world worked better over the last two years, those are people that just don't want to work. Those are the kind of people that you're paying to breathe in your company. Yes. So – we're excited that the world going to get back is going to help us get things done. So – but RH England, when we open it, I think it's going to create a huge conversation. What will they the demand be like right away? I don't know. We're excited about it – and things we tend to get excited about other people get excited about. We know a lot of people in England and in London are talking about it. We think now we just got the approvals for the last things we wanted to do, we think we'll get it kind of wrapped up now kind of late August, and then we need about two to three weeks to kind of about three weeks to kind of set a gallery like that, maybe a little longer because of the two hospitality concepts. But we'll have full restaurant, Orange will open, the Lows [ph] will open, which is more casual. And we have a third restaurant that we'll open, I think will open next spring, probably in open it in the winter, but probably not a good time to open out there. But it will be like – unlike anything else in the world. And I think we'll get a lot of excitement. We'll give some demand but hard to promise anything at this point. But yeah, it could be a wide range. So it's hard to say what will year one sales of RH England be. I wish we could – we were better at guessing at things like that. That one -- it's just a hard one for us. So yes, we'll see how it goes. We like to say inside our company every plan we have is some degree wrong. The question is, are we strategically right? Are we directionally right? If we're directionally right strategically right, we kind of get going and we move pretty quickly. And then we get feedback, we get real feedback and real data and then we kind of improvise the gap to overcome, adjust and try to make things extraordinary. So -- but we're excited about it. I think it's going to be the coolest store that's ever opened in the world. And that's hard to say after you just opened in San Francisco.

Thank you, Gary.

Our next question will come from the line of Steven Zaccone from Citi. Your line is open.

Great. Thanks for taking my question and I appreciate the shout out for the Italian lineage on the call. So, I wanted to ask about the guidance change for the year. So could you just comment a bit more on maybe the softening of demand you've seen as of late, you gave such great color the last time you reported. So, what are you really seeing in the business to guide 2Q revenue to be flattish and then take the second half of the year down? And I guess I'm curious, how much of it is a reduction in demand versus maybe a delay in some of these new initiatives?

And Yes. I don't know how much more color I have. I mean, the demand slowed at the beginning of the war, softened further as the next couple of months and most of the narrative, I think, is out there. I think we -- we're guiding it as we see it today. How do we -- how does this all unfold? I don't think anybody really knows right now. It's the first time anybody has seen inflation like this in 42 years, right? So I don't know if, how many people on this call were adults 42 years ago. Not a lot, right? Not adults that had a lot of wisdom, at least I like to say. So the people that really had wisdom 42 years ago are 80, 90 or 100 years old. So just not a lot of those people still highly active in decision-making roles. I guess like we have a President that at least you might have been old enough to kind of know what's going on, but it doesn't seem like they know what to do. Janet Yellen finally did come out and say I was wrong. I mean, everybody is giving her all this credit for the Mea culpa like what took so long? Like how clear did it have to be to kind of admit you were wrong, right? Like how long ago did inflation go from 2% to 4%, 4% to 7.4% and then 8.5%. And you have to ask yourself like, where is inflation really today? I've had a chance to interact a dinner down in Woodside with some really interesting small group of people from mostly North America, but also someone who runs one of the biggest companies in the world out of China. And one of the biggest venture capitalists, cryptocurrency experts, so on and so forth. And we all got to ask several questions at the end of the night before we're wrapping up, I asked, okay, no one's getting at here without saying what's going on right now. What do you think is happening? What's going on with this economy. And my sense is and it was the same way I was lucky enough to attend the Wonder Conference that Jeffrey Casterberg [ph] put on not too long ago, that had 150 people from around the world that I think a lot of people don't know exactly where we're at. I think that if you look at what's happening, you say we've got we've got really high inflation. Is it going to come down? Is it done? If you ask me to tell you what the consensus of the people I talk to business leaders and people who run big portfolios of businesses and so on and so forth, where they're venture capital or not. They say inflation is running much higher than the stated numbers and we would concur with that. We know that the Fed has to raise interest rates. We know when interest rates rise, it usually leads to a recession. It surely is not good for the housing market. Anybody thinks that rising interest rates is a good thing for the housing market hasn't been alive long enough. And so you've got rising interest rates. You have the government starting to -- they've been doing quantitative easing we're going to tighten. That's not good for the -- to the debt markets. The cost of money is just going to go way up everywhere, right? So, -- and there's a lot of things about -- did we have a multiple contractions and are we in somewhat of an earnings recession based off the highs and where did it go from here? So, none of us know. None of us have a crystal ball. We can just look at the best data that we can get our hands on and try to make the best predictions and forecasts that we can. But it's a time to remain highly -- I believe, highly flexible and it's like -- we like to say inside the company prefer piece it planned for work. And how do you prepare yourself for almost anything and everything that could happen in a market like this. And part of our strategy was to raise capital, be prepared, have our balance sheet prepared. We want to be able to protect the business model. We want to be able to capitalize in an environment that might get volatile. Look, if all of a sudden for some reason, more accurately, they figure out how to fixed inflation without raising interest rates too high, and there are some magic bullets in the economy that change things. So, we paid a little bit of interest expense. All the term loan debt we have is repayable. So, we don't spend the money -- we haven't spent any money. We've got the money, we're paying for optionality right now. So, we think our guidance is our best view of the future today, but it's a very uncertain future today. Very uncertain future. And I'd say doubly uncertain for anybody in the home business because we're on the other side of COVID, we're up against big numbers like everybody else. You've got rising interest rates. You've got -- you're coming off a super-hot kind of a couple of years in home prices and home sales. And even though there's low inventory, it doesn't matter if there's low inventory, if you have low demand. And so a lot of people moved over the last few years. I don't think that there's going to be anywhere near the amount of movement in America than there was. We went through a historic amount of movement, especially the migration from cities to suburbs, which was very good for our business and our industry, right? People may be moving from a 1,500 square foot apartment to a 3,000 square foot home, 4,000 square foot home. It needs a lot more furniture. Are they moving back? I mean, they might be. Are they buying new furniture again? I don't know. I mean -- but I don't think a lot of people are necessarily moving back. I don't think there's a whole lot of people moving. I know there's been people who have cited reports that were on Google and stuff. That's a Lending Tree report. And that was from January 11, by the way. It's not very fresh data. If you want to put your confidence in reports from January 11 that are posted on Google by LendingTree, good luck. I don't think there's going to be a lot of movement, and I don't think there's going to be as much activity. So what do you have to do in a market like that? You have to be really fresh and new. And that's what we are. I mean, we are going to be the most exciting thing in maybe the most uncertain market that we've seen in 10 or 15 years. So I like how we're positioned no matter what happens. So I hate to say I'm indifferent, but at a big picture level, I’m indifferent. Our long-term strategy is unbelievable. What we're going to do over the next several years is the world’s never seen before. And we're doing it with the best model in our industry by roughly 50%. So for people that have a long-term view, there's not a better place to park your money. For people that are generally around the short term, like, I don't know, I don't invest in our sector. There's a lot of hate if -- it's just it's going to be very uncertain, I think, for at least throughout this year, at least until the government figures out what to do with inflation and how high do interest rates have to go. If you go back in the '70s and '80s, I remember buying it -- my team will crack up, I'm going to say this, actually, I remember buying a water bed when I was in college. And I was paying -- I've got $145 water bed, and I was paying 26% interest, right? Credit cards had like 28% or 32% interest. I think by the time I paid off that water bed, it was like $1,000, right, few years later. So our interest rates -- the federal funds rate is going to go back to 20%. I don't think so. Is it going to stay under 4% or 5%? I don't think so. So I think we've got a long ways to go in raising interest rates to fight inflation. And I think you just have to be prepared for anything right now.

Great. Thanks for all the detail.

Thank you. Our next question will come from Chuck Grom from Gordon Haskett. Your line is open.

Hey. Thanks very much. One for Jack on the guide. You gave some of the important building block sales, some SG&A color by quarter, which is helpful. But it doesn't seem like you're anticipating much gross margin degradation throughout the year. Obviously, 1Q was great. Curious what gives you that comfort level, given the recent change in demand and current inventory levels.

Yes. Everything I just said, we have incredible new products coming in that I think is going to transform our market. I think we're going to be the most exciting game in town. And I think that, it's a really good time to have a membership model like we have right now. Yeah, so we have a model that allows people to get a really great value, get a discount if they become a member of our edge. And I think that's a competitive advantage right now. And so there's a Jack, if you want to go to in.

I don't know if you're asking, again, we've addressed the promotional point. That clearly is a risk factor for anyone that gets into the promotional game. So I think Gary has addressed that fully. And then it's a question of what else could be happening to gross margin? Whether it's shipping expense or occupancy cost or any other pieces, could there be – just on the guide, could there be some modest occupancy deleverage? Maybe. But it's – you just have what the moves we've made with product margin and we have visibility into those persisting and wrapping those. So I think it's just a function of the model we built.

Okay. Great. I just wanted to clarify. And then just looking back on the first quarter, you exceeded your plan by a pretty wide margin, up 11%. The plan, I think, was 7% to 8%. I'm curious how much of that was fulfilling backlogs and versus current demand trends throughout the quarter? And how do we think about backlog levels currently and over the next couple of quarters? Thanks.

Yeah. I think there's certainly some of the backlog relief that occurred in Q1 – our backlog that helped us – when you think about that $200 million in backlog again, is it 20 to 30 got addressed in Q1, and we still have a big amount of that left, but certainly, I think part of the bid, as Gary just mentioned, the biggest part of the bid is related to the backlog. So, but still more to come on that.

Yeah. But it wasn't demand. It wasn't an increase in demand that helped us.

Got it.

It was things shipped faster.

Thank you. Our next question will come from the line of Curtis Nagle from Bank of America. Your line is open.

Great. Thanks so much for taking the question. So I guess as much as you kind of parse out, just thinking about the pullback you've seen. We don't need to get any numbers or anything like the path. But just kind of curious, I guess, how broad-based it's been across your customer base by demographics, by income levels? Anything in terms of regional differences. Just kind of curious how that is parsed out or just how broad-based is this in terms of the changes in the demand you've seen?

Well, yeah, I mean, there are some small regional differences. You've got to tell us – and so – but Curtis, this is not a business where we have the winter coats and the weather is awesome. Again, the regional differences that are always occurring, and it's not somehow – again, there might be differences, but it doesn't lead you to necessarily manage or lead your business in a different way.

Yeah. Like the people in Texas and places like that are going to be really happy right now the price of oil is pretty good. You're going to have some tailwinds that they're helping some businesses in Florida, obviously, because of all the migration in Texas, it still have a lot of people settling in. And I think that those markets will be better and they're affected by oil. Oil really affects South America, and South America affects our Florida business massively and also positively affects our business in Texas. Canada will be benefited from higher oil prices. So there's always going to be some movement demographically. I think, well, the high end -- like people are -- we've had people reach out to us say, 'Oh, well, luxury is doing really well.' Like aren't you, luxury? Like don't confuse the apparel industry with the home industry, I mean it's -- they're completely different. They're completely different. I mean, how many people bought new clothes over the last two years when you weren't going anywhere? Anybody go to a wedding in the last couple of years? Anybody go to any events the last couple of years? How about dinner parties? No. Like we had a path on many store opening events, we finally opened an event in San Francisco, [indiscernible] apparel sales should rip. Our stores were closed, everybody is staying at home. I mean, people were buying Lululemon and stuff like that. That was like the national wardrobe at the high end. But now, of course, the luxury brands are going to do well. I mean, yes, they might have issues and shutdowns in China and things like that, but travel is going to risk. Luxury hotels are going to do really well. Luxury apparel is going to do really well. Luxury home, home is a completely different industry. So like it's -- you have to kind of look at it at a very specific way to understand it. But I'm surprised at how many people think, well, gosh, Hermes and Louis Vuitton and Carrie have really good numbers right now. Why are you soft? I don't -- sometimes I just want to hang up the phone. That's a bad question. So I mean, things are what they are. Like this is the data that’s in the market, is really clear. It's not really good for our industry right now. Yes, now do -- maybe is our demand going to look softer than others over a period of time? Yes. Again, we introduced no new products for two years. In the first quarter, that became three years of no new products. Until now, Contemporary launch. So yes, maybe we're giving up some share because we've had no newness. I know we're giving up some share because we're not promoting. And it's evident. People that are saying, oh, we're not going back to site-wide promotions. Okay. Got it, but you still sent me 34 sale e-mails last month. Sometimes multiple a day. So -- like I think you can see who's going to promote, who's not going to promote based on the gross margin line. It's -- I've never seen a long-term strategy that works very well where you are trying to promote your business and then you might be able to cover the incremental cost with the extra volume. You can't do that forever. It usually becomes a downward spiral. Nobody has voted themselves to greatness except for discounters. If you're trying to build great long-term brands, there's decisions. Great long-term, high-end brand, let alone a luxury brand. Again, we're in a path no one's ever tried to take. No one has tried to climb this mountain before. So, our strategies are going to be all different than everybody else. We're going to make decisions that are different than everybody else. I don't really care if we were softer than everybody else in Q1 and part of Q2. I got it. I had three years of no newness. Newness per year, generally like five points to our business maybe more. So, you can argue, well, in the first quarter, over -- if you compound it, it's 15 to 20 points, right? So, we haven't had any newness in three years. That changes right now.

Understood. Thanks for the extrapolation on that. Just a really quick one to you. I just want to make sure I got the time on rate. In terms of the -- I know HARC opening, it sounds like that's going to be fall. I wasn't quite sure when you're expecting that. Is that correct?

Yes, our construction team, based on the fact that we just -- last week, we got our final approvals like -- I mean, it's been unbelievable trying to get simple approvals. But then again, it's 16th century Grade 1 heritage building out in the English countryside, not a lot of people didn't want to make a site visit instead of somewhat benefit [ph]. So, I had [indiscernible]. I feel bad, get on them pretty tough, then I'm like, okay, I got it. I understand what they're dealing with. So, it looks like we'll be done with the project late August and we'll need about three weeks to put it all together. So, I'd say early mid-September. We'll probably -- Stefan is here, and he's nodding his head. I don't necessarily trust that either. But no, I think we should -- we'll definitely be open in September -- I think, sometime in September.

Do you have time to be there in England. So, hopefully, the timing works out in terms of weather. Anyway--

Say that again?

September is usually a great time in terms of weather in England. So, hopefully, that lines up to you. And good luck and thanks for answering the question.

Yes, we're going to. Rain or shine, we're opening. It's been too long. Thank you.

Our next question will come from the line of Max Rakhlenko from Cowen. Your line is open.

Great. Thanks a lot guys. So, as you continue to count the luxury mountain, I guess, how do you think about who your core shopper is today, whether it's household income or net worth? Just because it does seem like your shopper may be evolving in real-time here, especially once you get going with Contemporary. So, that's the first one.

We don't think about them any differently than we've been thinking about them as we climb the luxury mountain, I say, I tell everyone -- I'm trying to tell everyone, maybe I haven't said this public in the call, but we are both a share giver right now, and we're a share taker, if you think about our client, right? So, as we climb the mountain, we are kind of giving share to people below us because we're moving this brand up. So, we're constantly raising the level of quality, raising the level of design, and building a more desirable luxury product and experience. So -- and by the way, that's no different than the last 20 years, right? So we've been a share giver. Like, when I get here 22 years ago, the best-selling sofa was the $9.99 Chanel sofa. I forgot what it's called, it was that green ugly Chanel sofa, best-selling one in the company. So we don't have a Chanel sofa. Again, any sofa that’s $9.99 anymore, right? But again, it's -- so we're constantly giving share, leaving share behind. And what we're doing is, we're taking share at the higher end of the market. And the key is the arbitrage, a positive arbitrage, right? A lot of times it is. Sometimes you might be a little wrong. Sometimes you may not take as much share as you gave up. But you have to be committed to the client, right? It's like trying to climb Everest. You might get to a spot where you get stuck, right? The weather is not good. You made a bad decision. You went to a park, you slipped down a bit, you went down your rope and you got to kind of go back up. It's not a stroll in the park, trying to do what we're doing. This is not a stroll in the park. This is a climb up a mountain that nobody has made before. Nobody’s taking a business like ours, at we are selling. I mean, I think the number one item in the company when I joined was a little cardboard -- piece of cardboard, sold for $2, and it was called Auto Bingo, okay? One of the next best-selling items was a back scratcher, okay? The item after that was a foot duvet. You guys remember the foot duvets? We used to have mountains of them, right? We had to sell them back then, because they had not go bankrupt. Like, we can go on and on. You want a pocket hand warmer, you got to go somewhere else. We don't sell them anymore. I’d go on and on and on. High demand dog toys, so on and so forth. So we'll be speaking the same way about some of the goods we sell today. I'd say, a-third to half of our assortment won't be here in the next three to five years. So -- and probably the bottom third of the assortment will evolve over the next 24 months, I’d say, yes, 24 to 36 months. So all of that, you say, well, what happens? Do all the customers that could afford that level of quality and design? Can they all afford the next level of quality design? Of course not. But we're taking share at the high end, and the people at the high end spend exponentially more in the home. They have multiple homes, they spend more in the furnishings for those homes and it's a completely different market. So the way to think about our market, if you thought about a pyramid, like people usually look at a pyramid to say a market and that’s okay, the 1% up here, and this now -- there's not as many people there, there's more people down here in the middle. Well, the way to think about the spending is, you have to kind of turn that pyramid upside down and lay it over the typical pyramid. So if you look at the top 1% to top 0.5%, the higher up you go, the spending is exponential on the home. So that line is the widest, is that, that's at the very top. So we're going to go to the top. And how much gets left behind? We'll figure it out as we go. We'll figure out how to optimize it. But it's worked for other luxury brands in other categories. It just hasn't been done in our category, right? I mean, there's people have, I can argue, being the Italian kind of luxury sofas, they don't really sell anything else, a couple of light, things. There's no real dominant global luxury brands doing what we're doing. And no one has started where we started and tried to get there. So it's kind of unseen before. So yeah, but – and again, we like to say, leaders have to make others uncomfortable. That's what we do. So we're going to make you guys uncomfortable, we're going to make ourselves uncomfortable, we're going to make some of our customers uncomfortable, unfortunately. But we're going to excite a lot of people, and we're going to create a lot of extraordinary things and we believe we're going to create extraordinary value.

Got it. That's very helpful. And then, Gary, I think previously when you were talking about the conversion of, a, legacy gallery to a design gallery, I think you used to say that within like a 12 to 18 month horizon, the store revenues double and then e-comm sees a little bit of a lift as well. So just curious, is that still the framework that we should think about, or I think about it, I don't know, six months or a year ago, you said that the restaurants are going to do better. So just curious how we should think about the long-term growth algorithm as far as the store openings go.

Yeah, I'd say directionally, it's about the same. The base gets bigger, so the double gets harder, right, when you're on a higher volume. If you think about it, when we started this journey, our average –our average store volume in the company, I think, was $2.1 million in our old galleries. And like, for instance, in – let's just take Marin. Some of you have been at here to centers, you've seen Marin, our legacy Marin gallery when I got here was $2.5 million. When we closed it, it was what, $18 million, $20 million, somewhere around there. It was doing about $20 million. So if you think when we started doing these big stores, our average volumes were probably $8 million to $10 million, then they went to $12 million, like maybe $8 million, our average legacy gallery today is probably $15 million. And so the base has gotten bigger, so that the double gets harder. Actually, when we started, our average volume was 7.

That's right.

But we have, in our average legacy galleries we have an average volume of 15. But everywhere, we open a new galleries, especially now that we have the restaurants and the incremental traffic it brings and so on and so forth, we're doubling. So if we have a $15 million gallery, it generally turns into a $30 million gallery. $20 million gallery turns into a $40 million gallery roughly. So – and like Marin, I think, is what we like trailing 12 or trend to $50 million, something like that. So Marin went from $20 million to $50 million.

With the restaurant.

With the restaurant, yeah. I'm talking all inclusive, yeah.

Thank you. Our next question will come from the line of Jonathan Matuszewski from Jefferies. Your line is open.

Great. Thanks for taking my question. First one, Gary, you've mentioned in the past RH Modern price points at launch were significantly above the levels of existing at the time, we can flip through the Source Book page by page, but can you help frame aggregate RH contemporary pricing relative to some of your other assortments today? Thanks so much.

Sure. Sure. Yes. When we launched Modern, it was on average, 50% higher price points than Interiors. And Contemporary is about 30% to 35% higher than the current assortment. Yes, some things might be 50% higher, some things might be 20% higher. But on an average, we're about 35% higher.

That's helpful. And then just a quick follow-up. On the last call, you indicated the Palo Alto gallery make it push to 1Q of next year. Is that looking more likely these days? Is that kind of taken out of the new annual guide for revenue, or just any clarification there?

We haven't. We still believe it will be open in the fourth quarter, but we are using that to kind of evolve the prototype, right? So we're -- it's going to have a new look, a new feel and there's some new things that we're doing there. So, it means it opens a quarter later, it might. But today, we feel pretty good about Q4. So, we'll keep you updated.

Thanks so much. Best of luck.

Thank you.

Our next question will come from the line of Brad Thomas from KeyBanc Capital. Your line is open.

Hi, good afternoon. Thanks for taking my question. I was hoping to just talk a little more about the Source Books and just advertising and promotions in general. And Gary, I know that you all don't do marketing or advertising in a traditional way. But I guess I was just curious if you're thinking as you get the Source Books out, how you're thinking about page count and doing big books like you always do versus maybe supplementing with some smaller books, particularly with the new Contemporary product coming out? And then perhaps if you're considering doing more with digital advertising, again, with the Contemporary line and with the World of RH website overhaul? Thanks.

Yes. We're considering all of the above. So everything you're talking about. So, as we start to ramp back up whether it's the size of the book, the depth of the mailing, I would say, we were so excited about Contemporary, we expanded the mailing more aggressively. When it relates to size of books, generally, just directionally, when you add more pages to a book, your cost leverages a lot. It's a lot less for incremental pages. And generally larger books are more productive than smaller books. You're throwing out a wider net. So, until that math says differently, we'd like to be in the range of 300 to 500 pages. I mean, some of our books we've got to 700 pages. They become a little difficult get into all the mailboxes and stuff. But the numbers still kind of tell us what to do there, right? We've got just a lot of data. But it's clear as the world keeps evolving, and we get better devices and we have more mobility with devices, print will become less and less important over time. And things will evolve to become more digitally intuitive. That's why when you look at the World of RH website, like the first part of the launch is just kind of what I -- the first layer, right, of what you see and how you might explore our brand and what our brand is all about in what is it, mid-July, we launched Part 2 of the World of RH.

Yes, mid to end.

So, mid to end of July, the next transformative part, the whole back-end changes. And so all the product pages, the way you shop, the way you--

Experience the functionality--

All the functionality and customer experience changes massively. I think, together, when you see these two parts of the World of RH all come together, it's transformative, it's like no other website in the world. And so right now, you're just seeing kind of better word marketing layer of the brand. And because before you go to our brand and you might just see a light fixture on the front page, you need things like, well, are they a lighting company or who knows what you see? It's like when you go -- when you go to the web and companies are still promotional, and it says, warehouse sale or bedding sale, you think that's all they sell. Because remember, the web is shrinking, you see, you can't see beyond the screen. It's very different when you have a 3-dimensional store. You can see the size of the store. You can tell this store is bigger, must get more than another store. You can walk in the store, and in seconds and minutes, you can figure out what they do and what they sell. Website is very different. Like it was so important for us to get the first part of the World of RH done before we launch internationally, right? Because we don't want people to just like who are they on our website, and you see some product page on the front, whatever we're showing. A lighting collection, a sofa collection, whatnot. Now, you get a sense for a much bigger idea, a much bigger kind of business, a much bigger kind of brand. And if you look at again, if you click on it, it goes through the dream, design, travel, time and experience the World of RH. And then you see the products, places, services and spaces. And if you click through any of those click-through our spaces, but places click through our products, click through our services, you get a sense of really what we do very quickly and who we are very quickly. But it's the engine of this website changes and the customer experience changes as you get into it massively mid to end of July. So, -- and I think that's going to -- it's going to make a big, big difference, just as customers discover us what they get to know. But you'll see, we're experimenting with some digital advertising. We're experimenting with some places we think. And as the world keeps changing, we're watching consumer behavior. We're looking at where we might invest, we're always trying things. So, you'll see us continue to kind of evolve our approach of getting -- what we say, getting our truth out there, getting our work out into the world for the right people to see it. So, am I going to do a Twitter account? Everybody tells me I got a Tweet. I'll have a lot of followers, I don't want to do that. I don't want to have to kind of respond to everybody. I don't know how Elon Musk keeps up with it for God sake. The guy is are incredible. You must -- I think I don't sleep a lot. I think he might never sleep. It's really incredible. But we believe, even though we've said this before, even though we don't have an Instagram account and we don't have a Pinterest account and a Twitter account. We're still the most in-brand of our kind in the world and Instagram brand of our kind of the world and tweeted brand of our kind in the world. And we are, because we do really incredible work, and we build really incredible experiences on this planet for people to go to and experience, talk about, to see. And while we don't sit there and say, 'oh, let's create an Instagram space. Let’s -- like this will be great for Instagram.' We just do incredible design and architecture, and the world is not full of that. They don't build things like they used to anymore. And, yes, there's not a lot of great buildings. There's not a lot of really extraordinary design that's open to the public. And we are. And therefore, people are excited to take their picture there. They're excited to tweet about it, to Instagram about it. They're excited about our product. I wouldn't be surprised if the reaction on Pinterest and the number of pins we're going to get in contemporary is going to probably go like wildfire. There's really nothing like it.

Very helpful. Thanks, Gary

Thank you, Brad.

Thank you. Our next question will come from the line of Seth Basham from Wedbush. Your line is open.

Thanks a lot and good afternoon. Gary, if you're successful in plumbing the luxury amount in your business and your customer profile, will be a lot different in five years than it today. But if the arbitrage between taking share at the highest end and shedding share below you is increasingly negative for the next 12 months, even as you elevate your assortment and continue to raise prices, what's the contingency plan? What's the plan B?

I don't know if that's not going to happen for 12 months. Again, we're not making 12 months decision. Not a 12-month strategy. So I think we've learned a lot. We'll adjust and so and so forth, but there's going to be years we take more and years that maybe we take less. So you look back to the transformations we've made over the course of our history here, sometimes there's some short-term pain for long-term gain. You don't know exactly what that looks like until you get there. But you get there and you work through it. You don't go backwards. You don't start going down the mountain when your goal is to go up the mountain, figure out how to get there. And, otherwise, you never get there. So we discuss in this company. It's not what we say; it's what we do that defines us. So we will get to the top of the mountain. Believe me, we will get there. We know -- we can see what it looks like. We have enough data. There's enough evidence to say that if we get there, we will create enormous value. And this will be a very, very large company. Over the next 12 months, I don't know, like, it cost us 5 points or 10 points. I'm not selling my stock. So there's a plan A.

Plan A. Let’s hope we’re in A plan, it pans out and it’s inclusive here.

The Plan A.

Thank you, Gary.

Operator, we’re ready for the next question.

We probably take one or two.

Our next question will come from the line of Chris Horvers from JPMorgan. Your line is open.

Thanks and good evening. So I had a couple of follow-up questions. First on Chuck's question earlier, on the 1% to 3% revenue down guide for the up a bit? And does that suggest you're on the demand side, you're expecting mid-single-digit decline?

Supply chain is better. I suppose there's an opportunity to have a better revenue outcome. I mean, this is our latest view of what we're seeing with supply chain and the lead times and continued delays, but also the improvement in delays. Good opportunity there, but we'll see.

Got it. And then following up on the advertising question. A couple of years…

Demand.

Say again?

We're not commenting on demand. So I didn’t at that point.

Okay. And then on the – following up on the advertising question. So last year, you had spent $40 million in advertising. A few years ago, you spent $100 million. Can you maybe bracket how you're thinking about that to any extent quantitatively, but just maybe even in terms of like how many books you think you will spend – send out across the different brands?

Chris, look, the $40 million reflected, essentially no mailing, but an outdoor book and some reprints. And so – and at peak, I think two years ago, we spent $108 million, and that reflected an outdoor book, spring and fall books and reprint. So this year is more like that. I don't, again, we're not guiding that advertising. I don't think it's back to that level, frankly, but it's certainly on the higher end of the spectrum just based on our current Source Books distribution platform.

Yeah, it's a meaningful increase. It's – we're more than doubling the $40 million spend.

Yeah. And that's in our guidance actually.

Yeah, that's in our guidance.

Thank you. Our next question comes from the line of Michael Lasser from UBS. Your line is open.

Good evening. Gary, how big do you think the market that you're going after is in the United States. If we say total home furnishings is $200 billion, the higher end of the market, top 10%, top 20%, that's a $20 billion to $40 billion market. Are you going after the top 1%, top 2%? That's the first part of the question. And the second part is if we assume that you're trading some sales for margin right now, is there a duration or a level of sales if it were to fall to that you would have to reconsider that strategy and start to engage in additional demand creation activities?

Well, first, you're saying the top 10% is $20 billion to $40 billion, because you're just running a straight line there, right? So you're not assuming...

Yeah.

Yeah, well, that's not the way the home market is, right? I just gave an example, you'd have to kind of take that pyramid and flip it upside down. The spending on the home at the high end of the market is exponential, right? It's no different than the distribution of wealth, right? So you don't have 10% of the people. You don't have 10% of the wealth in the world, right.

Yes. I understand

Look at the wealth distribution, think about how that affects the home market. Think about how many homes to people at the top half. Think about how much those homes cost. Think about how big they are, think about how much they'll spend for sofa versus someone down 10%, 20% lower. I guess the numbers are massively different than what you're thinking, massively different. Yes. I start there. The top of the mountain is like, it's like thinking about where is the gold in the mountain. It's -- they're really -- all the gold, it's kind of concentrated at the top. So that's why we're trying to get to the top of the mountain that's just say we had a nice climb. That's where the rewards are. And so, it will be worth whatever kind of short-term pain we've got to take to get there. And it's no different than the past we've been on. We've been doing this for a long time now. It just gets a little harder to get higher. But the decision-making and the criteria is all kind of the same. And in every -- several years, you're going to make a big pivot and big moves. And so COVID created that opportunity for us to kind of look at things again and make different investments. And so, is there a sales decline that would -- you reconsider additional demand creation? Not within a certain period, right? Like if we make some decisions that we think, look, we ran up this part of the mountain and it's slippery up here. There's too much ice. We've got to slow down. We've got to get some different gear. We need more ropes or whatnot. We'll obviously make small modifications as we go, but nothing is going to get us to reconsider where we're going. Nothing. And we're smart enough to figure it out. We may not make all the right decisions in the moment. But we are really fast to improvise and change our mind. So, we're not vetted to anything, but our vision and values and beliefs here. And so -- but we believe this is the right strategy, the right vision to have for the company. And we can figure it out. We figured out how to get to where we are today. The hardest part of what we've done is -- I mean it's in the past like try not to go bankrupt when you have no capital not making any money, you got rid of all this crap, don't -- barely can pay your rent, like -- we live at $1.13 billion of trailing 12-month EBITDA, I used to have $40 million to $50 million negative. Very big people that lend us now people want to lend us $2.5 billion. like we have all -- we're way better resource, but that doesn't mean were any less determined that we're any more lazy. It's not like we're not having conversations with this company on, are we going to return to work? Like, oh, people are going to do a better job working at home. -- like it's not the culture we have here. Those kind of people, they'd still be at the bottom of the mountain, maybe they get up to the first, third and have a little bit of a view, and then they camp out there. Yes, we're going to try to do something that the world's never seen that no one's ever done. As we say we have to sink until it hurts, until we can see what others can't see so we can do what others can't do. We don't have it all figured out, but I believe we're directionally right. We are strategically right and we're going to create massive value. And we're just -- it's not easy, though. So, there are no straight lines in business unless you decide -- unless you fall off the edge, and you go straight down. But when you're trying to climb and build something, it's no straight lines, we're going to get some things right, we're going to get some things wrong. We're going to improvise, we're going to adapt, we're going to overcome. It's just who we are and kind of what we do.

Thank you very much and good luck.

Thank you.

Thank you. And that's all the time we have for Q&A today. I'll turn the call over to Gary Friedman for any closing remarks.

Great. Well, thank you, everyone, for your time and we want to thank team RH for doing such an extraordinary job, not over these past few years of pandemic, but the work that is now bearing fruit and coming out of this pandemic, I think, is transformational, and I just couldn't be more proud of all the leaders on this leadership team and all the people here at our center of innovation and headquarters across the country throughout our supply chain. The level of kind of invention and innovation in this company is an all-time high. Our culture continues to get stronger. And I just could not be more proud of the work we're doing. And no matter whatever anybody does to our share price short-term, we will reach the top of the mountain, make no mistake about that. So, thank you, everyone.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.