Cammeron McLaughlin - VP, IR Karen Boone - President, CFO and Chief Administrative Officer Gary Friedman - Chairman and CEO.

Michael Lasser - UBS Peter Benedict - Baird Steve Forbes - Guggenheim Securities Matthew Fassler - Goldman Sachs Brad Thomas - KeyBanc Capital Markets Geoffrey Small - Citi Adrienne Yih - Wolfe Research Daniel Hofkin - William Blair John Parke - Gordon Haskett. Oliver Chen - Cowen & Company.

Good afternoon. My name is Kathrin, and I'll be your conference operator today. At this time, I would like to welcome everyone to the RH First Quarter and Fiscal 2018 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. I would now like to turn the call over to our host, Cammeron McLaughlin, RH Investor Relations. Sir, you may begin your conference..

Thank you. Good afternoon everyone, thank you for joining us for RH's first quarter and fiscal 2018 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 also 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 the call over to the operator to take our first question..

[Operator instructions] Your first question comes from the line of Michael Lasser with UBS..

Good evening, and thanks a lot for taking my question. So you’re looking for a big acceleration in your top-line growth over the next couple of quarters, you’ll benefit from having some of your new design galleries open.

Can you give us the sense for what the underlying comparable brand comp is implied within the next few quarters of the top-line guidance that you’ve outlined?.

Sure, this is Karen. For the comp wherein Q2 through Q4, we expect a range of about 8% to 9% in Q2, about 5% to 7% in Q3, and about 4% to 7% in Q4, and that should line up pretty closely with the guidance table that we have included in the release.

The reason it dissipates in the back half and gets smaller is because we expect the new stores to provide a greater contribution to total revenue, so that therefore is kind of the plug to get to the comp to total..

And do you expect your membership growth during that same time to mimic what your brand comp growth should be?.

Yes, generally we expect membership to just translate to total growth, not outlet necessarily, but new store growth. Even though it’s not comp, it would have a membership correlation as would comp brand. So, in general, when sales are growing, membership is growing.

As we’ve kind of previously said, this was really not intended to be especially just a loyalty program for a loyalty program, it was a new way and a different way to have a better promotional program..

And then my follow-up question is on gross margin, you’re guiding to call it 39.5% gross margin this year, that’ll be 200 basis points higher than the highest gross margin that you’ve achieved in the last 10 years.

So, is that -- is the delta that 200 basis points all related to the difference in the economic structure of your membership program versus the more promotional oriented model that you’ve had in the past? And the reason why the question is important is because the market is going to want to understand what the upside and the shape of the gross margin is going to look like as you roll-in incremental top line dollars in the next couple of years..

Yes, it’s really a combination of everything we’ve outlined in the letter. So, I think we’re pretty complete in articulating what’s driving it and what the bridge is to the low-to-mid-teens operating margins and beyond.

So, it’s everything from the power of the membership model, unique and proprietary product offering that allows us to get better margins and people that are selling other people’s goods, our efforts revolutionize physical retailing.

And the work we’ve done thus far to rearchitect and redesign our operating platform, which we’re in the very early innings of, right. There is a lot more good news to come there. So….

Okay, I guess I was talking specifically about….

There is nothing -- there is no news outside of what I wrote in the shareholder letter..

Okay, thank you very much. .

Thank you. .

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

Hi, guys. Thanks for taking the question. First just a quick one, just as a clarification.

So on the coverts, I mean it looks like basically all we’ve got here is now you’re going to pay them off in 2019 and 2020, and there’s really nothing else to consider with those between now and then, is that fair?.

Sure, we have included a share count table in the -- one of the tables in the press release that shows kind of the illustrative examples of at different rising share prices, the dilution that will come between now and then in our EPS, but that’s more of an accounting item.

For GAAP purposes we would have dilution all the way beginning at the lower strike prices of $116 and $118, but because we have these economic bond hedges in place to actually deliver and offset that dilution, we won’t actually have true dilution until above the upper strike.

So, there is some accounting that will go on with our diluted shares calculation above the lower strike, but we truly will not have dilution until we pass the upper strike..

Yes, the $172 and….

$172 and $189. .

Okay, now that’s helpful. And then you talked about leverage and where that’s going, I guess sub-2 by the end of this year.

Where do you guys envision being comfortable running the business, I don’t know how far out you want to go 2021 or just in the next few years, what’s a good level of leverage you think that the business should operate under?.

Yes, as we mentioned, we could be in a position to be at 2 times by the end of this year, beyond that we haven't really set a target. We think 0 to 2 is probably a good range, but we haven’t -- it really depends on what the uses of cash are that we would have for any outstanding borrowing..

Yes, I think as we said in the letter, we will continue to be opportunistic with the capital markets if there’s the ability to have offensive [ph] cash on the balance sheet, we may think about that and pursue those options.

And so -- but that wouldn't necessarily deleverage if you will -- it would be cash sitting on the balance sheet, no different than when we first did the two convertible notes. We kind of carry that cash for a while until we acquired Waterworks, and then significantly made a repurchase of our stock..

Understood. And just one quick last one, just around hospitality, can you help us kind of understand maybe the size of that business. if not today, where you maybe see that as a percentage of the business as we move out a few years based on what you have planned? Thanks so much. .

Yes so, we couldn't be more excited about the integration of hospitality into our business model.

Not only does it drive significant incremental traffic to our galleries and brings in the right customer, and as we can see mathematically adding the significant bump to our revenues in the galleries that have hospitality, but as we are evolving and learning and designing the business model for hospitality, we think hospitality will be incrementally profitable to the model besides the integrated benefit, which we really never had a plan for quite honestly.

But, I think the experience that we're designing the incredible food and hospitality experience that Brendon and his team are bringing to life inside these pretty magnificent spaces we're creating, I think what surprises us is just how popular they're becoming.

And so as we think about it, I mean I think there could be a third, maybe more of our galleries, third half long term it all depends. And what we like about the business, one of the great things about it. I mean it is a different business integrated into our retail business right.

So this is all hard work to kind of thread these needles and get it to all work seamlessly. I think we’ve found a model that's really unique, and there’s lots of things to like about it, right. It doesn’t really impact our overhead or costs structure, you have the inventory have fast turns in the F&B business.

We don't have to build another DC for those sales, we don't have to carry the inventory, increase those turns, it's got faster return on cash and so on and so forth. So lots of things to really like here. But we're still really early and we're still learning so much. I would just say it's just significantly beyond our expectations how this turned out.

Our original vision was to have a really amenity inside our galleries. Because our customers spend so much time working with us designing their homes and the ability to have them have a place to have lunch or early dinner to keep them in the gallery. We hoped it would drive some traffic or revenues.

But take Chicago for example, there is a building in a residential neighborhood. There is just a little sign on the building that has RH. There is no identification that there is a restaurant in there, you have no idea walking by. And initially our questions internally is like who's going to really want to go to a furniture store to have dinner.

So just so far, everything beyond our expectations and we're just in real learning mode and making a lot of adjustments and fine tuning the model and now are in a position to believe that this is going to be meaningfully more incremental than we thought, and it will be a real business.

I think we're going to build several hundred million dollar hospitality platform here..

Your next question comes from the line of Steve Forbes with Guggenheim Securities. .

Good afternoon. I wanted to focus on the customer insights that you're gaining from your RH members program.

Especially as it relates to demographic appeal of the brand, like the RH brand, are there any learnings that make you rethink that $4 billion to $5 billion long-term opportunity, as you think about how broad the brand can travel as it relates to just demographic whether it’s age or income spreads and so forth. Any insights would be valuable..

Nothing particularly different than what we anticipated. So, I would say if you look at where we -- how we saw membership would translate, and how it would impact the business, we are just really happy that we're really directionally right with this. Again, it's relatively early right, first could of years of all of this.

But the real key to membership, we can all talk about customer data and customer insights and all those other stuff, and I’d listen to so many retailers conference calls and they're all talking about all this big data and all this customer data and insights. We’ve all had the data on the customers, right.

I mean you have retailers out there that have had credit cards for years, they know everything, they've got all this data, yet they can't grow their business over the next -- the last 10 years, right. So, I think people sometimes put too much of a premium on these things.

For us, remember the objective here was to smooth out our business to not run a chaotic promotional business that we believed had just massive -- it was massively distractive to leadership to try to run a business like that, you are not making high quality decisions. It's enormously cost inefficient to manage inventory or manage the business.

So this was to really simplify and streamline our business that was our major goal. We run a big direct business, right. We have data on our customers. I mean I didn't expect all of a sudden find out we have -- we are going to have all new customers on membership, I mean, honestly that would alarm to me.

I mean the idea -- we have -- we know a lot about our customers, do we know that much more. I think what's happening is look our average transactions are going way up, we're getting great leverage, we're spending more quality time with our customers, they are not all rushing in at the end of an event.

And you've got a store of 300 people and a staff and a team trying to serve everybody on the closing weekend of an event. Now our business gas smooth out, we're giving significantly better service, we can staff the business better, we have better relationship, average orders are going up.

Our interior design business, which is an important element that’s linked to this is really growing and becoming more and more important.

Every month that goes by we have more and more $100,000 interior design jobs, I mean we just did about $900,000 job in Italy DP [ph], we finished an install in Italy, we're working on a $1.3 million installation in Shanghai. We're becoming a serious interior design firm.

And the membership is linked to that, but the real objective here for us was to move from promotional model right to this membership model to smooth out and streamline the business and we thought there were massive cost efficiencies.

And it's allowed us to reverse engineer the supply chain take -- from our numbers, if you really look at the numbers at the end of this year, we would have had plan to have $400 million more inventory than we're going to have, if you looked at our previous long range plan.

So, net-net you guys are seeing that we're probably going to take somewhere around $300 million out, but we would have inventory growth. If you run the business on the same terms, on the turns, it's about a $400 million difference in inventory.

You couldn't run the inventory, the way we are running it, if you are running a crazy promotional model like we were. You just would always be buying around.

And yes, so that there is so many things here that membership is unlocking all kinds of opportunity in the business, and I’d tell you the least important part is do we know more about our customers. We know a lot about our customers..

And then as a follow-up here Gary, you mentioned some international sales there, can you update us on your thoughts around the international opportunity in general as it relates to having a footprint there whether be in London or other countries in fact….

Yes, no good question, we're really excited, I mean we are shipping goods all over the world and we have customers that really passionate about this brand. And so we keep getting more and more excited about the international opportunity, we just want to be really smart about it.

It’s complicated in a business like ours where I tell people a lot when you are in the apparel business its men’s and women’s, tops and bottoms and accessories, everything comes fold at the same size, it all comes in the same size box and nothing breaks in transit. Our business is exactly the opposite of that.

So, when you decide that all of a sudden take your business to another country, you really got to think through all those aspects, the supply chain and so on and so forth and we have been working on that. We have done a lot of work on the real estate side, we’ve -- again we think we’re zeroed in on a location in London and possibly one in Paris.

But our deals are not the simplest and easiest to do, these are pretty iconic locations that we think are perfect for the brand and if we can get them done, we’re in -- we’re kind of parallel path-in working through what the operational mechanics and how does that all translate.

So, as we know more and get closer to it we’ll be there, but clearly there is a huge market opportunity here, I mean, it maybe -- the international opportunity maybe bigger than the U.S. opportunity because the competition is -- I mean, there is really no competition internationally when we look at what we’re doing.

And we have all kinds of people that want to license it, want to franchise it, license it and we’ve just said no to everybody, we really believe we want to control our brand. So for now that’s the path we’re taking..

Your next question comes from the line of Matt Fassler with Goldman Sachs. Matt, your line is open..

Thanks a lot, good afternoon and thanks for the color that you offered up in the letter. My first question relates to gross margin. The gross margin was substantially better than you had guided to at fiscal year-end as is your guidance for the year.

Can you give us a sense on this line item in particular what’s really breaking your way of beyond that you had initially expected. Because lots of the changes that you’re speaking about have been in place for a number of months. So is it the mix of business, is it what the cleanliness of the inventory, does to your ability to sell it full price.

So give us a sense if you could about the nature of the upside to price here?.

Sure Matt. So, gross margin was really hitting on all cylinders in Q1, so we have been talking about this skew rationalization and inventory optimization efforts and cycling through those was by far the biggest item.

But to your point, we did have very clean inventories, we -- now that we have the membership, we’re not going to have a lot of variability in selling price, we’ve to do lot of full price selling.

But then the other things that also fall into gross margin for us, are things like having a full quarter of the benefit of the DCs and the reverse logistics of not taking the outlet goods all the way back to the DC, that’s in transportation.

So there’s just a lot of benefits of the way we’re handling the goods and having fewer DCs and the way we’re really just -- the way we’ve kind of architected the platform as Gary mentioned. Just has a lot of efficiencies as it relates to the movement of goods, the storage of goods, the handling of goods.

So it’s kind of products was by far the biggest items. But within transportation and occupancy, there is also savings there..

Yes, and it’s a little hard as Karen said, we’re still in very early stages right of kind of realizing the opportunities that we anticipated.

And so trying to forecast that, try not to get ahead of ourselves until -- right, I mean at one point earlier in the quarter we got one of the roll ups guy came to me and said Gary money is falling out of the trees.

And it was just true, I mean, I think the simplification of the back end of this business and the business being architected in a truly unique way that custom to our business, not like anybody else’s architected operating platform.

I mean we’re really thinking deeply, we’re bringing first principle thinking to everything, we’re not looking to best practices, it’s all next practices and I think the time and effort that this leadership team is putting in, you’re just seen opportunities all the way through.

So, I wish we could be more specific with all this, but we took the learnings in Q1 and we try to reproject the year and we try to be conservative projecting the year, we don’t want to get ahead of ourselves. So, we're learning, you're learning all good so far..

Super helpful. And then a quick follow up, I know margin was really the big source of the upside surprise, but you spoke about sales overseas. And there is a point a couple or three years ago where the oil market and the tourist market et cetera did start to weigh out of the business a bit.

If we look at macro factors and we listen to other companies, the oil markets are in better shape, tourism into the U.S. seems to be in better shape.

Are you feeling that at all? Is that a factor in the strengthening of your comparable brand sales momentum that you can discern?.

Yes, Matt the markets that we've mentioned before that are most impacted by oil that you would anticipate in Texas and as you kind of go to Canada and look into Florida. And then some of the ones tourist did not as much for us.

But the oil markets we're seeing better performance out of the markets that would have been negatively impacted in the oil, where it would dropped all the way down into the 20s, 30s. So oil will move as markets, it's just no getting around that. So logic prevails here..

Thank you. .

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets..

Thanks, good afternoon. Gary in your letter, you highlighted a number of things DeMonty team are working on like the supply chain and customer service, the in-home delivery the call centers. I was hoping if you could talk a little bit about the timeframe with which you hope to make maybe the most meaningful progress on this.

And maybe talk about what might just be more customer facing versus the areas of what is working on that are really contributing more meaningfully from a financial standpoint?.

Yes, I think we'll be prepared to kind to be more specific and give you a lot more color probably later in the year and maybe with our next quarter. I mean, DeMonty is just completely getting close to this with his team making real changes putting fresh minds in the business.

And also just putting people in the supply chain that actually come from a customer perspective and a gallery and stores perspective that think about the business completely differently than a typical supply chain person might. And we're just seeing opportunities that other people couldn't see and unlocking a lot of value.

So -- but we're still early on here. The moves we've made to consolidate the DCs from four to two. I mean there are still more work and more opportunity there in the DC network designs. In the outlets piece where we simplified the reverse logistics that's the early work, there is a lot more work there.

I mean we're seeing benefits in outlet margins and other things, but we think there is continued margin opportunity in outlets from minimal handling. We think we're going to turn the goods a lot faster by not transforming them as far. So we still don't have outlet stores in every market by our galleries.

So there are still places where we have to take it somewhere cross state still moving it too far. So we're in the early innings of rearchitecting the outlet platform. We're in the very beginning innings of rearchitecting the home delivery platform and network. Soon we'll have in the Bay area the new model up.

And we'll have more to report there when we have real data. But one of the things that's really interesting, when I got here 17 years ago, in the Bay area, we actually did our own home delivery. We in-sourced and did it ourselves and it had the best metrics in the business.

And without way for better three or four years and then we decided to outsource it and then the metrics looked a lot worse. So it’s interesting the guy that used to run it is still with us. And now that we're listening to him. He is telling us here is how we used to run it, here is the metrics from 15 years ago.

It's just that nobody believed it could be done. So it’s just bringing first principle's thinking into the business, looking to things with fresh eyes, building up from what is truth not speculating. And if you came into our offices you've seen on one wall kind of current state.

And then you’d see right across in the other wall a design of future state. And I think the logic of looking at the fact that today, I would say we have a home delivery network design that almost looks like a DC network design.

For example, in the San Francisco bay area, we pick the orders that are DC in Patterson we drive the orders 20 minutes to our HDL in Tracy and then we unload the goods after 20 minute.

Take the matter they are protected packaging, blanket wrap them, which kind of protects the goods and then we send drivers into traffic for 2.5 hours to get to their first delivery in marine over San Francisco or Palo Alto or Wood Side.

And if you ever driven a truck or been in a truck in stop and go traffic, you can only image the furniture banging around against each other right with the blanket.

And so, just a simple solution like hey why don't we put the home delivery and delight centers near the customers? And why don't we send the goods at night not during the traffic? And why don't we leave them in the protective packing? And then why don't we unpack five minutes from the first delivery.

And so it's not getting banked around for 2.5 hours. And by the way, what is the math look like when your drivers aren't seating in traffic for 2.5 hours before they make the first delivery? And then have to drive back with the returns in 2.5 hours.

What if he just drop the return off in an outlet that’s somewhere in the market where all the customers are stead of taking it into the middle of nowhere where there are no customers like maybe the terms will be better, maybe the margins will be higher, maybe the teams will deliver twice as many orders in the same day.

Like it's just bringing fresh eyes, fresh mind, first principle’s thinking, find out what the truth is, built it up from the truth and don't hire consultants that’s going to come and tell you how everybody else is doing it, because they may be doing it wrong. So you’re just seeing the very early stages of this.

I mean I think it is going to be so transformational, I think the model we're going to build here is -- we wouldn't tell you mid-teens operating margins unless we really believed it. I mean, we believe this and it might be more than that. So, I think we're going to build the model that is unlike anybody has seen.

No different than the front-end, like why do we build these spectacular galleries that do. When I inherited the business, the average store volume here was $2.9 million a store. We have stores doing $60 plus million. The same little boxes they were doing $2.9 million a store, now we are doing $15 million a store in the same square footage.

It's just looking a thing difference, but that same creativity, that same approach, the same cross functional collaboration that helps us architect an integrated solution that is unlike anything anybody has ever seeing is the same energy creativity, cross functional collaboration that is going into building the operating platform.

And we're having a blast, we're finding things that like, Oh My God, we feel stupid for doing it the other way for so long, but you couldn't be more exhilarated to find like every problem is an opportunity. So, the opportunities are enormous here.

And I just think that that we're just taking our own path and bringing fresh eyes in thinking and not having consultants come in and tell us the way that everybody else does it that's not going to get you ahead of anybody.

So we're going to conceptualize a leapfrog operating platform and you are just seeing the beginnings of I think what's going to unfold here over the next five years..

That's great, very helpful, Gary. And if I could squeeze in quick follow-up maybe for Karen on the source books, I know the interiors book is getting out.

Meaningfully earlier this year than it did last year clearly that should benefit I would think sales at least for 3Q from a timing perspective, how should we think about the other maybe P&L impacts from getting that source book out earlier?.

Sure, so what’s difference is actually is not just getting in early we're having two drops. So last year we had modern drop in the spring and interior drop in fall and now we have two drops of interiors one in the spring, one in the fall, and two drops of modern, one in the spring, one in the fall.

So, it is there is an incremental advertising investment, but in total we’re doing different things with certain page counts and sets that’s on the year the ad caution to be that different.

And then with respect to the new accounting rules, we have tried to make it clear how that’s going to shift significantly between quarters and put a table in the press release to try and show some of the variability between quarters for example in Q3 when the fall books go out, you’ll see all the expenses that in Q3 then Q4 will be massively improve, because there isn’t really any expense in Q4.

So there is some variability by quarters, but in total on the year ad costs should be relatively consistent with last year..

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

Hi, Gary and Karen, thank you for taking my questions. Gary, you just touched upon gallery productivity and I believe eight of your next generation galleries have now been open for more than a year or anything something like 18 months to about three and half years.

I am just curious whether you can offer any color on the comparable sales growth you’re seeing from those galleries relative to the company as a whole? And also whether the market wide lift in direct revenue from those new galleries has met or exceeded expectations..

Yes, so we continue to be extremely happy with our new galleries and we continue to fine tune them. As far as the impact of the direct lift we’ve -- the model is relatively similar and we’ve articulated before, we expect a modest direct lift in the markets when we open the big galleries, the major lift is in the galleries themselves.

And that will actually change the whole complexion of our sales over the next several years.

So if you just think about a market where our sales at retail will lift by 2x to 3x over a few year period at retail and our direct business might lift by 10% to 30% over that period of time, you’re going to wind up with the business here, people -- it’s funny.

Again you study what other retailers are doing and what people are excited about and people get excited about their direct business growing faster than the retail business, I don’t know why, because the direct business makes less money and every retail company in the world on positive of that. And that’s why you see decline in operating margins.

But I’ll tell you this, our business will go -- we were almost 50% retail, 50% direct, that was because we had significantly undersized retail stores. So when you really size the retail stores correctly, this model is going to look like 65-35, 75-25. And quite honestly we’re kind of ambivalent where the sales fall.

I can’t influence whether someone is going to place the order from home or they are going to place it in the gallery with an associates. We just want to kind of build the net if you will that we catch the customer.

Where the customer wants to interact, or not even where the customer wants to interact, so how could they want to shop your gallery if there’s not one there. So really it’s about where and how do you position the business. To grow in the most productive way how do you allocate capital in the most productive way.

So we look at a market and we try to price the gallery, size the circulation, think about the investment and advertising, think about all the things we’re going to doing and the investment in a market and then how do we really optimize that market from a return on invested capital.

So -- but we think we have the most exciting retail stores in the world today and they are only going to become more productive overtime, not less productive overtime. We’ll only get smarter in how we merchandise them, how we market them.

I think the fact that they are so unique and different that we’re getting a share of traffic that others are not getting, we’re becoming more important to developers and landlords, I mean, just interesting fact, now that we now have a real proven concept, we have an F&B opened that developers now believe these will work.

We have now layered on top of that a hospitality experience that is really terrific compared to anything else in a retail development and that has developers excited. So it drives traffic not just to our gallery, drives traffic to any development.

So, I just think we’re on the right track, we’re on our own track and we couldn’t be more excited about what’s happening with our galleries..

Thank you, Gary. It’s really helpful color. And on the SG&A side, it looks like though spending came in above your expectations in the first quarter after adjusting for the accounting change. And I know if took out the plan for the year again after the adjustments.

Presumably the spend behind the new source book mailings was one component of that increase.

But I'm wondering what else is driving SG&A higher than initially expected?.

Sure, so we do have a couple just investments this year that we are continuing to invest in hospitality. As Gary mentioned, we have three experiences this year, so that's incremental startup cost there plus just more openings than we have last year, so we have more preopening costs.

But then separate from that we have two kind of compensation, I think one is incentive comp is higher than it was last year. Obviously we didn't have the same strength of our business that we have this year. So we have higher incentive comp in our base.

And then there is just other small incremental investments modest in other areas things like our call centers and some of the changes that Gary mentioned in the release openings of call centers on our campus for example. So there is other modest SG&A investments in there..

Yes, that wasn't in our plan. And we decided we needed to get the customer closer to us, whichever way we can get closer to the customer get out to the customer, bring the customers' voice into the hallways of our corporate campus here. So we're making investments to just strengthen our ability to serve the customer.

But I think look, are we spending a little bit more money? Yes, we might be, or we are making massively more money, yes. This is about -- business is about investing, it's really not about spending. So if we're investing more we making more that's what we always ask at the table. Now what do we investing in? What do we expect to get for format.

And so I think our numbers tell a pretty clear story that any incremental investments in SG&A that we're making are result of significantly better returns. .

Your next question comes from the line of Adrienne Yih with Wolfe Research. .

Good afternoon. Let me add my congratulations. Gary, I was wondering if you can give us an update on the RH delivery network, what you are doing there.

And then also can you talk about the quality of transaction either increase in order size, return rates lowered that lead time just from having cleaned up that inventory? And then for Karen, with regards to the warehouses with this skew rationalization.

How many of those warehouses are now I guess decommissioned so to speak? You talked about one of them being anniversaried. And what -- as we go forward, what can we see from the remaining warehouses? Thank you..

Yes, so I think the first question is an update on the RH delivery network. And I think I just talked about that to see the simplification of that and the ability to kind of move home delivery into life centers closer to customer. So goods travel farther in the original package that gets it almost anywhere in the world undamaged.

So when you take that packaging off products what are you doing with it. So there is….

Timing of implementation or when we might see.

Yih, it's going to take several years to get through the whole country. And so this is a long-term project. But the returns and benefits are we believe are going to be continue to be really good.

So as we learn we'll adjust, but we think there is tremendous benefits to make and lowering returns, lowering damage, lowering exchanges, getting orders to stick being able to deal with a customer issue immediately as oppose to you make the delivery a customer has an issue when it goes into a process and a system that gets back to the customer.

And it could take days or weeks, I mean we can have Medicare in customer’s house in 30 minutes in our new model. But it's going to take a long time to kind of get this everywhere nationally.

Some things we'll be able to go faster about, just doing simple things like adding more routes, moving to 7 day deliveries, delivering when the customer wants the goods, just not when it's most convenient for the trucking company to deliver. And all kinds of things like that.

So -- but I think we'll be more specific with our plans here probably in the fall, I think sometime in September when we report second quarter. We'll take you through a more broader view of what we've learned and what we're doing, I think, but we’re just at the early stages there. .

I think I was referring more to the -- you wanted to have your own employees, the RH employees. .

Yes, sure yes. I mean, we’ve bias for more control than less control, but at the same time we have a lot of partners that are kind of raising their game and expressing very passionate about wanting to be our partner and wanting to integrate with us and work in a deeply collaborative way to do provide a service that’s not been offered in the industry.

So, there is people who can partner with us in a right way and can actually differentiate themselves great. People that can’t differentiate themselves, I mean, we’re operating in a business that really doesn’t have a peer, we really don’t say who else’s really at the kind of more luxury end of the market with scale no one has that.

So -- but we can’t have our goods on the trucks of the other people delivering being delivered the same way our customer expects one, our galleries are different, our experience is different, our home delivery experience has to be different. So -- and we’re just being very clear and transparent with our partners and a lot of them are stepping up.

So we’re optimistic but it means a real focused commitment and investment into RH for them. So, we’ll see whose game..

And then Adrienne, with respect to DCs, we used to have four furniture DCs and two of those closed last year in Q4. So our LA warehouse and then our Dallas warehouse, those both closed in Q4. And then we still have two left in East Coast and a West Coast, as well as our small parcel or shelf stock facility in Ohio.

So that’s the structure and kind of the plan for now, we’ll continue to evaluate and see if there is opportunity, but that is our -- we don’t have any immediate plans with any other of those warehouses..

Okay, great.

And just one last one for Gary, when would the timing of the gallery in London potentially be?.

Too soon to tell. I mean we’ve got to nail down the deal and so, it’s not that easy, but hopefully -- it’s on the top of Dave’s list we think it’s probably a $300 million or $400 million opportunity if you just look at that the UK market. We think we could open one gallery and probably create a $200 million to $400 million business very quickly..

Your next question comes from the line of Daniel Hofkin with William Blair. .

Good afternoon. I apologize if I missed that. I know you talked about your sales guidance by quarter the remainder of the year and within that it sounded like the comp expectation was starting with 2Q some deceleration from that to 4Q. Just curious what was driving that wasn’t immediately obvious why you would expect comps to decelerate? Thanks..

Sure, so the real estate, so when we open new stores those are non-comp, so those are a bigger contribution to total revenue growth in the back half. So those are offsetting some of the -- we’ve given our total top-line revenue guidance and if the new stores are contributing more comp is therefore less..

Okay, got it. Thanks..

Your next question comes from the line of Chuck Grom with Gordon Haskett..

John Parke on for Chuck. I think the outlet sales were down 22% in the quarter, I mean, given easier compares and the linear inventory.

I mean, how should we expect the trend for the balance of the year?.

Sure, so outlets were a 2 point drag in Q1 and we expect a very similar drag in Q2. But by the time you get to Q3 and Q4 it should be more neutralize and roughly flat in Q3 and maybe down just under a one in Q4. So that’s how that should landscape. And then skew rationalization and this is probably another point for Dan, on the prior question.

Skew rationalization which was not in the outlets, it was just our core product that we were discontinuing that was selling through the regular channels that actually dissipated through the year two.

So that’s another contributing factor to the comp, so we have easier compares if you will in Q2 than we do in Q4 when there wasn’t that much skew rationalization left. So, in addition to the real estate lessening impact of skew rationalization is another factor at play in the sales cadence throughout the year..

Got it. And then just switching gears a little bit, I appreciate the margin bridge the long-term guidance.

I mean, I guess is the expectation that some of the new businesses that you’ve kind of have been holding back on over the past few years that they'd be relatively flat to margins going forward once you kind of do look to roll those out?.

Those are basically the new businesses. We wouldn't expect those to be a significant impact positive or negative to margins at that point..

Got it, thank you. .

Your next question comes from the line of Oliver Chen with Cowen & Company. .

Hi, thank you. Regarding the inventory, you've made some really good progress. What are your thoughts about the breadth versus depth now, and it looks like you can continue to maintain great revenue growth with less inventory, which is encouraging.

I'm just wondering where you are in the context of that strategy? And Gary, as you think more broadly, would you ever intersect hospitality with membership in terms of having a membership model within hospitality and or think about shared workspaces just because a lot of consumer model with millennials and the on-demand lifestyles also shifting in that way as well.

Curious on your thoughts..

We think the -- let's start the inventory. I think by the end of this year, the inventory will be relatively close to optimized. And then I think we'll hit turns as measured -- internally the way we measure getting up 3.7. Maybe we can probably run the turn to 3.5 to 4 depending on how we're buying or how much newness we're betting on.

But I think we can maintain these high turns. It’s just simplification of a DC network design and how we design the network. It’s just going to be way more productive. And then obviously benefitted by the consistency of membership right.

Smoothing out the business, which allows you to buy it better when you're wrong you're not as wrong when -- and so on and so forth.

So as we think more broadly would we intersect membership and hospitality? It's funny, we get a lot of feedback from people and one of the things we're struggling with I don't know struggling with, it's good problem to have we're now extrapolating what we're doing and these other restaurants and then saying what is that look like on the rooftop in New York.

And how we're going to run that volume? I mean we could have a $15 million restaurant on the rooftop of a retail store and how does that impact our business.

And how do we think about the inside of the restaurant the outside people buying a $4 cup of coffee and have a business meeting for 5 hours and out there furniture outside and a nice table [ph] stuff. So many idea of people saying why don’t you make it a member saying once you have to be a member to eat at your restaurants and so on and so forth.

And I think I mean you could do that and at the same time we really want people to discover the brand and discover RH. Because people don't go to furniture stores very often. If we'd all just step back and say how often do you go to a furniture store not very often.

And so you don't -- you missed the opportunity to inspire people to give them ideas to help them see their home in a new way. So I like the kind of the openness of it. I mean, we can naturally additive around price point and offering and attract the right people. But I like the incremental traffic.

And look, there is the Soho house and other people that are doing what they're doing like they're great at that. That's not really who we are. And so I never want to say never, but I think obviously there has been a lot of discussions around how to think about membership and how does it integrate with hospitality or the other pieces of business.

And when I think about shared workspaces, I think the same way, I mean we work fantastic they're doing a great job, there are the market leader. Could we do that sure, Soho houses doing that other people are trying to do that. Just like other people are trying to be at Soho house. No one is anywhere near as good as the Soho house.

Other people are trying to do WeWorks. No one I don’t believe anybody is going to be as good at WeWorks as WeWorks. So we just want to really to be great at RH. And we think if there is markets where there is an opportunity to be truly distinctive and differentiated. We will test those things.

And we believe that in the hospitality that's why we're testing a guest house in New York. I mean we think that there is an opportunity to bring a product to the market that does not exist. It's not about people asking like, so you're going to sell your furniture and your guest houses, no that's not what we're doing.

It's we're going to build the hospitality experience that does not exists. That's tailored to what we believe is fantastic and great and missing. And so we'll learn, but we're not rushing out to get into a whole bunch of new businesses, that we're not good at and we don't know a lot about we really want to own this business..

It's very helpful. And on the strategy of simplify to amplify and thinking about customer centricity.

So what are the kind of the simple key metrics you're looking at regularly just to judge yourself with this idea of customer centricity and being on top of satisfaction and the way in which people perceive or receive your brand?.

I mean, we're looking at all the metrics that everybody else's looking at and some that are unique and specific to us that I don't know if that’s important to talk about. But the good think about the retail business is you get a report card every day.

We know how our sales are everyday at what margin every day? We know our orders and the average order value every day. We know what they're buying every day, we know specific products they're buying every day. What finishes they're buying it every day. There is plenty of metrics here that are important that we review and assess about.

And I think it's not even so much about the metrics it's your ability to draw the right insights. So a lot of the people in the world that are great at reporting the news not making the news. And it's really about being able to take data and turn it into insights and from those insights conceptualize new and better ways of running your business.

And I think if you look how we're running our business. We're running our business in a very unique way. We're pretty counter to almost everybody in the industry. People are shrinking the size of their stores and closing the stores we're building the biggest specialty stores the world's ever seen.

People are eliminating catalogs where mailing, inspiring source books right that rival some of the most the best produced magazines in the world.

If you look at how we merchandize and assort our business, just moving from promotional model where to a membership model I mean just about every aspect we take we tend to be the others, we tend to be going the opposite direction and not because like we're just hey, we should go the other way, but I would tell you the most of the winners in the world when you really look at whether it's countries or businesses or cultures or individuals and so on and so forth.

The ones that tend to really win tend to be doing something unique. Because they have better insights than other people. And so it's not so much do we have the right metrics, everybody probably has similar metrics in this industry.

Can you do the right insights and from those insights can you conceptualize a better methodology and a better outcome that you can actually bring to life and execute at scale, which is also hard to do. So I don't know if I answered your question, but that's how we think about it..

Ladies and gentlemen I thank you for your questions. I would now like to turn the call over to Gary Friedman for closing remarks..

Great, well thank you everyone for your interest in our brand. I would like to say congratulations to our people and our partners around the world who work so hard and bring our passion and energy to bring our vision and values of life each and every day. We all -- we spent a good 18 months marching through hell in this company.

And it's nice to get a taste of heaven on the other side. So thank you for believing everyone on the call. And there is more good news to come. Thank you..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..