Cammeron McLaughlin - Vice President, Investor Relations Gary Friedman - Chairman and Chief Executive Officer Karen Boone - Chief Financial and Administrative Officer.

Matthew Fassler - Goldman Sachs Michael Lasser - UBS Peter Benedict - Robert Baird Steven Forbes - Guggenheim Securities Daniel Hofkin - William Blair & Company Oliver Chen - Cowen and Company.

Good afternoon. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the RH Fourth Quarter and Fiscal 2015 Q&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 Instructions] Thank you. Ms. McLaughlin, you may begin your conference..

Thank you. Good afternoon, everyone. Thank you for joining us for RH's fourth quarter and fiscal 2015 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Karen Boone, Chief Financial and Administrative Officer.

Prior to this call, we posted a video presentation to our Investor Relations website, ir.restorationhardware.com, highlighting the company's continued evolution and recent performance.

Before we start, I'd like remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the Federal Securities laws. Including statements about the outlook for our business, and other matters referenced in our press release and video presentation issued today.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Also, during our call today, we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release.

A live broadcast of this call is also available on the Investor Relations section of our website at ir.restorationhardware.com. With that, I will turn it over to the operator to take our first question..

[Operator Instructions] Your first question comes from the line of Matthew Fassler from Goldman Sachs. Your line is open..

Thanks so much. Good afternoon. My primary question today relates to the cadence of revenues embedded in the guidance. It seems like you're anticipating that your growth for the year will be a bit slower than the revenue growth you expect for the first quarter.

So if you could please explain the puts and takes behind that color?.

Great. Hi, Matt, this is Gary. Let me take a pass at that, and then Karen can follow up if there's more color. The way I'd think about it, if you stand back and think, we had high demand in Q4, and so you'd expect some revenue coming into the first half from Q4.

But if you stand back and think about it, besides the higher cancel rates and investments we made to retain and delight our customers which are an offset to revenues, the upside you might have expected is being mitigated by moving our annual source book mailing from Q2 to Q3.

And then additionally, the shift in revenues from moving the book into the second half is offset by lower promotional activity, specifically in Q4. And our decision to discontinue certain non-core legacy holiday products that are not aligned with our strategy to become the world’s just kind of leading interior design platform.

Specifically, if you think about products like stocking stuffers, novelty toys and games, et cetera, as we continue to build our team of interior designers, their time is significantly deleveraged when helping a customer find a slinky or some item like that when they're working with clients designing a room or home.

So theirs is kind of a double shift here if you think about the transition of the business.

And then I believe we are being rightly conservative as we think about the transitional nature, consumer behavior from a highly promotional business with a cadence of multiple monthly promotions to smoothing out our business as we transition under the grey card program..

That's really helpful, and I know there's so much else to ask. I'll try to keep it to top line, and just - but my follow-up will focus on sort of the cadence of the business as you saw it play out through the quarter and perhaps into Q1.

And then also, what the pace of the fulfillment of that strong Q4 demand is, is all of that going to be handled in Q1 or are some of those out of stocks pushing that into later in the year?.

Yes. I'd think about it - it's mostly going to be handled in the Q2 period. So we'll see a little bit flow into Q1, but mostly those orders will be filled in Q2 with a little bit that runs into Q3. And that's where you'd think about the shift out of Q2 of the annual source books into Q3 that kind of offsets that upside, so to speak.

And then if you think about Modern from where are we today and where do we anticipate we'll be as we see the months and quarters roll out here. We're currently in the 70% range as far as our in stocks today and we expect that to build to the mid 80%s by the end of the quarter which is more at a normalized level.

We would generally run in kind of the mid-80%s, low 90%s from an in stock point of view. So we will be substantially caught up by the end of Q2 and there is a few items or two here that we'll still be chasing that get pushed into Q3. But we'll be meaningfully operating at normalized levels by the end of Q2..

Okay. Thank you so much..

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

Good afternoon. Thanks a lot for taking my questions. I just want to start there is on the overall environment. It sounds like you experienced significant volatility in June, which you attributed in part to some of the gyrations in the capital markets. Trends have stabilized, at least what we see in the capital markets.

So does that mean that you've seen some stabilization in the business or is it being overridden by other factors at this point?.

Sure. I think it's a good question. You said June. I think you meant January..

January, sorry, yes..

Yes, no worries. Just want to make sure we're talking about the same month. Yes, we definitely saw disruption in our business within January that was related to the significant disruption in the capital markets. Post that period, I'd say that aspect has seemed to have stabilized, although I'd say it's stabilized at a somewhat lower level.

I think that we still feel that there's a general softening at the higher end of the market. And then I think more specifically, as I outlined in the video, the continued pressure from the markets relating to energy and currency continue to be a down drag. I think that's what we're most concerned about.

If you think about last year, and we've been tracking this very specifically, we saw a two point drag. The total company revenues coming out of those markets and that two point drag in the first half accelerated to a four point drag in the second half.

And now has accelerated to a five point drag in Q1, and that's on top of the two point drag of Q1 last year. And even more specifically, it's accelerated to a six point drag in March at the end of the quarter. So we're highly focused on that.

We think that's concerning and are somewhat concerned could there be collateral damage here in some of these markets. There is a meaningful slowdown in the Miami and Florida markets and we - that's driven by South America. South America is tied to oil and is also being hurt by the currency, the exchange rates with America.

So we're meaningfully down in all these markets. The collateral damage which could end up being real estate in Miami and other things could trigger other issues. So I think it's a time for caution, and a time to just be really thoughtful about how we're investing, the pace of those investments and how we're thinking about our business..

Are you seeing a discernible difference between what's happening in Miami because of some of those issues in South American and Texas or Canada or is it all very similar?.

Yes. It's all within a certain number of points. So we're relatively similar. We did some things to try to stimulate the Canadian business that we mentioned. We reduced some of the shipping charges to offset some of the duty rates and things like that. It had a minor impact.

So my sense is that even though that oil prices have come up a bit, right, that you've got a lagging affect in all of these markets based on the fall of oil. I think our business is more of a leading indicator than a lagging indicator. Someone asked me recently about, gosh, Home Depot's business looks strong.

Lowe's business looks strong, why are you feeling the headwinds differently than others. And I'd say again, if you think about our business in the context of businesses like those, home improvement businesses are tied more to hard, physical construction at homes. And so, our business is more discretionary based.

If you're in the middle of building a project, remodeling a home or building a home, and there's a headwind in a market or a disruption in a market, you're not going to stop building your home. You're not going to not put the roof on. You're not going to not complete your bathroom or build out of your kitchen and so on and so forth.

You've got to put in your hardwood floors, you have got to finish the house or your asset is going to be significantly undervalued. But you can finish that home or if you have moved into a new home, say cheese, maybe we ought to use the furniture we have, maybe we don't need to buy that new couch just yet.

And I think that's why you see our business somewhat more volatile than maybe other data points and things that people might compare to us. I think, just like I think the real estate market is going to be a lagging indicator to the oil issues and those markets.

No different than we're a leading indicator versus a lagging indicator like a Home Depot or a Lowe's or other kind of building material kind of businesses..

And then just lastly, I know in the video you mentioned 40 months of new store contributions.

Could you give a little bit more detail just to provide some assurance that the real estate transformation is on track? Can you give a little more detail on how you're thinking about the contribution to your guidance from the new stores versus the same-store contribution in the upcoming or this year?.

Yes. We're very early into the transformation of our real estate, and I'd say at a high level, one, it's working exceptionally well. And I'd start there, every one of our new next generation design galleries are performing over plan, and the fundamental - and that's despite the headwinds, by the way.

So when you think about this, the opportunity to take this company that's $4 billion to $5 billion in North America with a mid-teens operating margin, that part of our strategy is fundamental and it is working exceptionally well.

What we are learning, however, is due to the significant development nature of these projects, we have less control of the timing aspects of the approvals and construction schedules than we may have previously had experience with.

For example, if you think about it in Austin, the surrounding lifestyle center and the development and the domain that's around our gallery is not complete. We completed our store in the fourth quarter last year, early fourth quarter and we're ready to open and everything around us is a construction site.

There is no sidewalks, there is cranes, there is not a building that’s completed next to us. So, opening would just be foolish. So we're sitting there with a built out store, waiting for the development catch up.

In another case that's different but somewhat similar, in Toronto, an old Sears department store was torn down at the Yorkdale Shopping Center, and we are now the new anchor of a new wing of really Canada's number one shopping center.

And the development of that wing of the shopping center is behind schedule, and behind what we thought the schedule was. So in that case once again, we don't have as much control around the certainty of timing. I'd say the certainty of projects is no different.

There is going to be some certainty and flexibility we realize now that we are going to have to have around these development projects. I mean, the third one, I think you guys - a lot of you that are from New York are more familiar with.

But in New York City where we have a partnership and a development on the corner, the meatpacking, I think many of you know the developer of the project experienced a tragic accident, and the project that's resulted in the job being shut down for several months. We're now under construction again, but we lost more than a half year on that project.

And so, again, not our fault, we're not the developer, and it wasn't our construction crews or anything to do with us. We're waiting for a building to be built. And then once we take possession of that building, we'll do our interior build out or fit out.

So in many of these cases, what we're learning, this isn't like a typical retail store rollout, right. We're not taking airspace in a mall and building a 30 foot to 50 foot storefront and putting some glass in and a logo on the front and doing a simple build-out in the interior.

These are significant development projects or significant adaptive reuse projects in historical buildings. And the certainty of timing based on the - having less control just means it's going to be somewhat lumpier and somewhat more unpredictable. But it is definitely predictable that they will all happen.

There will be some timing moves here and there. And I think that our sense is probably to be less ambitious with how fast we go. I think, especially with how we're seeing and what we're seeing, again with some of the signals in the energy markets and the currency issues and what we think might relate to some real estate issues down the road.

We're also just I think being cautious and right now and pursuing deals at maybe a less aggressive pace, only because we think that if there's dislocation in the market and uncertainty in the markets, we think asset values will come down. There's going to be more and more of an opportunity for us to capitalize on that and get better deals.

And I think you can combine that with the fact that now we have a proven concept. Remember before, we were doing deals and when we had a proof of concept, we had not built one of these 45,000 to 60,000 square foot developments, and today we have multiple ones and they are all working. And the most exciting one we've done in Chicago.

Now it's proven that we can not only have a successful retail concept, but we can have successful hospitality and restaurant concept, which gives us a double advantage because developers want traffic.

I think I mentioned on one of the last calls, we're feeding 500 to 1,200 people a day in our cafe with limited hours in Chicago with no alcohol, just wine and beer. So we think we're becoming more desirable. We think there's going to be even better opportunities for us to do better deals.

But we think it's - because of the environment and because of what we've learned early here, we just have to be thoughtful. We're going to take our time and focus on executing well..

I would just add on your question about the new store months. The 40 is as much the wrap of last year's openings as it is the ones that are opening this year.

So when you think about the contribution that's why we moved to that new store month calculation is it does take into account the wrap last year's galleries knowing that some of the four that are coming on this year are coming in the back half..

Okay. Thank you so much..

Your next question comes from the line of Budd Bugatch from Raymond James. Your line is open..

Good afternoon, this is Bobby filling in for Budd. Thank you for taking my questions. I just wanted to touch real quickly again on the growth - on new full line design galleries.

I was hoping now with the Atlanta concept being open for more than a year you could give us some color on how the presence of that full line design gallery has impacted the demand in that market?.

Yes, I think we've indicated that our plan for each of these galleries is to increase retail sales in the range of 2 to 3X either 2 to 4X, excuse me, in each of these markets, and then we would have a corresponding list of I think in the range of 20% or so on the direct side of the business. So we're very pleased with Atlanta.

As I said, Atlanta is performing over plan. We just, I think last week installed RH Modern on a full floor in Atlanta, and also added RH Teen which was - that store is built for those two businesses to be received. So Atlanta now has all the pieces of the puzzle and we expect it to only to continue to grow and take more market share..

Okay. Thank you. I appreciate that.

Then, Karen, I was hoping that maybe you could touch a little bit on what is the outlook for the core merchandise margins in fiscal year 2016, excluding kind of the moving parts around the RH Modern impact?.

Yes. So at this point, we're just going to speak to Q1, because there's still a lot of moving pieces in our plan as it relates to the Grey Card membership. And the introduction of that throughout the year and some of the other levels we have with the source books and things. So for now, we're just going to provide color on Q1.

And as you can see or implied from our guidance, the earnings have been significantly impacted by some of the investments we are making in customer from the Modern and other customer experience items. So that is going to have - overall including that, our margins are going to be down in the almost 300 basis point range.

The biggest single piece of that is those investments. We also have product that was significantly discounted in Q4 that's shipping in Q1. And then we have some deleverage still wrapping from our new DC and Patterson in Northern California that's going to continue to be a drag in Q1 and Q2 until we lap that in the back half..

How much more discounting product ex Q1 will be left to ship? And then maybe lastly for me, could you help us think about what the impact was from the new distribution center in California versus the 30% year-over-year inventory growth?.

Yes. So on the margin, just going into the quarters, the impact will taper. When you go from Q1, it'll get a little bit better in Q2 and then it will moderate in the back half. So we don't expect that to be a drag all year. But that is a bigger impact than the promotional cadence left over from Q4 shipping into Q1.

And then the inventory growth of 30%, that is a result of we underperformed in Q4 versus our expectations. So that 30% growth will continue into Q1. But that's not as much - that some of the places where we have too much inventory isn't necessarily related to the new DC. It's a different market..

Yes. And I think the shift and with the new business dynamics of Modern where we over performed in Modern and slightly underperformed in core also added to the dynamic of higher than anticipated inventories..

And that's a big focus for us this year is making sure our inventories are right sized, and we're getting rid of underperforming SKUs. So overall on the year, we do expect to grow inventory in line with sales at that pretty low mid-single digit range.

So, we don't expect that 30% growth that we have in Q1 or in Q4 it's going to stay pretty high into Q1, but by the middle of the year and by the end of the year it will go down significantly..

Thank you. I appreciate the detail. And best of luck moving forward..

Great. Thanks, Bobby..

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

Hi, guys. Thanks for taking the question. Two questions. First, Karen, just on the free cash flow positive view on 2016.

Can you maybe talk to the drivers of your operating cash flow? How you're thinking about D&A this year and maybe the working capital contribution?.

Yes. We do, as I mentioned, with inventory we do expect working capital to improve significantly with some of the inventory initiatives we have in place. Depreciation isn't going to grow too much, maybe in the $10 million range from last year, so not too significant. And then our capital is what it is, it's the $175 million to $200 million rang.

So a better contribution this year from working capital, both inventory and accounts payable..

Okay. Thank you. And then we notice on the balance sheet I guess the PP&E line declined $41 million versus the third quarter.

Can you give us a sense of what drove that?.

Yes. So our build-to-suit leases as we've tried to put a lot of transparency and color in our SEC filings and we've done a lot of almost teach-ins on these. Build-to-suit leases have a significant portion of the landlord assets on our books. It's a gross up, it's in assets and liabilities. Our northern California DC was a build-to-suit lease.

We affected a sale-leaseback on that DC and leased at the end of the fourth quarter in January and $75 million of the landlord assets were removed from our balance sheet, both the property balance and the corresponding liability. So $75 million from property and $75 million from you'll see that build-to-suit liability.

Both the asset and liability were removed once we affected that sale-leaseback..

Perfect. Thank you. Last question. Just curious, I know it's early, but how the Grey Card transactions thus far have compared to maybe your historical average transaction in terms of size and maybe gross margin rate? Thank you..

Yes. We're not disclosing that just yet. I think, you know, maybe what I can do though is just add a little bit more color around the Grey Card. And I think in the video we tried to keep it short, and kind of focused in, but let me just maybe motor up and give you a little bit more perspective.

Why the Grey Card? Why we think it will work and maybe even how to think about it if you say what if it doesn't? But as I mentioned in the video, much of how we have behaved promotionally was left over from the great recession and did not reflect the brand we're building nor the way our customers shop with us.

One, first, we've moved from a product based business to a project based business. The percentage of business we do with external interior designers, internal interior designers and projects has significantly shifted over the last 5 to 8 years.

Presenting various promotions during different time intervals is not aligned with the vast majority of our business, which are customers working on furnishing an entire room or a home.

And the Grey Card, it also supports our strategy of moving from what we think of as a traditional retail business with the primary focus of creating and selling products to an interior design platform that is conceptualizing and selling spaces.

Second, the previous promotional approach was built on a vocabulary of discounting and price, not taste, design, quality or style, and is virtually impossible to differentiate our brand from anyone else. Sending repetitive promotional emails is in conflict with the very essence of the brand that we are trying to build.

And additionally, we don't believe anyone wants their inbox flooded with redundant promotional emails.

If we just think about how many President's Day sales we hear about, private sales, spring sales, fall sales, holiday sales, winter sales, Mother's Day, Father's Day, one day only sales, friends and family sales, so on and so forth, how many can a customer process before you lose all credibility and they become numb to your brand.

We believe that the Grey Card also brings pricing transparency to all of our brands, you know, previously, our source books and website displayed mostly full price items. Unless you received a promotional email or entered a promo code on the website, the promotional selling price was not obvious and I don't think most people realized that.

Now, member pricing will be prominently displayed in all of our source books, websites and galleries which we believe will more firmly establish the disruptive value proposition of the RH brand. Third, which I think is important point, we believe this is the right model for our business.

The promotion activities we ran historically skewed consumer behavior and created peaks and troughs of volume from being on and off events. By smoothing out our business, we can operate in a more efficient and cost effective manner in our galleries, call centers, DCs, delivery hubs, throughout our supply chain and organization.

I think another important point to note is that the vast majority of our revenues are driven by customers who spend more than $500 with RH. And we believe the $100 cost of the program is set to maximize conversion. Our goal here is not to create a traditional membership program as you might be familiar with.

But to establish the best relationship with our customer and align our behavior with our brand ethos and optimize our business model. That's what we're trying to do. We don't think that's possible with the old promotional cadence, and it's been greatly marginalized.

And while there's - we ask a lot of question about how do you think about this, who do you point to. And I'd say, well there's not another retail program to point to like this in the market. It is akin to the high end to the trade showrooms who offer a set discount to interior designers and to the trade.

And we believe the Grey Card program brings the best elements of this experience directly to the customer. Allowing our customers to shop when they want, for what they want, enabling us to communicate our brand ethos and brand authority, simplifying our business model and reducing costs throughout the organization.

And providing pricing transparency, and highlighting the disruptive value proposition that has allowed us to really gain market share so rapidly over the last 7 years in this marketplace.

And I think the other thing I would comment on, again, because a lot of people have asked questions both externally and internally, questions we ask ourselves, what if it doesn't work, right, and I'd say that we've developed multiple downside risk scenarios.

We believe it will take two to three quarters to allow for the new buying behavior to be analyzed correctly. We believe that the customer that's been working on a project, whether it's a room or a home and we force them to buy in these kind of episodic moments based on all these multiple promotions.

Buying their lighting when the lighting event is going on, buying their bedding when a bedding event is going on, so on and so forth. That we will see a delay in some of those transactions and then they will be fewer, bigger transactions, fewer, bigger orders based on a change in the buying behavior.

And we won't see the big peaks, and we'll see that smooth out. So there's going to be a natural delay and a natural shift in the business. And we think that's going to - our view, it's going to take us two to three quarters to really to analyze that and to study that.

And we've got our thesis of how we believe it will happen and we'll be watching that closely. And if for some reason our assumptions are incorrect, and by the way, any plan in my entire career I've ever been associated with or developed is some degree of wrong.

So we expect to be some degree of wrong and that's why we have a lot of what if scenarios and kind of backup plans in place. But if for some reason our assumptions are incorrect, we can always insert some level of promotional activity back into the business that will still maintain the integrity of the program.

There's lots of ways we can massage this program to make it work. We do believe it will fundamentally enhance the overall customer experience and the business model of the company.

We believe it's the right thing to do, long-term, and we know it's - no one's ever done it before, and that there is some level of uncertainty, but we believe, we've spent a lot of time, we've spent several years on this. We've been studying this and thinking about this for, gosh, five years.

So - but it's going to take a while to transition, but it is absolutely aligned with how our consumers shop from us, what our brand strategy and brand ethos is, and it is in alignment with our strategy to optimize the business model at RH.

Okay. Great. Thanks for those thoughts, Gary..

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

Hey, guys. I want to focus on talent acquisition and maybe the in-store labor model.

So can you quickly discuss the company's experience thus far as it relates to acquiring and retaining for the necessary talent, especially at the store level, essentially, do you feel you have the right labor model in place to service the customer the way that you need for the brand? And then I know we've talked about this in the past, but how does the commission sales force fall into that, are you guys still testing that or is that something you're looking at?.

What I'd say, I think we have one of the best retail organizations in the industry, and I think I would put our people and culture up against anybody. With that said, I would say, we're always evolving.

As I said in the video, we are in a constant state of innovating and evolving, a constant state of destroying our current reality to create tomorrow's future.

So as we think about the long-term vision and the positioning and the strategy for this brand and business, we're making significant investments to massively transform and upgrade the physical shopping experience.

We're making meaningful investments to upgrade the brand, whether it's online or through printed mediums, like source books and advertising.

We're making significant investments to elevate the customer experience, whether it's at the initial touch points or it relates to their interactions with us throughout an order process or all the way to in-home delivery. So everything will constantly improve and we expect to make investments and to elevate the workforce.

As it relates to attracting and keeping the right people, I think we're at the top of the list today of some of the most desired places in retail to work. I think the environment we create, the culture we have is second to none.

But at the same time, we're making investments to build an interior design platform, and that means that we are recruiting and bringing more interior design professionals on to our platform. We're developing and educational kind of university if you will, around interior design and our kind of point of view and kind of authority in that area.

And so you'll see us continue to evolve. As I said earlier, kind of the transition from a typical retail model that traditional retail business with a primary focus of creating and selling products to an interior design platform that is conceptualizing and selling spaces is going to require us to continually upgrade the talent and capability.

So we're kind of always unfinished and always on the move here. So –and as it relates to commission selling and other things, we're looking at all of those things and we'll continue to test new ways and methods to incentivize our people to do the right thing. So, more to come..

Very good. Thanks, guys..

Your next question comes from the line of Daniel Hofkin from William Blair & Company. Your line is open..

Good afternoon.

Just wanted to follow up a little bit on - let say the cancellation rate so far with Modern, and whether this latest view, which is pretty similar to what you indicated in the prerelease, whether you feel like you're on the, let's say, the conservative side of the likely outcome? In other words, are you seeing cancellation rates stabilizing, and by that I mean cancellation rates due to delays that are greater than customers maybe expected or thought they would be, such that you think you're going to be largely up to date by some time in the early third quarter as you say.

How has that changed in the last month or two, that's my first question?.

Yes. I would say we're on the backside of the mountain, if you will. The most painful part we have experienced with our customers and I'm sure everybody somehow read the excerpts of the letter that created a firestorm in the media about our focus on empowering our associates to do whatever it takes to delight our customers.

There is a finite number of customers at the high end of the market, and they are very important to our business and to our model. And it's unfortunate that we've disappointed so many of them. But we're making the investments to try to maintain and enhance that relationship and save that relationship.

We have a whole initiative in our company around customer delight and not appeasement, but what do we have to do to delight the customers. And we're making the investments that we believe are necessary to delight our customers, and create advocacy for our brand even in light of initially disappointing them.

And that's expensive, but probably I think this will turn out when we look back in kind of our history and I believe we will look back at this and say this was one of the most important and correct decisions we've ever made.

So painful from a cost point of view, I think we can actually take a negative and in some ways turn it into a positive about how to respond when you let customers down. So I think we are on the backside of this now. I think we're past the peak. The in stocks in Modern are going up. We're not out of the woods yet.

We still have order delays, we still have a lot of goods that we have got to deliver. We have to deliver on our promise and especially in many of the situations here where we've had to make decisions to air goods in to get them here in time for people's projects, and we've still got to get them to their home.

We have got to get them there in perfect condition and undamaged. And so we're not out of the woods completely, but we are in a much better place than we were just a month or two ago. And I'd say this really peaked on us in January, February, and we've now got our arms around it.

And I think what we've also learned from it is to kind of mobilize the organization correctly. We had to tear down a lot of internal silos in our company, groups and parts of our organization that were acting independently, which weren't going to be able to satisfy a customer within their silo. We've torn down a lot of silos.

We flattened the organization. We've created cross-functional collaboration and we've learned a lot about ourselves through this. And I think we have a vision and a strategy to build a much more customer-centric organization that will operate at a higher level with much greater urgency and empathy for our customers.

And this is carried through, not just around some of the situations with Modern, but it's brought to light other opportunities, whether it relates to how we handle and move inventory, how we deliver products into our customer's homes, how much control we have of our supply chain versus not, how much control we think we need, where we need to make investments to really operate this company at the level of the brand experience that we want to build.

So I think we have our arms around what we think the costs will be. We have our arms around the work that needs to be done and I think we have a much more compelling vision for what the customer experience ought to be in this company.

And we have an organization and an organizational structure that is evolving that I believe is committed to delivering service that is second to none in any industry..

Thank you.

My other just quick question is, are there any costs that you've identified in terms of when you open a new store going forward that you feel like you can take out relative to what you would have opened in the last year without hurting the brand or the customer experience?.

Yes. Absolutely. Lots of learning’s in the first four or five….

And across the board of everything from how we open it to the execution, the capital spend, I think we're learning. In second vintage, I think everyone gets a little better and a little smoother..

Yes, the timing, the initial investment to build, the ability to think about how to value engineer the build-outs, how we stock them, how we ship goods to them….

How we map out floor plans - there's been a ton of learning and progress..

How do you organize teams to execute projects at this level, the investment, the staffing, how to be more efficient. So, yes, it's funny you asked this. We just spent several hours in the last week on this topic. So we think - and any of these things were doing, we have a lot of endeavors.

Because we are a company at our core, we are in innovative, driven organization, and we're not just a retail organization that continues to duplicate. We continue to innovate, and based on innovation, there's investment and cost on the front end of new ideas and the ability to learn quickly and understand how to optimize.

And as we scale, is critical to our model. So almost everything we do here, once we do it a second, third, fourth or fifth time, we get better and better and better. And that's why, for the most part, the exception for this Modern launch, we usually get better at what we do..

Yes, one point on the new stores, I will just clarify because Gary threw out a 20% number which is kind of a target, but in many cases that's a floor. We have seen direct lifts of 30%, 50%, upwards of 100% of direct lift when we opened these stores. So just a clarifying point there..

All right. Thanks, guys..

Your next question comes from the line of Oliver Chen from Cowen and Company. Your line is open,.

Hi. Thanks for the details on the transparency. Gary, as you did evaluate the Grey Card and the opportunity there, it sounds quite innovative and new and a really creative way to approach how to do this on a brand appropriate manner.

But what would you say internally were some of the key controversies you faced in terms of decisions you were making around Grey Card and your process for implementing that? And Karen, what should we know over time, how do we account for the revenues from the membership fees, is there anything we should know about modeling that? And do you think on a longer time horizon, the Grey Card penetration rates should be really high? And is there a CRM component as you engage in a lifestyle experience in terms of engagement with your customers as you're thinking about the RH brand at large? And Karen, on the comp store sales, can you just help us understand our model as we look at the spread between square footage and completed, just what we should know about the spread widening or narrowing as we look at our models and get to the implied comps store sales on your full year revenue guidance? Thanks..

Do you want me to start on - I'll start on the Grey Card, just the membership revenue, the fees and those are - we'll take the $100 fee in and it will be required to be amortized over the 12 month membership period. So you will see a ramp. And we will take in the money, but that will have to be recognized over time, so you'll see that build over time.

Eventually, once we cycle this thing, that membership revenue will be more consistent, but for now it is, you're going to take 1/12 of it in the first month that you get it and that will build over time. Gary, I don't know if you want to talk about any other....

Yes, I think the question was what were the internal controversies, look, I think on any initiative here or strategy or investment, we have a highly and deeply collaborative culture that has a lot of aggressive debate about anything we do, and everything we do goes through kind of three filters in a sequential order.

One, we look at everything based on emotional value. Do we - is this going to connect with our customer on an emotional level, or is it something that we connect with emotionally, are we going to be passionate about it? Because we think if you try to do work you're not passionate about, you're not going to do very good work. So emotional value.

Number two is strategic value, what's the strategic value of any initiative for any strategy that we are pursuing. How does it position our brand, how does it position us to win, and the long-term implications of that.

And three, then what is the financial value? Which relates to the return on both our human capital and financial capital investment and how does it relate to other things. So I would say as it relates to those filters from just a choice to do it, there is, I'd say, 100% alignment inside the organization.

In fact, the alignment was so great, especially with our field organization, that I was bound to a promise that I wouldn't waiver on moving forward on this because everybody felt it was so important to transform the business and the customer relationship and the way we do business today.

And so, lots of controversies internally about exactly how, exactly when, how do we think about the level of discounting, how do we think about what price we charge for this, back and forth on, guys, does $100 feel like it's not enough, should we be charging more? Again, I'd say that our goal here was to really transform ourselves off the current what I would call chaotic promotional platform, onto to its kind of an operating business model that was going to allow us to focus our time and energy in the most productive way, and build the best customer experience and relationships with our customers.

So, was there camps that said we shouldn't have done this? I don't think there was a person that believes we shouldn't have done this. Was there a lot of debate? I think I was probably the biggest hold out at the end of the day, just because at the end of the day, we're a very math driven kind of culture.

We talk about facts a lot more than we talk about feelings. And how we feel about something generally relates to what are the facts that we can gather, and what is the data we can gather, and how well informed are we, and how certain are we that the data informed our decisions.

So here we took a lot of time gathering a lot of data, building a lot of theories and hypothesis. And when we got down to it, I think the alignment and the energy behind this is really fantastic in the organization. And I think that's why the acceptance rate out of the gate is so high.

We have an acceptance rate on Grey Card that is - I think it would exceed probably what most people's expectations would be for a kick off on a program like this. But yes, but everything here in our culture is highly debated, highly scrutinized. It deals with a lot about facts versus just feelings, and we're very scientific and methodical.

But we also know, when you innovate there is a degree of uncertainty and risk, and that's why it's important to have alternative plans and back-up plans, and what if scenarios, and we think we've developed those. And we feel very strongly that this is the right thing to do strategically for the brand and business.

And again, I think this is going to be another one of the things we're going to look back 2, 3, 4, 5, 10 years from now and say that was one of the most pivotal decisions in the history of this brand..

With respect to brand comp, I think you're talking about the total revenue growth versus the comp growth, and that was a 2 point delta in Q4, and on the full year we would expect that to continue. And then as we have new store months growing, you would expect that to diverge a little bit even more than the 2 points we saw in Q4 and last year.

But it's always going to be tempered based on ones that are then going into the comp base. So as soon as we start anniversary some of the new full line design galleries, those go back into the comp base. So you would never expect too big of a delta between those two numbers..

Okay. Thanks, guys. Appreciate it. Best regards..

Thank you..

That concludes our question-and-answer session. I'll now turn the call back to Mr. Friedman for closing remarks..

Great. Well, thank you, everybody, for your participation in our call. We are excited about the prospects of the company and the direction that we're moving towards, and we're excited to talk to you again next quarter at our next update. Thank you very much..

This concludes today's conference call. You may now disconnect..