Soho House & Co Inc. Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 15, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the SoHo House and Co. 4th Quarter 2023 Results Conference Call. Today's conference is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Thomas Allen, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you for joining us today to discuss SOH House and Co. 4th quarter financial results. My name is Thomas Allen, and I'm the Chief Financial Officer. I'm here with Andrew Kearney, our CEO. Today's discussion contains forward looking statements that represent our beliefs or expectations about future events.

Speaker 1

All forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statements. Some of the factors that may cause such differences are described in our SEC filings. Any forward looking statements represent our views only as of today, we assume no obligation to update any forward looking statements if our views change. By now, you should have access to our Q4 earnings release, which can be found at soohouseco.com in the News and Events section. Additionally, we have posted our Q4 presentation, which can also be found in the News and Events section on our site.

Speaker 1

During the call, we also refer to certain non GAAP financial measures. These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Reconciliations to the most comparable GAAP measures are available in today's earnings press release. Now, let me hand it over to Andrew.

Speaker 2

Thanks, Thomas, and good morning, everyone. Before I start, I want to acknowledge our continued confidence in how we run our business and our accounting practices. To further counter any misleading statements that have been made about us, our Audit Committee engaged a large, globally recognized forensic accounting firm and a prominent independent global law firm to review our accounting and accounting practices. Their review was recently completed and the results reported directly to the audit committee. As expected, this has shown no material issues.

Speaker 2

As part of our year end audit, we have made 2 small non cash revisions to our ongoing financial reporting, which Thomas will cover later. 2023 is my 1st full year as CEO. I'm proud of our achievements and what our teams have delivered. In the past 12 months, I prioritized visiting our houses around the world and SOWHA House is still as special as when we opened our first site in 1995. Our houses are full of creative interesting people from different backgrounds who come together to have a good time and meet fellow members.

Speaker 2

As the only global private members club of its kind, we operate in more than 20 cities that represent creative, dynamic and progressive hubs. During our 29 year history, we have never closed a house and the reason for our success and enduring appeal across all ages is that we're a scaled global membership club with local houses where members create its identity. We're building on those strong fundamentals with a business that we believe is getting stronger and stronger, a result of the plan we put in place 18 months ago to focus on 2 strategic priorities, to grow and enhance the membership experience, which leads to increasing recurring revenues and to drive operational excellence leading to greater profitability. Our 2023 results show we are making good progress and I'm excited to share the results with you today. We welcome more than 30,000 net new SOH House members, an increase of 20% year on year, taking us to 194,000 members globally versus our guidance of above 192,000.

Speaker 2

Our membership growth last year came primarily from 24 houses we had opened since 2018. For example, Nashville, Austin, Paris, Rome, Brighton and Stockholm. These newer houses allow us greater choice in where we grow membership given their maturity curve, as well as positively enhancing the membership experience for represent approximately 80% of our total membership. We are particularly pleased with Mexico City. Since we opened back in September, we have more than 2,000 members.

Speaker 2

This makes us even more excited to continue to expand in Latin America where we will open Serra House San Paulo soon. Cities Without Houses or CWH membership grew 50% in 2023, demonstrating the strength of our brand in cities where we do not have a physical house, but the demand to be part of our global network of creative members is high. It signals the runway that we have for further growth. Demand for membership was very strong and our wait list finished in 2023@99,000 up from 86,000 at the beginning of the year, demonstrating the continued appeal of Sohuhaus globally. Annual retention remained high at 91.5% and in line with our expectations given the recent growth of membership and the expansion of our business into new regions like Asia.

Speaker 2

Total revenues grew 17% year on year with membership revenues, the cornerstone of our business model, rising 33% year on year and representing 32% of total revenues, up from 28% in 2022. In house revenues grew 13% and other revenues grew 7% in the year. Adjusted EBITDA more than doubled in the year, growing approximately 110% to 128,000,000 with margins almost doubling from 6% to 11.3%. Finally, net cash flow from operations more than tripled year on year to $50,000,000 or $15,000,000 in 2022 and negative in prior years. Looking at just the Q4 itself, we welcome more than 9,000 net new storehouse members.

Speaker 2

4Q adjusted EBITDA was 37,000,000 dollars up approximately 60% year on year, supported by 13% margin compared to 9% in 4Q 2022. Total revenues were up 8% over the same period. Membership delivered $96,000,000 of recurring membership revenues, a 24% increase year on year. Net cash from operations for the quarter were again positive at $19,000,000 compared to a $15,000,000 loss in 4Q 2022. Now let me give you an update on progress we're making against our 2 strategic priorities, growing and enhancing the value of membership and delivering operational excellence to drive profitability and cash flow.

Speaker 2

As I've said before, giving our members the best experience is at the heart of what we do. I want to give you more color on what we're focused on in 2024. We continue to invest in talent and training across our teams to deliver high quality service to our members. We're expanding spaces and refurbishing areas our members love like our pools and rooftops in our existing houses. For example, in London, we have recently refurbished White City House roof and pool and expanded the ground floor to create more member space.

Speaker 2

In LA, we will open the Lutman Club, an 8,000 square foot new event and member space at Soho House West Hollywood, while we're also working on a new member space on the roof of Holloway House. And in New York, we're refurbishing the outside space at Sur House Dumbo to be ready for an exciting summer. We continue to introduce new food concepts and dining options. Our popular Japanese restaurant, Pen Yan, has just opened at Ludlow House in New York, while we'll open Baren Jack, a celebrated Persian restaurant at Soho Farmhouse in the spring. Members have told us how important fitness and wellness is in their lives.

Speaker 2

We're investing in new equipment and facilities across all our houses. Some examples include expanding our gym at White City in Chicago, while recently opening a new wellness barn at farmhouse. Our new weekend wellness retreats at SOH Houses globally have been a real hit with members. Our member satisfaction scores that we are constantly tracking show that our approach is working. This is particularly true in our 3 most established cities, London, New York and LA, where our demand and retention rates are very high.

Speaker 2

We have 17 houses in total across these cities and our plan as of last year is to limit intakes in these cities. This means we will not increase membership in 2024 in our most mature houses, Sower House London, Shoreditch House, Sower House New York and Sower House West Hollywood as we focus on making sure our houses don't feel too busy. We have always been very intentional about where we've opened new houses and chosen to expand into creative, exciting and progressive cities, introducing new members that make our global community more diverse and interesting. Portland is no exception With its exciting food culture and thriving arts and film community, we opened Sohuhaus Portland last week in Central East Side. Located in a historical building that has been restored by the Sohuhaus design team.

Speaker 2

It offers members a rooftop terrace, a pool, gym and an attractive club spaces. Sohu Sao Paulo will be our first house in South America and will open soon in one of the city's most ambitious urban redevelopments. The house is situated within the former hospital and features 32 bedrooms, a gym, a rooftop pool and bar and club spaces for members. SIR House Manchester, our 3rd house in the north of England is set to open later this year across 5 floors with a gym and health club, bedrooms, rooftop pool and bar, event spaces and 2 floors of club space. And finally, we will open Soho Mews House in London's Mayfair area later this year.

Speaker 2

Turning to our second strategic priority, operational excellence. We have made significant improvements to make SIR House and Co. A more profitable business, whilst delivering a better experience for members. Initiatives over the past year include operationally streamlining processes and systems like rotary to allow house teams to spend more quality time with members further rolling out an F and B ordering system, which allows our teams to more frequently tailor menus for members whilst growing margins. Re platforming the technology for online bedroom bookings and simplifying the member journey.

Speaker 2

Launching personalized event recommendations on the app that are relevant to member interests and introducing a state of the art warehouse for SOHOME to optimize delivery times and service. Initiatives like those are delivering for the business and for our members, helping drive EBITDA to more than double from $61,000,000 in 2022 to $128,000,000 in 2023. Adjusted EBITDA margins in the year almost doubled from 6% to over 11%. We continue to keep a firm grasp on costs with wages as a percentage of revenues for the year improving approximately 200 basis points year over year and approximately 100 basis points versus 2019. While F and B margins were flat year over year despite very high cost inflation and up approximately 200 basis points versus 2019.

Speaker 2

Full year RevPAR was up 11% year on year and 32% higher than 2019. We've seen improved house contribution margins in our mature houses at over 40% across each of London, New York and LA, and we're seeing strong growth in profitability in our newer houses in line with expected maturation curve. Now let me pass on to Thomas to give you more detail on

Speaker 1

the numbers. Thanks, Andrew. Total revenues for the Q4 grew 8% year on year to $291,000,000 or 5% on a constant currency basis. Membership and in house revenues rose 24% and 4% respectively or 21% and 1% on a constant currency basis. Other revenues fell 4% or 7% on a constant currency basis.

Speaker 1

House level contribution increased 44% year on year with house level margins up approximately 700 basis points to 31%. House level contribution margins did benefit from a $6,000,000 out of period lease adjustment, but even excluding it, margins improved approximately 400 basis points. Note this adjustment did not benefit adjusted EBITDA. Looking at the full year, house contribution margins were 27%. To help you with your understanding of the business, houses that were over 5 years old had an average contribution margin of 37% compared to housing that first year had average margin of negative 13% and in the 2nd year were roughly breakeven.

Speaker 1

As our newer houses ramp, this signals significant embedded growth in the future. Other contribution was up 9% year on year in 4Q with the margin coming approximately 200 basis points to 21%. For the fiscal year, other contribution was up 33% with margins increasing approximately 400 basis points to 21%. Turning to revenues, we saw continued growth year over year increasing revenue by just over $20,000,000 Membership growth and pricing drove a nearly $19,000,000 increase in membership revenues. In house revenues were $4,500,000 higher year over year driven by a good October and strong trading at the end of December.

Speaker 1

This was offset by not opening Portland or Sao Paulo by the end of the quarter and weaker trends in November early December. Like for like in house revenues were approximately 20% higher than 4Q 2019 and roughly even with last year. Other revenues were down $3,000,000 through a mix of lower standalone restaurant revenue, which includes the impact of closures from earlier in the year and lower design fees. Moving to adjusted EBITDA. As a reminder, we only published 1 adjusted EBITDA in our earnings release, earnings presentation or discussed on our earnings calls.

Speaker 1

This adjusted EBITDA includes the impact of pre opening costs, deferred registration fees and non cash rent. Our 4th quarter adjusted EBITDA was $37,000,000 up approximately 60% year on year as we continue to benefit from the profitability initiatives we have outlined and continued membership and revenue growth. A fiscal year basis adjusted EBITDA was $128,000,000 up approximately 110% year on year. Despite this increase, we know our performance here was slightly behind our guidance and I want to call out a few items here. Total revenue came in at the low end of our expectations.

Speaker 1

We manage expenses well, but we weren't able to fully offset. We have also made 2 changes to our accounting policies that are worth talking through. We hired a new Chief Accounting Officer who started in November and have new audit partners at BDO. Together, following a detailed review, we elected to make these changes that were then confirmed by the independent advisors that were retained by our audit committee, as Andrew previously mentioned. We incurred approximately $3,000,000 of additional expense in 2023 related to development that we are expensing rather than capitalizing.

Speaker 1

Roughly $600,000 of this relates to 4Q that we booked in the quarter and approximately $2,600,000 relates to prior periods including approximately $800,000 for 2022 that are impacting our full year adjusted EBITDA, which is why our full year adjusted EBITDA does not match the sum of the quarters. We incurred approximately $2,000,000 of additional expenses related to taking a larger obsolescence reserve against our inventory. Historically, we haven't held any major reserves against our inventory, which is mostly related to Soho Home as we have used items in our houses. Given the much larger size of Soho Home today, we have now elected to take a reserve. It's worth noting that neither of these changes impact cash flow.

Speaker 1

Moving to our balance sheet. We ended the year with a strong liquidity position of approximately $250,000,000 a combination of $164,000,000 of cash and cash equivalents and a $90,000,000 undrawn revolving credit facility. Our cash and liquidity positions in fact increased slightly quarter over quarter. Our net debt to reported adjusted EBITDA position also continues to improve ending the year at 5 times compared to 9 times at year end 2022. We continue to drive the business to reduce these levels even more in 2024 and beyond.

Speaker 1

We have no significant debt maturities until 2027. As it relates to our balance sheet and cash flow, there have been some questions recently around our cash conversion in 2023, which I thought it would be helpful to clarify. On inventory, the majority relates to Soho Home. We have strategically grown our Soho Home business, which is digital first and focused on helping our members decorate their homes. We are really pleased with the results so far.

Speaker 1

Home revenues have roughly tripled since 2021, while inventory has been managed well and grown around 150%. We believe there is significant opportunity for SOHO Home to grow further. On receivables, prepayments and accrued income, our company as a whole has grown total revenue significantly approximately $600,000,000 over 2 years. So receivables have grown as well. In addition, our business mix has shifted more into home, management contracts, design and development, where the revenue that we booked doesn't convert as quickly to cash as traditional SOHO House membership, food and beverage or room revenues.

Speaker 1

We have built out disclosures in our 10 ks to help drive better understanding of our business. For example, we've added new detail in inventory supplier advances as well as giving more detail on our buildings depreciation. Our 2024 guidance reflects our focus on giving our existing members a great experience while growing membership, driving the bottom line and delivering further operational efficiencies. We are guiding to over 210,000 SilverHouse members at year end 2024, more than 8% increase year on year. This will be driven principally by maturing houses, but also through new house openings, which welcome new members into our global community.

Speaker 1

These include Portland, Sao Paulo, Manchester and London Mews House which we discussed earlier. While we remain confident about house growth with a strong pipeline of more than 20 houses, our focus in the near to medium term will be on membership and profit growth over house growth. As we have discussed throughout the past 18 months, the development market is tough and we have been hit by a number of developer delays with little we can do given it's primarily their capital building our houses. We're adapting to the currency of the market and avoiding these challenges from burdening our company and cash flow. As a result, we're planning to open 2 24 Soho Houses a year for the next couple of years before returning to a higher cadence when credit and development markets become more accommodating.

Speaker 1

Beyond Soho House, Scorpius will open its 2nd site in Bodrum this summer followed by Scorpiot Saloom and NetDC. We want to remain disciplined around our mostly asset light approach. If you look at our CapEx as a percentage of revenue, it has dropped from 18% in 2021 to 10% in 2022 to 8% in 2023. We expect 2024 CapEx to be in the $90,000,000 to $100,000,000 range remaining at approximately 8% of revenue. Turning to revenues, we expect total revenues for 2024 of $1,200,000,000 to $1,250,000,000 up 6% to 10% year on year.

Speaker 1

This reflects our expectation of strong membership revenue growth, a 2024 house pipeline and more conservative growth in in house and other revenues given macro challenges and soft restaurant trends in year to date versus last year. That said, we benefit from still being able to grow revenues because of recurring membership revenue, which we expect to grow to $405,000,000 to $415,000,000 a 12% to 15% year on year supported by membership growth and pricing gains. It's worth noting that in 2023 revenues include approximately $20,000,000 of membership credit revenues, up from approximately $15,000,000 in 2022, most of which is accounted for in our in house revenues when members spend the credit. This represents approximately 2% of our total revenue and supports footfall into the houses from new members when they first join, which leads to stronger retention. We would expect a slightly smaller amount of revenues related to membership credits in 2024 versus 2023 given lower new member growth.

Speaker 1

On adjusted EBITDA, we continue to manage our business efficiently, ensuring membership revenue flows down to the bottom line. We're guiding to adjusted EBITDA growing 21% to 29% year over year to $155,000,000 to $165,000,000 with adjusted EBITDA margins rising from 11% to 13% despite persisting cost headwinds. As you can see, we are well on our way to our medium term target of 15% EBITDA margins and see a longer term goal of 20% plus. Finally, we expect to continue to improve our management of working capital to support higher cash flows from operating activities. Let me now pass it back to Andrew.

Speaker 1

Now let me close by reiterating our confidence in

Speaker 2

the strength of our business, of our membership model and of our future growth. 2023 was a successful year in terms of membership and revenue growth, underpinned by continued appeal of SORHOUSE, which hasn't wavered in almost 30 years. Meanwhile, our focus on operational excellence is driving better profitability and cash flows. I'd like to personally thank our teams globally and our members for their continued support and loyalty. Before we head into Q and A, I wanted to mention that we announced on February 9 that our Board had formed an independent special committee to evaluate certain strategic transactions, some of which may result in the company no longer being a public company.

Speaker 2

Our Board and their affiliates own approximately 74% of our common stock and have received interest in the company on a number of occasions. In line with its fiduciary duties, the Board weighs up the benefits and costs of being public versus the potential value that could be created through any transaction. Given that this work is offering is led by independent members of the Board and their advisors, as management, we do not have anything to update on it and will not be able to address any questions regarding it on the Q and A. We will have an announcement if and when there is something to announce. Operator, we can now take the first question please.

Speaker 2

As a reminder, you can either ask your question on the phone or submit them over the webcast.

Operator

Thank you. We'll take our first question from Steven Zaccone at Citi.

Speaker 3

All right. Thank you very much for taking my question. First question I had was just with the pivot to opening less houses, when you look at the guidance you're providing this year for top line growth and then EBITDA growth and margin expansion, should we think this is the new kind of growth rate for the business? Like is the opportunity bigger now for EBITDA to go a bit higher because you're probably spending less on some of these upfront cost to opening houses?

Speaker 4

Hey, Steve. How are you? So as you can see from our guidance, we're guiding to EBITDA margins or adjusted EBITDA margins rising about 200 basis points year over year in 2024. We've talked in the past about how we saw a medium term path to 15%. And then on with this earnings call, we highlighted that we saw a 20% plus margin goal.

Speaker 4

I think it will take a couple of years to reach a 15% and then but then I definitely believe that we should continue to see pretty consistent growth beyond that.

Speaker 3

Okay, great. And then maybe to just focus on the discussion around opening less houses, can you talk through the decision criteria of like where are the biggest opportunities for you to continue to scale? I know in the past you talked about going more to the Americas overall. Has that changed? Any color there would be appreciated.

Speaker 2

Steven, it's Andrew. So I think we've been talking about our new house openings for the last 12 months. And as we've mentioned before, we have a pretty fantastic new house pipeline. So we have got 20 houses that are signed, all based off CWH successes globally, all on our attractive terms and asset light model. I just think what we're saying today is, look, developers are having a really tough time.

Speaker 2

The market environment is challenging for them, supply chain issues, labor availability, inflation materials, expensive financing. So what we see is the impact of having our houses delayed. So as you're right, we don't want to use our own capital to open any unnecessary preopening costs or miss our opening schedules for our members. So we're just choosing to slow down a wee bit at the moment for the next 18 months to 2 years. But a lot of the houses that we've already mentioned about growing in Australasia, growing in Asia, growing in Europe, growing a lot more in North America, that's still the case.

Speaker 2

It's just going to take a little bit longer given the macro environment with our developers. Okay. Thanks for

Speaker 3

all the detail. Best of luck.

Operator

We'll go next to Shaun Kelley at Bank of America.

Speaker 5

Hi, good morning and afternoon everyone. Thanks for taking my question. So maybe just to start off, Andrew or Thomas, could you just give us a sense of the consumer spending side? I think there was some color provided about the trends you saw across the Q4. It sounds like October was strong and maybe the end of the year in December was strong.

Speaker 5

But just as we look at the broad pattern and I know you know I focus on this a lot, but just the spending pattern of in house relative to membership growth continues to be quite a bit below that. So kind of what are you seeing under the hood in terms of mix shift, new member spend relative to existing member spend and then just kind of broadly as it relates to consumer?

Speaker 2

Thanks, Sean. I always enjoy your macro questions. So I'll give you some color. So what we saw if I take Q4, so what we saw was members visitation was up in the quarter pretty much across all houses across all regions, but there was a slightly low F and B spend per visit with our members. So they kind of balanced out.

Speaker 2

That's why we were flat year on year and obviously up versus 2019 by about 20%. So if you think about our macro environment, it is pretty challenging. Here in the U. K, we're in a technical recession. So what we do is we focus more than ever on giving our members a great experience in the houses, which is working because footfall continues to grow.

Speaker 2

And that's what we're very focused on. We see a similar spend between new members and existing members. That hasn't changed. And I'll give you a little bit more color on what we're seeing year to date. I think that's important.

Speaker 2

So our like for like in house growth has softened a bit, which is what and I know you've been on lots calls with other folks, but it's what you're hearing from everybody right now, especially in the high end dining companies and also you can see that from Opel's table stats. January was impacted by a calendar shift. What we also saw in January was a much bigger spike in nonalcoholic beverage consumption, much more than we've ever seen before. But positively, results have gotten sequentially better each month. So meaning Feb was better than January and the 1st 2 weeks are better in March.

Speaker 2

So we are seeing nice better growth. And we're in a better position, as you know, than any other hospitality industry because we're a membership club and we have recurring membership revenues. So we might be slightly down F and B, but we're still growing our membership revenues each month.

Speaker 5

Great. Very clear. My second question, so I won't go macro for 2 in a row, would be, Thomas, could you give us a little color on some of the cash flow bridge components here? Obviously, it's a bit more in focus, just given some of the questions that are being asked out there. So maybe you could help us break down a few key components.

Speaker 5

Things I'm looking for would be anticipated G and A growth overall, if we could get a sense across the business and then cash interest expense, maybe cash rent. And then, if you could help us think about the net working capital investment you need in the business, again, as maybe things start to normalize around SOHO Home, you called that out pretty clearly, those would be some helpful components. Thanks.

Speaker 4

Thanks, Sean. Yes, so I'll go through these one by one. So on G and A, we expect to see operating leverage on G and A. We do expect it to grow year over year as we open new houses and enter new markets, But we expect to see good operating leverage there. On cash interest expense, we expect it to increase slightly.

Speaker 4

We increased the size of our Miami mortgage a little bit last year. And so and then obviously we have the PIK interest on the loan, sorry, that's non cash. So just we increased the Miami mortgage. On cash rent, some of our loans are sorry, some of our leases are tied to CPI. And so as you've seen significant increases in inflation over recent times that you should see slightly higher cash rent expense on a like for like basis.

Speaker 4

If you typically think kind of 2% to 3% inflation on same store or on leases, I would say this year is closer to 5%. And then you also obviously have the addition of the new house leases. On working capital, a lot of working capital has to do with timing. I mean, if you look at the Q4, for example, our cash position actually went up quarter over quarter. We talked a lot about how we're really focused on working capital.

Speaker 4

We've been managing our inventory balances a lot more when it comes to Soho Home. And so I'm not going to guide to a specific working capital basis, but we don't think it will be as big of a drag in 2024 as it was in 2023 and it has potential to actually be a tailwind. If you go back to the past few years and you look at our average working capital, there are definitely years when it's been up. So benefit last year it was a drag and then years at a breakeven. So a lot of it's just timing related.

Speaker 5

Thank you very much.

Operator

We'll move next to George Kelly at ROTH MKM.

Speaker 6

Hey, everybody. Thanks for taking my questions. So first on Scorpius, I'm curious, you're opening those two locations. I think the Bodrum is mid year in Tulum, I want to say is later this year. I'm curious, how do you factor those into guidance?

Speaker 6

And that the legacy location is so successful. I'm just curious how you're thinking about these next 2. And then same topic on Scorpius. What is the kind of medium or longer term opportunity for that brand? Do you think beyond these two locations that are soon to open, is there a big pipeline of future locations as well?

Speaker 2

Hi, George. Good questions on Scorpius. So we are very happy with Scorpius. In 2023, it had a record year again in Mykonos, which is super exciting. We've always said we wanted to grow Scorpio.

Speaker 2

So this is our 1st year we will add new Scorpio's. The Scorpio's in Bodrum is incredible. It has its own villas, a new wellness concept along with all the things that are great at Mykonos. And in Tulum, it's similar and first time they've got bedrooms. So we've done a bedroom offer as well in Scorpius.

Speaker 2

So we're really happy with 2 this year. Our founders, Mario and Thomas, are fantastic at doing this. We want to really focus on getting these 2 right this year, and we then have further growth planned for Scorpius in sequential years. Given it's such a great business, it's such a profitable business and our SOH House members also love Scorpius a lot.

Speaker 6

Okay. Thank you. And then second question for me still on that other revenue line. I'm curious, Thomas, you said in the prepared remarks that you see a lot of future opportunity for SOHO Home. And so I'm curious if you could give more detail like what are the plans to continue growing that business?

Speaker 6

And are you getting to a point now where it has enough scale, we're going to start to see margins inflect higher and that will help contribute to the overall profitability?

Speaker 2

Yes, Joe. I'll take that one. So we're incredibly proud of our SIR Home business. As Thomas mentioned in his prepared remarks, it's growing threefold. It's very much aimed at taking the house home and interiors by SIR House.

Speaker 2

That's our USP. That's why it's been so successful. This year, we will continue to grow. And I'll give you some examples why we're very excited about the growth. From an assortment basis, we've only scratched the surface.

Speaker 2

So we're nowhere near, if you think of Restoration Hardware assortment choice. We've literally just begun. So the growth has been based on a very small assortment. We are going to expand that assortment now into Greater Furniture. We've recently, last week, just launched outdoor furniture.

Speaker 2

We'll be going into the window furnishings business, expanded lighting, etcetera, because of the appetite for our products is so high. So that's why we think there's a lot more opportunity. It's digital first. So we so it's a higher profit model than having lots of big stores. So that's why we feel there's more margin.

Speaker 2

And as Thomas mentioned, in 2023, the margin in SOH House grew substantially. So we feel good about SOHomes.

Operator

Our next question comes from Zach Riddle at William Blair.

Speaker 7

Hi, good morning and thanks for taking my question. Just a couple of questions here on the refurbishments and kind of the cadence of new home openings.

Speaker 6

So I guess

Speaker 7

first, with the plan to open 2 to 4 homes a year for the next couple of years, is there an expectation that maybe you do more refurbishments of membership spaces or I mean, were the recent refurbishments more of a run of the mill standard refreshing of the spaces that you're doing all of the time? And then I guess somewhat related to that is the gym experiences and the wellness offerings and the wellness retreats. I mean, is there a big opportunity there? How much of an opportunity is there to add kind of a wellness offering at all of the houses? And then I have one follow-up.

Speaker 7

Thanks.

Speaker 2

Great. I will take these questions. So from a refurb perspective, what I articulated for this year is pretty normal for how we do things. We're always refurbishing our existing houses. We're always looking to increase member space from the examples that I gave.

Speaker 2

So that's not going to change going to 2 to 4. We'll always continue

Speaker 7

to do

Speaker 2

that. Regarding wellness, wellness is one of our big investments. Our members have told us it's a big priority in their lives, both from a physical perspective but also mental well-being. So we are investing in wellness, which again, I did on my prepared remarks. We're, rolling houses with new gyms.

Speaker 2

We've created a complete immersive wellness experience in our Serho farmhouse. We're expanding in our cities. Our members are looking for new technology, for example, ice baths, infrared saunas. So we're putting them in our gyms globally. So yes, I would say out of everything we're doing right now in existing hands, wellness is a very, very big focus for us.

Speaker 7

Great. Thanks. And I know somewhat on the same vein, as far as having fewer new homes in the mix, how could we expect that to impact house level contribution margin? I know the more mature houses have significantly higher margins than the ones that are younger on the maturity curve. Thanks.

Speaker 4

Thanks, Zach. So look, I mean, we don't guide specifically to house contribution levels, but as you can see from our overall guidance, we expect margins to increase. That will be partially driven by that will be partially driven by house contribution margin. We are still in an inflationary environment. I think if you listen to other earnings calls, companies talked about continuing to see wage and food and beverage inflation.

Speaker 4

The positive thing about us is that we have the membership revenue growth and you can see from our guidance, we're expecting continued really strong growth there. And so that should generate good operating leverage.

Speaker 7

Great. Thanks. I'll jump back in the queue.

Operator

And that does conclude the question and answer session and today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Soho House & Co Inc. Q4 2023
00:00 / 00:00
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