Allison Malkin IR, ICR
Gary Friedman Chairman and CEO
Jack Preston CFO
Chuck Grom Gordon Haskett
Adrienne Yih Barclays
Steven Forbes Guggenheim Securities
Tami Zakaria JP Morgan
Michael Lasser UBS
Steven Zaccone Citi Research
Anthony Chukumba Loop Capital Markets
Curtis Nagle BofA Securities
Max Rakhlenko Cowen and Company
David Bellinger Wolfe Research
Cristina Fernández Telsey Advisory
Bradley Thomas KeyBanc Capital
Seth Basham Wedbush Securities
Zachary Fadem Wells Fargo
Call transcript

Ladies and gentlemen, thank you for standing by, and welcome to the RH First Quarter Fiscal 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Allison Malkin of ICR. Thank you. Please go ahead ma’am.

Allison Malkin

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2021 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 With that, I’ll turn the call over to Gary.

Gary Friedman

Great. Thank you, everyone.

We’re going to start with an overview of our shareholder letter, which highlights our results and outlook. And then, we’ll open the call to questions. To our People, Partners and Shareholders: Fiscal 2021 is off to a strong start, with revenues up 78% in the first quarter versus down 19% a year ago. Total Company demand increased 101% in Q1 and RH Core demand increased 109%, the strongest demand trends in our industry.

We continue to set a new standard for financial performance among home furnishings retailers with adjusted operating margin increasing 1,260 basis points in the first quarter to 22.6% versus 10% a year ago. Adjusted net income increased 375% and adjusted diluted earnings per share increased 285% to $4.89 per share versus $1.27 last year. We generated $228 million of adjusted EBITDA in the quarter and $136 million of free cash flow. Q1 ended with total net debt of $382 million and trailing 12 months adjusted EBITDA of $896 million.

Our expectation is to be net debt free by the end of this fiscal year. Increase in Fiscal 2021 Outlook: Based on current business trends, we are raising our outlook for revenue growth in fiscal 2021 to a range of 25% to 30% versus our prior outlook of 15% to 20%. We now expect adjusted operating margin in the range of 23.5% to 24.3%, an increase of 170 to 250 basis points versus our prior outlook of 100 to 200 basis points, with ROIC in excess of 60%.

As it relates to the second quarter, we expect revenue growth in the range of 35% to 37% and adjusted operating margin in the range of 25.9% to 26.1%.

While fiscal 2021 will surely be a tale of two halves, there are many data points that lead us to feel optimistic that our strong performance will continue through the second half of 2021 with growth accelerating in fiscal 2022 and beyond. These include a strong housing and renovation market, both with pent up demand and a long tail, a record stock market, low interest rates and the reopening of several large parts of our economy.

Additionally, the unmasking of the general public could lead to a Roaring Twenties type of consumer exuberance. Town & Country captured that feeling perfectly on the recent cover of their magazine, titled, “Remember Fun? Get Ready for the Comeback!” Combine that with the largest new product introduction cycle in our history beginning this fall, and the launch of RH International next year, and fun it could be.

You should also rest assured that we have pressure tested our business assumptions and risks, and are confident in our ability to maintain an adjusted operating margin in excess of 20% in just about any economic downside scenario we can envision. The Emergence of RH as a Luxury Brand Generating Luxury Margins: We have spent decades building a brand and business model that generates industry leading profitability and return on invested capital, and believe, like Bernard Arnault, “Luxury goods are the only area it is possible to make luxury margins.” With 21.8% adjusted operating margin in fiscal 2020, RH has eclipsed the operating margin of LVMH, and we now have a clear line of sight to 25%-plus adjusted operating margin over the next several years.

As it relates to our business model, what is often overlooked is the simplicity and low risk nature of what we have built. I thought it would be helpful to highlight some of the key attributes: No Seasonal Inventory: We don’t offer seasonal categories like Valentine’s Day, Easter, Halloween, Thanksgiving or Christmas. Nor do we carry collections or color palettes tied to spring, summer, fall or winter like many home furnishings or home improvement retailers. We spent years eliminating those categories to avoid seasonal markdowns, enabling us to have a significantly higher margin business. Limited Fashion Risk: Our business is not driven by the fashion cycles found in retail models that require frequent discounting. The major trends that drive our business are tied to architecture and the dead. Architectural trends tend to change over decades not years.

As an example, many point to the 1997 opening of the Guggenheim Museum in Bilbao, Spain by legendary architect Frank Gehry, as the beginning of the recent modern movement. We launched RH Modern almost two decades later in the fall of 2015, when a critical mass of modern homes and condominiums was reached, establishing a sizable new market.

As it relates to the dead, generations pass away and their belongings move through estate sales, which feed the antique markets, which drive the high-end interior design market, which influences the high-end reproduction market, and the trends continue to flow downstream.

If you want to know where the Mid-Century Modern trend came from, do the math or visit a cemetery. Membership: Moving from a promotional to a membership model, as we did in 2016, simplified and streamlined our business, eliminating the chaos and costs associated with a constantly changing customer proposition. Membership also deepened our relationship with our customers as the majority use our interior designers to furnish their homes. This evolved our business from selling products to selling spaces, driving higher average orders and lower customer acquisition costs as RH has become their top of mind choice for luxury home furnishings. Luxury Positioning: Luxury brands have proven to be less susceptible to economic downturns as their customers may temporarily pause their spending but do not lose the ability to spend.

Additionally, investing in the home grows exponentially as customers accumulate wealth, acquiring more homes, which drives higher sales, resulting in lower advertising costs, and a more profitable operating model. A Compelling Vision for The Future: We enter this new decade with a compelling vision for the future, a team passionate about bringing that vision to life, and the strongest brand and business model in our industry. We plan to launch an unimaginable amount of innovative new strategies designed to further elevate and expand the RH brand.

As I did in my recent annual shareholders’ letter, I will outline the strategic separation we’ve created and the strategies we are pursuing as we continue our quest to become one of the most admired brands in the world. Product Elevation: We have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world.

Our products are presented across multiple collections, categories, and channels that we control, and their desirability and exclusivity has enabled us to achieve industry leading revenues and margins.

Our customers know them as RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Rugs, RH Lighting, RH Linens, RH Baby & Child, RH Teen and Waterworks.

Our strategy to elevate the design and quality of our product will continue as we introduced RH Contemporary in 2021 with a 400 page Source Book, dedicated website, national ad campaign, and a freestanding RH Contemporary Gallery in the San Francisco Design District.

We also have plans to introduce RH Couture Upholstery, RH Bespoke Furniture and RH Color over the next several years. Gallery Transformation: Our ability to transform our legacy stores into multi-dimensional design galleries that double our retail revenue and profitability in every market will enable the RH brand to reach $5 billion to $6 billion in revenues with mid-20s adjusted operating margin in North America. These inspiring and disruptive physical experiences render our products more valuable while creating strategic separation and unmatched brand awareness, enabling us to gain significant market share at lower advertising costs. This presents a conundrum for our competition who are closing or downsizing their stores while we build the largest specialty stores in the history of our industry. We believe our galleries are proving to be a huge competitive advantage enabling RH to acquire customers at lower fixed costs versus variable digital advertising costs that can change daily for store-less or store-closing brands. All you need to do is walk a mall to notice most retail stores are archaic windowless boxes that lack any sense of humanity. There’s generally no fresh air or natural light, plants die in most retail stores and they can’t be a good environment for humans either. That’s why we don’t build retail stores, we create inspiring spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality. Spaces that are filled with fresh air and natural light, with garden courtyards, rooftop parks, restaurants and wine bars. Spaces that activate all of the senses, and spaces that cannot be replicated online. RH Dallas, which opened in May of this year is off to a tremendous start with our rooftop restaurant booked until August.

Our plan is to open three additional design galleries in 2021 including RH San Francisco, RH Oak Brook, RH Jacksonville, a freestanding RH Contemporary Gallery opening in San Francisco, plus our first RH Guesthouse, opening in New York this fall. Brand Elevation: We are beginning to evolve the brand beyond curating and selling product, to conceptualizing and selling spaces, by building an ecosystem of products, services, places and spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, taste and place maker.

Our Products are the core of our ecosystem and include RH Interiors, RH Contemporary, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Rugs, RH Lighting, RH Linens, RH Baby & Child, RH Teen and Waterworks.

Our Services, RH Interior Design, RH Contract, RH Trade and RH In-Your-Home render our product more valuable while extending the brand into adjacent businesses that amplify the core.

As an example, we believe that RH Interior Design has become the largest residential design firm in North America and has facilitated our transition from selling products to selling spaces. RH Trade serves external interior designers and design firms, partnering on projects and acting as a support organization managing the logistics of large, complex designs. RH Contract serves the Hospitality and Commercial markets with design and logistics support for large scale, volume projects. RH In-Your-Home, elevates the customer experience with furniture ambassadors managing every detail of your delivery, extending the selling experience into the home while creating a memorable and lasting impression.

We are also exploring the opportunity to expand our services to include RH Architecture and RH Landscape Architecture as we receive constant inquiries regarding the design of our galleries, garden courtyards and rooftop parks.

Our Places include RH Galleries, designed to elevate and render our product and brand more valuable, RH Restaurants, which further elevate the customer experience while driving high quality, incremental traffic to our galleries, RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion hotel industry, and RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services that will deliver taste and time value to wealthy and affluent, time-starved customers.

Our spaces, conceptualized to inspire and elevate the brand, will initially include Plane & Yacht Design and Charter, where customers can access our design experience, view our work online, and charter RH1 & RH2, our private planes, and RH3, our luxury yacht, which is available in the Mediterranean and Caribbean where the wealthy and affluent visit and vacation.

We will also be unveiling our first RH Bath House & Spa as part of our Aspen Guesthouse scheduled to open in the second half of 2022, as well as other exciting spaces we will be revealing over the next several years. We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world. Digital Reimagination: Our strategy is to digitally reimagine the RH brand and business model both internally and externally. Internally regarding how we innovate, curate, and integrate all the dynamic aspects of our brand, and externally as we introduce our customers to The World of RH, a new digital portal presenting our products, services, places and spaces. This multi-year effort began internally last year with the reimagination of our center of innovation & product leadership, which will incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation.

Our external efforts will begin this fall with the launch of phase one of our new digital portal, The World of RH, which will include rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable. We believe an opportunity exists to create similar strategic separation online as we have with our galleries offline, reconceptualizing what a website can and should be. Global Expansion: We believe that RH has the potential to become a $20 billion to $25 billion global brand in its current form, and possibly larger if aspects of our ecosystem become meaningful revenue streams.

Our view is the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, or brand of RH.

Our global expansion begins in the spring of 2022 with the opening of RH England, The Gallery at Aynhoe Park, a 73 acre historic estate designed in 1615 by Sir John Soane, arguably one of the most respected and celebrated architects of his time. RH England will feature The Aynhoe Architectural Library, The Aynhoe Organic Gardens, The RH Restaurant & Orangery, and The RH Champagne & Caviar Cellar among other unique experiences. Pending reopening plans for France, our goal is to open RH Paris, The Gallery on the Champs-Élysées in the fall of 2022. Customers will arrive through magnificent 18-foot gates and walk down a decomposed granite path lined with majestic hedges that lead to a garden courtyard where you encounter 18-foot brass doors that open to a six floor atrium connected by traversing brass staircases and a glass elevator. RH Paris will include a restaurant overlooking the gardens inspired by the Grand Palais, a sparkling champagne and caviar bar on the top floor, and a romantic rooftop garden where you can sip an RH Bellini while enjoying views of the Eiffel Tower. In total, we have secured five locations in Europe including London, Munich and Dusseldorf, and are in final lease negotiations for an additional five locations which will open over the next two to three years. Climbing the Luxury Mountain while Building a Brand With no Peer: Hermès, Chanel, Louis Vuitton, Gucci, Cartier, Tiffany and the rest of the finest luxury brands in the world were all born on the top of the luxury mountain. Never has a brand started at the base, as we have, and made the climb to the peak. We believe RH can be the first to make the climb, knowing very well those at the top don’t necessarily want us to. The truth is, we’re not from their neighborhood, nor invited to their parties. To make the climb, we understand our work has to be so extraordinary that it creates a forced reconsideration of our brand, requiring those at the top of the mountain to tip their hat in respect. It is not a climb for the faint of heart, requiring imagination, innovation, and a great deal of persistence and perspiration.

We have to be willing to endure short-term pain to drive long-term gain, as we did moving from a promotional to a membership model, elevating our product, transforming our stores, redesigning our operating platform, or managing the business with a bias for earnings versus revenues as we built a financial model to support long-term high-quality growth.

We also understand the strategies we are pursuing, opening the largest specialty retail experiences in our industry, while most are shrinking the size of their retail footprint or closing stores; moving from a promotional to a membership model, while others are positioning their brands around price versus product; continuing to mail inspiring source books, while many are eliminating catalogs, and, refusing to follow the herd in self-promotion on social media, instead allowing our brand to be defined by the design and quality of the products and experiences we are creating, are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry. We believe when you step back and consider: one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape and we would argue, will also prove to be equally valuable. I want to thank the people of team RH who live our values and fight for our cause. A team that is building a culture of leadership versus followship, that strives to innovate versus duplicate. A team of people with the courage to continue the climb even as the air gets thin and the odds get slim. A team of people willing to get knocked down 10 times and get back up 11 as they strive to plant the RH flag at the very peak of the luxury mountain. Carpe diem. We’ll now open the call for questions.


[Operator Instructions] Your first question comes from the line of Chuck Grom with Gordon Haskett.

Chuck Grom

Hey. Thank you. Good evening. Incredible results to the team. Gary, is there any way to size up the degree to which categories such as outdoor is supporting total sales growth, maybe the penetration of the category in 2018 versus where 2021 can end up? And are there any other categories that you believe you’re seeing outsized growth today, just exceptional results?

Gary Friedman


I think if you look at our demand trends, everything’s way up, right? So, but outdoor is one of our best performing categories. I mean, we’re the most dominant outdoor brand at the high-end in the world today and have the biggest business in the world at the high-end for outdoor by multiple.

So, you would expect that we dominate that category. Even though there’s really long lead times, and we’ve been sold out for a good part of the past year.

Chuck Grom

Great. And is there any other categories you would highlight besides outdoor?

Gary Friedman

Again, if you take the core business at 109% demand growth in Q1, they’re all way up.

So, business is strong across all categories.

Chuck Grom

Great. And then, in your shareholder letter last week, you wrote, we have to be willing to endure short-term pain to provide long-term gain. And you referred back to a lot of other growing pains in the business over the past few years. But, I was just curious, if there’s something down the road that you were referring to in terms of the future outlook?

Gary Friedman

It’s the mindset of investing with a long-term view to build one of the most admired brands in the world. And it’s not a path that most people take.

I think you’ve got -- most of the world is focused on duplication and moving a lot of small rocks, and we tend to focus on big rocks that create big value, and those sometimes take multiple years to move and to bring to life.

And so, look, I think if you look at our guidance, it would indicate, we don’t see anything in the near future that could be disruptive to our results. And today, as we think about the investment horizon over the next several years, whether it’s international or digital reimagination or product elevation or any of the big moves we’re making. They’re all implied in our outlook and our guidance. But, from time to time, there may be a significant investment we have to make that’s going to leapfrog the business further into the future, right? I mean, that’s the way we have an operating margin. It’s almost twice the next best person in our category.


We ask that everyone limit themselves to one question and one follow-up question.

Next up, we have Adrienne Yih, Barclays.

Adrienne Yih

Good afternoon.

Let me add my congratulations. Eloquent, as always, Gary. Gary, I guess, my question is about the TAM opportunity -- or actually, the $5 billion to $6 billion sales target in North America and the $20 billion to $25 billion.

You talked about it being in the Company’s current format. Can you talk about the number of galleries that supports in North America, but more importantly, the number of galleries that supports globally? And is it just focusing on the home furnishings industry with no hospitality, no B2B et cetera? So, just want to get more color there. And my follow-up will actually be when you’re opening the stores internationally, all the different cities, different countries, is there anything that you’re doing from a product market research or customization for each marketplace? And should we assume that each of those stores delivers the same sales dollar, or is every one of that is distinct? Thank you.

Gary Friedman

Hi Adrienne. That was a lot of questions in one question. I am going to -- where do you want me to start? Let’s see. The opportunity, as it relates to the $6 billion in North America, and $20 billion to $25 billion in the current format, how many galleries in North America and how many galleries internationally? It’s an interesting question. Because in North America, I think we’ve always said about 60 to 70 galleries in North America to kind of penetrate North America. And you’ve got to think about the fact that we built America -- we built North America while we’ve transformed the brand and transformed the business.

So, we had a pretty logical footprint that was in all the major markets and all the major suburbs, so on and so forth. And we basically consolidated and transformed in our opening large design galleries and replacing the former footprints. And the question is, do you need as many galleries internationally as the world continues to evolve and change, right, as consumers continue to be comfortable shopping online, not seeing products. That’s somewhat unknown I think to us. If there’s no indications today that we should have less galleries in North America, we wouldn’t penetrate the markets the way we penetrate the markets today with less galleries as we do the math.

So, even though there’s kind of a migration online, you really got to be careful in today’s world not to look at the channels independently. I really would caution any retailer who’s doing that.

I think it’s a foolish way to look at a business. Because we live in a -- we’re physical games, living in a physical world, and being able to see brands and no brands in a physical manner, being able to understand how big they are, what their assortment is, what they stand for, what the quality is like, what the taste and style, it’s like -- it’s I think critical.

And so, my sense is, is we’re building globally, might we be able to build a few less galleries? I don’t know. I don’t think so.

I think that replacing physical stores with digital advertising is a bad move. I don’t know why anybody would want to sign up for a variable cost -- variable cost structure that can change daily to market a brand, right? And so, physical stores are basically big brand building statements that are three dimensional that customers can interact with, they can touch the goods, they can interact with the brand, they can see the size and scale of things, they can understand the taste and quality and style, and all kinds of levels. And I think that it’s impossible to replace that with some kind of digital advertising or other advertising format, especially when it’s not a fixed cost format.

So, argue, while there’s migration online and stuff like that, there’s just natural migration online, even if you have a physical gallery. That doesn’t mean it. It just means once the customer knows your brand and shopping from you, they might go home and make a transaction after they’ve seen it in a physical store. The people believe they can close a lot of stores and have the same market share, I think are naïve.

So, when we look at this, we think our footprint will be similar to North America. That’s how we look at it today.

We’re studying -- I think I’ve mentioned on the last conference call, our business is basically -- breaks down 80% suburbs, 8% -- 12% second homes, and 8% kind of city, urban locations. And I believe that’ll be similar internationally.

I think we wouldn’t be wise if we said, oh, all we need is a store in the major cities in Europe. I just don’t think we capture the market share we would in North America. It’s just no different than when you’re in a country -- or in a city, you kind of know that this is better. Like for instance, if you came to Corte Madera, California, and you are at our Center of Innovation, four blocks down the street is RH Marin, it’s village at Corte Madera. There’s no luxury stores in that mall today, not one. Nordstrom’s, if you want to call it, a luxury store, I don’t call it a luxury store, is the highest brand store. And if you want to call Apple luxury, you can call -- there’s an Apple store there. But there’s not another luxury store in that entire mall. We opened up one of our big new galleries there. It’s got a restaurant, and it’s going to be massively successful. And if we probably weren’t here and didn’t have a legacy store in the mall, we wouldn’t have understood the potential in Marin County. And we would have been a lot smaller. I’m sure other luxury brands, now that we’ve built our big gallery are going to follow. Like I heard Tiffany is taking a location now and now that LVMH owns Tiffany, I think we’re going to see that change.

So, I think we’re going to be pretty similar as it relates to the products.

I think, the world is getting smaller and smaller. A lot of people say to me, oh, the houses are smaller in Europe. Not really. Yes. Are the city homes somewhat smaller? Yes, the city homes are somewhat smaller and the urban demographics of North America also. And everything we carry comes in all sizes. We sell sofas from, what, 6 feet to whatever -- however many feet you want, right? You want it 5 feet, we’ll make you 5-foot sofa.

So, our products come in all kinds of sizes.

I think we’ve got the assortment that will be appropriate for the world. And I think the world wants RH. There’s nothing like that’s out there. And I think our brand is going to translate very well.

So, I tried to answer all those questions. I don’t know if I missed anything.

Adrienne Yih

Yes you did. Thank you so much.


The next question comes from the line of Steven Forbes with Guggenheim Securities.

Steven Forbes

Good evening. Hey Gary.

Given your comments in the letter about maintaining a 20% EBIT margin in any scenario you can envision here, because I think we’re all living in the scenario land. I’m curious if you can provide some color on how you’re thinking about the potential paths of demand growth as we head into the back half? And if you can contextualize sort of the downside scenario, right, that you tested in the model, so we better understand the flexibility that you see or that sort of inherent right to the model that you have.

Gary Friedman

Sure, sure.

So, look, I think, anybody that’s not -- if it’s things that go up generally that you have no control or don’t necessarily stay up. The question is how long do they stay up? What does it look like when things evolve and return to some kind of normal? But, this isn’t a new normal. And I think it’s naïve to not really look at all the models. And look, if you were talking to me a month ago, it’s a lot more pessimistic than I am today. I’m a lot more optimistic a month later because I have more data and the organization we have -- we can see more trends and we can see what’s happening, and not just data internally and how our demand trends look and as we look ahead and what’s happened and what we think will happen. But just what’s happening in the housing market, what’s happening in the stock market, what’s happening in the remodel world, the pent up demand that exists. And if you think about people that are building homes, the homes are taking longer to build.

You can’t get the trades. People can’t get people to remodel their homes.

All of that means that they haven’t bought their furniture yet, right? We’re kind of the last stop on the journey.

So, there is this kind of pent up demand, back up. A lot of things that indicate to us when we think about our pipeline and look at our pipeline that look very good as we look out into the rest of the year, and possibly into next year. And when we get into next year, we’ve got some step-ups, right? We’re going to introduce a record amount of kind of new products beginning in the later part of the second half this year. That will mostly accelerate revenues in 2022, right? We’ll ship some of it this year, but not a lot of it.

So, as we look at it, we kind of look at the current trends, we’ll get something in the second half for new stores that we just opened, new stores we are opening. We’ll get some for new product, but really, those will set up ‘22.

So we have all of that momentum going into 2022, and then we start opening internationally. And internationally is very different than opening a new gallery in North America because most of our galleries in North America are replacement galleries. There’s just a couple that are -- like Jacksonville, you can argue if that’s new market or expanding the Florida market. We’ve only got a couple ahead of us where we’re not -- we’re not in Hawaii and we’re not Montreal. I can’t even member if there’s anything else.

We’re not...

Jack Preston

Naples maybe.

Gary Friedman

Naples. Yes, you can argue Naples probably could be incremental, but they’re not probably 100% incremental, since we’re somewhere in those countries already. But we’re not in the United Kingdom, right? We’re not in France.

We’re not in Germany.

We’re not in the Netherlands.

We’re not in Spain. I mean, on and on and on.

And so, we’re going to be opening countries, which is a very different dynamic, right? And we’re not only opening countries with a handful of galleries.

We’re opening countries with a multidimensional digital portal that people are going to have -- and the entire country is going to have access to the brand. And then, we’ll probably figure out like how do we think about selling cross-borders until we establish our presence there and delivery and stuff like that. We may be able to -- we may able to reach more of the continent. I’m sure there’s going to be customers, they are going to want to ship to Russia and the Middle East and so on and so forth. And we’ll figure out how to do those things. We won’t officially open up the continent of Europe when we open the first handful of galleries is just a bit complex from an operational point of view and would create too much upfront cost.

So, we’ll kind of learn as we go there. But that gives us a step-up.

So, when you think about that -- the downside model, which is important to look at, right? And like we’ve had it ever since we’ve been -- since we saw this uptick, we said, look, it’s -- how is this going to play out? And so, today, my view is, the rest of this year looks pretty good based on everything I can see and know right now, right? Could the stock market fall apart? I don’t know, it could. Could the housing market slow down? I don’t know, like your guess is good as mine. But I can -- my data is probably as good as yours, and vice versa.

So, we’re all kind of speculating into the future. And every plan we have is some degree wrong. The question is are we more right than wrong. And today, I believe we’re more right than wrong about the outlook we gave you, right? And we tend to be relatively conservative in our outlooks and give ourselves some room to navigate. But, I think about it this way.

As we built our models, we went back and said, what would normal have looked like, right? What would 2020, 2021 and 2022 in our long-term outlook for the Company look like. It would have looked like kind of 10% growth in 2020, not 8% because we couldn’t ship things, right? So, we didn’t really benefit from COVID last year. And that’s the point I tried to make on only 8% revenue growth, we hit operating margins of 21.8%.

So, not really a COVID leverage, like most other retailers.

We have no cash and carry product, right? We don’t -- what do you sell, 0.1% of our sales walk out of store. I don’t think we have anything that walks out of a store in a bag unless somebody really needs a towel that day.

So, we have really a direct-to-customer platform. It’s all delivered to customers’ homes. A lot of it is special order. It has longer lead times, things like that. And it’s not things that all of a sudden you can turn on a dime and say, hey, we’re up 40 and the manufacturers can start delivering at that level.

So, we had this big backlog that’s slopping over. Well, that backlog continues. They’re about the same amount, about $150 million as we look forward. Will it all catch up this year? We don’t know, it depends on how the trends look. Probably not all of it we’ll lap in this year because we’ll -- as we ship those goods, we’ll create new backlog.

So, we’re not exactly sure when it will all kind of normalize. But, if you looked at our longer term plan, we would have said, hey, normal look like up 10, up 10, up 13 to 14 in 2022 as we opened internationally, right? And we would had a bigger uptick then.

So, we kind of look at it and say, okay, well you’re up 8 instead of up 10. This year, we’re -- you know the guide. And then we kind of look at it and say, in 2022, if we were -- if we landed where our normal business would be, what would that look like roughly, right? And so -- and then, at that level, we’re saying, now let’s give back any of the COVID lift.

So, we’ve got math around what did we get, so we shouldn’t have gotten. And we take that out, which is some number, you can do the math. And then, we said, what if -- like we’re in the longest economic expansion in the history of the U.S., right, without a recession.

So, at some point, if something is going to happen, it’d be naïve and foolish to think it will never happen.

So, you got to be ready for it.

So we say, okay, let’s say there’s a economic downturn of 20% in 2022. And you take that -- and that’s a big one, right? Because that looks like 2008, 2009 where we were down about 15 or so.

So, take 20% out and so it’s taken out of COVID lift that’s taken out 20%, and we’re still at 20% operating margin, slightly above.

So, what I feel good about is that’s how good our model is, right? That’s how good our model is. And what I feel comfortable and confident about when people ask me, hey, should I buy your stock? And I tell people the same thing. I say, look, if you’re a trader, in your short term -- you just focus on short-term episodic moves, don’t buy our stock.

If you’re an investor and you have a long-term view and you’re going to hold the stock for five years or more, you’re going to make a lot of money here, and just as people did since we IPO-ed. And you guys have seen the numbers on that.

And so, there’s a lot of upside in the story. There is a -- it’s by far the best model in our industry. No one’s got anything close. It’s all a little massed because some people have a lot of COVID lift right now, and it looks like their business is better and their margins are better. They’re not promotional. Look, no one’s promotional right now. Like that’s -- Jesus, like forgot to say, how can you be promotional with the kind of demand trends and you can’t even get the inventory.

So, the good news is, it doesn’t affect us because we’re never promotional, right? So, our margins are our margins, right? So you can count on our margins being our margins. What I count on everybody else’s margins being their margins, not at all. There’s no way when the world returns to some kind of normal in the home industry, the people that used to promote are going to have to promote again. And it’s very foolish to think they’re not. I’m just happy we made the move from a promotional model to a membership model a long time ago because we don’t have to change anything.

So, our margin structure is our margin structure. The only thing you’re seeing in our margin structure that might be giving us a little lift in through this period is we have less advertising.

So, we cut back advertising. We couldn’t get the goods. But, if we were to have had the advertising expense, we would have probably done more volume. But, there’s no sense spending in the advertising and mailing books when you can’t get the inventory, right? That would have been like just burning money. Lighting the match and burn the money.

So, we decided not to launch new products, not to advertise like -- and so, my sense is when the advertising investment returns, we’ll have the inventory and we’ll get an incremental lift in the top line. And that’s another thing that we’re -- I should have read about that in the letter.

Now, I think about it. The fact is we’ve got -- we’ve pulled back in advertising.

So, when we start mailing books again, that’s also going to create momentum in the business.

So, that’s why we feel today, Steve, very confident about how we think about the rest of this year and what it looks like next year. And we feel extremely confident that if the world changed and the home industry gave back any COVID lift and you pop on top of that at a recession, and you give back another 20% of the business, we’re going to see in the 20% range, and we’re going to be able to play offense and take a lot of market share and do a lot of smart things that I don’t believe other people are going to be able to do.

Steven Forbes

That was super helpful, Gary, really appreciate that. And then just as a quick follow-up, it’s sort of hard not to get excited here about RH International.

So, just curious, as we’re -- what are we, less than a year away, right? What else needs to be done to ensure a smooth and seamless launch as you sort of prepare for this grand opening here?

Gary Friedman

Sure. All the things that you would expect. I mean, we’ve got to build the operational platform from a distribution and logistics and home delivery perspective, which we’re working on and building. We’ve got to make the inventory investments and be able to get the inventory, which we’re working on. And we couldn’t have launched this year, would have had no inventory, right? So, we had to delay everything by a year. Thank God, we did, because we wouldn’t have any goods to sell.

So, we have to have the inventory to build the inventory. And you’ll start to see that being reflected in our balance sheet as we build the inventory for international. And then, we’ve got to continue building the team. And the good news is -- what’s the latest pull, how many people from our organization want to work for us internationally?

Jack Preston

A couple of hundreds...

Gary Friedman


We have several hundred people that have already volunteered from America to go work in Europe.

So, we’ve got -- and some of them are from Europe.

So we’ve got a lot of enthusiasm about people who want to go help us open internationally. But plus, we’ve got a team that’s -- and we’ve got a leader on international. And we’re building that team. And if you came here and you’re in our center of innovation, we have giant RH International room with maps and dots and cities and numbers and volumes and populations and things we have to do and where we have to go and where do we open home delivery, where do we open this and that? So yes, we’re working on all the things you have to do. I mean, the good news is they are all the things that we do here.

So, it’s not like there’s anything really new. It’s just in some cases -- for the most part, everybody speak in English. It’s not like 50 years ago. And there’s slightly different currency, things like that. And then, the question is, how do you price the goods. And I think that the good news is, is we study it and we look at how other brands have priced their goods. There’s probably a bigger margin opportunity than we thought.

So, we feel more positive than less positive that RH International, as we begin to scale it, will actually be margin accretive, not margin dilutive.


The next question comes from the line of Tami Zakaria with JP Morgan.

Tami Zakaria

Hi. This is Tami. Thanks for taking my questions.

So, my first question is around international openings.

I think in your shareholder letter, you mentioned you’re going to open 10 locations in total over the next two to three years.

So, probably the cadence, I’m guessing, is international opens per -- two to three international opens per year over the next two, three years.

So does that mean you plan on opening an equal number of U.S. and international locations over the next couple of years? So basically, what I’m trying to understand is what is your gallery opening cadence, over the next two years, and how is the split between international and domestic.

Gary Friedman

Sure. Thanks for the question, Tami. And by the way, you’re kind of -- you had a crystal ball, I saw your note right before we announced and your projections are pretty close to our projection.

So, good job on your models. But, the gallery opening cadence in North America will remain somewhere around, I’d say, three to five or so, maybe four to six, depending on how these deals come together. And then, international, I would look at it and say we’ve got two in the first year as long, as France opens and we can get work done there.

So, Paris will either open in the fall of next year. And if for some reason, we continue to have COVID delays and we can’t get in and do the work we need to do, it could go into the spring of the following year. But beyond that, we have the other locations, some of them are much easier to open than others. They’re less complex. These first few are relatively complex, and then London is relatively complex.

Some of them are less complex where some are not quite as big a footprint, and where we have an ability to kind of test, if you will, and have some flexibility. We don’t want to be locked in everywhere in a bunch of countries where if we made a mistake, we have a permanent mistake. We don’t -- net-net on Aynhoe in England, that will be a relatively low net capital deal as we bought the property, investing some money. We’ll do a sale leaseback. We’ll have more capital in Paris, that’s a long-term lease, and then we’ll have more capital. And we’re more pregnant, if you will, in London in Mayfair where we’re kind of stringing together four buildings to make a spectacular gallery. But some of the other locations, we have shorter leases on and we’re making a much smaller capital investment, just so we can understand the markets and understand the country, still spectacular real estate and buildings. I mean, the great thing about Europe is you have all these spectacular buildings. I mean, in the United States, North America, just search for a building of stature and taste and style and great architecture. Europe is filled with them.

So, we love the buildings. We love the real estate we’re taking. We believe they’re the right locations, but we don’t know for sure.

So, we want to learn.

So, we’ve got some with shorter term leases that give us flexibility.

We’re going to invest less capital.

We’re not going to open restaurants everywhere because it’s -- that’s a bigger capital investment. And we’ll kind of test and learn and then we’ll have kind of flexibility and mobility to kind of make a bigger investment once we know those markets better.

So -- but to the consumer side, they're all going to be spectacular.

As we look at it, they're slightly smaller. Not all are going to have the restaurant investment. But we have a lot of galleries in North America that are our old legacy galleries that do big volume, are highly productive, and these are much bigger than those. These are -- I'd say some of them are more like our kind of 1.0 design galleries like Houston or even Boston, where you've got 15,000 to 25,000 square feet as opposed to 50,000 to 60, 000 square feet.


Your next question comes from the line of Michael Lasser with UBS.

Michael Lasser

Gary, it seems like what you're suggesting is RH has spent the last 20 years or so building this unique luxury brand that hasn't existed in home furnishing. It now has pricing power and should command luxury margins, which we've seen you realize in the last several years. And COVID has allowed you to accelerate that process by raising prices and getting to the margin level that's appropriate for the fitting a luxury brand in this market. Is there a case where you haven't gotten a great sense of elasticity in your core customer segment because of -- or the size of your core customer segment because of these unique conditions? And that could change on the other side of this? So that's the first part of my question. And then the second part is who is in the demographic that you've seen come in buying? What have they been coming to buy in the last couple of months to drive this level of growth?

Gary Friedman

So I'll start with the second question. It's really that -- it's kind of a core RH customer, nothing different in the demographic that's buying from us.

Just more activity, more movement, more people moving, more people moving for cities to suburbs, second homes, things like that. And then more people just refurnishing their current homes just because they've been spending so much time in their home and they couldn't really travel.

So people doing their outdoor spaces and stuff like that. And that's all continued to be strong.

As it relates to COVID speeding anything up, it really hasn't speeded anything up. Not for us. I mean, this year, it's going to give us a lift. But again, if you just go back to last year and say on 8% revenue growth, 7.7% revenue growth, we had 21.8% adjusted operating margins, right? So that's -- that was lower than we thought we be. We thought we were going to 10% to 11% growth.

And so our model is pretty clean if you look at it through 2020. And then this year, you've got -- you have some lift. Obviously, we're going to be up 25 to 30.

And so the way I'd look at it is model us out over 3 -- if you model this at kind of 10, 10 and 13, you'd kind of be directionally right, plus or minus 1 point or so here or there. And then the question is what is 2022? Is 2022 a giveback year or a flat year because the COVID cycle and the focus on the home goes back? I mean could be. We've got things that should make it a better year than that because of the fact that we haven't introduced new products, how long it’s been now? 18 months at most?

Allison Malkin

It will be 2 years in the fall.

Gary Friedman

Okay. It will be 2 years, okay, in the fall where we have introduced new products. Think about that. 2 years. No new product at RH.

So we've got quite a backup that will be introduced this fall, next spring.

Just the product pipeline for the next 18 to 24 months is a really dynamic pipeline and of new products in everything, right? In RH Interiors, RH Modern, not just RH Contemporary but interiors, modern, baby, child, teen, beach house, ski house, there's a lot of new product coming in as well as RH Couture Upholstery, RH Bespoke Furniture, RH Color, lots of things we've been working on.

So that's a big plus to us. And then we're opening up internationally, and that's a big plus, right? That's a 100% incremental, right? It's not like just transforming a gallery where it's a market that is already doing $15 million, and it's going to go to $30 million or $25 million market is going to go $50 million.

So this is not incremental markets, incremental countries and then thinking about it more as an incremental continent. Because at some point, we'll open enough galleries in Europe, and we'll have our infrastructure and home delivery figured out, and then we'll just open up the whole continent, whether we have galleries everywhere or not, we'll be able to figure that out. The big thing is why you can't rush to just open up the continent is you have to figure out the reverse logistics, right? You have to figure out, what am I going to do with the returns? Because what you don't want to do is all of a sudden like open up the country too soon, and you've got a bunch of returns in Russia or Copenhagen or places where you've got no infrastructure, no outlet infrastructure, and you've got no way to handle the goods and you'll just lose a lot of money all day along, right? So we're just trying to be prudent about how we open up these countries. At what point do we have the infrastructure in place and have figured it out. Figured out how to handle returns, how to handle the back-end logistics and how to wire that to change like what a lot of people don't know, I mean both, but I'm public, not going to say it. I mean we made in our reverse logistics outlet business, we made a -- it's about a $200 million business. We've had $100 million difference in profitability in that business over the last 4 years. $100 million, okay? We know what it looks like when you don't run that business well. And we know what it looks like when you run that business well and you figured it out in all the handling and transportation costs and everything that goes wrong there.

So we just want to kind of build a really great business and a really great model there.

So we'll go a little slower. But when you think about our model and the COVID piece, this year is going to have a little COVID lift. But if you look at the growth that will come next year, whether it slows down or not, where we're at this year? It's kind of a good place because we have other things that will balance it out.

So -- but the good news is like -- and by the way, we didn't really take any price changes increases because of COVID, right? So we just took our normal kind of price increases because we -- that's what we do.

As we -- and because we have pricing power and we're a luxury brand, we can pass through price increases in other parts of our business. And that's 1 of the advantages you have when you're in the plan in the luxury market and you have exclusive product and you control the distribution, right? So -- but I wouldn't say our business is that COVID effective except for the leverage we're to get with the big -- with a lot of the revenue that's going to hit this year.


Your next question comes from the line of Steven Zaccone with Citi Research.

Steven Zaccone

Maybe shifting to the margin side, given such strong performance here in the first quarter, is there any real change in thinking about the drivers of gross margin versus SG&A on a full year basis versus the initial guidance you provided back in March. And then I guess specific to the second half of the year, given the momentum in gross margin, is there opportunity for gross margin to continue to expand?

Gary Friedman

I don't know, Jack, do you want to take that?

Jack Preston

Steven, I don't think anything has changed with respect to what we said in the last quarter.

If you look at historically what's driven our operating income margin increases, I kind of view it as sort of 3/4 of it roughly coming up in gross margin quarter up in SG&A. And of the gross margin, the bulk of that, call it, 3/4 coming from product margin and the moves we talked about elevating design quality taking the margin of the goods up.

So that's been pretty consistent as we look at the model back 4 or 5 years, as Gary was talking about the evolution. This year, we'll have a little bit odd comparisons because of the way 2020 played out.

So obviously, with Q1 down 20% -- 19% last year, Q2 being flat and so -- and the growth rates we have now, you're going to see a little bit swings in sort of the, I guess, the margin deltas versus last year. One thing we were just looking at -- or that I like to look at is in the same way that people look at 2-year growth rates, I would look at margin changes on a 2-year basis as well versus '19. And that sort of formula that I alluded to earlier holds ongoing, and I would expect that going forward. And then I think the opportunity for the gross margin to expand just to address that. I mean there's always that opportunity I think you know our position on how we communicate our guidance and our outlook numbers to you and how our internal models are positioned. But it's something that we -- where we do well, we continue to elevate the design, the quality, and the luxury mountain, and I think you've seen the benefits of that, and I think that will continue to accrue to us.


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

Anthony Chukumba

So Gary, I mean, you guys are doing a lot of different things right now. A lot of very exciting initiatives, particularly the international expansion, but all the product newness and some of these new concepts. And I guess my question is, how are you personally allocating your time? Because I know -- or I'd have to imagine that you're very, very intimately involved in a lot of this, particularly the international expansion.

And so I would just love to get a better sense for that.

Gary Friedman

It's a good question. That's -- we say inside our company, we do -- we really do 2 things. We allocate human capital and financial capital. And then the most important one is human capital and how we allocate our time.

So we don't work on any things in this company that the cross-functional leadership team can't work collaboratively on.

So whether if you look at the kind of the big product initiatives, and thinking about the product initiatives, this happened over years, right, so that by the time you're seeing contemporary coming, we have been working on contemporary for a long time. We've been looking -- working on color for years. We just -- it's just been other things more important than we've launched, so color keeps getting kicked to the back of the bus because we don't think it's as incremental as some of the other things that we're doing sooner or maybe not as important to elevate the product brand. But all the big initiatives we take kind of the cross-functional collaboration of the entire leadership team to move the big rocks because they're all big rocks. I mean, whether it's product elevation, whether it’s gallery transformation, brand elevation and the things that we're doing there to elevate the product and elevate the brand. The things we're doing to digitally reimagine the business, not just the website, but digitally reimagine the way we move information and data and how that amplifies -- can amplify the productivity of the teams and the decision-making of the teams and then global expansion. They're all things that we -- as a leadership team, we allocate our time. We ranked everything in this company through a lens of what's the emotional value, what's the strategic value and what's the financial value in that order, right? Because you -- to do really great work, you've really got to deeply believe in it.

You've got to be able -- you have to be so excited that you'd rather be doing that than something else because to do extraordinary remarkable and amazing work is not for the faint of heart. It's not easy to do. Being the best in the world at what you do is not easy to do. It takes a tremendous amount of effort. And you're not going to put in that kind of effort.

You're going to -- not going to have that level of commitment unless there's real high emotional value around an initiative and the strategy.

So we only focus on things that we're deeply passionate about that we're really aligned about that. The entire leadership team is passionate about because we've got to work on that in a collaborative way, and we've got to put in a tremendous effort. And then the second thing we look at is what is the strategic value of an idea? How does this idea render the brand or business more valuable? Does this idea create strategic separation between us and others in our industry? And the ideas have to have high strategic value. And then third is financial value. And like -- and a lot of companies, I think, work on it exactly the opposite way, and that's why they don't do great work as someone comes up with an idea that this is a $1 billion idea, and nobody is really that passionate about it.

So nobody works that hard on it. Nobody -- they get knocked down 2 times and they don't get up a third time. When you're really passionate and you believe deeply in what you're doing, you get knocked down 10 times you get up 11 times.

You just keep going as you care so much about what you're doing.

So those financial ideas that people articulate that there's not high emotional value generally don't pan out. They become a -- what happened to that $1 billion idea? Yes, we wound up -- we drove into the ditch and we couldn't get out and it never happened.

So -- and -- but the things you really care about, they tend to be worth more over time. We might have something that has really high emotional value, really high strategic value, and it looks like moderate financial value. But what we've learned is, over the course of time, people seem -- they're working so -- they're so passionate, they're working so hard, they tend to uncover more opportunities, see more. The work is better than you could imagine, and the financial value goes up over time.

So what you thought might have been a $500 million idea turns into a $2 billion idea because the work is that damn good.

And so -- but we spent a vast majority of our time debating and deciding how to allocate our human capital, how to allocate our time because that's the most important thing we do. We -- I can always go figure out how to raise more money. We can go get more money. We -- I haven't figured out yet how to get more time.

So we spend our time figuring out how we're going to allocate our time because that is, by far, the most valuable resource in the company. And when you think of these, it seems like there's a lot here, Anthony. And there is -- we've been working on this stuff for years, for years. Like this is -- these are not like new. These are just now we're talking to you about them.

And so somebody asked me how long have you been working on the guesthouse? I said I've been working on the guesthouse for 25 years, for as long as I've been traveling and frustrated about the experiences. And asked, why doesn't anybody do this? Why didn't anybody do that? So I designed the room for the guesthouse like 25 years ago.

So you'll see it's way better, by the way. I'm pretty passionate about it -- of the organization. And by the way, if you ask me 2, 3 years ago, like even 3 years ago, how do you feel about the guesthouse? How big of an idea it’s going to be? I would say, yes, it's good.

I think it's going to be great. It's going to be a very good idea.

Now I'd tell you, I think it's a redefining idea.

I think it's going to define an entirely new market for privacy and luxury.

I think it's so damn good it's going to shock people in the industry. But that's just because we're really passionate about it.

So it tends to become really great work. No different than RH Contemporary, we're really passionate about it. There was a team in here last night, last couple of nights until, I don’t know, 2:00 in the morning.

You couldn't get them out of here because they're so damn excited about what they're doing. And they know it's going to break through and it's going to kind of change everything.

So it seems like we're doing a lot. But by the way, that's our nature. We do a lot. But we're also highly focused. We know how to edit. We know how to say no to 1,000 things.

You're seeing the handful of things we decided to focus on and that we have the capacity to focus on. And you don't really know the whole team here.

You don't know the depth and breadth of the organization we've built. We've got a very deep team and a lot of talent in this organization.

So you don't want to lose people because you're not working on enough extraordinary things. They'll go somewhere and they can go work on something extraordinary.

So if you want to have the best talent, you better be working on the most exciting things in the world. Otherwise, they'll go work for somebody else. I wouldn't worry that we're doing too much. People have been saying that about us forever.


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

Curtis Nagle

Maybe just turning back to international. Maybe a little too early to ask or assess this. But just, I don't know, Gary, how do you think about kind of like what -- I guess, the baselines or the comps would be for some of these early markets you're doing, London and Paris, where you've got these magnificent spaces, recognition of the brand, but certainly a decent number of people in those cities, but they are new markets. I mean the benchmarks -- I don't know, perhaps New York, maybe that's aggressive, is it L.A., San Fran? How do you think about that? And then just as a quick kind of model question. Could you comment on kind of what demand trends are doing now? Are they sort of proportionately similar to what you saw in 1Q in terms of how they are balanced relative to sell-through?

Gary Friedman

Sure. Yes.

As far as international, we think about London like New York.

If you look at the population demographic profile of this broader New York market, broader London market, they're profiled pretty close.

If you look -- think about the UK, we think about the UK a little bit like we think California. There's 68 million people in the UK, and there's 39 million people in California, so it should be bigger.

If you look at the profile of kind of high net worth and ultra-high net worth people, California skews a little higher per capita.

So we look at California and say, California is probably long-term $800 million to $1 billion market.

So London should be somewhere around $1 billion market. We've got to have the penetration of galleries and the brand recognition to get there. But the upside is we're opening some pretty spectacular places. We're opening with a brand that's got kind of worldwide recognition with our core customer. It's not like people don't know the brand at all unless they don't travel to America or they don't have any friends in America, right? If they travel to America and they have wealthy friends in America, we're on their radar.

And so the question is just like how is it -- how quickly does it scale? We don't know. We'll know more when we open them. We're going to do a great job.

I think we're passionate about it. We're -- the work we're doing is going to be extraordinary, and it's going to be remarkable. And I'd like to say that when you do extraordinary, remarkable work, you can usually figure out how to monetize it. But it's very hard to monetize ordinary or unremarkable.

So we feel better than worse. We feel excited about this. We're very passionate.

As it relates to demand trends, we gave the demand trends through last year because it was kind of such an odd year. We don't want to get in the habit that we're giving demand trends for the rest of our life here, and we don't -- within a quarter. But you can back into all that stuff with the numbers. We gave you pretty fulsome guidance.

So we gave you a relatively normal guidance that we would have given before, right? So we're not here not giving you guidance. We gave you guidance for Q2. We gave you guidance for the full year.

You can back into those, and you can kind of figure out what the demand trends might have been no differently than you would have had through our historical guidance. But we just don't want to sit here and what we're going to do is track a bunch of short-term hedge funds and day traders. If we're talking about like, hey, through last week, we're here. We want people who are more long-term based. But you can figure that out. We -- I think we've given the most fulsome guidance I've seen anybody given so far this year.


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

Max Rakhlenko

So just staying on Europe, just curious on the margin side. What do you think profitability could look like versus the U.S.? And I think earlier on the call, you said that margins might actually be accretive.

So just curious how you're thinking about GM versus SG&A. And then just leverage on the overall business?

Gary Friedman

I don't think we're ready to talk about that level of detail.

I think when I think about it directionally and strategically, we believe that we think it can be accretive to margins long-term and pull our model up as opposed to be dilutive to our model. We're going to have to get some scale. We're obviously going to open distribution facilities and capabilities and make investments in inventory and other infrastructure that we've got to be able to open the business to.

So -- and depending on how quickly we ramp and how quickly the business ramps, we will determine how the model evolves.

And so when we're talking about it, I'm talking about more long-term. Like I look at -- we studied now a lot of people's businesses, a lot of models, what people are charging, what they're charging there for similar goods. And we look like a tremendous value. And our view is it can be a higher-margin business than the U.S. And also, the reason it can be somewhat higher margin as you just don't.

You're not -- we're not -- like traditionally, a lot of people -- American retailers that would open in Europe, they duplicate all kinds of jobs. They duplicate buying teams and duplicate corporate overhead and infrastructure and things like that.

You had a lot of levels of duplication, and we don't believe we need to do that. We're going to run it more as a like -- look at the world is kind of one place and we'll have very few duplicative infrastructures. I mean we obviously have to have some human resources and people, leaders and people running stores and oversight and stuff like that. But we're not going to duplicate many of the things that other businesses or brands have done. I mean the good news is we don't need a big inventory management team. Think about most retailers. Most retailers are filling their store with product that they're selling out of all the time and they're replenishing all the time. We don't do that. We set up a gallery and nothing moves for a long time. Like nothing moves. We make sure that the -- we steam the beds and we straightened it up. But nothing is moving in our galleries, right? So we don't -- you think about the complexity of inventory management in a normal retail store or other home furnishings retailers that are selling stuff off table tops and this and that, that are in the cash and carry business. We're not in the cash and carry business, much simpler model, much simpler model.

So they would have to build big inventory management teams and duplicative teams in different countries, right? They'd have to think about all these different profiles and what sell-through rates and all that other stuff. We don't have to do that. We keep a DC in stock, right? And everything pulls from there.

So it's a much, much simpler model. And those are the -- yes, a lot of those reasons is why we -- or why we think it's going to be accretive to operating margins. We just don't have a lot of duplication.

Mas Rakhlenko

Got it. That's very helpful. And then just as a quick follow-up. On RH Contemporary with the continued supply chain disruptions, just how are you guys thinking about fulfilling what will probably be really strong demand. Are you guys able to bring anything in ahead of time? Or is that not really feasible given that the business is really custom driven? Just curious how the team is approaching these challenges as your sites have a lot of newness over the coming quarters?

Gary Friedman

Yes, good question. It's not that it's all special order. There's -- it will probably have a slightly higher special order mix to start. But we will stock a good portion of the product. And the real key is the supply chain catching up, and what the demand trends are and what's the level of kind of in-stock rates can we be at? And that will determine, we'll probably go all the way to the wire to figure out how many books we may, how big we get behind this just so we don't drive another giant level of backorders and long lead time.

So we've got a few months here to see how the supply chain is happening, how people are catching up, what the current demand trends are going to be. And we'll figure that out as we go. But there is a bit of a supply chain constraint. And that's why we haven't launched anything in a long time.

So -- but right now, we feel pretty good that kind of middle to late, I'd say late September, early October, we look like we can launch Contemporary. And we'll launch the business. But it's like our business, people get a book, they don't start ordering that much in the first few days. It's about a month to digest it and the designs, does that work in my house and so on and so forth.

So by the time people really start ordering contemporary, we should have pretty good in-stock rates, but it will keep getting better and better and better as we move through the end of the year. But we think we'll be in a good enough shape. But for some reason, the demand trends are bigger than we think as we move in -- through the quarters, we may have to just launch contemporary in a smaller way.

And so -- but look, it's all a good problem to have, right? It's not like nothing's selling here. It's just that, okay, you don't really want the demand trends to go down so you can launch contemporary on time, right? Like that would be bad to wish for. I'd like the demand trends to stay up. And a good outcome would be, hey, guys, we’ve pushed contemporary to 2022 because our demands are damn strong, right? Now some people would say that's really bad.

I think that's really good. That means our business has continued stronger than we thought.

So it's not really exactly when we launched contemporary. It's -- just it's going to happen as depending on demand trends and the ability to ramp production.


Your next question comes from the line of David Bellinger with Wolfe Research.

David Bellinger

So just looking at all the success over the past few quarters through the membership model, how much have you seen your customer base grow over the past call it, 12 to 18 months. And more importantly, where can that number go over time as you build towards the $5 billion to $6 billion sales target for North America and a much larger opportunity on the international side?

Gary Friedman

Yes. We don't really give that data.

Jack Preston

David, I might say, I mean our membership count is disclosed.

You can look at it in our 10-K.

So last year, on -- as Gary talked about 8% revenue growth on membership went up by 4. 6%.

So we went from 415,000 members to 434,000. And that's one proxy. Clearly, sales in general tend to outpace with increased average order values, other things we've talked about that tend to outpace the growth in members or customers.

David Bellinger

Got it.

Okay. And then just as you think about the trends here, it's incredibly strong throughout Q1, are there any regions of the country that you're seeing within that strength that are either outperforming or being held back in some way? And did you see any moderation trend in some of the areas of the country move closer to normal? Or is this more of just a broad-based strengthening throughout the entire business?

Gary Friedman

It's pretty broad-based. Yes. I mean you have the -- you had through this pandemic, obviously, the core dense cities where you had more of an exodus of people. Those were softer.

The second home markets were explosive. The suburbs were explosive. And now you've got the cities that people are coming back and we're getting close to the unmasking of America that the cities are -- the energy's coming back, the business is coming back, and they'll probably have a stronger kind of later surge is how we think about it.


Next up is Cristina Fernández with Telsey Advisory.

Cristina Fernández

I wanted to ask a follow-up question on Contemporary. Can you -- do you think that line will bring a new customer to your -- to the business like Modern did a few years ago? And how are you thinking about presenting it in stores the price points. Maybe can you compare that to the launch of Modern, like how this one is going to be similar or different? That would be helpful.

Gary Friedman

Yes. We think it's going to be a lot like Modern. We think it will bring a new customer into the business. It's higher price points like Modern was versus the Interiors business.

So it's a higher level of quality. All the new product kind of reflects the elevation of the product and the brand, right? So you'll see higher-quality, higher-priced product kind of flowing in over the next several years as we take the brand up the luxury mountain.

You'll see the quality get better everywhere.

You'll see the design get better everywhere.

You'll see the designers and people we work with -- more -- people will be more aware of them, designers that -- a lot of people said would probably never design for RH are now coming onto the platform.

And so you'll see the product continue to elevate, and that should have a positive impact on average order, average ticket and a lot of good things that help the model of the business.

I think that's the thing that you got to think about long-term with our business as you're kind of taking -- going up the luxury mountain, you're taking quality up, you're taking design and quality up, you're also taking price points up.

You have more pricing power there. All the leverage flows through, right? I tell people all the time, imagine if you're selling a $2, 000 sofa or a $10,000 sofa, I mentioned a $10,000 because that's our best-selling sofa.

So it cost you roughly $200 to deliver a $10,000 sofa, it's a fraction from a shipping cost point of view as it is to deliver a $2,000 sofa, right? You're 2% versus 10%.

So it cost you 1/5, and that's why you can get such better margins here.

So when you think about margin growth long-term, you've got to understand, we're still climbing the luxury mountain from a product point of view. I kind of look at it and say, we're slightly above halfway, maybe we're 60% up the mountain, 65% up the mountain. And the product quality, the product design, the taste and style, the brand is going to continue to go up. And we're going to continue to be disruptive at the highest end of the market, right? That's where we think that the most opportunity is, the kind of independent showrooms and a small boutique, high end stores and retailers.

So that's all going to be very accretive to our model. And that's why I think I mentioned before, I don't know if it was 1 or 2 quarters ago, kind of a couple of quarters ago, I talked about kind of the correlation to Hermés and not that we put ourselves in Hermés kind of -- place Hermés in the world from a brand point of view, but we aspire to things like that. And Hermés has, I think, 34% operating margin. And yes, so there's a lot of good things happening during this climb. It's hard to make this climb. No one's ever made this climb. Everybody who's up there is born at the top.

So we're kind of in uncharted waters here, as we climb. But it's all good stuff. The leverage that customer acquisition costs, everything here is margin accretive, the path we're on. And I think a lot of people overlook that because they're so used to building models further. No one are -- there’s not an analyst or investor that's ever built a model like this for a home business.

You've got -- people ask us all the time, are you more like -- should I look at Home Depot, should I look at this? Are you like this? Or are you like that. No, we're like nobody. Like go look at other category -- other categories, there's people like us in other places, there's no model like us. That's why there's no results like us.

So everything we're doing is going to be accretive to margins.

Cristina Fernández

That's very helpful. And then my second in Hermé question, last year and this year, your source book strategy changed, you only mailed one. Do you think you go back to like spring and fall. Like how are you thinking about just broader about advertising source books as its business normalizes in 2022?

Gary Friedman

Yes. Sure. We used to do 11 or 12 a year, right? And then we went from 11 or 12 and we went to, I think, 3, then we went to 2, then we went to 1, then we went back to 2.

Now we're at zero.

So we'll go back to at least 1. And then we'll keep -- the world is changing, right, all the time. When we open these big -- one of the things to study, to think about, when you take RH -- again, I mean it's great because we had this point of reference here right next to us. And I encourage anybody who hasn't -- if you haven't been to our center of innovation, product leadership, you ought to come out here and kind of see not only what we're doing, but how we do it, and you'll understand how unique and different we are. And then we'll take you to lunch at RH Marin and we'll walk you through. But if you just like walk them all and look at, oh, there was our in-line store in the mall. And then you see us as a third anchor in the center that you can't miss when you come driving up to this place.

You got to think about the fact like, hey, how many source books do we have to mail in Marin when everybody in Marin who is a potential customer of ours is going to at least come have lunch or dinner with us once a month, maybe a little less frequently, but most likely. And every time they go to the mall, they go to Nordstrom, they go to Apple, they get a drive by our magnificent gallery with how many 100-year-old Dollar Trees surround it? Like it doesn't even look like it belongs in the parking lot, but it's this magnificent thing. And if you just look at it and then you look at -- you just walk the mall and you look at all these other sad retail stores, you go, well, no wonder, they might have to spend a lot on advertising. They're all like 30 to 50-foot storefronts with like a little kind of crappy storefront. And they have no windows, except for a little glass in the storefront and you walk into kind of a windowless box and everybody looks the same.

And someone is standing behind the register. It's all kind of the same.

And so when you build the galleries that we build and you do the volumes we do and you've got the hospitality component driving lots of traffic, I got to believe we're going to spend a fraction of the ad cost of everybody else to optimize the market.

So no one -- everybody looks at the negative investment into a retail store and nobody does a positive. I tell people all the time, it would be an interesting world, if we could all just go peek at it. It would be a world that only had online retail that like -- think about the last couple of hundred years, you could only buy things in stores. I mean, buying things online, and there was no stores. And then all of a sudden, somebody invented a store, and they did a bunch of volume. And all of a sudden, everybody started opening stores and there was a shift to retail stores. And all a sudden you go, everybody -- excuse my language.

You go, heck, everybody starts closing their websites because stores is where it's at. Nobody ever kind of shifts the perspective and listed it differently. We're going to follow the herd mentality. Humans are followers for the most part, and we don't like change.

And so everybody is just like following the herd, they think like, oh, everything is going to go online. In my lifetime, we will not see more volume in online than we are going to see in retail stores in our categories.

Just not going to happen, unless everybody closes their stores and they force it to happen. And that's really good. I hope everybody sells our goods, closes their stores. It'd be the best thing to happen for us. We -- our operating margins might be 40 if they do that. I hope they do. But look, right now, let them all follow each other, and let us be the only inspiring magnificent physical spaces in the world. I like the fact we'll be kind of a market at once.

So is Apple.

So is Tesla.

So is all the great companies. They're generally market to one because they don't follow everybody else.

You got me excited on that one. But imagine that world. It'd be like a gold rushed open retail store.


And your next question comes from the line of Brad Thomas with KeyBanc Capital.

Bradley Thomas

Gary, you mentioned an interesting point in the letter about the RH Dallas restaurant being booked through August. I was hoping you could just give us an update on where the overall restaurant business stands and its reopening and recovery. And how that flow through is translating over to the extent you can tell at the restaurants that have opened sooner than others?

Gary Friedman

I think it broke up a little bit. What was the question?

Jack Preston

So around F&B -- the overall F&B business...

Gary Friedman

Yes, the F&B business is coming roaring back. And look, one of the things we did, we took the opportunity while we were -- everybody was sheltering in place, we reimagined our hospitality business. We redesigned our menus, our pricing structure, our turn times, our service standards. We've got a tremendous leadership team. And we believe we're going to make a huge impact once we can go back to kind of full service, a huge impact in our F&B business, both from a revenue and a margin perspective.

So many of the restaurants that like maybe it would have been $5 million or $6 million, we think they'll now be $8 million or $9 million, maybe up $10 million just by the enhancements we've made. We used to have -- our pantries used to be more of a coffee bar.

Now it's really a wine bar. And we have 40 wines by the glass. We found out that, hey, you have 82 points of margin on average when you’ve wine by the glass.

So that's a really good business to be in, it's way better than coffee. And look, coffee is not a bad business, right? You wouldn't mind being Howard Schultz Starbucks. But we like the wine business. It's a really good business. When you're paying somebody to kind of go carry something to a table, if they're carrying a $4.50 glass -- cup of coffee to a table versus a $24 glass of wine to the table, think about what that looks like on their payroll as a percent of sales. Again, just keep -- everything we're doing, keep thinking moving up the luxury mountain, kind of higher price points, more leverage, more volume, serving actually kind of fewer customers and you make a lot more money.

So F&B, we've kind of done the same thing. We've elevated the menu, elevated a lot of things.

In fact, yes, most of the menu elevation we're doing right here right now in Marin, and we'll be rolling that out.

I think that will be a significant impact. But I think we're in a -- I think we have one of the great hospitality businesses in the world right now. Like our volumes are incredible.

Our model looks incredible. Most of our restaurants are packed all the time. And we can't wait until we can get to 100% seating. And I mean, just out of the gate, Dallas looks like it's going to be a $10 million-plus restaurant and with the new wine margin structure, which is really good -- and they're drinking a lot of wine in Dallas.

So we feel good about it. Like it's going to be a good part of the model. And when you think about how much traffic it drives to our galleries and what that does and then what that traffic does to offset advertising costs and other things, it's -- it all looks incremental to us.


And your next question comes from the line of Seth Basham with Wedbush.

Seth Basham

My question, if you can hear me, is around the design services business, and you mentioned it being the largest in North America. Wondering by what metric you're measuring it? And then secondly, could you give us an idea of what you've learned from that business over the last 2 years and how you might translate it to Europe?

Gary Friedman

Sure. Yes.

If you just look at the volume our interior design business generates and the volume our trade business, which is really part of our design services generates, support the external interior designers. I mean we're really if you look at design firms, residential design firms, we -- I don't know if anybody that's larger than us or close to larger than us.

So it's been a big, big enhancement to our business. It's moved us from kind of just selling products to selling spaces and moved us from products to projects.

And so it's a huge, huge strategic strength of ours, and we've created a great strategic separation. And we continue to invest in that business. I mean, it's an important business for us. And as it translates to Europe, we think it's going to be very successful in Europe. People -- if you just stand back and think, how many times in people's lifetimes did they get to kind of furnish an entire home? Very few times. Therefore, why would they be any good at it, right? It's -- you can't be good at something you only do a couple of times in your life. And that's why if you look at -- I would say look at Zillow or look at Redfin or look at anything and just go through the most expensive houses, the least expensive houses, you generally see bad architecture and bat interior design.

And so we think we can make a big impact in the way people live and to live with just -- not just more beautiful environments and spaces, but massively more functional and logical. People just -- they don't know how to do it. Why would you be any good at it? And if you'd be like walking on to a tennis court for the first time if you've only been a bowler or something like that, why would you be good at tennis? Like -- so people -- I mean, I think it's interesting, a lot of people are like, oh, I want my home to really reflect me. Well, that's great. But if you're not seeing a good interior design, your house will reflect you, and it's not going to be any good.

And so I think our service now that it's out there -- and the great thing about our design service and why we're so successful at it and why it's so much more impactful than other people is the galleries, right? The galleries in the source books and the way we present goods. We don't build retail stores. Most people selling furniture and home furnishings, you walk in, and it looks like a retail store.

You got dining tables piled up with all kinds of seasonal craft on them.

You've got stuff all over.

You've got shelves full of pillows and candle sticks and tchotchkes and all times of stuff. I mean it looks like a mess. It doesn't look like a home. It looks like a store.

You walk into one of our galleries, it looks like a home. Not just -- it doesn't look like any home on Redfin and Zillow, it looks like better than any home on than Redfin and Zillow.

So it's a very inspiring physical manifestation of our brands, and people want their homes to look like that because they haven't seen anything that looks that great. And then therefore, that gives our design teams credibility because the marketing -- they're servicing the customer within the example of the work, right? That's why we have credibility.

If you walk into kind of any of the other people that people might go buy from, it's a bunch of crap all over. It doesn't look like we want to live with like a dining table with a bunch of tchotchkes, Halloween or Christmas stuff piled on it, or pillows all over shelves everywhere and candle sticks everywhere. And like most retail stores, you walk them all or you walk in at home stores from furnishing stores. They're like a mess. We look like a beautiful inspirational space.

So that's why it works, and that's why it will translate. But you can't just like say, oh, we have design services, great.

If your stores look like shit, nobody cares.


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

Zachary Fadem

Gary, 2 questions on guesthouse.

You said a lot of exciting things here.

So first, I'm curious if there's anything you can share on the revenue model. And then second, maybe you could walk us through the food and bev or experience offerings versus a typical boutique hotel?

Gary Friedman

Well, we're not building a hotel.

So I don't know how to compare us to one. But -- yes -- the guesthouse revenue model, you'll learn more about it once we open it. Yes, we're going to have fairly expensive rooms. We're building an experience that the world's never seen.

So it's not going to be cheap. It's actually -- think about it this way. The guesthouse is the flag gets planted immediately at the top of the luxury mountain.

So every other luxury hotel in the world is -- I think is going to be forced to tip their hat. And they're going to say like, wow, we've never done that. Wow, how did figure that out? We're just going to do a lot of things that have never been seen and we're doing it at the very top end of the market.

So it's going to be an incredible aspirational, inspiring experience. And it's all designed about privacy and luxury. And I think we're going to command very high rates, and we don't have to sell a lot of rooms because we don't have a lot of rooms.

And so -- but most boutique hotels are all about trying to -- they're all trying to be hip and cool and they're trying to have lobbies with a bunch of people sitting in them. And like if you go to -- what's the one I forget now, I'm blanking. But the one you go, you have the Ace Hotels or anything like that, which I think are cool for the market they're going after. But you walk in and...

Jack Preston

The original W...

Gary Friedman

Yes, the original W.

I think there's all kinds of people sitting in the lobbies and they have their Apple, they have a bunch of little Apple lit up logos, everybody is working, a bunch of unemployed people working on their laptops in the lobby. That's exactly the opposite of what we're going to have. This is about privacy and luxury. Like private entrances, whiff stuff to your room, you don't have to walk by a bunch of people in the lobby. There's no people in the lobby that can like get up the elevator to your room. This is like a whole different gig. And then the F&B experience is super elevated. I mean it's a beautiful, beautiful restaurant with an incredible live-fire component to it. I mean there's no restaurant like it in the world that I've ever seen. And we're really excited about the restaurant concept. We're really excited -- New York has been open with our first champagne and caviar cellar, that's going to be an incredible -- I think it's going to be the best experience anybody seeing around caviar and champagne. And it's targeted for very wealthy and affluent and discerning clientele. And it's -- the idea is it's going to elevate our brand. It's going to position us as a thought leader, as a tastemaker and a placemaker in the world. And Aspen will do the same. And Aspen will have our first RH Bath House & Spa, and that will have a membership component to it because we only have 9 rooms in Aspen, so you can't rent a bath house and spa with 9 rooms. But Aspen is going to be a really good model for us with having a membership to a bath house and spa. That will be the nicest spa you can go to in all of Aspen.

So you'll get it when you see it. It's really hard -- this is the kind of stuff we do, sometimes seeing is believing. No different than RH Modern. We're first launching that, A lot of people were like, what? What's it going to be? And then we launched it.

Now it's a huge part of our business. And same thing with contemporary, same thing with guesthouses, same thing with everything we do. They just haven't been done before.

So it's basically, we try to anywhere we can't create new markets, right? So we don't say, oh, let's do it like this person, just a little better. We try to kind of conceptualize something that is significantly better and more unique and desirable than anything that's in the market. And we think our guesthouse is going to be that.


This concludes today's portion of the Q&A call. I will now turn the call back over to Gary Friedman for closing remarks.

Gary Friedman

Great. Well, thank you, everyone, for your interest in our brand. And I want to thank our team for everything they do to bring our brand to life. And we're all excited about the kind of the unmasking of America and moving past this pandemic. We think it's going to be an exciting time, and we have a tremendous amount of innovation in our pipeline. And we look forward to talking to you next quarter. Thank you.


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