Good afternoon. My name is Suantal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter and Fiscal 2017 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. Cammeron McLaughlin, you may begin your conference..

Thank you. Good afternoon everyone, thank you for joining us for RH's fourth quarter and fiscal 2017 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Karen Boone, President, Chief Financial and Administrative Officer.

Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws including statements about the outlook for our business and other matters referenced in our press release issued today.

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

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

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

A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn it over to the operator to take our first question..

[Operator instructions] Your first question comes from the line of Steve Forbes with Guggenheim Securities. Your line is open..

So, it's John Heinbockel in for Steve. Guys maybe touch upon -- you mentioned learnings in recent galleries that have led to the new prototypes.

So maybe what are some of the key learnings, particularly as it relates to merchandise curation? And then when you think about the use of the new prototype, does that alter in anyway your thinking about what the ultimate size of the gallery footprint that you need to cover the U.S.?.

Sure this is Gary, I'll take that. As you know, we started developing these new larger galleries in 2010. So we're seven years into it and over those seven years we continue to innovate and evolve quite dramatically as a business and a brand as it relates to the breadth and depth of our assortment.

The business extensions and our brand extensions and new businesses that have been added to the brand. So if you think about this, we continue to evolve this as over a number of years, including adding hospitality.

So now, what we've done over the last couple of years is really been able to study productivity, study space investment and now design a gallery that we believe will yield the most productivity and integrate all of the businesses in a single footprint.

So this -- while the square footage looks smaller, and it is, it will have no less assortment particularly it's just a much more efficient design. So it's probably the most efficient presentation of all the businesses.

And our view today is as we look at the majority of the market, that this will be the best expression of the brand in a majority of the markets. And it also simplifies it for our organization to execute and rollout the stores will all have the same presentation, the same goods presented.

And the biggest question becomes do we want to put the integrated F&B component of the business in the gallery or not in the gallery one of the big breakthrough for us was really RH West Palm where we had not yet tested a restaurant on a rooftop.

And quite frankly that was not our initial intent and if you read my shareholders letter, we designed that store much smaller initially, than Baby Child team, became real -- designed until it has become real. We added a whole back section to that gallery.

And then once we did Chicago, and we saw the response to the F&B component of the business, the only place we could actually put a restaurant was on the rooftop. And honestly we were worried about it. It's on a fourth floor of the rooftop, you couldn't see it from the ground, we didn't know if it would work or not.

And it's it our highest performing hospitality experience. And again you saw my comments it's tracking to do in excess of $7 million in its first year. And it draws people, what we like is it draws people up and through the gallery.

So we really like the courtyard, we really like how it in Chicago and how that creates energy in the middle of the gallery. But we really like how the rooftop restaurant pulls people all the way up through the gallery and exposing to a lot of products as we are walking through.

So there is so many things we like about the component, it’s just really the best of things we've learned over the last five to seven years. And now it’s been working for the last couple of years integrating it into what we think is the ideal prototype. And we don't foresee any huge big changes.

We've got a lot of brand extensions, some new businesses but nothing that will shift the footprint dramatically. So we think this puts us in a position to be a lot more efficient with our time, with our capital and we're going to have a much better return on capital.

So think about the first 15 of these as an ongoing experiment over the past five to seven years. And now we're pretty locked in on what we think will serve the majority of the market in a tremendous way. There is nothing cutback in this gallery, it's fantastic experience.

So that's really how to think about it, there is no less productivity we're planning. It's just really efficient design. And expressing the best of what we've learned..

And then just as a follow up, you think F&B will be in what percentage of the new prototypes?.

Not sure yet. So I don't want to commit to anything. But I'd say probably the way we’re thinking about today probably about a third maybe more..

Okay, thank you..

Yes..

Your next question comes from the line of Matthew Fassler with Goldman Sachs. Your line is open..

Thanks so much, and good afternoon, guys. The first question I want to ask relates to the relationship between hospitality and the membership program. So with hospitality, you seem to have a successful somewhat more high frequency draw to the stores than you had in the past.

Can you talk about whether you expect this to impact membership whether this would tie membership into hospitality and whether you have seen membership trend different in the stores that have the element of hospitality today than from some of other galleries?.

Yes, I don't think they really tie together. I think that we have a dynamic F&B experience that is clearly driving incremental traffic into our galleries. And if you stand back and think about shopping for furniture, right, going to a furniture store and how often people do that.

It is massively infrequent, it's massively infrequent, I mean, most people might go to a furniture store every five or ten years. And it's driven by a real need, it's an event driven business, it's based on people buying a new home, remodeling a home or redecorating, redesigning their home.

So, you've got the dynamic of the industry we are in that has really low frequency of visits. And what we are trying to do is one, when we have a visit, they are long extended visits. If you are doing your job and you are helping a customer design their home, it's multiple visits and they’re long visits.

And what we are trying to do is really enhance that experience. So, they don't have leave for lunch, we can offer them coffee, a glass of wine. We can really present hospitality experience that’s more home than store, right? And that was one of our initial goals.

So a second goal was just understanding the business we’re in and the customer behavior of infrequency is would we because we believe we build pretty inspiring spaces and present goods in a really artistic and inspiring fashion.

Could we by driving more foot traffic, and not just food traffic, but driving the right consumer traffic into our galleries, could we have people come in when they might not have come in, experience the gallery, sit and experience the restaurant, look around them, be inspired by the environment and say geez, honey, look at that beautiful chandelier I wish we had that in our dining room or as a walkthrough the gallery, while they’re waiting for a table and enjoying a glass of wine and see a living room or a bedroom setting and be inspired by it and say why don't we redo our bedroom, why don't we redo our living room or possibly redo our whole home.

And because I think a lot of us with our -- and it's interesting about the furniture business, but people spend significantly more time obsessing about buying a $3,000 couch than they do $100,000 car, right? And it doesn't make a lot of sense, but it just is what it is, where for some reason there is a perception that when I change my furniture, it's for the rest of my life.

And so -- and I get it because again most of us really if we just think about our days, we don't really go a lot of places that we see inspiring environments, inspiring architecture, inspiring installation of home products, inspiring into redesign.

And so -- there is nothing is really exciting as to kind of pull a trigger or to kind of think about that. So, we believe by having people come into these galleries that are massively unique in the industry, right.

And architecturally and from installation point of view, interior design point of view and be inspired and then say, I wish our home looked like this.

The biggest comment I think I've said it before when we first did the first few galleries all the way back to Houston, was when we got feedback from our clients and customers and we asked our teams like what are people saying. The number one comment, people were saying is I want to live here.

I've been in this business for almost 40 years and I have never heard anybody say they wanted to live in a retail store, until now. And I think there is something to that. So getting people to come into these environment, feel inspired be in place that makes them to say, Gosh, I’d love to live like this.

And we think it’s highly important and it was always a goal and that’s the most important piece of hospitality.

Trying to tie in a membership or make things -- it's like there's so many people that through loyalty programs and other things that are doing so many meaningless things with points in this and that, like does it really effect anybody's behavior, I don’t know, I get so much of that marketing stuff coming out at me.

We don't want to complicate membership, we really don’t. It's simple and it's working, and it has smooth out our business and allowed us to build and it allowed us to begin building an entirely new operating platform that is going to leap frog this company’s operating performance..

Thank you so much..

We’re not….

Oh sorry, thank you..

No, no. Okay..

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

Good evening, thanks a lot for taking my questions.

My first question is on the membership, how did the memberships trend in the last few months? And to get to your longer run sales growth estimate of $4 billion to $5 billion, what do you have to do from a membership perspective, how many memberships are going to be inherent in achieving that long-term outlook?.

Yes, we don’t even think about it that way. So, simple way to think about getting to $4 billion to $5 billion is thinking about our real estate transformation and some modest product expansion and that gets you there..

And what about how recent membership trends, because I think you mentioned in your letter that 95% of your sales are coming from your membership. So….

Right..

It would be helpfultohave context on how that's been trending?.

Yes, that’s just same, nothing….

It’s been similar that way for several months. So it hasn’t really changed significantly..

Okay. And then as far as some of the tweaks to your outlook from what you had previously provided.

Can you give a sense for what's changed today versus a few months ago, both on the top-line and then on the margins as well?.

Specifically what part of our outlook?.

So revenue growth is going to be a little bit lower, margins are a little bit higher, why is that?.

Yes, so we've said that we’re going to restrain ourselves from chasing low-quality revenues as many are in the industry. And really manage the business with a bias for earnings versus growth right now as we’re building the operating platform.

And as we’ve gotten into this and as we gotten into re-architecting and beginning to build this new operating platform, we see so much potential, we see just incredible opportunity to have an operating model that distance this brand, separates this business and brand from any other model in our industry meaningfully.

And the opportunity to stay focused on that, and to get that work done is so incredibly valuable that I've made a decision to not introduce any new businesses or product or brand extensions this year and we have many in the pipeline and I don’t know a month ago guys, month and half, we were upside and we are doing our planning and as we keep peeling this back, we just see so much opportunities is once-in-a-lifetime to build this.

It’s hard enough to kind of -- to reset and rebuild an operating platform in a business that’s running, I mean, it’s just rarely ever happens.

And it takes the leadership of the entire cross functional leadership of every part of this company to sit together in an integrated fashion -- collaborative and integrated fashion and rebuild the company from the ground up, and rethink everything that we’re doing.

And so we think it's the best investment of the human capital and the financial capital company is to focus on that and I think we need another year. And so we just pushed everything up and said there’ll be no new businesses. That’s why 2018 is again the year of execution architecture and cash.

And I think it’s going to be the best investment we ever made. I think we’ll look back and say, boy, that time and that effort made all the difference..

So just to clarify, the difference in the top line in the bottom is more about delaying some of the launch of the new business lines rather than pulling back on some of the promotional activity that you mentioned?.

No, no we don't really have promotional -- I mean, like we’ve always said, we’re just not going to chase low quality revenues. But, yes, it’s just pulling back….

So on the revenue -- this is Karen, it's exactly as Gary mentioned. It's both New York and it's new businesses.

But on the bottom line I think as you probably noted in his letter and in the press release, we are seeing just tremendous benefit from the work we've done so far with architecting the operating platform all the things we said last year about what we thought was going to be happen with reverse logistics and with closing two DCs we're seeing all of that, and then some it's actually even been more profitable than we expected.

So that's where you're seeing much better -- we took that 9% to 10% operating margin to 9.2% to 10.2% even though we have $50 million lower sales in that top-line target in our 2018 guidance.

Of course net income also has a tax benefit but even just the operating margin is better because of some of the gains we're seeing from all this operating platform and re-architecture work that we're doing..

That's very helpful. Thank you so much..

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

Great, thanks very much for taking the question. So, I guess just going back to the 4Q gross margin, you guys put up just terrific results again. And just out of curiously I mean what drive it so materially higher. And I guess just what changed from last time we spoke in December wasn't that long ago. And it did look like it was materially higher..

Sure. So, part of that was just kind of being cautiously optimistic at the time about whether we were going to achieve all of those savings. Again our gross margin does have occupancy, so we had savings from the DC closure and not having rent, but also just reverse logistics because transportation is up in gross margin was better.

But the biggest thing almost the entirety of the beat and a lot of that 390 basis point expansion is product margins. And that's really just cycling last year's fee rationalization, the outlet drag all of that not happening this year.

And as Gary mentioned, not chasing those low quality sales, we're pretty happy with our sales, we're still smacking the middle of our guidance, and with such good gross margin expansion. So a lot of things have been going really well based on a lot of the work we've been doing..

Terrific. And then just I guess a follow up on that. So it sounds like the DCs are now closed, I guess, are you guys now operating on the new supply chain model and I guess what could you say about early operations, early earnings or learnings I should say.

And yes, how you feel it's going?.

Yes we have two of the -- Curt so two of the DCs closed. And we're just again in the early stages of architecting this new model right including the DC network redesign. And so there is more to come and as we're working through this, whether it's the DC network redesign, the redesign of our reverse logistics and outlet model.

We're still in the mid-stages of that and then re-conceptualizing home delivery, which we have an early test happening in a market and still doing a lot of work and a lot of math around that. So, we've got several more years of work to do here. I think we've got another solid year of design and architecture.

And just really understanding everything that moves and measuring everything that moves and understanding what all the optionality is and just how to think about it differently.

I think what I've learned, I grew up at the gaps, I grew up in apparel and then went to Williams-Sonoma and stumbled into housewares and then stumbled into a Pottery Barn business, and we tested and started selling furniture and next we got into the furniture business. And as I think -- and then I came to RH.

And this was the business that was when I got here was 52% discovery items knickknacks and things like that. And I think we were about 24% furniture at the time. So when I look back at my career and I think of my experience at Williams-Sonoma Inc.

and at a Pottery Barn, I think my experience here I realized that no one is really built our national supply chain for furniture or maybe there has been some private companies like Ashley [ph] or some companies that's all they did for their life and people don’t really get into the insights of it.

But most companies when they build the supply chain, they hire one of four or five consulting companies. The companies come in with their best practices. And they give you their view and they do their model and then companies generally execute against that.

And that's been my experience at Williams-Sonoma and that was my experience in the early years at RH, right. And in fact, we use the same consultants at Williams-Sonoma and we kind of got the same thinking and supply chain. And Sonoma’s supply chain, think about this is a lot different than ours, ours is much higher percentage of furniture.

We’ve really become a serious furniture business and big-ticket, big items. So furniture is high ticket, low velocity business.

And it's -- like I say it's very difficult because, my days of the gap, you had men’s and women’s tops and bottoms and accessories, everything fold at the same size, everything went into the same size box and nothing broke in transit.

Everything here comes in a different type box and almost everything except some of the textiles can break in transit and get massively damaged. And it's just a completely different business, with completely different math.

And so, what I realized is everybody's kind of doing the same thing and nobody is really doing anything different and nobody is really ever scaled the national spike and the furniture business historically was built in a kind of a regional model, it was kind of regional family run businesses that power players in California, in Florida, in the Northeast, in Texas and I realize it was regional, because once you get national it’s very difficult from a supply chain and execution point of view, and a cost point of view.

And, so what we’re doing is just really challenging all the conventional wisdom, all the assumptions and we realized that the math is entirely different, when you look at it and when you challenge it. And so we’re doing it ourselves without any consultants, without any people that have never done it, except done it for someone else.

And we’re doing it from the inside out and that's what's taking the enormous time from -- cross functionally from the entire leadership team. And so, I just think we’re going to do it better than anybody else, because we are thinking about it at the detailed level that nobody has ever went to.

And I think we’re going to wind up with just a completely unique and differentiated operating platform. But we’re still learning as we go.

The good news is we are more and more excited about it, I mean, look people know look my reputation is on -- it’s on the creative merchandising side, conceptualized new business and growing businesses and that’s what I've done my whole career.

So it's probably a little odd for everyone to go like Friedman focused on execution, architecture and cash, right? And I'm got 90% of my time focused on rebuilding this operating platform, because I believe it’s going to be such a huge unlock and such a huge leap frog that.

So we need more time and it’s not that I would say 90% of my time, call it 70% of my time. But, we’re still focus on the product, we’re still going to have really exciting product, we’ve got a worldwide team with the best designers and artisans in the world. So -- but we’re going to have the best operating model in the world when we are done.

And I don’t think in our lifetime anybody will ever try to do this..

Great, thanks very much for the commentary. I appreciate it. ..

Your next question comes from line of Bobby Griffin with Raymond James. Your line is open..

Good evening and thank you for taking my questions. Two quick questions for me, one on the gross margin improvement that’s probably next year and the forecast of 260 to 340 basis points.

Is it mostly for merchandise margins or is it from the work with the supply chain and the outlook and you kind of help us understand the buckets there?.

Sure it’s about, I’d say three quarters of it is product margins, and the rest is primarily DC and some transportation..

Okay. And then the transportation is just the redesign of the outlets or are you getting different rates from a transportation contract standpoint..

Yes, no, it’s a redesign of the entire supply chain, right. So it’s the DCs, it’s the outlets, it's the reverse logistics, it's a lot of things..

Exactly, and that’s even offsetting there is some nominal just increases in the industry we’re seeing which is freight both the ocean contracts, UPS for our parcel business. Those are actually going up, so this is kind of more than offsetting some of those increases..

Okay, that’s very helpful. I appreciate that.

And then just lastly a quick modeling question, can you just update us on the cadence of the source books introductions this year and how we should think about those in our model?.

Yes, we are we are going to test a second drop for both RH Interiors and RH Modern this year. We’ve -- as you know we’ve over the years went from I think 10 to 12 books a year we went down to two books a year and then we went to one book a year. And again you've got a long tail data on the business we're in. And you really got to look at your contacts.

It's not like typical catalog businesses that look at their contacts every 6 to 12 months. Our contacts sometimes you have to look over three to five years because again people don't necessarily change their home that often. And as we've looked at our data and look back to the data from when we went from two contacts to one contact.

There is enough data now that says that there is people that were affected by that contact. And we believe there is an opportunity to test the second contact. So you're going to see us have two contacts of RH Interiors and RH Modern and we'll test that again this year.

We think that will also be a benefit to revenues in the second half by having, especially having that second contact to modern in the second half..

I appreciate the detail. Best of luck this year..

Thank you..

Thanks..

Your next question comes from the line of Geoff Small with Citi. Your line is open..

Hello, Gary and Karen thank you for taking my questions. I first want to ask about the longer term 8% to 12% revenue growth target, particularly the level of comparable brand revenue growth you're anticipating as well as the proportion of growth that will come from gallery openings and other new initiatives..

Yes, the way to think about it is probably, we've got somewhere between half to two thirds will be new store kind of driven and one third to half will be comparable growth driven. And it will change depending on what years we are introducing kind of new businesses, brand extensions and et cetera..

Okay, that's helpful.

And on the longer term operating margin target for low-to-mid-teens level, can you potentially break that down between the gross margin improvement you're expecting and the SG&A leverage please?.

We kind of laid out the levers I think in the letter. Karen….

I'd say it's not unlike what we've -- our prior bridge. But just seeing very specific things that were a drag right now that we’ll kind of grow out of as we start to not having as big of hospitality drag some of the things that we will continue even just this year continuing to cycle out of inventory optimization.

But now we're seeing I would say even more benefit in gross margin. We've always seen benefit from gross margin occupancy related to the stores as we have this more efficient model. But now we even see more opportunity with the DC architecture and some of the work that we've been doing.

And then as we put more of these real estate boxes and have those open and have the higher volumes we will see leverage in SG&A. So at this point I'd say it's about two thirds, one third gross margin versus SG&A.

And we'll continue to tweak that some of the savings we're seeing in the DC architecture is actually coming from some labor that actually hit SG&A. So as we continue this work, we'll have even more refined thinking on how that will split..

Thanks again and best of luck over the rest of the first quarter..

Thank you..

Your next question comes from the line of Adam Sindler with Deutsche Bank. Your line is open..

Yes, hi good afternoon everyone. Thanks so much. So I guess my first question either for Karen or Gary was on SG&A and maybe you just answer that with the second book drop. But I think when we heard back in November about some potential outlook for 2018, where you are talking about 50 to 100 basis points of SG&A leverage.

Now looks like we're talking maybe about 30 to 20 basis points of deleverage.

Just wondering if you can help us bridge the gap between those two?.

Sure, we just have some continued ongoing investments with both hospitality, with some store openings there is actually more this year than last year. And then just thinking about some of the other investments we want to make in the business as we're thinking about people and process and just some of this architecture we're doing.

So it's still modest it’s not as big as we thought then, but it's still roughly flat it's not a huge deleverage from prior year..

Yes, onetime step up in bonus plan too, because we're planning to have a really good performance this year..

Yes, incentive comp is up modestly not as big as the jump from last year to this year, but in 2018 it will be a little modest step-up as well..

Perfect. And then just thinking about some the new business and brand extensions, obviously in the out years, is there a way and I know in the past when we were thinking about Modern, you gave us sort of a few things you guys were thinking about working on. I know in the past, you've talk about the hardware side of the business.

I know in the past you talked about average RH Color and things like that.

Any way to help sort of conceptualize what maybe some of these things cloud look like or some opportunities you would like to address?.

Not at this point, we don’t need to layout our product roadmap for rest of the world..

Okay, thank you..

Thank you..

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

Hi, guys. Thanks for taking the question. First, there were some fillings yesterday that provided some additional disclosure around the revenue mix. So like 20% of your sales in the first half of last year were contract and shipping.

I'm just curious how that 20% breaks down between the two is one materially larger than the other? And how does that look on an annual basis, I'm not sure if there is any kind of seasonality that may have affected the first half numbers?.

So, Peter, I'm not sure what you’re referring to when you said fillings yesterday..

There were some letters that were filed that were going back and forth from you guys and I guess the SEC. But we'll -- we can take it offline, but it just gave some further breakdown in terms of your revenue mix over the first half of the year, it's not a big deal we can follow-up offline.

I guess my second question would just help us -- help frame the home delivery re-conceptualization that's going on right now.

Where are you with that, when do you think it will be completed and just remind us what the key benefits are going to be of that?.

Yes, we are at the very early stages, we're working on designing it, we’re learning a lot over testing, we're testing the market and as we get ready to do more, we will share that with you. I think we've articulated key benefits many times when there is an opportunity to enter our customer's home.

So what should that experience look like and what are the opportunities when you enter your customer's home, which is the place you are working on or there is tremendous opportunity and it’s a secret place for the customer.

So what should that experience look like and we think we can massively improve that experience and capitalized on opportunities when we enter the customer's home. We think that there is tremendous opportunities to reduce returns, to reduce damages, to reduce transportation and handling cost. All of these are going to be huge impact.

So, again I think if you looked at the rest of the industry, everybody basically doing it the same way. And one of the benefits we have and why we can do it another way, is because we have a much higher ticket than everyone else, right? So we have the opportunity to invest where other people might not be able to.

So, if just think about the simple math and why we will probably be able to build something nobody else has. We're the only one selling high-end furniture at scale in the United States today, period. We're the only ones selling what we sell at scale in the country today at our price points and average ticket and average orders.

So that allows us to have an opportunity to build a platform that nobody else can..

That's helpful, thanks, Gary. Last one just on the tax change, I'm just curious if it influenced your 2018 plan at all or are you guys just pretty much letting it flow to the bottom-line? Thank you..

Sure, I think our investments and what we were going to focus on hasn't really changed. So for the most part it’s flowing to the bottom-line and we continue to feel really strongly about what we are investing in and don’t really think that needs to change..

Okay, fair enough. Thank you..

Thanks..

Your next question comes from the line of Peter Keith with Piper Jaffray. Your line is open..

Hi, thanks. Good afternoon, everyone.

Interesting point on West Palm running substantially ahead of Chicago, I'm wondering if the early read is the more successful hospitality you have within a store, does that lead to more successful furniture sales in that same-store as well?.

Yes, the store is outperforming our expectations..

And that would be for both hospitality and on the furniture side as well?.

Correct, we have an expectation of the translation of hospitality revenues to retail revenues, the incremental lift that we get and we’re getting the additional incremental lift based on the high performance of hospitality..

Okay, very good. And then second question is just on the overall macro backdrop, I would say affectionately I think you guys kind of merged to B2B rolling drum, but the broader furniture industry seems like it had a little bit of a slowdown here in the first quarter, maybe it’s from weather, stock market volatility, what have you.

Curious on what you’ve seen as of late if it’s been pretty consistent, or if you have seen a little bit of a slowdown that leads to that Q1 guidance?.

Yes, this is not really anything outside of what we’ve communicated in our release..

We did have stores closed with weather, but everyone had that..

Yes, the Northeasters have hit us and closed stores and clearly other disruptions the much of our lives was disruptive to the weekends business and as you might expect in some markets and we’re -- it is unusual times.

So, we’re being cautious and optimistic at the same time, we understand we’re in a late cycle of an economic expansion and we’re in a period of rising interest rates and the expectations for rising interest rates.

And so, I think that’s creating volatility in the markets and -- but again I think we’ve got a conservatively positioned plan that we believe we can execute and perform again.

So, I -- we feel that relatively similar to how we thought last year, I mean, the market wasn’t quite as volatile, I think the market is a little bit more volatile now for many reasons.

But we’re not good speculators on the economy, look I thought there’s going to be a recession three years ago is where I did the two convertible bonds, so we can play offense in the defensive markets and nothing happened.

So, we’re just more focused on what we can control and what we’re working on here and we’re in a position where we have contingency plans based on any kind of market we operate in. So….

Okay, that’s great feedback. Thank you very much..

Your next question comes from the line of Oliver Chen with Cowen and Co. Your line is open..

Hi, Gary. As you do build these really unique capabilities and these vertical integration skills, what are your thoughts on M&A as a method of value creation? And our second question was just about the reality of the membership program overtime and the intersection of membership and personalization of big data.

What do you want to build in terms of community and engagement five years out in terms of the future of your membership program?.

Our biggest priority is to -- we have been excited about the goods we sell, right. Because I think a lot of people in our industry missed that point.

It’s about the goods and it’s about you presentation of the goods and the value equation of the goods and you can do all the social media stuff and all the loyalty programs and all the customer engagement you want. And if you don’t have the right goods and they are not presented the right way with the right value equation, you’re going to go home.

And so, that’s where we focus. As we mentioned membership was first and foremost. The strategy was to smooth out a chaotic business and it’s done that.

And so our priority is to have the best product in the world presented in the most inspiring ways of the world at a disruptive and the best value equation in the world and that’s how we’ve gotten to where we are today. And we think that there is nothing to that that has changed.

And, lot of people doing a lot of things on social media, investing a lot of money, a lot of fancy talk about all kinds of -- all the trends, anything you want to talk about, augmented reality this, that, so on and so forth. Put on a pair of glasses walk through a virtual store looking at crafty goods, they're still crafty goods.

And this is the business about the right product presented the right way at the right value equation. And being the best of the world at that and then also in our business what’s so important is in being the best of the world at delivering those goods and executing on the back.

So it's a part of the business that I think is very different than apparel or other things from supply chain it can be something that is a huge positive or huge negative in a business like ours. So that's how we think about it.

And I think you're going to see a lot of bells and whistles and membership coming out from us, we're extremely happy with what's happening today. Doesn't mean we won't keep evolving and thinking. But we're not kind of following all the trends everybody else is. I got to tell people -- I don’t even know what big data means.

Everybody is like big data it’s like all I care about is the right data. The right data to make the right decisions, like what is the decision data we need, like most of organizations, most people are overwhelmed with data, I just read a study the other day that we are absorbing 7 times the information than we were 20 years ago as human beings.

The pace of change based on that generational change used to be measured in 30 year increment the same thing that happened with 30 years is happening in five years. And I think in a world of massive data it's even more important to be able to edit and focus. And so the great skills we have with products and presentation.

I think those skills are going to be very valuable when you think about data. When you think about assorting, editing and focusing and presenting data to make great decisions..

And Gary, about M&A you've been creative and you pursued some great assets in the past and you’re building capabilities which will be difficult for others to replicate. And there is also a lot of innovation happening at all kinds of brands and capabilities.

Are you -- do you that's part of your journey as you think about different ways to drive value?.

It's not our focus. It's not what's at the top of our list. At the top of our list is all kinds of internally generated ideas and opportunities. I think I mentioned before that waterworks was on my list of like to own businesses for 15 years. Because the best assortment and have the best brand in our space.

And 15 years later that business now part of RH. But we don't have some M&A list we're not an M&A focused business, we don't have an M&A team inside the business. I'm not going to say never, but that's the -- if you look at our past I think I'm 16 years here now, we’ve done one thing. So I wouldn’t expect that cadence to kind of change materially.

And again I never say never because it could be three years from now where we're setting on such a prolific operating platform that gives us so much leverage and so much capability that could you put other brands on top of this and could you do something like an LBMH kind of platform for the home. You could we talked about things like that.

But let us get there first and maybe those opportunities will open up but right now we're hedged down and focused and getting the work done..

Okay. And lastly you gave us a lot of details on supply chain Gary, what are the harder -- what's the nature of the harder questions that you're facing as you build this yourself.

I'm just curious about which ones are the more challenging questions about the network and digitization and kind of the Omni-channel approach or the easier ones if you can contextualize what kind of decisions you're facing to make sure that you try to make the best decision possible?.

Look I think it's all hard work. So none of this is easy. Most people don't really try to do it themselves. They're hiring consultants to come in and spent a couple of million bucks and have some will give you a binder and tell you what to do. And usually looks like everybody else.

So we're -- the hardest thing is allocating the time and the human capital to get into the details and understand your business at a level that nobody else does. And that's where the opportunity is.

It's been able to motor up really high and see the bigger pictures, see the opportunities at a high strategic level and be able to get into the smallest details to really understand the truth if you will.

If you even listen to Elon Musk talk, he talks about first principle thinking and that is it's basically doubting everything and boiling everything down to the essential truth and then building up from there.

And we use that framework and thinking inside our company whether it's first principle thinking or the Cartesian doubt theory where you just doubt everything until you get to the truth. Because most of things that happen inside companies are even inside lie for some version of somebody's perspective or it’s some outcome of other people’s thinking.

And we can all be victims of our own history and our history can service well, but in a world that is speeding up and evolving faster and faster, your history can be a present. Because there is new data, new information, new methodologies and technologies being introduced all the time you have to example completely willing to be open and to pivot.

And so -- but it's really hard to do that if you don't even know what people are talking about. If I think all the supply chain strategy sessions I was in over the last 30 years of my career, most of the stuff we are talking about you couldn’t really understand you are in a meeting for an hour or two when people are presenting the deck.

And I guess that must be right in for us. We -- if it moves right now we're going to know about it and we're going to measure it and we're going to understand it and it's not rocket science. We're like moving things around. So I think we can figure that out..

Thanks for the comments, very helpful. Best regards..

Thank you..

Your next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Your line is open..

Good afternoon.

I wanted to ask about the fourth quarter comp, the 2% versus the negative 18% the year before was a little bit lower than we expected, can you quantify how much of this rationalization pressure the fourth quarter and any other factors that could have held back that comp from being higher?.

Sure, so I think one of the things that people are getting confused on, so I'll just give a breakdown of how that 13% growth breaks down. As we -- the 53rd week that extra week, we did consider non-comp.

So just looking at most of people were in line with where we were on revenue, but just had the comp sort of out of wax, but I think people didn't include the 53rd week as non-comp. So, outlet contributed 2 points, which is the non-comp item. The 53rd week was worth 6 point and then new stores was about 3 points. So that's just leaves the 2% comp.

So, hopefully that clarifies that because we’ve been getting a couple questions on that item. And really I think for us curate we've been saying has been something that was contributing this year, but also was even more so last year.

So if anything it was margin drag, but hard to be up against and that’s something that this year most of those efforts are done and the inventory optimization you saw that’s down 30 in inventory we feel really good about the progress there. But it is something that even in Q1 that we’re up against versus last year.

So that will start to dissipate as the year goes on..

Yes, I think we're living in really interesting times. I can't tell you how many retailers who have kind of had a dead cash balance like they have run negative comps for some many quarters and also they run up one or two.

With operating earnings down and earnings down and their stock goes up 10% because everybody so excited about comps that drive less earnings, like we're not interested in that, we're just not.

And so, we're really focused on building a great model and we're not going to spend out a whole bunch of friends and family last minute emails and take a bunch -- create a bunch of crazy promotions that try to squeeze out another point or two. And not make money on it by the way, have our operating margins go down.

So, I mean, it’s just really hard to compare us to everybody else right now and we talk about it here. And like I'm seriously I sit there and go, you are kidding like earnings are down, operating margin are decline, but because somebody got a two comp or a three comp like Wall Street thinks it’s really good. That’s not the lens we use..

And I do think the prior year was not even a real comparison, because we went from pre-membership to membership. So this year it’s not really the growth rate from last year is not really relevant anymore, because it was two completely different models.

But just looking at last year Q4 to this Q4, that’s more relevant and that’s where that 13% is from with the two comp. Hopefully that helps to clarify..

That’s helpful. And then it’s my second, I wanted to ask sort of a macro question.

When you think about some of the changes from tax reform and the impact they could have on your business particularly you do have exposure to high tax, high property states like New York and California, how you’re thinking about your customer in those markets and where you could see a negative impact from the changes there?.

I think it’s too early for us to tell you out exactly how it’s going to impact those customers. I think it’s what you’re saying is well known, I mean, like we know we’re thinking about it, but we’re not economic predictors. We don’t know exactly know how it’s going to shake out, you’ve got the stock market still at relatively all-time highs.

You’ve got people paying lower taxes on some levels, paying higher taxes on other levels, we are not smart enough to figure it out. So that was the end of my comments. Yes, by the way..

Your final question comes from the line of Janet Kloppenburg with JJK Research. Your line is open..

Hi, guys. Congratulations on a great year. Just a couple questions. Garry, when you talk about the holiday quarter, you always said it’s kind of a….

We can’t hear you Janet. You’re….

Janet, speak up a little bit..

Could you just talk about the holiday quarter a little bit Gary, not so much about the comp but I think about what restoration have this opportunity is in the fourth quarter, I think it’s a bit of a conundrum for the brand and just love to hear your thoughts there? Second…..

We keep -- okay, go ahead. Yes..

Great. Second….

I am better with one question at a time, by the way..

Okay, that’s fair, go ahead..

Alright. As you know, we keep kind of pulling back and editing holiday out of the assortment, because we’re no longer a typical mall based store that piles up products on their dining tables and coffee tables and at any time of the year and we think especially is detrimental at a holiday.

So, we’re giving back a lot of businesses and exiting, and we’ll be exiting more this year, as we kind of finally completely transform the brand interior design platform. So, holiday will become less and less important to us, in fact the month December is generally the smallest month in the furniture business..

Okay, great. Thank you. And then, when you think about SG&A Gary and Karen, with the tax opportunity and all of the ideas at hand, I was actually impress that you only look for small amount of deleverage in 2018, because of the gross margin opportunity and also the tax opportunity.

So I wondered how you thought about the timing of investments and if you skewing them all or a greater percentage to 2019 and perhaps then we won’t have as much operating margin improvement in 2019 because you’re making the greater investments. I know what the goal for 2021, and I get that and I see how it’s achievable.

But I was just wondering about the cadence of operating margin and your thoughts there with respect to investments? Thank you..

Yes, again, we’re -- I think if you think -- take the guidance that we’re giving today of 9.2% to 10.2% and then projecting that out to 2021, and say we’re going to be in the low to mid-teens. I mean that’s a pretty huge opportunity..

No, I mean, that’s not -- it’s just I wondered about the cadence between 2018 and 2019, that’s all..

It’s going to depend on the pace of work and the opportunities we’re going to cover. So we’ll let you know more as we know more..

Okay, let me ask you another question, are there more opportunities to lower infrastructure in fiscal 2018 like could there be another DC closing or something of that nature that would provide some natural opportunity on the SG&A line, while investments are being made..

Well, we're not prepared to comment on anything we're not commenting on in our broader release. So if we have plans on anything like that we'd be talking about it. So I wouldn't anticipate anything like that today..

Okay. And then can I ask one more question Gary, the first quarter guidance largely anticipated because we know you have a heck of a lot of clearance last year.

But could you just comment about the underlying strength of business and the full price business? How are you feeling about that?.

We feel really good about the full price business. So we're as excited as we ever been about the potential of the brand on every level. So we're just cycling through a lot of transformative efforts. So the landscape into the P&L and the business is going to look a little funny probably for four more quarters at least through this year.

And then I think the model is going to be much more understandable. I do think if you stand back and -- at least the way we think about it here is look Q4 from a just an operating margin point of view right gets us back to historical kind of high levels. And Q4 is still has drags in it in the P&L, so Q4 is nowhere near where it could be.

But if you look at Q4 and then you if you -- we're halfway through the quarter right. So we're not going to be a lot off on Q1, I mean, I knock on wood I’d hope nobody does anything crazy from an economic environment point of view. But if the world is similar to how the world looks today, everybody is going to believe Q1.

And so if you believe Q1 and you believe Q4 and you just book in the year then you believe the full year guidance. And then you go okay, that's where they are today. And here is the other opportunities, that's how I think about it.

The biggest thing is, I mean, we’ve had and we've had to have the most volatile stock over the last 10 to 12 months in our industry. I mean, every time we’re doing a release our stock move 42%, 44% one day it went up 27% at our investor meeting. I don't know how much it is up in after hours now.

I mean that's a reflection of a lot of people not believing what you told them. And so -- and I tell the team here, guys, no one is going to believe what we're telling them. When we told you 9 to 10 it’s like I got to believe 90% of the people didn't believe 9 to 10.

And of course they didn't believe 9 to 10 our stock went from a high of 109 and went all the way down to 75. So that just told you what everybody believed. And so the key is how people can connect the dots and see what we see. And we obviously have an internal view of this and can see more than any of you can see today.

But we'll try to do our best to help you connect the dots. And hopefully some of the dots that everybody is connecting as wow, look what could happen over the last several quarters. There has been a lot more good news than bad news.

And yes, it's little hard to understand all the moving parts, but the news looks really good and at least as good or better than what they told us. And we feel every bit is confident about the outlook and the guidance that we just gave you for 2018. I think from our point of view tell teams like don't worry about the stock.

Everybody was saying like Oh My God, like should we put out a prerelease for Q4 it's like why because the stock went down, like really we didn't do anything different. Like we're going to build this company and run this business like we own 100% of it.

And we're going to do it right for the business and right for the long-term and we're just not going to be reactive to the fact that the stock is volatile or so on and so forth. And I think if everybody -- but where we stand because record Q1 operating margins historically for this company was 4.4% in Q1. That year they made 9.7% operating margins.

We just guided Q1 operating margins like at the midpoint at almost 8%. So that looks a lot higher and we just had a Q4 that kind of looks close to the operating margin before, what do you think the middle is going to fall out, it’s not.

So it’s I think just now people are going to start to get and believe where we’re going and -- but honestly we still have I think one of the highest short positions on the stock. So we’re going to be subject to short squeezes and doubters and naysayers, but that’s what you get when you run a public company.

So, I’d just tell you that, we just never been so confident or excited and driven to build something truly unique in this world. So, anyway….

Well, thank you. And just to clarify, I wasn’t doubting the guidance, I just wondered what the underlying business tone was..

I just used as an opportunity to set up say what I wanted to say, Jane. Thank you though..

Okay, enjoy, have a great evening. Thank you..

Thank you..

There are no further questions at this time, I will now turn the call back over to Gary Friedman..

Great, well thank you everyone and thank you to all our people and our partners around the world who help bring this brand to life every day. And thank you for all of your support and all of our shareholders and stakeholders who are betting us to win and for those of you are betting against us I wouldn’t want to be on your side. Thank you..

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