Premier Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 7, 2023

There are 8 speakers on the call.

Operator

Good afternoon. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2023 RH Q and A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I will now turn the conference over to Alison Malcolm of ICR. You may begin your conference.

Speaker 1

Thank you. Good afternoon, everyone. Thank you for joining us for our Q2 fiscal 2023 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about our outlook of our business and other matters referenced in our press release issued today.

Speaker 1

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 opinion 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 adjusts 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.

Speaker 1

A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Speaker 2

Thank you. Let me begin with our letter to our people's partners and shareholders. Revenues of $800,000,000 and adjusted operating margin of 22.2 percent exceeded our guidance for the 2nd quarter due to a $25,000,000 revenue benefit from faster than expected deliveries and a shift of approximately $40,000,000 of advertising costs from Q2 to Q3, reflecting the later mailing of our RH Interiors source book. We are raising the low end of our revenue guidance for the year and now expect revenue in the range of $3,040,000,000 to $3,100,000,000 versus our prior outlook of $3,000,000,000 to $3,100,000,000 and are maintaining our outlook for adjusted operating margin of 14.5% to 15.5%. We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20 year highs and the current outlook for rates to remain unchanged until the Q2 of 2024.

Speaker 2

The company repurchased 3,700,000 shares in the 2nd quarter at an average price of $325.65 representing approximately 17% of the total shares outstanding at the beginning of the Q2. Product elevation. We recently mailed our new 604 page RH Interior Sourcebook. And while it's too early to read the response with only 40% of the mailing in the home this week, The early indications do look promising. We continue to expect our business trends to inflect in the second half of this year with the mailing of our RH Contemporary source book in late October and our RH Modern source book in early January, as well as the refresh of our galleries over the next several quarters.

Speaker 2

We believe our inflection point will peak in the first half of twenty twenty four as our new collections fully ramped and we begin another cycle of source book mailings, completely transforming and refreshing the assortment across the entire brand over a 12 month period. We believe the new collections reflect the level of design and quality inaccessible in our current market and a value proposition that will be disruptive across multiple markets, positioning RH to gain market share throughout fiscal 2024. While a product transformation of this magnitude will be margin dilutive in the short term as we cycle out of waning collections, We believe it will once again become margin accretive as selling rates stabilize and allow our supply chain and sourcing allow for supply chain and sourcing efficiencies. Platform expansion. Our plan to expand the RH brand globally, address new markets locally and transform our North American galleries represent a multibillion dollar opportunity.

Speaker 2

This summer, we introduced RH to the United Kingdom in a dramatic in unforgettable fashion with the opening of RH England, the gallery at the historic Einhope Park, a 17th century 73 Acre Estate that is a celebration of history, design, food and wine. We had a spectacular turnout for our opening event in early June and the national and global press coverage the brand received was multiple times greater than any gallery we've ever opened. Due to RH England's countryside location, we expect the majority of revenues to be driven by our interior design and trade businesses, which are dependent on building books of business with high value repeat clients like interior design firms and hospitality projects. The quote books are building and we'll soon mail our 1st source book in the United Kingdom. While pleased with the early response, there is still much to learn about seasonality of the business in the English countryside, especially in the winter season.

Speaker 2

We will know more once we start mailing source books and experience a couple of seasons. Our global expansion also includes openings in Dusseldorf and Munich later this year with Paris, Brussels and Madrid scheduled for 2024 and London, Milan and Sydney for 2025. Regarding our North American transformation, We continue to plan opening RH Indianapolis and RH Cleveland in the second half of this year, while RH Palo Alto and RH Montecito will now open in early 2024. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years. We also believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns and small cities where the wealthy and Fluent Live, Visit and Vacation.

Speaker 2

We have several existing locations that have validated the strategy in East Hampton, Johnville, Los Gatos, Pasadena and our former San Francisco Gallery in the Design District, where we have generated annual revenues in the range of $5,000,000 to $20,000,000 in 2,000 to 5,000 square feet. We have just secured our first new location for design studio in Palm Desert, which should open in the first half of twenty twenty four. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Outlook. As mentioned, we are raising the low end of our revenue guidance for the year to a range of $3,040,000,000 to $3,100,000,000 and maintaining our outlook for adjusted operating margin in the range of 14.5% to 15.5%.

Speaker 2

We estimate the 53rd week will result in revenues of approximately $60,000,000 For the Q3 of fiscal 2023, revenues of $740,000,000 to $760,000,000 and adjusted operating margin in the range of 8% to 10%. We expect to have increased advertising costs of approximately $50,000,000 versus Q2 2023, reflecting the shifting of the RH interior source book from Q2 to Q3, the mailing of our RH Contemporary source book and the mailing of our first source book into the United Kingdom. For the Q4 of fiscal 2023, we are forecasting revenues of $760,000,000 to $800,000,000 and adjusted operating margin in the range of 14.4% to 16.6%, with incremental advertising costs of $5,000,000 versus Q4 of last year. RH Business Vision and Ecosystem, the long view. We believe there are those with taste and no scale and those with scale and no taste.

Speaker 2

And the idea of scaling taste is large and far reaching. Our goal to position RH as the arbiter of taste for the home as proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, of artisans and manufacturers scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5,000,000,000 to $6,000,000,000 in North America and $20,000,000,000 to $25,000,000,000 globally.

Speaker 2

Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that establishes the RH brand as a global thought leader, taste and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking luxury and privacy in the $200,000,000,000 North American hotel industry. Additionally, we are creating bespoke experiences like our Chantfield, an integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and our H3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation.

Speaker 2

These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture. This leads to our long term strategy of building the world's 1st consumer facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the brand and amplifying our core business, while adding new revenue streams, while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170,000,000,000 furnishings market into the $1,700,000,000,000 North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning time starved consumers. The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Speaker 2

Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7,000,000,000,000 to $10,000,000,000,000 one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70,000,000,000 to $100,000,000,000 opportunity. Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by our age, creating an emotional connection unlike any other brand in the world. Taste can be elusive and we believe no one is better positioned than our age to create an ecosystem that makes taste inclusive and by doing so elevating and rendering our way of life more valuable. The end of COVID confusion, the beginning of the next evolution.

Speaker 2

We've spent far too much time over the past 4 years debating if This was going to be the decade of home or the death of retail. If inflation was transitory or fiscal tightening was mandatory, home sales and prices shooting up like a rocket and now falling to earth like a rock. For the first time in my career, retailers were comparing their growth rates To anyone of the past 4 years in any given month of any given year. The fact is we're directionally in the same spot we were 4 years ago. Worrying about a financial recession and the poll saying we might have a presidential regression.

Speaker 2

If there was ever a time the world needed a compass, This might be it. To the people of TeamRH, our compasses are vision, values, beliefs and culture. Those things that drive us and unite us. Those things we live for, would fight for and die for. After several years of being apart during the COVID, We finally returned to the Palace of Fine Arts Theater in San Francisco for what used to be our annual leadership conference and we talked about those things.

Speaker 2

For the first time in the past 4 years, everything came into focus. Clear replaced fear and connections were personal and not virtual. It felt different because it was different. There is a different level of accountability when someone is standing in front of you looking straight into your eyes and making a suggestion or request versus blankly into a screen, not knowing if those on the other end have you on mute or just aren't very interested. It's time to break the bad habits of COVID.

Speaker 2

It's time to get off the screens, get out of our home office and reconnect in our team office or as we did at the Palace. It just felt different because it was different and I'm sure it's going to lead to an outcome that's different. Yet it also felt familiar like finding our way back home, back with our people where none of us are smarter than all of us, getting all the brains in the game and the egos out of the room, listening and learning, discussing and debating, elevating and aligning. It felt like the beginning of our next evolution and it felt like we were beginners again. Never underestimate the power of a few good people who don't know what can't be done, especially these people.

Speaker 2

Onward, team RH. At this time, we'll open the call to questions.

Operator

Session. Your first question comes from the line of Stephen Forbes from Guggenheim Securities. Please go ahead.

Speaker 3

Good afternoon, Gary, Jack. Gary, I was hoping you could maybe just expand on what's driving your confidence in seeing an inflection in the business during the back half. And what's the early indications from the RH interior book? And I guess, RH England as well, inform you about what The potential reacceleration in demand could look like as we think out to 2024 and beyond.

Speaker 2

Sure. I think there's a couple of dynamics happening. I think you've got kind of a cycling of the Backside of COVID and you've got a cycling of the dramatic rise in interest rates and And the fall off of the highs of what I call a COVID and a 0 federal funds rate driven home market. So from our view, I think that cycling Happens at the end of this year. And the question is, is there a longer downdraft In the home cycle, I think that the unanswered questions really deal with if you say what's the problem with the housing market today?

Speaker 2

You've got this real delta in interest rates between People who bought a home over the last several years at dramatically lower interest rates that are sitting there with 2.7% to call it 3 point 4% interest rates, 90% of the market is fixed. So you've got 90% of market owning homes with really low interest rates and you've got an interest rate gap, current 30 year mortgages are going for 7%, somewhere between 6.8% to 7.4%. It's kind of the range depending on credit. So you've got a huge spread there. And what's compounding that huge spread is you haven't had home prices drop enough yet, right, to offset That margin spread, if home rates dropped, home prices went up 42% in the 2 years In the 2 years post the COVID, through the COVID boom, once COVID hit and there was Everybody is stuck at home and focused on exiting cities.

Speaker 2

They have the biggest migration from cities to suburbs in history and biggest migration to second homes in history. So you've got a lot of people that moved at a record rate. You've got a lot of people locked into really low interest rates. Now you've got really high interest rates And you have no inventory in the market, because people can't afford to buy a new home once they sell their home, Because they're going to trade at 2.7% to 3.4% interest rate for call it a 7.2% interest rate Yes, maybe at the midpoint. And so you've got a lock on that.

Speaker 2

We're going to begin to cycle this. So If the Fed has CPI, if they have inflation under control and we don't there doesn't have to continue to be Kind of tightening. The question is, when do home prices come down enough for people to Step up and pay the higher rate or when do rates come down and close that gap. Either housing prices have to come down or interest rates have Come down or the gap doesn't close, right? So you may kind of wallow at the bottom or there could be further downdraft if there's a more broader Economic issue in the economy or if anything that's happening with the commercial market with offices.

Speaker 2

It's not a good market. And our view is not all of that negative news has kind of unveiled itself. So there's But we're from our view, we're kind of at the end of the worst of it. It's is there going to be a bounce? I mean, if you look forward at the market to saying that we should expect interest rate cuts Yes, starting next year in Q2, Q3, I mean Q4 maybe 100 basis points.

Speaker 2

It's 100 basis points of interest rate cuts Move the housing market much and maybe it moves it a little, but I think there's going to be a bigger you got to close this gap. It's a gap that I've never seen. I don't think anybody on the phone has ever That's created kind of a conundrum in the housing market. And then you've got look the news and the press says, oh, new houses are up 20%, well new houses are only 10% of the market. The existing home sales is 90% of the market.

Speaker 2

So until you get existing home sales And this market stabilized, not a downdraft, that's going to be critical. So we expect stabilization, we think next year. We don't think there's going to be acceleration until there's interest rate cuts or pricing comes down, home prices come down to kind of close that gap. So let's put that off to the side. That's one issue.

Speaker 2

Then you've got what we're doing, which is a complete transformation re imagination refresh of the brand that we've been working on now for several years. It's going The unveiled here over the next several quarters. So, the early indications on the books And again, we're hitting 40% of the books in home by the end of this week, look really good. The early, early indications. Now you got to be careful and how you extrapolate that because you have to extrapolate it on okay, What does this look like when all the books get in home?

Speaker 2

What does this look like when the in stocks reach their optimum levels? What does Look like when you start refreshing the galleries in the stores with those there's all lift factors to all of that. So when we look at this and we extrapolate this, we think there's going to be a real inflection point. How big is that inflection point? Yes, it's to us it looks like a meaningful inflection point.

Speaker 2

And then there is Part of our decision to kind of push the mailing into Q3 was to kind of take a longer term view of what Should be our contact strategy as we've now we are going through this brand refresh and re imagination and repositioning. And our view was, we've through history, we went through cycles where we contact the customer twice a year Yes, with each book and periods where years where we contact the customer once a year, one kind of big cycle of mailings. And our view is, I think we've got to reacclimate the consumer to the RH brand to The newness, the excitement that's in the brand and everything we're doing, and our view is to set up a 2 contact strategy. So the timing of those contracts, we should we believe should be A fall contact and a spring contact, it's how I'd frame it. So, fall being kind of a mid to late August contact that gets in home by end of September.

Speaker 2

Our books especially our interior books our interior book is 604 books. Nobody does a 604 book page book than other than us and getting that printed and bound and through the system takes longer It will on our other two books that will be more in the 300 page range. We've got this first contact that will get all in home kind of call it end of September, 1st week of October. And then we're going to Come out with the contemporary book, kind of mid October through late October And then we'll come with the January book with the contemporary book in the October period and then The modern book in early January when people get back from holidays and so on and so forth and everything reopens again. Then we'll cycle back around and we'll hit everyone with this next contact, if you'll get over a 12 month period.

Speaker 2

And that will be kind of a March, April, May, June contact. And so the 3 books we'll hit again. We'll have another meaningful round of newness coming. And by the end of that Contact, we will be kind of fully transitioned. It doesn't mean we won't have new product in the next contact when you think about the next fall, But the percentage newness will be more in the 15% to 20% range, where this is basically An 80% refresh of the brand.

Speaker 2

It's massive. It's the biggest product move I've ever made in the history of my career and I've made some pretty big product moves. So you've got to kind of think about how you're spreading it out, how much can the consumer digest at a time, how you're going to read it correctly and how you're going to have The contacts not overwhelm them and the news not overwhelm them. So as we kind of took a bigger view at it Instead of this kind of one view and look at it more, how do we think about it strategically, maybe call it over the next 3 years. We think this is the right contact strategy and we'll create By the peak of the inflection, I think it will be really meaningful.

Speaker 2

I think we will gain Significant market share, significant market share versus anybody else in our category. And I think the other thing to put into context is just How we think about disruptive pricing from a circular point of view, which I think we've In our efforts to elevate the brand, I think we weren't as kind of critical minded looking at price. I mentioned last conference call, I thought we probably were A bit arrogant looking back. And now I think we're laser focused and laser sharp. So we're going to be very aggressive.

Speaker 2

We're going to use the size and strength of our platform and the leverage it gives us to be disruptive from a pricing point of view. And so and I think that's going to make a meaningful impact. I think if you look at the new book And you look at the messaging and you look at the key items and you look at the key collections and you look at the quality of the product, the design, The quality design and the quality of the make of the product and you look at the value, the price Value of that product, I think it's going to disrupt a lot of people. And so I think we're as confident as we've ever been. I think that's the timing.

Speaker 2

And then the unknown is, What does the housing market do? Is it flat? Does it go down another 5% or 10% or do we get a bounce? Regardless of whatever happens with the housing market, we're going to have a meaningful inflection point with the business and the brand. And that's why we deployed the capital.

Speaker 2

That's why we bought back 17% of the shares, 3,700,000 shares. And so we like what we see early with the books here. We like our strategy. I think we're laser focused on this. And I think we're going to come out looking really good.

Speaker 2

So that's how we see it.

Speaker 3

Thank you, Gary.

Speaker 4

Your next question comes from

Operator

the line of Simeon Gutman from Morgan Stanley. Please go ahead.

Speaker 5

Hey, Gary. Hey, Jack. My question one question maybe 2 parts is you mentioned product transformation and margin dilution. Is that all contained to 2023 or does some of it move into 24? And then Gary to your point, if this market wallows a little And we do have another downdraft.

Speaker 5

Given that you have leverage or the business has leverage now or a little more than it's normally used to, Do you operate anything differently if the macro just takes longer

Speaker 2

to come

Speaker 5

out and then maybe the curve is steeper in later years, but It's flatter in the medium term.

Speaker 2

Yes. I think by the first half of next year, the inflection is Going to be much more significant than the macro. So I don't think it changes anything for us.

Speaker 6

On the margin dilution, Simeon, look, I think about it also just Where the margin or the discounting activity and clearance of that inventory will be in Q1 of 2024 versus Q1 of 2023. So, yes, there's going to be still some of that in the 1st part

Speaker 2

of the year, but But there's going to be I think that's 2 things, Right. You've got margin dilution from a product margin point of view as we're transitioning the assortment. And But you're going to have leverage and margin accretion with throughout the model based on what we believe will happen with our top line. So, yes, I think 2024 is going to be a very good year, Unless there is some kind of crazy crisis that we don't believe is on the horizon. I think that history would tell us if Things really got worse that the Fed is going to ease.

Speaker 2

If I look back at the last 20 years, I mean, The Fed has been very consistent. We've lived in a very long period of really low interest rates with just a few slight blips That are high and I think the Fed will act in a way that will Stimulate the economy again. So and then housing will at some point housing will take off, right? You've got a lot of pent up demand. It's just that the demand can be super pent up, but if the gap doesn't change, right, if either Pricing doesn't come down or interest rate?

Speaker 2

Yeah, doesn't change, interest rates have to come down. 1 of the 2 things happen. If they both happen, prices come down and the Fed eases, Yes, you can get I think we can get a really good bounce in the housing market, but we just can't control that. We have a point of view on it, share a point of view. We look at a lot of things and we Yes, we've got a lot of data that we study.

Speaker 2

The key for us is, it's like if you're We think about the balance sheet, which we do, and we deployed a lot of capital. We have a lot of confidence in the model. Yes, we're in the middle of a transformation. It's not this is not by any means the first time we've done it. It's The biggest thing we've ever done.

Speaker 2

But our experience in making moves like this It's deeper than anyone in this industry. And we're laser focused on it and We understand our balance sheet really well and what our cash flow is going to be like and the timing of capital and outflows and projected inflows. And we have all kinds of downside models and know how to operate in any kind of environment, Any kind of difficult environment, I mean, so we don't fear the leverage and we've had a lot more leverage on this business and people have seen us navigate through those situations in a relatively Uninterrupted way except for the real depths of 2,008, 2009 or something like that. So we feel great. But I think The key headline I'd say, I just would be really it would be shocking if we don't outperform whatever macro Might happen in the first half of next year unless it is so severe that it becomes some kind of a crippling thing across The economy.

Speaker 2

And I just don't think that's going to happen. I think that Fred is going to do the things that the Fed Yes, usually does. And if we get any kind of stabilization or uptick in the market, like we'll have an incredible year. So I think we're set up better than we've ever been set up in the history of the business. And I think we'll have The biggest inflection point we've ever had is my view by Q2 of next year.

Speaker 2

It's like there'll be an inflection point before that, but I think we'll peak when I look at All the lines of I think about production and in stocks and floor sets and All the transition moves we have to make, I think that in the 2nd cycle of the books, I think it will start to peak And then I think we're going to have an incredible run.

Operator

Your next question comes from the line of Steven Zaccone from Citi. Please go ahead.

Speaker 7

Good afternoon. Thanks for taking my question. So I wanted to shift to the RH England opening. It sounds like it's Good successful opening event, but it will take some time to maturity. Do you expect the rest of your international openings to resemble this maturity curve?

Speaker 7

Or is this the longest one since it's kind of your first? And then similarly, the letter confirmed 9 international openings by 2025. Can you talk a bit more about the pace of annual openings for international going forward? Is 3 kind of the right number? Thanks.

Speaker 2

Yes. Let's start with the first one. 1, RH England is unlike anything we've ever opened, not just because of an international perspective, But really the kind of location and our view of how we wanted to introduce the brand and when we wanted to introduce the brand, when we wanted to introduce the brand in a very unique and unforgettable fashion. Just because The U. S.

Speaker 2

Isn't really seen from a European perspective. When you think about design, taste and style luxury market, so on and so forth. That's not really the game we play really well. I think I made the comment before that The only true luxury brand we've had, I think in the United States is Tiffany And now the French own it, right? And all the luxury brands are from Europe.

Speaker 2

So how are we going to go into that world and introduce ourselves? We thought that was really important. And so And we also thought the timing, like how do we kind of get the name known and establish ourselves in a unique way. And we could have waited and opened Paris first or we could have waited and opened London first. We would have had to wait longer and we came process opportunity at this property and we thought this could be something remarkable.

Speaker 2

It could be a really great introduction for the brand. And I've always said that we've made the decision on RH England because of its location. It's an hour and 45 minutes outside of London. It's in the Cotswolds. It's around wealthy and affluent people, but Not around density.

Speaker 2

You don't have anybody kind of walking by this gallery. Like it's not it is a true destination. And it's you kind of got to go out of your way. But you're going to something that's spectacular that you've never Before, so the impression of it is like nothing else. And I don't want to make the wrong comparison here, but if you just think about kind of Things that have went into the, what I call the middle of nowhere and changed everything.

Speaker 2

You think about Disneyland. Disneyland opened in the middle of nowhere. If you went back to when they opened, that's the middle of an orange orchard And there was no one around. No one there was no population density anywhere near it. And it changed everything.

Speaker 2

If you think about Las Vegas. Las Vegas didn't exist. It was created and I don't I'm not Trying to make a correlation that's exactly right. What I'm trying to say is, we're trying to Create a brand at a level of the market that hasn't been created before. And our view was that this was a decision that was more to drive a conversation than it was to drive commerce.

Speaker 2

We never thought This is going to be a high volume gallery. But we didn't think it'd be no volume. I think it's Going to be fine. I think it would take much longer. If you took anything like this and put it in London, I mean, it's going to do multiple times Immediately, multiple times faster.

Speaker 2

It's a little inconvenient, but it's extraordinary. And a lot of Really extraordinary things in the world started as being inconvenient, right? It was inconvenient to get an iPhone, inconvenient to get a Tesla. How long did people wait to get a Tesla? How long did people wait?

Speaker 2

Yes. How long have they waited to get the new Roadster or the cyber truck? So it's you've got to kind of Think about what are the long term things you're trying to do. We're trying to shape The brand in a way that's brand has never been shaped before, introduce the brand to Europe where the luxury brands are And create the right conversation with the right people and create the right high halo for this whole thing to then As you introduce it in the other places, there's an excitement about it. They've heard about it.

Speaker 2

It's coming. They've seen it posted. They've seen it written about. I mean the press we've got on it was is just incredible. It's multiple times higher than any gallery we've ever opened because it's something nobody's seen before.

Speaker 2

And it's given the world something to talk about. And we have really interesting and high profile people showing up there, Setting up appointments, sir. And wanting to do collaborations with some of the highest end car brands in the world, want to do Car shows on our property and things like that. I mean, so I think it's just going to open up all kinds of new opportunities and new conversations and new perceptions and possibilities for the RH brand. But it's not the gallery I would Used to kind of say, oh, let me extrapolate what happens here.

Speaker 2

We don't have anything like this in America. Yes. We don't have any kind of location like this. It's similar to this at all. So And that's why I think it's getting so much conversation, but it's not the most convenient place to shop.

Speaker 2

We knew that going in. Yes. So this is really to kind of introduce the brand, create the right conversation, let it build, let's go through a winner, Let's go through it, Michael. Let's see what we have to do. And remember, we haven't mailed the book yet in the So we've got very little advertising.

Speaker 2

We've got all the press that everybody's written about and then we've run a few ads and some magazines and stuff like that. And So I think all the other locations we're opening are highly visible In the major markets, lots of traffic and around them, more what I'd call Typical from a location point of view, not typical From a competitive or market point of view, they're going to be extraordinary galleries. Some more extraordinary than others, some of the markets More important in some locations we took some of the Abercrombie locations That we might not have taken to get London and Paris because they were such incredible locations. And so there's some things that are Smaller that we're not investing much capital to, but we're going to open them and we're going to learn. Yes.

Speaker 2

But I'd say, you can't use this as a proxy. It's not there. And I don't know if we'll ever build something like this again. We may. But it's not what anybody would typically do, but that's why everybody is so interested in it and that's why they're Writing about it and that's why they're talking about it and that's why the quality of people that are going there or people you just probably wouldn't you might not have Had them come as you open something ordinary, but they're coming because it's extraordinary.

Speaker 2

And Yes, but it's just one small piece of a much bigger composition and puzzle we're putting together to build the RH into a truly dominant successful Luxury Design Brand. 2nd part of the cadence. The international opening cadence. Yes. I think this is a start from the opening cadence.

Speaker 2

I like our start. I think moderately aggressive, I think. We've got we're planting a lot of flags in important places and really dominant fantastic real estate. We're super excited about it. So but I think we're going to learn a lot in the next 3 years.

Speaker 2

Thank you very much. Sure.

Operator

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Speaker 4

Hi. Good afternoon. Hi, Brian. So my question with regard to the buyback. So you clearly stepped up to buyback significantly here in the quarter.

Speaker 4

So the question I have is, I guess, how should we be thinking about this? Was this More or less a kind of one time adjustment or is it should we expect the buyback to stay aggressive here going into future quarters?

Speaker 2

We communicate our intentions with every kind of Yes. Buyback, we still have open to buy on the buyback, I think a few 100,000,000, dollars 7 100,000,000. And so Yes. I think we made a relatively aggressive move here. And it's and we think We bought 17% of the business at a really attractive price.

Speaker 2

And I think our shareholders are going to benefit from that. And if we're right with our view of Yes, the next couple of years, it's going to look like a really great investment. How aggressive we'll be in future quarters? Yes. I think you've looked at us historically.

Speaker 2

We're kind of optimistic opportunistic. We're not like a big corporation that sets up a regular buyback every quarter and stuff like that. I mean, I That was so smart to do, Warren Buffett would do it, right? Warren Buffett is a very opportunistic repurchase of their stock. And We're trying to be opportunistic investors, whether it's in our stock, whether it's in anything that we do.

Speaker 2

So we think this was a great time to deploy capital and buy back a meaningful position in our company. And it depends what the market does, depends on what we see and how we feel, and what we'll do in the future.

Speaker 4

Appreciate it. Thanks, Doug.

Speaker 2

Sure. Thank you, Brian.

Operator

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

Speaker 2

Hi, Curtis.

Speaker 4

Great. Hey, Gary. How are you doing? Thanks for taking the question. So I just wanted to go back on the point You mentioned the shareholder letter just about some of these early signals that we're reading pretty positive from the source book launch, right?

Speaker 4

Like you said, still early. But can you just elaborate just a little bit in terms of what you meant? Are we seeing more people come back The brand, are we seeing conversion rates go up, the larger order size, but just love to hear a little bit more about, yes, some of those findings in detail, if you could.

Speaker 2

Yes. Well, we look the new collections that we think are the meaningful collections are Acting like they're going to be meaningful collections and the markets that the books Getting into look good. The responses look good. And You just got to see it over a period of time. Our business isn't our business is a it's driven mostly by events.

Speaker 2

It's driven by people buying a new home, remodeling a home or deciding to redecorate a home, all of which don't happen very often, right? It's a very high transaction value kind of business. So if you look at our customers over a period of several years and take their peak day, They spend roughly 80% to 85% of what they spend with us in a kind of a 90 day period, right? And then they spend very little If you look out the next couple of years on the end. So you've got to kind of get them when they're buying.

Speaker 2

And that's why the business will get impacted more than others during a cyclical down market like this. And look, we know when we exited The holiday businesses and all the whether it's the Halloween business and The Christmas business and the accessories business, we're not very dominant in those businesses. We used to be. And In a down cycle, we wouldn't take as big of a hit because people are still buying the small things. We don't sell really much of the small things and we don't Sell any kind of seasonal holiday stuff, right?

Speaker 2

So we'll take bigger hits Other people in these down cycles, but we'll have bigger ups in the up cycles and because of the mix and stuff like that. So But you're not going to see people right away like the Books won't hit and you're not going to see the full potential. You need to let these books kind of get in. And Usually, we get ramped in a book by 3 months. We hit kind of ramp rate.

Speaker 2

And that's the bin stocks happen well and so on and so forth and things build and so on and so forth. But We like everything we see. I mean, we really do. I mean, the early signals are good And we just want more time and we want to transition and set a few stores with some of the new goods. We want in stocks To build, we've got a lot of new things that some look like they're going to be runaways.

Speaker 2

And so you got to say, okay, how do I get in Run it out and how do you reallocate production time and so on and so forth. And you have some things that are you're always going to have things that outperform what you think and underperformance you think. So you Take all the pluses, minuses and aggregate those, but then focus your efforts to optimize your real winners. And But everything real early, everything looks, I'd say, real good for only 40%. So just Keep that into context.

Speaker 2

I'll have a lot more to say next quarter. And if something really is meaningful enough, maybe We talk to everybody or do something sooner. We'll see. I mean, this is we're very early and Yes, we're very positive, but we're still in a not so positive housing market environment. So It's going to be a conservative tone to a degree, but we'll be a lot smarter in another 8 weeks and then Yes, we'll have enough information to make moves to kind of Think about investments in the first half of next year from a mailings perspective and How big, how deep do we go?

Speaker 2

How right are we? And how big do we go? But we're going to be some degree of right This is not going to be a swing and a miss. I mean, I don't want to jinx anything, but like we've been doing this a long time and We're good at reading the data. So it's just I think it's to the what degree of Really good to great is the outcome.

Speaker 2

And then what's that worth as a reset And then how do you compound on kind of that reset?

Speaker 4

Got it. And if I may just a follow-up, international. So you got Munich and New Store coming up, right, I think technically within the 4 months just looking at the newsletter. How are you feeling about those openings? And I guess just curious why lead with those 2 cities?

Speaker 2

Yes. Those are just Smaller ones that don't have a lot of capital like Nor hospitality. Nor hospitality or anything, right? So those are some locations that we thought Yes, the locations were decent. It will give us some without putting a lot of capital in, just give us some feedback, get the brand out there.

Speaker 2

I mean, Look, I mean Abercrombie didn't have any bad locations. These were just we think we're going to get We're going to learn and get information, right? And then we'll decide how long might we stay in these locations, because we've acquired some leases and Are there bigger, better places to go? And what do we do? But I think one of the key things is just kind of get the brand out there In a good way.

Speaker 2

But the real key was what did we do first? When people met us or heard about us, what did they hear? What did they get pointed to? How did they think? So now we've I have done that.

Speaker 2

I don't think people will think Munich and Dusseldorf aren't beautiful galleries. They're just not going to be At the level of London and Paris and Milan and some of the other ones we're doing. So Right. There are locations that were we were required to take to get some of the really key locations that we really wanted and that was Central London and the Paris location. So We think these are fine, kind of let's get going.

Speaker 2

Let's learn. Let's see how the business builds. Let's Quickly learn how to operate in these different countries at a relatively low investment and Much lower effort than doing the really big ones with a lot of work that take multiple years that and that have hospitality and other levels of complexity. So

Speaker 4

Got it. All right. Thanks. I appreciate the thoughts.

Operator

Sure. Your next question comes from the line of Seth Basham from Wedbush Securities. Please go ahead.

Speaker 7

Thanks a lot and good afternoon. My question is around margins. How should we think about the product margins on the new product line? You plan to be much sharper on pricing. So Are you thinking about consolidated gross margins in the mid-forty percent on a run rate basis going forward?

Speaker 2

I think we'll have more to say. I think we believe long term our merchants can We had our historical highs. I think we've got to kind of win Yes, some share here and we got to play a little offense and just be sharper. And So there's few points of investment we're making there, but We also have places where we're playing aggressively, but our margins are at historical highs. So it all sounds like what we're targeting, how we're targeting certain categories.

Speaker 2

Yes. So, we have more to say that. Yes. Let's see how these books do when they get in. Let's see what's Let's see what we're responding to.

Speaker 2

There's going to probably be places where We've taken pricing that's really sharp. There are many places we're going to take pricing up, right? We've already got one collection that's Kind of through the roof, looks like our best collection ever and we're going to probably take prices up this week. So just as we've got so much demand and we think we can the product is Still going to be positioned at a disruptive value. We probably just swung the pendulum a little too far on some This is the business we're in, it's day to day, week to week, you're learning, you're getting data, You're rethinking things.

Speaker 2

You're everything you do when you buy new product is speculative. Based on backwards looking data, so you're never everything we buy is 100% wrong. We've never bought anything and we go, that's exactly how it's selling. That's exactly right. So you're always adjusting, right?

Speaker 2

You're getting real data, real information and then you're learning from that And you're extrapolating that, you're making the next best decision. So I wouldn't jump to any conclusions just because of our What I call it more short term view of just trying to transition From the current kind of products to the new the next generation products And playing offense from a disruptive value equation point of view, it's how we got here. I just think it's probably we should have kept that edge the way we did. And but You go through a period where you're in COVID and your business is running at 40% and your prices are going up You've got we went through multiple rounds of tariff increases and price increases and supply chain increases and COVID increases and ocean freight increases and I think That's why I made the comments I did at the end of my letter. I think we're finally At the point of everything that kind of like make it made everything go up with COVID is one of the kind of the back Side of the cycle of everything going down and everybody everything washing through.

Speaker 2

And I think if you just like kind of take those years and say, okay, what are the best things I learned I'll get them out of the way and you got to kind of rethink about your business. But I think I just wouldn't make any long term assumptions based on anything that's happening On a short term basis right now, in this transitionary period, I think you'll see us return to A really good model. If we get the inflection that we believe is going to happen in the top line, especially Where we think it will peak as we get into kind of the first half of next year, you'll see our whole business model snap back.

Speaker 7

Right. But just to be clear, Gary, so the margin the product margins on the new product that you guys are launching over the next say 6 to 9 months, It's going to be lower by a few points than what you are earning on products during the pandemic. And then the real benefit that Gross margins could be from volume, improved volumes?

Speaker 2

That's not necessarily. So we weren't that specific. We don't guide

Speaker 6

gross margin. As you know, we don't disclose product margins. So We're trying to tell you just a directional flavor and I think just to recap a little bit what Gary said, some products are going to

Speaker 2

be higher, some products are going to be lower.

Speaker 6

We're not making a general statement. I'll just you can roll back the tape on what Gary said as far as the investment we're going to make that, that's right. But as far as like what the future is going to look like, let's just let that play out and we're going to make margin commentary, especially gross margin commentary After each quarter's results, because again, we don't guide that particular line.

Speaker 7

Understood. Thank you, guys.

Speaker 2

Thank you, Seth.

Operator

Your next question comes from the line of Max Rehlenko from TD Cowen. Please go ahead.

Speaker 7

Great. Thanks a lot. So if we were to bucket your initiatives over the next 12 months into U. S. Gallery openings, European openings and then new product introductions.

Speaker 7

How would you rank order their magnitude? And then just for clarification, How much of a refresh inside the gallery should we expect both over the next 1 to 2 quarters and then a year from now both in terms of new products as well as the number of galleries that the new products will hit. Thanks a lot.

Speaker 2

Sure. Take the product and the product is by far the most important thing we're doing, right? And the new openings and building out the platform, those are it's the platform for the product. So what we're doing with the product is going to make the most meaningful impact over the next several years. So when you think about the investment in gallery floor sets, We just began setting RH Marin next to our headquarters and we will all see it Over the next it gets fine tuned over the next couple of weeks.

Speaker 2

As kind of a Phase 1 move of it, we have kind of Right now Phase 1 and Phase 2, and then we'll have a Phase 3. I think you'll see The majority of the galleries reset by Q1 of Next year and as we all together. Yes, yes, all the galleries, yes, reset. And Yes, you'll have some winners and some losers in kind of the product mix. And as we mail The modern books going in, in January, I mean, you're going to find out there are some things in modern that are probably really good and Better than some things we might have rolled out into the galleries and you'll make some adjustments.

Speaker 2

But I'd say we'll be By Q2 of next year, we'll be really educated, Especially by the late Q2, we'll have had 2 cycles of drops. We will have a lot of newness. We'll have 1st phase, major phase, 2nd phase still not as major as the first phase, but still more meaningful than normal. And we'll have had a good period of time to measure and have seen Phase 1 of the product transformation and first drops. And then we'll have some data on This second cycle and we'll be fully ready for the second half of next year, but to kind of keep optimizing it, right, because we're going to just get a lot of A lot of information, you're making a lot of adjustments.

Speaker 2

And we'll keep doing things that kind of What I'd say build the trend, when you go through a big move like this, it's you're going to get some of it really right and you're going to get some of it wrong. And Yes, it's as long as you're throwing more things above the line than below the Then you're going to learn and then you're going to make adjustments. And those adjustments will move the business higher, Right. So I'd say, we'll hit max inflection in Q2, doesn't mean we'll hit max run rate. When I talk about the inflection, I talk about the early inflection, then we'll build on that, right?

Speaker 2

So I would assume that the The first half of next year will be very good and the Second half of next year will be better than the first half. Yes.

Operator

Your next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Speaker 7

Hi, good afternoon. I was hoping to follow-up on the topic of operating margins. And Just hoping we could maybe frame up some of the puts and takes. Obviously, the full year implies kind of this mid teens level for the operating margin. Can you help us think about maybe your latest thoughts on structurally what the operating margins look like in this world where you're opening up stores Internationally in this world where you have new product coming out, there's more source books.

Speaker 7

What do you think sort of normalized margins start looking like as you get back to revenue growth again. Thanks.

Speaker 6

I don't I think Brad, we're ready to talk about that. I think we're talking about some short term changes, near term impacts to the margin and especially moves related to and making some investments due to competitive reasons as Gary had talked about. What the other side of that looks like, we have our discussion with you about each year's guidance in March. So we'll do that and give you a better look then. But as far as we sit here at the end of Q2 and the many sort of Changes in levers we're planning forward with.

Speaker 6

We still don't have that visibility or that ability to tell you what the steady state looks Other than as revenue grows and we get leverage in the business, We expect margin to increase from here. Where that baseline level is, I'll let Gary chime in here. But no,

Speaker 2

I think that's correct. I mean, I think we're Yes. For the most part, we're giving you color today, maybe slightly more different or a different angle on the color And what's written in the letter, but we don't want to kind of talk about things that we don't that we haven't really released, right? And We're not really releasing kind of that far out, but yes, All of us on this call are going to know a lot more next quarter and the next quarter. And Yes, we're either going to be more right or more wrong.

Speaker 2

We think we're going to be more right than wrong and everything that we said, we believe in. And it's there's some level of speculation, of course, but There's a lot of data that we have based on doing what we're doing, introducing newness, Nailing source books, resetting floors. We know all the list factors and what will happen if we do this, that. And We're directionally usually right on those things. And so we've been rusty, we've been somewhat out of the game and we're going to come back into the game in a very impactful way.

Speaker 2

So, yes, we're looking forward to kind of getting the data. But look, the good news is The early data doesn't look bad. It looks good. So, So far so good. That's as much as we know right now.

Speaker 7

Gary, maybe if I could ask you another way. When you Did some significant share repurchase back and I think it was 2017. You later described that time as a period where You've kind of taken the racetrack off the your car off the racetrack and done a lot of surgery on it. Does it feel like it's that significant of a time for you As you think about how you're positioning the company?

Speaker 2

Yes, bigger than that. We've redesigned the whole fleet of cars. It's really the biggest repositioning of the business we've ever went through. And Yes. I think the best work we've ever done.

Speaker 2

So it's much bigger. I think it's going to be much more significant than that. And look, we've just bought back a lot of stock. We played it we put our money where our mouth is, right? We took a really big position in the stock.

Speaker 2

And we've allocated a couple of $1,000,000,000 That's twice as big, I think, as the buyback then. So we wouldn't have done that if we weren't confident. And our Board wouldn't have let us do that Unless they weren't unless they were confident, right? So this is a fully informed kind of position we're taking from An investment perspective on inventory, on share repurchases, But we're not a new team. It's an experienced team, it's experienced board.

Speaker 2

Like you said, we've done this Just a smaller magnitude, we're a smaller company too. So we're a bigger company, take place in a bigger bet. So, I kind of like where things are. I think, look, there's everybody's speculating, right? Like if you just like Just look at what's happened in this quarter.

Speaker 2

Our stock started this quarter The day after earnings $2.74 a share. $2.47 Yes, dollars 2.47 a share. Yes. At the end of Q2, it ended today at 369. It peaked at 402%.

Speaker 2

It went up 49% and it peaked at 63% up within a quarter With the only information and disclosures was we bought back 17% of the shares. So everybody could do the math About how many shares we bought back. And because there's new disclosures that have to be made every time my ownership goes up by one point, there's a lot of Disclosures, it's a lot of filings. And so you would say, hey, They're buying back, just stopped up 17%, just go up 20%, just go up 14%. I mean, it went all the way up 63%.

Speaker 2

And at the end of today, it was up 49. And after hours, it's still up 36%, even though it's down, I don't know, 28 points down, something like that. They just flashed it over here a second ago. So Yes, people are like, wow, it's like, wow, is it a bad day? No, it wasn't a bad day.

Speaker 2

I don't know, we've had a 1,000,000 good days and a 1,000,000 bad days Within a quarter, not a 1,000,000, but like so many so much volatility in the market, because so many people are guessing Like what's next? What's this? When is the Fed going to ease? What oh, they're buying back stock? What does this mean?

Speaker 2

And I would just say, stay focused on what we write. Yes. You want to know what you mean? Reread the letter. That's why I write these letters.

Speaker 2

So it's on there. It's not random Comments from a conference call that can sometimes be less focused and just Everything I spent a lot of time writing those letters and the team and I spent a lot of time together saying like crafting What we believe is the best version of the truth and what we believe is going to happen with the business. We're not going to always be right, but Yes. We have a pretty good track record over a long time. And so, but it's just a lot Volatility, it's a time of speculation, right?

Speaker 2

When or is this Fed going to ease? Are they going to tighten? Is the housing market bottoming? Is Is the pent up demand? Is there going to be more inventory as it relates to our market?

Speaker 2

And RH's new book is going to work, the goods going to be, this customer is going to accept the goods, where the margin is going to be at, all kinds of stuff. We just put out a release today that confirmed the year's numbers, confirmed them. And the stock is down $30 in after hours. I don't think any of it made That's going up. I don't think it makes sense right now going down, but maybe it does just to kind of say, hey, where should it be?

Speaker 2

Yes, but we're all kind of looking at the same information. I mean, that's the funny thing. So I'd say, it's like one of the things you learn, if you really study Warren Buffett, There's a real long term consistent view about how they operate and what they do. And Yes. We try to learn from people like that or Bernard Arnault and how he's built LVMH and How people have built things.

Speaker 2

And even if you look at like a lot of people think that there's so much inconsistency with Elon Musk. See, I see consistency. He consistently innovates. He consistently keeps innovating. And so has he ever hit a launch target on anything or an intro target?

Speaker 2

No, he consistently doesn't, because He doesn't manage the business. He leads the business and he innovates consistently. And so there's always going to be Kind of more fluctuation short term, but long term, He's building one of the most incredible businesses the world's ever seen. And so I always just kind of stand back and look at the long term. I hear people I think Elon Musk, oh, he bought Twitter and that's stupid.

Speaker 2

He turned it into acts like whatever. Those are little sideshows. The guy is building one of the great companies in the world. Like, people say, oh, he lost his Head of HR or he lost this. Like now, If you look at it over a number of years, he's building one of the best things in the world.

Speaker 2

And anybody that's bet against him has lost a lot of money. And I think we're just trying to build one of those great things. And so We just try to stay focused on the long term, learn from all the short term data, but don't overreact. We know we made some mistakes and We know we are arrogant in pricing and we know we kind of our muscle atrophied a bit in new product introductions and Trying to ramp back up wasn't our best work. We learned from that.

Speaker 2

We're going to snap back from that. And you will see us not only snap back, you'll see us better than you've ever seen us. And I feel real confident like and So we'll see how it plays out. We'll see how right we are.

Speaker 4

Your next question and comes

Operator

from the line of Jonathan Matuszewski from Jefferies. Please go ahead.

Speaker 7

Great. Good evening, Gary, Jack, and thanks It's on the contemporary business. In the past, you referenced $1,000,000,000 milestone over 3 years. Just hoping to see if we could get an update on how that business is looking today as more product has been rolled out across the galleries And how we should maybe think about the run rate of that business maybe by the time of early next year, which would be a couple of months after the October source book mailing. Thanks so much.

Speaker 2

Yes. I think about the totality Of what we're doing here. I wouldn't just isolate contemporary, right? Contemporary is a new book. Do we think it's going to be $1,000,000,000 Yes, we do.

Speaker 2

But you really got to you just got to look at this whole thing in concert, right? The biggest book is our interior's book. You will continue to be contemporary modern, be number 2, contemporary number 3, Contemporary might ramp bigger than modern. We make may make decisions like a lot of times what exactly goes in contemporary versus what goes in February versus what goes in modern versus what goes in interiors can be somewhat subjective. Like there's sometimes some blurred lines I'd say, I wouldn't go kind of micro like that right now.

Speaker 2

I think you'll miss The bigger idea. The bigger idea is the totality of the product transformation we're making. And I think about it is, We're going to mail about 1200 to 1300 pages of product and across that 70% to 80% newness. I think the next biggest book that Competes with us is 228 pages. We haven't mailed anywhere near this number of pages in a long time and we've never had this much new product Get a market like this at the design quality, The quality of the make and the what we believe the value equation.

Speaker 2

And anytime we've done anything like this, we've moved the business meaningfully. And so this is the biggest thing we've done. I think it will be the biggest the most meaningful thing that we've ever done strategically. It will reset the company for the next 5 years.

Speaker 7

Appreciate the color and best of luck.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Steve McManus from BNP Paribas. Please go ahead.

Speaker 2

Hey, afternoon. Thanks for taking the question.

Speaker 7

So I had a

Speaker 6

question on suppliers. We're seeing more and more suppliers go out of business here, pretty big one on the high end side last week. So just curious what you're seeing with respect to the financial health of some of your Any challenges that you're facing right now that's worth calling out?

Speaker 2

Yes. I mean, you're probably referencing one of Suppliers that filed for bankruptcy, Mitchell Gold and Bob Williams, really terrific people. As I said, it's an unfortunate thing. I think they Yes, I went through some private equity hands and there's some they stepped back from the business and had some Wrong leadership. It's that decision that it kind of goofed up the company.

Speaker 2

And there There's, I don't know, probably $30,000,000 $40,000,000 of demand with them. We can resource it All pretty easily. We don't see any meaningful interruptions or anything. They're not one of our big suppliers. So and I think it just goes to show how hard it is to do every part of the business, right?

Speaker 2

When Yes. They're typically they were a furniture manufacturing company, really great aesthetic, great marketing, great style. They got into the retail business too and that added a lot of complications. It's hard when you try to do both. You try to be a wholesale business, a retail business, a manufacturing business.

Speaker 2

You're kind of in 3 kind of complex businesses right there. So I think there's always going to be some people Yes, they kind of don't make it through different down cycles like this. Could there be more that could? There Could be more on the retail side. There probably will be.

Speaker 2

But, yes, we don't see any real Fundamental risk to our business that is going to be meaningful. Otherwise, we would have talked about it in disclosure. Got it. Appreciate the color. Thanks, Gary.

Speaker 2

Best of luck. Sure. Thank you.

Operator

Your next question comes from the line of Michael Lasser from UBS. Please go ahead.

Speaker 3

Good evening. Thanks a lot for taking my question. Gary, is it right to interpret Your statement that you expect the business to inflect in the first half of next year to mean that it's going to flatten out In the first half of next year before resuming a growth trajectory in the second half of next year. And my follow-up question is, would you expect based on everything that you know today That your totality of investment spend, independent of it's going to be in the gross margin or in the SG and A, Is it going to be greater than, equal to or less than what you're spending this year? Thank you so much.

Speaker 2

Sure. Sure. So Yes. Let me just try to be real clear and direct that We expect the business to inflect in the second half of this year, right? Meaning, and when I talk about inflection, what does that mean?

Speaker 2

That means a meaningful move in trend and this means to the upside, right. So we think our business will inflect and our trend will change to the upside Visavis where we've been trending, where how the rest of the market is performing, We think we'll have an inflection that will make a meaningful move against all those metrics, right? We'll inflect that against our trends, we'll inflect that against The market trends will inflect up against the competitive trends. We think we will reach kind of a peak of that inflection of this first phase From these books, we think we will hit that in the first half of next year. So I'd say, think about an inflection happening here over the rest of this year will inflect that.

Speaker 2

And then in the first half of next year, there'll be another kind of inflection above whatever that run rate is, right? And that's against our trends, against the industry's trends, against our competitors' trends. And then as we cycle and get into the second half of next year, I think we will build on that trend, but it may not be as big of an inflection, But it will be a building of momentum. Again, kind of disregarding any kind of Meaningful thing that happens in the economy and whatever happens in the economy, I would be surprised If it's more dramatic than our positive inflection, right? So if the market goes down, some step down, Our inflection point will be bigger than that step down.

Speaker 2

Does that make sense? Is that more clear?

Speaker 7

I think I catch your drift.

Speaker 3

If you've been trending down high teens, low 20% range, The inflection is, look, we're not going to be trending down at this range. The counterargument would be, well, if you're going to be Facing easier comparisons,

Speaker 6

it's harder for us to

Speaker 3

dissect how much is due to is the market getting better? Hugo.

Speaker 2

Yes, yes. No, you just got to think about things about all those things I just said. What's the industry doing? What are the key competitors doing? What are we doing?

Speaker 2

We're going to inflect against all of that, right? So it's not just our trend. Our trend will be one of those elements, but we're going to inflect against the industry. We're going In flex against the key competitors. That's how to think about it.

Speaker 3

Understood. Okay. And then on the

Speaker 2

Which means we'll be taking market share, right? So I think we've been giving market share. We will go from giving market share to taking market share.

Speaker 3

That's clear. And then as you think about 2024, will the magnitude of the investment that you're making be larger than, smaller than or equal to this year?

Speaker 2

We haven't guided to that yet. So yes, we're not prepared to kind of talk about that.

Speaker 3

Okay. Thank you very much and good luck.

Speaker 2

Great. Thank you, Michael.

Operator

Your next question comes from the line of Christina Fernandez from Telsey Advisory Group. Please go ahead.

Speaker 1

Yes. Hi. Good afternoon, everyone. I wanted to go back to the advertising spend and the shift you're making to the twice a year cycle. Does this mean you go back to 4% of Sales spent on advertising, I know the last couple of years was very low or with the product introductions you're making and visiting store openings in Europe.

Speaker 1

Does it make sense for that spend to be at a higher level? Just want to get a sense of directionally where that And then go.

Speaker 2

I don't know yet. We'll know a lot more when we see the inflection in the business.

Operator

And we have no further questions in the queue at this time. Gary Friedman, I'll turn the call back over to you for closing remarks.

Speaker 2

Great. Thank you, operator. Thank you everyone for your time and interest. Thank you to Team RH for your leadership and efforts. Your hard work is going to pay off and thank you to all our Partners around the world who are part of this team.

Speaker 2

Your support and efforts mean the world to us. And I can tell you all three constituencies that are all probably listening into this call, I think share the sentiment that we shared with you today. I don't think we've ever been more excited about the future And I believe we'll demonstrate that to the other constituencies and that's the shareholders that are on this call. So Thank you everyone for your time and attention today. We look forward to the next few quarters.

Speaker 2

Thank you.

Operator

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

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Earnings Conference Call
Premier Financial Q2 2024
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