Ladies and gentlemen, thank you for standing by, and welcome to Restoration Hardware's First Quarter 2020 Q&A Call. [Operator Instructions] Now I would like to turn the call over to your speaker today, Allison Malkin with ICR. Please go ahead. .

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2020 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer.

Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about 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 this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release.

A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q&A session. Operator, we're ready for questions..

[Operator Instructions] And your first question comes from Michael Lasser with UBS. Please go ahead..

Good evening. Thanks a lot for taking my question.

Gary, what are the building blocks for this year to get you to positive operating margin expansion? And as part of that, can you describe what assumption is being made about your sales outlook, particularly in light of all the uncertainties in the world? Maybe a way to frame it is what – under what sales environment would generating positive operating margin expansion just not be possible..

the outlet business, the – that moving from a single-source rug vendor to a direct source model, other things we're doing within the core business, elevating the brand, so on and so forth.

We see a very clear path to now, I believe, 20% plus operating margins, right? It's – we are – as we continue to elevate the brand and we – you can see us emerging as a true luxury brand that generates luxury margins.

And if you try to just stand back and think about that, you say, like, what other luxury kind of design furniture brands are there in the world, just ask yourself that question, vertically integrated covering all the categories, presenting a business like us that generates the kind of productivity that we do. There is a lot of luxury apparel brands.

There's a lot of luxury jewelry brands. There's a lot of luxury car brands. There's a lot of luxury brands in every category. And in our category, I'd argue that you really can't point to one.

You can point to somebody who might be a luxury sofa brand, upholstery brand, somebody who might be a luxury lighting brand, somebody who might have luxury pieces of businesses. But there's really not a business like us on any level anywhere in the world.

And so – but look, it's a long – as I like to say, it's a long hike up the luxury mountain, right? And we have to earn our way there. We have to do such extraordinary work that we create a forced reconsideration of this brand. I mean it's really interesting.

I kind of made a face at our team at the table here because the conference call operator introduced us and said, "Welcome to the Restoration Hardware conference call." It's not the name of our company anymore. We're RH. But it's hard to shed old perceptions, right? No different than every analyst on this call.

Most of you, I'd say not everyone, most of you still think of us as a furniture store. And you kind of comp us against Ethan Allen and other kind of people. And it's not even the same business. Like it's not even close, right? And so I think it's just going to take time for everybody to kind of, I think, see us in a way where we're going.

And I think, look, we have to prove ourselves. And I remember all the reports that came out. When we had 11.4% operating margins a couple of years ago – actually, a little over a year ago. And there was a couple of reports that said, "Oh, they have hit 11.4%. And Williams-Sonoma at their peak was at 10.5%, and now they've eroded to 8.5%.

And there's no way RH can maintain 11.4%. Short the stock." Right? And I had so many people that said like, "Oh, you can't maintain these operating margins." And then we went from 11.4% to 14.3%.

And now people are actually saying the same kind of thing, "Can they maintain those operating margins?" I mean we're used to this, right? We're used to kind of having a lot of skeptics.

And people don't generally believe something until they see it unless they're part of the team that's creating it, right? This is our vision, not anybody else's, right? So we – as our vision unveils itself, as our work becomes real, then people will see it and believe it.

But I could probably tell you every detail right now, and you're not really going to understand how we're going to do it. You have to get on the inside..

Why don't you try it?.

Yes. But you know what I mean? Like – so – but it's laid out, right? It's in that.

It's in the Q3, Michael. Q3 2019 letter that we released in December. There's $4 billion of upside there. And as Gary said, we – at that point, we were talking about 200 basis points of upside..

At least..

At least. And Gary has alluded to, obviously, when we say that, there's – in our….

We're not going to say at least if we had 200 basis points, right?.

Yes..

Sure. Understood. Let me ask a quick follow-up. The results that you've seen in May and quarter-to-date in June have been very notable.

Has that been driven by the reopening? So your sales have grown by just more design galleries reopening? Or are you seeing increasing and accelerating growth inside of the design galleries that have been open for a long period of time?.

Yes. I mean it's a combination of both. The – even as all stores were closed and galleries were closed, our business was building week over week as we started opening galleries incrementally, a few this week, a few that week. I don't know what our biggest week was. Maybe 10 or something in a week.

Clearly, our business is way better with a gallery, with a retail store. I mean the people that think retail stores are going to go away because of the pandemic like are brain dead. So I mean is that – as everybody's pointed to, like, well, look, nobody needs a store anymore.

So the retailers that use this opportunity to actually shrink their store base are going to shrink the company. It's an impossible move.

So it's – I mean, to me, it's a very interesting time to just sit back and watch because people are asking – I've had people ask me, "So are you going to still open galleries? Are you going to still open your stores? Are you going to stop? Look what's happening with Amazon or Instacart or this or that." Like I got it.

Yes, essential goods, ordering toilet paper, things like that. Yes, I think retailing that takes taste, and style and presentation and imagination and so on and so forth, humans – I don't know about anybody on this call.

Did anybody like being home the last three months every day?.

It certainly has been interesting..

Is anybody dying to get out of your house and go somewhere, see something, see some people? Is anybody like waiting to not have to wear a mask? Like everybody is. Like you see it on the TV, the reports. It's like they barely open certain places, and beaches are flooded. Bars are flooded with people and so on and so forth.

So we're really optimistic about our business, our model. We've got a huge direct business. We're – we think we're very capable direct retailers, digital retailers, whatever you want to call it, web retailers. Everybody's got a different name for it. It's just another channel. And we're going to get better and better with that channel.

We've got some exciting announcements that are coming as far as how we're going to reimagine our entire web platform. And part of it was in my annual shareholder, which parts of that are repeated here because you got to kind of keep saying the same thing a lot of times for people to get it.

But you're going to hear soon about the world of RH, which is a portal that will take you into the products, places, services and spaces of RH. And we're just going to keep getting better at what we do. And so we think that there's – the galleries are going to tend to be strong.

I think the biggest question we have, and I think probably every retailer has, is as you reopen – I mean two things.

One, as you reopen, how much pent-up demand is snapping back? And how much comes back? And how long does that last? And what does that look like? And then the second one is what are the seismic shifts in spending? I mean clearly, Wayfair goes from up 18[ph] to up 19[ph], right? A lot of reasons driving that.

All their competitors At Home, Bed Bath & Beyond, a lot of people like that, like all the store-centric businesses shut down like it's driven to Wayfair. Wayfair has got a huge kind of kitchen, kind of the furnishings business.

So if you go to Wayfair, I think they have, I don't know, like 20 pages of toasters, right, 600 toasters or something like that. And so that's like nobody was going to restaurants. Nobody was eating out, right? Like I can't tell you how much my significant other, she spent at my alma mater, Williams-Sonoma.

And so – but the question is, okay, these seismic shifts and these lifts, which I think we're benefiting – clearly, people are staying home. They're looking around at their house going like, God; we're going to be here for a while. Why don't we make it look better? We're not traveling. We're not going to vacation. We're not doing all kinds of things.

So there's a seismic shift to spending happening. And is that sustainable? Does that – is there a giveback? What does the timing look like? We don't know any of that. We can't tell any of that. There's no way to kind of really figure out that data. But we know long term; people are going to still live in homes.

For now, they're going to still buy furniture and furnishings and lighting and so on and so forth. And if we have the best assortment in the categories that we're in, pandemic or no pandemic, presented the best way with the best value at the best service, we're going to do just fine. And so – and we're focused on the long term.

So I – and I'm not – people ask me, like, is it going to – what about pent-up demand? What about this? Was that like – yes, I don't know. Like I don't know exactly. I don't know if we'd do anything different if we did. All we know is, like long term, we think we're going to build one of the most admired brands in the world.

And that's what we're focused on. .

Thank you very. .

Thank you..

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

Good evening, just good afternoon. Thanks so much for taking the question. Gary, maybe I just want to touch quickly on – or maybe not quickly, on the RH Residence business. And just maybe go into a little bit more detail in terms of kind of why now, how long you've been developing the concept.

What are the economics? Are you partnering, I don't know, I guess, with homebuilders to do it? I would just love to hear a little bit more about, I guess, the vision for, I guess, what you think looks to be a pretty big opportunity..

Yes. It's really – what we try to do is put out there our kind of big, long-term vision for the business, right? One that will outlive me.

So I think we have a vision for this brand and this company that is going to be multigenerational, right? When you sit here and think about the – if you sit and think about what we wrote, yes, it's probably – throws a lot of people back. But if you think about it, it's all kind of connected in a very simple way.

And if you start with the idea that there's those with taste and no scale and those with scale and no taste, the idea of scale and taste, we believe, is very large and far reaching. And everything that we're going to do here is not in a silo, right? So it's all – it all amplifies and elevates and renders the core brand more valuable.

So Residences is just that – it's just a space, right? If you think about spaces, we already do spaces. We build some of the most inspiring spaces in the world. If you think about what those spaces look like, we're obsessed with great architecture. We either find historical-grade architecture and readapt it or we build great architecture.

And that great architecture amplifies the product. And we do great architecture. We have great interior design. We – if you look at our rooftops or our gardens, we have great landscape architecture. If you think about those categories because – let me step into it for a second.

If you think about those businesses, there are – none of them are consumer-facing businesses. Where do you find an architect? Do they have an office that's reflective of great architecture? Not really. You don't even know where to go. It's like trying to find a dentist, right? You ask a friend.

Where do you find a landscape architect? Where do you find an entire – interior designer? Someone will say, "Oh, you can find those things on house." And yes, you can, but there's no physical manifestation of the business. And we have a physical manifestation of great architecture, great interior design, great landscape architecture.

So embedding a services business inside a business that stands for those things seems pretty logical. We've had very – we've had great success with our interior design business and believe we can take that to a much higher level. We practice great architecture today. We build great architecture and design it and develop it.

We design great sets and great rooms. We do great interior design. We do great landscape architecture, so that – we're really good at those things. So it's logical to have a services business, an expanded services business that provides those services in multiple businesses that are not consumer-facing.

It's why we've been able to build RH because high-end luxury furniture, for the most part, is not consumer-facing. At least it hasn't been, right? The design districts, the design buildings, I used to say, behind the iron curtain of, right, to the trade design showrooms.

You need to be an interior designer and have a resell license to get into those places. So same kind of things in these other businesses. You think about homes today. I would ask everybody in this call, if you get a second tonight, go on Zillow, go on Redfin, go on, pick your website for real estate.

Go look at 100 homes tonight in a price range that you think we might play at. And tell me how many have great architecture, tell me how many have great interior design and how many have great landscape architecture. If it's 1% – if it's more than 1%, like you must live in a really great area. But even in the great areas, it's so low.

How many friends' houses do you go to that you say, "Wow, this is beautiful architecture. This is great interior design. This is great landscape architecture"? Almost never. Almost never. It's like a completed – completely uncharted world. When you really look at the big homebuilders, they're kind of stamping out some – it's not a McMansion anymore.

Call it whatever you want. But it's a stamp out, right? And it's a nice organized development, but there's no one providing completely turnkey homes. Like Eri says to me a lot, like they don't sell you a car without an interior.

You don't go buy a beautiful Mercedes or whatever brand you like, and it comes without an interior and you got to figure it out yourself. I don't know how many people on this phone have tried to do their own interior design or furnished their house. It's a nightmare. It's a nightmare for me, and I do it for a living.

I have a house in the Napa Valley that I finished remodeling like 3.5 years ago. It's not furnished yet. It's that hard. It's a pain in the ass. And so we know how hard it is. We know we're good at it.

And we believe that if you – as to work – when I worked for Howard Lester at Williams-Sonoma, he used to say, "You sell the hole, not to drill," right? Don't sell them the drill.

Sell them the hole because that's what the drill does, right? And in Williams-Sonoma, what they've been fantastic at, right, is selling you the idea of pizza, not the pizza pan. Selling you this idea of pasta or how to bake an apple pie. That's selling the hole, not the drill.

And I sit here and I go, well, why can't we – we're really good at architecture, really good at interior design, really good at landscape architecture. I know we can design and build things and furnishing that people will like.

And I think there's – if you think about people with money, okay, and you think about just what's the most valuable asset, time, right? By far, the most valuable asset. Everybody on this phone can figure out – if you lose your money, you can figure out how to make more money.

If you lose your time, you just can't get it back, right? So we think a lot about businesses that deliver time value will become more valuable. And I just bought a house in Beverly Hills. Why did I buy it? I walked in, it was fully furnished. It was designed by an architect and furnished by – the architect is also the interior designer.

He does one house every five or seven years, and it's completely done. I walked in. I was like, I'm good. That's going to save me two years of my life. And I could immediately move in and use the house. And we did a test house. I don't know if everybody knows, but if you can still go online, I think the video is still online.

If you look up Eight Palms, RH Residence. And the video is still out there. We did a test house in the Napa Valley. We took – you can watch the video and look at what we did before and after. We did a – it took a house that was – kind of needed some love. We completely redid it and furnished it and sold it. So we have more of those coming.

It's like anything we do, we'll test it. We'll try it. We'll work it. You got to perfect it. So it's not like we're going to stamp these things out. I mean again, the vision for the ecosystem is a big, giant vision. Like we – I think we're almost – I shouldn't say – we – or we – Dave is not on the phone right now.

It's like – I don't know if we signed the deal yet. Like I don't want to sound like – Allison, did – yes, I can't say anything. But let's just say we have a place where we'll announce our first ecosystem, where we'll have an RH Gallery, an RH Guesthouse and RH Residences in a really very cool place. And it'll be a great test.

We've been working on the deal and the vision for a long time. And people really love these first handful of houses that we do. I think we're going to have five – six residences, yes. The residences will be serviced by the guesthouse. So you want housekeeping. You want someone to set up and cater a meal at your residence and so on and so forth.

This is not connected. It's not a vertical. We have visions for vertical ones and so on and so forth. But we'll see. We'll see how our guesthouses do. We think our guesthouses are going to create a new market for privacy and luxury. If you think about the idea of privacy, we think privacy is going to become a very big market.

If you can stand back and think about privacy, it's the one thing everybody has given away on social media. And it's the one thing that the Internet has taken away. You could Google anybody. You can find out anything. It may not be true, but you can read a lot about almost anybody today. But I think we're in a world where it's so exploited.

Privacy is going to become very valuable. And if you see what we're doing with guesthouses, when you see it, when we open in New York, I mean, the can keeps getting kicked down the road to something else.

And then we have pandemic, and we thought like, yes, even though we probably hope we can open it in the fall, like it just feels like bad luck to open a hospitality experience on the heels of a pandemic. So I think we're – we don't want to open all 10 up and close if we got shelter in place for another month.

But we're going to create something, I think, extraordinary in hospitality. Not ordinary at all. Extraordinary. There's ideas in our guesthouse that have never been seen in the hospitality world.

And we have to do things like that because we have to force the best in the legends of hospitality to tip their hat and respect us because it's another rung up the luxury mountain. And I think where we've got it. I think it's an entirely new market. I mean no one's addressing it like we're addressing it.

And so you think long term, you think about, hey, if I can have guesthouses that work, if that works, that model looks really good.

If I put 10 residences on top of the guesthouse, I can have a total ecosystem where our F&B and our restaurant services, the room services, the restaurant, you could – in our second guesthouse – have we talked about our second guesthouse – have we talked about our second guesthouse, where it is? Yes, we have.

It's hit the news, right? Yes, it's in Aspen. So our second guesthouse is in Aspen. And in Aspen, we'll have our first RH bathhouse and spa in the basement. And you start thinking of these elements coming together and creating residential ecosystems that all kind of amplify, elevate and render each other more valuable in so many ways.

And you come back to time and you think about businesses that deliver time value will become more valuable, and we believe that deeply. We think that's why our business is very successful today because you don't have to go to 10 different showrooms. You don't have to coordinate deliveries from everybody.

You don't have to take the time and have the hassle. We're much simpler. We're much less friction, much less time. So all these elements of the ecosystem, we think we can do. There are things we already do in some way, shape or form. And we – the ideas we have for them are going to be very good.

And I thought, look, this is a real crazy time right now, right? We're in a pandemic. We've got civil unrest. We've got global trade wars. We have all kinds of all kinds of crazy stuff going on. Like for us, there wasn't a better time to unveil our long-term vision, even if it's just for ourselves, even if it's just for our people.

The world needs hope, needs inspiration, needs – it needs a positive thrust. It needs more light and less darkness. And so whether anybody believes in it right now, I don't really care. We believe in it. And the things we believe in, we usually bring to life. And we usually do them pretty well.

So we're not going to give you a model in the residence right now. We've got the models. They're all some degree of wrong. The question is, are they more right than wrong? Because once you get going and you do something, that's when you really start learning.

And that's where the learning curve accelerates, and that's when you begin to really improvise and adapt and shape it into the right direction and do the right thing. But I think our vision is a lot more right than wrong. Going to be some degree wrong.

I think we're going to – as we do everything else, we – generally the things we do, we take a real swing at it. We do them relatively well. They don't all work. But if we're half right on this vision, it's a massive idea. If we're 1/4 right on this vision, it's – the company is going to be 10 times bigger than it is today.

I sit back and I go, look, Elon Musk is doing electric cars, solar power, space travel, tunnels. I think humans – we don't tend to push ourselves to find out what's really possible. And so in our lifetimes here, we're going to try to do extraordinary work. It's what we live to do. It's what we're built to do. And it's what we believe in.

And so I think we'll be more right than wrong. And as we prove it, it'll play out. So….

That's a lot to chew on, and appreciate. Yes, a lot to think about. I'll pass it on to someone else, but yes, thanks for, I guess, extrapolating on the vision, Gary..

Sure..

Your next question comes from Adrienne Yih with Barclays. Please go ahead..

Hi, afternoon. Gary, I'm going to keep on this theme because I think it really is revolutionary. It reminds me of Baccarat Hotel, right, taking that luxury brand and then turning it into a new business. I guess my question is, did you not have a test of this back in 2016 in Crystal Cove? It was at Newport Beach.

How is that different? Were you only doing the interiors? And what did you learn from that? And then secondly, like what's the sort of timing of the launch of services to not necessarily this piece of the business, which seems far longer term, but the services that you talked about earlier? Thank you very much..

Sure. Sure. Yes, the Newport Beach Crystal Cove project was a project that our contract division – Contract and Hospitality division partnered with a builder. We were really hired to kind of do the interiors. And so there was a partnership. Kind of there wasn't really – we didn't control the architecture, the design of the homes and so on and so forth.

So it's really more of an interior job. And they wanted to use the brand. And I'm always a little careful about that. We kind of let them use the brand a bit.

It's like – I usually – and I hope the guys at Crystal Cove aren't on, but like there's not too much stuff that other people do in this kind of niche of architecture, interior design, landscape architecture that we believe people can do better than us. And so – and that's why we think it will work.

When you think about the timing of the launch of services that will be unveiled. Right now, we're highly focused on elevating the interior design business and investing heavily in interior design. You saw in our press release where we swung the investment pendulum back the other way. And we're going to continue to invest aggressively into our future.

And interior design, we think we can take it to another level of professionalism and capability. We will probably test sooner than later in a market. Maybe it's here in the Bay Area, somewhere where we test architecture and landscape architecture. Thinking about – like right now in San Francisco, we've got a big new gallery opening.

We've got a real opening here in Marin. They're right here. Do we test it in those two galleries? Do we take our old San Francisco gallery? I don't know if anybody has seen it, it's one of the most beautiful little buildings in the middle of the Design District.

It was built by Ed Hardy, who was one of the famous collectors and sellers of antiques, one of the key people at Sotheby's for years. And he built this beautiful palladium building, beautiful garden courtyards. It's what inspired us years back to do gardens and rooftop gardens.

And so we're thinking, geez, do we just hang on to that building? We own it. It's a very small investment. Do we put our services business into its own offices in this beautiful building that represents everything and – because we can't fit at all into the galleries, right? You'll have a consumer-facing part.

Like if you've been to one of our new galleries in kind of the middle and the back in one of our prototypes, we've got RH Interior Design, very visible offices that you see through a glass wall. And so eventually, that will become RH architecture, interior design and landscape architecture.

So the vision is to have a kind of forward-facing integrated services business, right, that kind of catches people. But you can't really – you don't really want to operate a whole offices business out of – I don't think, out of the gallery and out of that space.

I think it will – it won't fit exactly right, right? It's good for kind of a consumer-facing part to kind of interface, meet people, make the connection and then have an office, a true office for the services that's enter – so you really have the space for people to work and the right equipment and tools and so on and so forth.

So you'll see us testing that. You'll see us testing – look, the residences will be coming very quickly, the first test in a market over the next couple of years. We'll be building out the ecosystem. You'll hear more about that and the one test market will be our first one. You'll hear – you'll start to hear about the services business.

We'll be testing that. That's why we wanted to get the vision out here because you're going to hear more about them. You're going to see them. We'll start to be able to communicate more. And then we – look, the biggest thing we've got coming – in the short term, the biggest thing is RH International.

And we've got – are the deals signed? How many are signed? We got one signed or two? One is like – they're almost all ready to sign. And we're like working out the details.

Dave, you're not – is Dave on the call?.

He's not on the speaker line. He asked..

He's not on the speaker line. Okay. Dave can't talk. He's like – he asked to be. Okay. He has like – he probably is talking right now. You guys can't hear it. We didn't give him a line to talk into. But Dave has really laid out an incredible beginning strategy in Europe for the brand. I think we're just going to – it's going to be incredible.

I mean we – it's mind blowing for us. So I can only imagine what it's going to be like for consumers. But the first gallery could be open in 2021, in the summer of 2021. We've got to move relatively quickly. And it's – the latest will be spring of 2022, but it could be 2021 x that we'll open to RH England.

That will be followed by – unless something goes wrong with the deal in the last minute, but they're just basically done, but followed by RH Paris, RH London. We've got multiple other ones that I won't go any further. I don't want to jinx anything. I probably went too far. But those will – the next two will be 2022 or 2023.

The complexity of the architecture on RH London is – depends on how far we go with it. It's kind of three buildings we're integrating with a beautiful rooftop and a restaurant and all kinds of things. It will be incredible. It will be one of the most exciting stores in all of London.

The thing we're doing in England, which is kind of right outside London, mind blowing. The most exciting – I mean, both of those would be the most exciting retail experiences we've ever done that – it's good or better than New York in their own ways. And one is just – you can't even imagine it.

So at some point, one of the next decisions – I know we're going to hit the timing. We'll – I – we'll probably do it an Investor/Analyst Day. We'll lay the stuff out, and we'll show you all the pictures. So everybody can kind of really, really understand it. But no one's ever introduced themselves into Europe like this. Ever.

It will be the most incredible first impression a brand has ever made. And so we're just extremely excited about that opportunity. And that – you think about that, like, 75% of our business should be outside of the United States. I mean that's what the model should look like. That's what the wealth model is.

That's what LVMH and Kering and everybody else and Hermes' business looks like. So that's really the big, the – as you think about those pieces and how we go. But yes, it's all going to start happening, and that's why we put it out there.

And we thought, yes, it's a really good time to be – try to be visionary and inspiring and so – for no one else but ourselves..

No, I mean, it’s very inspiring. So first walk on that we will be watching. Thank you..

Thank you..

Your next question comes from Chuck Grom from Gordon Haskett. Please go ahead..

Thanks. Good afternoon. Can you guys speak to the pace of foot traffic within some of your channels, maybe the galleries, outlet stores and restaurants since they've been reopened? And then can you remind us, just – you talked about this just now, but your expectations for gallery openings in the balance of 2020 and also into 2021? Thank you..

Sure, sure. So yes, we don't have high foot traffic at retail stores, if you just start there, right? We're relatively low-traffic business, except for when we have restaurants. And right now, the restaurants are – we have four of them open, only half of them open. And they've been open a week or two.

And they're operating in limited capacity and about only, I think, 50% capacity. So yes, we're not really a traffic-counting company. And we – our business is just – we'd like to say – we don't really care about mall traffic.

It seems like the people that have time to walk the mall, the only thing they have to spend is the day, right? So we generally talk about creating our own destination and having fewer of the right customers inside our galleries.

It's one of the reasons why you'll see some changes that we're making in New York even from a hospitality experience, a bit guided by COVID and not having – having to operate with social distancing.

But just the fact that in New York, our kind of our barista bar and wine bar kind of became kind of the – we started to become the best free WeWork, the free Soho House, the free – a way better Starbucks, and we are serving a lot of people coffee and stuff like that. And they're sitting around in our furniture all day and making it hard to sell.

So we're going to – we're modifying things to actually have less traffic because it's not so much about traffic. It's really the right traffic, right, in our business. That's what we focus on. And we don't even talk about traffic. We really talk about the right customers. So we don't really – we look at it through a different lens.

But gallery openings for 2020 and 2021, we have Charlotte opening kind of the middle of June. We have – RH Marin will open towards the end of June or early July. We've just got to work with the local restrictions here and things like that. We're ready to go. It's all merchandise. It looks great. The landscape looks amazing.

We got a – we're still – Dave, if you're on the phone, we got to tweak the lighting around the crown moldings. But that's the only little thing that's left. I was there last night. But – and then we may have RH San Francisco opened in the fourth quarter. We kind of shut down construction everywhere except for Marin and Charlotte.

And so now we're rebooting up. And so we've got to see with the complexity booting up and getting back. And as everybody knows, construction is never smooth. But we could get San Francisco over the line. And then we'll unveil next year a little later when we're more certain.

And nobody knows if we can have another breakout of the virus in the late third or fourth quarter. Is there going to be any more kind of disruption and so on and so forth? What's that going to cost? Will there be work shutdowns? So that's some of the things we're up against. But yes, you'll see two or three happen this year. .

Okay. That’s helpful Gary. And then can you talk a little bit about the progression of your demand curve on the core part of your business? I think you guys said down 11 in 1Q, up 11 so far in June. Could you maybe amplify a little bit on what you're seeing by product, by region? Just any color would be helpful. Thanks..

Yes. It's a general lift. I mean there's some of the things that you're reading broadly about the outdoor business, things like that, that have bigger lifts and other things, which completely makes sense. People aren't going on vacations. They probably buy outdoor furniture. They're going be spending time outside. So we're having a strong outdoor season.

And then other parts of the business, nothing that's surprising. Our bestsellers are still our bestsellers. And I think what will be interesting, and I kind of mentioned it in the letter, I don't know if everybody picked it up, but we are now going to mail a spring interiors book.

I guess they're going to be a summer interiors book in the summer, modern book. So we had initially pulled back all circulation. We killed the books. And that's how we were able to – what was it, $50 million of ad costs we took out, right, because we killed the books in the first half. And then we saw the demand coming back.

Difficult thing is our offices were closed. So we couldn't shoot all the newness that we had. So we're pushing the newness to fall, but we did kind of repaginate the books. We had a couple of new things that we've gotten shot and we got into the books.

But you never want to mail books, you never want to advertise into a massive headwind like we had, right? Those first several weeks, I guess, three to four weeks, we're – you couldn't do anything to get the demand to change much. Even businesses that were running 10 or 15 points ahead of other businesses, all of sudden, everything went down.

Yes, they didn't stay up. So that's why you never want to be a mail a book into the wind.

So – but now that the business has changed several weeks ago, we said, well, do we have enough time? Can we improvise? Can we adapt? Can we overcome? Can we get the books in the mail? Because it looks like there's – they're coming back, and we've got a bit of a tailwind. And so we just mailed the books.

Now the books could make – I mean they're not going to do nothing, okay? We're mailing millions of books. Our two highest volume books. And they're not going to do zero. So yes, but I also don't know what the curve looks like, what the pent-up demand looks like, what – so we don't exactly know. Yes.

So we could be – could be, hey, maybe the business slows down and then the books pick up, and we're still up 11. Maybe there's more pent-up demand. And as we open more galleries, the 11's going to go to 15 or 17, and the 17 is going to go to 25 with the books. I don't know.

But if you ask me, I – today, if I had a bet, I think it's going up, not going down. Not all of our galleries are open. Our restaurants are only half opened. And our restaurants drive a lot of the right customers into our spaces. And so right now, as the world's reopening up, we feel a lot more optimistic than pessimistic and a lot more excited.

And we've learned a lot going through this pandemic. We're way better for it. Our people are – the kind of imagination and innovation that came out of our teams and how to operate differently through this and how to collaborate, and I mean we're way better coming out of this. We're a way better team.

Like we're like at least 30% better than we were, maybe 50%, just because of what we had to go through..

Thanks, Gary. Good luck..

Thank you..

You next question comes from Brian Nagel with Oppenheimer. Please go ahead..

Hi, good afternoon. Thank you for taking question. So Gary, maybe a bit of a follow-up to that prior question. But clearly, a really nice rebound trajectory here. It's really held up well through Q1, your core business, and here into the second fiscal quarter.

To what extent – as you look at the trends in your stores, to what extent are you seeing, within this crisis, new customers – reaching a new customer and that customer helping to drive this improving trajectory in sales?.

new member growth, renewals, et cetera and so on and so forth. So I think it's kind of a different business when you think about our business. We're an event-driven business. People either bought a new home, remodeling a home or redesigning their home. And that only happens – it happens very infrequently.

So you might get a new customer, and they might come in and spend a lot of money and do a design job, and you might not see them again for another 10 years. Or they might just come in and get some bedding or some towels and stuff like that. But our business is very much an event-driven business, and so it's not like a lot of people bought new homes.

We know that data, right? So yes. And so I've always thought about this. As we've debated it here, we got shut down. We were running up eight. Our business in the core business went down 40. So we lost 48 points of business. Do all those people now not need furniture? No.

Do they not get people – like we inspire a lot of people to buy furniture? But most of our business is – a good part of our business, I'd say, is a need-based business, right? So when you're in a need-based business, if you have a disruption and that disruption – if you have a fine – we – so this is an interesting thing that happened to us.

And we didn't just like – in 2008 and 2009, we had a financial disruption that was permanent. When I say permanent, like for 1.5 years, right, like the whole thing melted down. It was – the market went down. It was a very a different kind of impact.

And this – how permanent is this? Like yes, we can talk about – I mean what's the unemployment now? 40 million? Is it 30 million, 20 million?.

40 million in total..

40 million. Like look, they're coming back. I mean we've now brought back 75% of our furloughs, almost 80%, yes. And they're all coming back next week or the week after. We'll be 100% back. And everybody we furloughed is coming back. And in many of the businesses, you're going to have a lot of people coming back.

So to me, there's – how much of this is now pent-up demand? And then you might have some new customers for outdoor furniture. But were they just going to buy six months later or next year? And now you've pulled them forward. Like how much is pulling forward? How much is sustainable? Like look, I would not – like I'm not picking on Wayfair.

Some people think I'm picking on Wayfair. I just think it's really interesting that they have a market cap that's like 4 times bigger than ours, and we make so much more money. We have – our operating margins were like 20-something points higher than theirs.

Like if they catch up to us in this lifetime, it will be a miracle, but the point is I'm glad I'm not Wayfair. If someone wants to take a bet on is Wayfair going to be able to comp next year, no way. They're going to go up against 90 comp and they're going to be down 40. They're a 30. Or it's going to be a big change.

So that's why we like a membership model, not a promotional model, right? You have all these kind of episodic things going on, and it's harder. Your business is more complicated and you got to comp it.

And Wayfair's got to sit there and think about how do we comp 90 – up 90 when we were really only running up 18? How do you do that? Unless there's another pandemic or something else drives everybody to buy cookware and toasters and all the other things and essentials and stuff and – I know we're not going to spend as much money on all that stuff next year for our homes.

Like we've got all new stuff now, don't need new coffee makers. Don't need new waffle makers or whatever stuff like that because like we see that every night. And now all of a sudden, you're at home every night.

So some of these things are going to be kind of interesting, again, that's why I kind of sit there and go, yes, did we get new customers, this and that. I don't know. Like honestly, those are all really little small rocks.

Like if you focus too much on the little small rocks, you're just going to move little rocks around it, it looks a little different and you think you know more. But it's – none of it's that important.

What we're trying to do is look at what are the big rocks, right? What are those big things that can create real value and how do we move the big rocks? And how do we create real value, big opportunities? So if all of a sudden we had the best data tracking and we knew how many people were new customers, would we do anything different? Nothing that was going to be significant strategically, right? So yes, we just try to be better all the time at the core things we do.

And if we are, more people are going to wake up in the morning and think about us when they want to design their home. Think about us when they need a new chandelier or a new sofa and hopefully, long term, term, think about us when they want a new house. Yes. You have to be great at those core things. And then usually, the rest takes care of itself..

Appreciate the color. Thank you..

Thank you..

Your next question comes from Oliver Chen with Cowen and Company. Please go ahead..

Hey, this is Maksim for Oliver. Thanks a lot for taking our question. So first, you noted product margins are significantly higher quarter-to-date.

Can you maybe touch on what's driving that? And then secondly, more broadly, as you are thinking about future gallery real estate developments, does the current environment affect that? It's full of store closures. Does that put you in a more advantageous position as you look to continue to negotiate these capital-light models? Thank you..

Yes. The product margins, that's kind of, again, all laid out in that – was it the third quarter press release, Jack, all the bridge to the operating margins? A lot of it has do with product margins, cycling the outlet business, the accelerated burn down of inventory a year ago.

So outlet sales are going to be down but margins are going to be way up, right? Because we closed that DC in the fourth quarter of 2018, and we pushed all the outlet inventory out and sold in an accelerated way. So you've got an impact there.

You've got an impact from going from a single-source rug manufacturing relationship to a direct sourcing relationship that's kind of laid out in that bridge. And then you've got just various other things where the businesses were expanding, the things we've done, the price changes, price increases we've taken, the new collections.

If you bring new collections in that are more differentiated and higher margin and they work well, they lift the whole thing. We think about the business as the top third, the middle third and the bottom third, right? And if you bring in goods that are in the top third, it lifts everything up, whether it's sales or margin.

But if you bring in things and they kind of perform like the middle, nothing happens. Bring in things that are in the bottom third, it drags everything down, whether it's sales or margins.

So we've been – I think we've been just doing better work making smarter investments from an inventory point of view and a product point of view that are lifting margins and things like that.

And we're just also just – like, for instance, we – like everybody else, right, whether this pandemic happened – and it's actually great – so I'll tell this story.

We're thinking like, okay, what are we going to do? Do we promote? Like, God, if we promote, will we screw up our model that we worked so hard to build, the membership? But we've got convertible debt coming on. What if the business stays down 40? What if it goes down 50? All the modeling we have to do. And we didn't do anything in Memorial Day.

We didn't do one promotion. And our gallery leader – one of our calls with our – all of our teams, our gallery leader from Toronto, said, "Look, Gary, just you told it to the team. You said guys don't do it. Don't take a markdown." It's going to be really hard to climb that luxury mountain with crutches, right? And we got a visual to that.

We said, like, yes, we can't do it. We can't go back there, right? So we're just running the business in a very disciplined way.

And if you have the right goods presented the right way, you've got great design, great quality and then great value, and that value is determined by the design and the quality, the combination of the design and quality at that price, if it's a great value, people buy it. And I just think we're – we just keep doing a better job.

And if you do a better job, you can earn higher margins. If you do the same job, you're going to have the same margins. Don't do as good of a job; you're going to have lower margins. I mean it's just that simple. But yes, we look at it really strategically. And we think about how to strategically build the model that we want to build.

It's not accidental that we will have higher operating margins than last year. I'm pretty sure we'll be the only one in our category that does, and that's really it. And the real estate development deals, yes. I joke around it's like we're the most attractive person at the dance right now.

And a lot of people want to dance with us because yes, we're building not only the most beautiful and inspiring retail experiences that I think the world's ever seen, but they're among the most productive, I mean, behind Apple. And yes, we – in many places, our new galleries are the next highest volume experience.

And in some places, we might be higher volume than Apple. And in most places, we're higher volume than the department stores, except for a few of the Nordstroms. But even in some cases, we're higher volume than them. We're higher volume than Neiman Marcus in many places.

So you have the most beautiful, inspiring space with a hospitality component that looks like nothing else that is more productive than almost anything else in the mall. And it renders them all more valuable, puts you in a good position to build a bridge and do a deal that's – where everybody wins. So – but that's why we also paid our rent.

Nobody wants to do a deal with anybody who doesn't pay rent. So I wouldn't want to be in a lawsuit with any of my landlords right now. They're not going to be nice..

Got it. Thanks a lot. .

Your next question comes from Steven Forbes with Guggenheim Securities. Please go ahead..

Good afternoon. So Gary, I wanted to touch on two topics. The first is Waterworks and then the second sort of being what you noted on the spread between demand and revenue growth and really just the manufacturing network. So maybe to start with Waterworks.

Can you just give us an update on the business there? And less about how it performed and more about what you're thinking about the potential integration in that offering in the time line behind that..

Yes. So look, Waterworks was an opportunistic acquisition at the time, right? It wasn't – we had so many big things we were focused on, but Waterworks was marketing themselves and made themselves available. We – it was always on our list as something, as a brand, we'd love to partner with and integrate on the platform that we're building.

And – but it was an opportunistic acquisition, and we did the deal when we did, and quite frankly, haven't focused a lot on it. We've tried to enable them to focus on their business and build the best business they can. And we're getting to a point where it will be the right time to kind of think about how to amplify Waterworks on this platform.

And so not a real time line yet. We've been all distracted and busy trying to get through this time. But sometime probably later this year, we'll talk about what that could look like. And it's not that we've never talked about it. It's just deciding exactly how and when you do that. So it's a long-term opportunity.

I think – look, I think the business on our platform can be multiple times the size that it is today. So – and then the spread between demand and revenue really has to do with the dislocation of the supply chain. Kind of really three or four things, so we're very aggressive to cut inventory and cancel orders when the pandemic hit.

And that looked like a smart thing for the first three weeks. And then by week four, things looked a little better. And then it started to get traction, right? So we – it's hard when you cancel those orders and shut down. Factories pulled back. Factories laid people off.

And then you've had factories got disrupted, right? Factories got shut down and not just in China and other parts of the world but in North America. We have – our upholstery business, 57% of our upholstery business is in Asia. That's China and Vietnam and some other – a few other smaller countries.

And 41% of our upholstery business, which is really what our biggest business is, is domestic. It's made here in the United States. And so – and then we have – a small part of it is in Italy.

And then if you think about the special order part of that business, which is that it's a huge part of special order, 51% of the special order is Asia; 47% is domestic, right? So domestic manufacturing in the United States was in shelter in place, shut down, not an essential business.

Same thing, we have some of it in Mexico, right? And kind of shut – Mexico got shut down. And it affected our outdoor furniture business because our cushion manufacturing domestically and in Mexico shut down. So big back orders – or big, yes, back orders building, time delays, so on and so forth. And so – and then compound that with weak cut orders.

And then we have to try to catch up, and an increasing demand, demand way better than we initially thought. We could have never forecasted what happened in the first two to three weeks of the pandemic.

We were – like everybody else, we were wartime, trying to not get hit by the next missile and trying to figure out how to protect the business and protect the balance sheet. So that's a big piece of this. And then you've got this other piece where consumers have to – want to take delivery.

And so we have a whole bunch of consumers that, for whatever reason, maybe they have a second home and now they're not going to be there, and we're holding deliveries. And so we've – that's a couple of points to it. And then – so you've got revenue building. We're trying to catch up on receipts.

So we got back orders significantly up, all compounding because the back orders are getting bigger and they're projected to get even bigger because our demand is going to grow. So – and then factories coming back online, but then they've got to get back up to speed. It's not that easy. It doesn't all of a sudden, they come back and they're at 100%.

It might take three weeks, four weeks to get back. So we think a lot of this will kind of – I mean our initial numbers look like a lot more is coming in Q3 than Q4, but it never is exactly what you think. You can tend to be optimistic. So we think a lot more is hitting in Q3, some may hit in Q4.

By the time we get all – when I'm talking about all caught up, right, where we come back into kind of balance and harmony with the business and so – yes. And then you had to ask yourself if the back orders are too long, do you have a higher cancel rate because of back order time? So we could give a point or two of that back. I don't know yet.

Generally, if we hit our dates, they don't get canceled. But if the factories tell you that they're going to be up in four weeks and instead it takes eight weeks, and then someone gets a back order notice and it's another four weeks, you might see some cancellations. So – but there's a big dislocation there. That's why we wanted to call it out.

It's the biggest one I've ever had. I've never seen one like this. So yes, so we'll continue to kind of update you as this comes out. But I think our numbers are pretty good. I think we'll see 90%, 95% of it will all flow through. Some may get canceled. But we'll get most of it. And I think the majority today, as we look at it, will be Q3..

And then just a quick one, if I think back to 2016 and some of the RH Modern disruption, right, there was customer combinations in order to provide people at some window of time, right.

I mean, are you feeling that from the customer today? Or are you sort of explaining the issue, and do you feel like there's a general understanding and appreciation out there?.

Yes. Right now, there's, I'd say, for the most part, a general understanding and appreciation. Everybody knows the whole world stops, right? It's not like it was our fault, like with Modern. We're – we could try to blame the factory. But to the customer, in their mind, it's our factory, right? So we just had to be able to communicate with the customers.

I think everybody has the same – some form of the same issue. I think every retailer cut orders everywhere. And if you're in a business that runs back orders, many retailers don't have a back order business. Furniture businesses tend to. So I don't think we're the only one that's going to be in this boat.

Ours is probably bigger because we've got maybe better performance in certain categories in our business.

And because of our really strong kind of direct business, online business, we probably, at least from the bigger product furniture side of the business, lighting side of the business, stuff like that, take away the kind of housewares, kitchenware, those kind of businesses that are creating really big lift for a lot of people, if you kind of isolate more furniture-based retailers.

And right now, right, we don't have any of those other ancillary businesses at all. We're super clean. We got rid of holiday and everything. So, I think when you compare us to people in our category, furniture, we're probably going to have the best numbers in furniture.

So we'll probably have a kind of bigger gap between demand and shipped sales because of that. So – but we've got a lot of history having gaps like this. It generally – you might lose a little bit of it. Depends on how we execute through it.

If we can – if – the biggest issue you have is if you have to push the orders one or two more times, right? So that's where you start to get cancellations..

Thank you, Gary..

Yes..

Your next question comes from John Baugh with Stifel. Please go ahead..

Thanks for taking my question. It's very quick. Obviously, if you're going to expand operating margins over time to 20%, I would expect your return on invested capital to go up. But I'm just curious, with all the various RH Residence and Guesthouse sort of things, how the capital piece sort of weighs in.

Will that be capital-light relative to the margin expansion? Thank you..

Yes. That’s a really good question – really good question. So the answer is yes. The first guesthouse is no. And so – but we've kind of already spent most of that capital. So that's in the rearview mirror. But any new thing on test, you've got some investment. There's – you've got to have something to sell and something to partner with people on.

Our guesthouse model is going to be unlike some of the other people that are doing branded hotels that are really doing it with a flag, doing it with another hotel company and doing a Baccarat Hotel with a hotel group or a Bvlgari Hotel with some hotel group. We're going to control the whole thing.

But it doesn't mean we won't have a development partner. But we could be doing deals in the future. Like if we're the developer, and we think that's the right way to do a deal, we'll be the developer. If – for instance, in Aspen, we have kind of a JV deal, right, with profits, interest and stuff.

And so we've got different kind of deals in different places. Aspen is going to be capital-light. New York is the first one capital-heavy. Why were we able to get capital-light in Aspen? Because we designed something in New York, we had something to sell.

And we also – you think about – if we can bring the value of our business to a property and it helps the developer create value for themselves, we're in a position where we can share that value. So I think it's all going to depend on how well the first few do and how excited people are about them.

And I think the first few are really important that way and get a second chance to make a first impression. So – but this is very different than a West Elm Hotel or – what's the other one that did it, the watch Shinola, people like that. I don't think any of those people are running their own hotels. I think they're just signing a flag deal.

And I don't think – you don't really do much there. You kind of say, use my furniture, design it this way, but you get a little bit of a revenue cut on it. So you don't have a lot of risk, but you don't have a lot of upside either. You don't really control the experience.

We – no different than I said that brands that create time value will become more valuable. We believe that brands with more control versus less control will become more valuable. I think that one of the biggest weaknesses brands have today is where they don't control their brand, they don't control their distribution.

It's one of the challenges with Ralph Lauren today. They have to unwind all that shitty distribution. Think about how much of Ralph Lauren's business is in really shitty department stores. Like everything around the brand is rendering the brand less valuable. And I love Ralph Lauren, by the way, one of my favorite brands.

But that's a hard thing they're unwinding. Like that worked for a lot of years, but it's – but they don't do a lot of the business out of their own stores, right? So they don't control their experience.

And if you contrast that with what Bernard Arnault has done over the last 10 to 15, maybe 20 years, I think he saw this coming and he invested in building his own platform. And now you've got a bigger and bigger percentage of LVMH's business controlling the experience from concept to customer, right.

And those brands that control the experience from concept to customer, I think, will become significantly more valuable and can control the brand experience all the way through. And they have no risk of having somebody else render them less valuable, right? But you don't want to be a brand in a department store today.

Like I was in a meeting with someone who had a great new brand, and they thought they had good deal because they're – Nordstrom is going to put them in or this or that. And it's – even Nordstrom, I mean, like it's – I wouldn't want to be in Nordstroms today. It's just an old model. It's not a great model. Those – they're all lucky.

Their department stores are lucky they have such cheap rent. But they don't control their goods. And then the people that are putting the goods in the department stores don't control the experience, right? Like – so you have like eek, bad model.

Like you're sitting ducks for someone like Amazon or some version of Amazon to disrupt you, where brands that really control the brand from concept to customer, from product ideation to product presentation, I think, is going to be the really valuable brands long term. And I think that's been proven in the luxury sector.

And I think LVMH has been a shining example. It's like brilliant, brilliant transformation in real estate strategy. And I think Kering has done a lot of the same. And Hermes, the same thing. And so they're less and less dependent. So for us, it's all the things we want to do, everything. It doesn't matter if it's a guesthouse.

It doesn't matter if it's a restaurant. It doesn't matter if it's a residence deal. We might have a partner from a development point of view, but we will control it. We want to own it. We want it to be ours. We want to be great at it. And it's hard to be great when you're kind of licensing out parts of your business. No one's going to care as much as you.

No one's going to love it as much as you. And if you want to be the best in the world, it is not for the faint of heart. It's not – you can't rent that. You can't buy that. You've got to build that..

And Gary, as a follow-up on that note, and I know the deals aren't even complete, and you don't want to get into weeds in the details, but London and Paris aren't free. Are they – would you rate those as capital-light, capital-moderate, capital-heavy.

Any lead there?.

Yes. I'd say two capital-light. The first three, two capital-light, one – no, no, capital – well, one of them, we're working with Foster and Partners, and they're so good. Like really it's like maybe the best architect in the world. And they did the Apple campus. They do so many – I mean they just are so good. Their offices are so inspiring.

And they – their first pass at kind of weaving these four buildings together in London and what it could be, I'm like, yes, we're going to have to do that.

And so it's going to be – I'd say that's going to be more like a New York investment, but you should be making a New York investment in London, right? You should be making a New York investment in London. And by the way, New York, two – less than two year payback. That's really good. So – and I think London will be like that.

I think we will open up an entirely new market. Think about London like – it's like opening in New York and not having any store in New Jersey or Connecticut or anywhere near. Like, we've got all these stores around there doing it. If I took all that volume, and I mushed it all into New York, man, I mean, it makes a lot of money then.

So you might argue, well, you won't get the whole market. Well, I don't know. Like if you build something that's incredible and you have a great direct business and a great platform and you have – there's nothing like us. We have way more competition in North America than we are going to have in Europe. Way more competition in North America.

So might take us a little bit longer to get the brand awareness, but I don't know. Like in the main cities, they know us. They know us. And they're shipping to us. They're shopping from us. They've been in our galleries in New York and Los Angeles and Chicago and so on and so forth, Palm Beach. So anyway, the headline is it will be a mixture.

And it – if you have two out of three that are capital-light and one's kind of capital-heavy, you're kind of – from a capital point of view, you're in the bottom third, which actually is not – that's the right third for the capital investment.

But again, you want to do great work, right? It's – did we spend more money than we thought we were going to spend in New York? Yes. Is the gallery greater than we thought it was? Yes.

Was it the right investment? Two year payback on a flagship store like that in New York, find another retailer that's ever done that that's made an investment – and most people don't make money in New York, right? They build a big store, and they don't think they're going to ever make money. It's like it's a billboard.

We don't really have that strategy. Everywhere we invest money, we want to make money. And so – but some things, you got to – you have the courage – like you have to have the courage to do great work. And if London takes a New York kind of investment, so be it. It's arguably the second, third most important city in the world, in the top three.

Like if you're not going to make an investment there, where are you going to make it? So anyway….

I appreciate the details. Good luck. Thanks..

Yes, thank you..

Your next question comes from Tami Zakaria with JPMorgan. Please go ahead..

Hi, thank you so much for taking my question. I have a really quick one. So can you talk a little bit about how much of the announced $150 million of cost savings did you recognize in the first quarter. And do you expect any more savings in the second quarter.

And also, how much of this is actually permanent given you eliminated some positions back in April..

Good question. I don't know, Jack, if we can kind of break that out, how would we think about exactly that….

As Gary mentioned, we are reinvesting some of those savings back, right, $90 million. I don't have the breakout, Tami, at my fingertips. So maybe we can follow-up..

Yes. You've got a chunk in the first quarter and then you've got a chunk in the second quarter. Most of it was first half..

Yes, because if you think about the compensation savings related to furloughs, obviously, you have those upfront. And as Gary mentioned, all furloughed employees will be back in the next few weeks. So those were front end..

And then the ad costs we put back in, just kind of a little later, right? And then we had some ad cost savings in the second half. We're putting that back in. Yes. So yes, it's a good question. Let us – maybe we'll do some work around that. And maybe in the next quarter, we'll lay it out a little bit.

So we can disclose it in a way that everybody knows the answer. So let's figure that out. Good question. We don't have the detail with us. Yes..

Got it. Thank you so much, and best of luck..

Thank you, Tami..

Your next question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead..

Hi, good afternoon. I also have two quick ones. One, can you bridge us how to pay the convert in July, the $300 million relative to the $70 million in cash at the end of the quarter? Is that mostly just from free cash flow coming here in the second quarter? And then a little bit bigger picture question.

In retail, we've seen definitely a shift towards digital. It might be less so in your business, but you've also rolled out virtual design consultations in the quarter. So maybe just your thoughts on technology and consumer spending – or consumer habit shift, how that could impact your business. Thank you..

So I'll start with the first question, Cristina. As we've said, we're going to repay it in cash, which means cash both that we've generated and cash borrowed on our asset baseline. So what you are going to see in the 10-Q that's going to be filed tomorrow is our availability on the line.

And if you were to consider us repaying the debt as of today, for example, or as of, I guess, May 29th, is what we had noted, we still have availability of $170 million on the line. And so we will, obviously, with the business trends we have, continue to generate free cash flow from there. So….

$170 million on the line at the low point after you pay..

Assume if we had to – have repaid it by last Friday that is that – so basically, it's – I would think of that as a low point. That is what would have been available. If we had repaid from the cash we have on hand with the remainder from the ABL. And so again, we will generate free cash flow from here, and that will look a little different by July 15..

Yes, because cash flow negative in Q1 becomes – our expectation is it becomes positive in all the next three quarters. Significantly positive..

Correct..

And then the shift towards digital, I mean we're going to – we're making a lot of big investments. This year, we just hired a new chief kind of digital experience officer, who's someone we've been trying to hire for years. I think he's one of the most creative, smartest people in the space, we – consulted with us about 10 years ago, Eri? Yes.

And will be joining us soon. And we're going to make some significant investments in completely reimagining the whole website, and it will kind of move from a website to a portal. And we've got some visions for it, and I'm sure it's going to change 100 times. And the gentleman that's joined the team is going to have, I'm sure, a huge impact.

And we're also going to bring in other talent. We're going to try to bring collection of the world's best thinkers, best designers, best – just with internally and external resources to kind of create a leapfrog experience. Something that has never been done. That's equal to the strategic separation we have in the physical world today.

So – and I think that's going to be harder to do, right, because the screen size is the same size. You're more in a democratic platform. But we've got a lot of good ideas that we've been thinking about for a long time, and now we're going to make meaningful investment, and we think we've got the right talent lined up.

So the shift in habits, thoughts about technology or the shift in habits. I think that the shift to – it probably got accelerated. If you think about e-commerce world, I mean, you've got – clearly, you've got a forced shift in habits.

And so I think we probably accelerated the shift to digital shift, to online by maybe three years or something or maybe five years. So what was total online business last year is what, 15%, 17%, something like that. So – no, it was the projections for this year.

But – so maybe you get to 30%, three years faster, four years faster, something like that in total online business like on a sustainable business, sustainable way. So I don't think that's a massive change. I mean that's – I mean I think it's a massive change for a short amount of time.

I don't think you're – this is not going to stick this level of spending. I mean it's very different. Again, if you're thinking about just basic essential things and putting them on a reorder with Amazon or whoever, shampoo you buy or wherever you buy, whatever thing you use, yes, all that stuff, there's been a forced shift and that will stick.

I think a lot is going to be a lot like it was, just a little different, not a lot different for our business. It's going to be a lot different for some other businesses, right? But yes.

I just think you're going to see – the biggest fallout here is the – or the biggest change is the best brands and the best kind of retail businesses will be much stronger coming out of this.

And the people that were weak, that were on the fringe, the people that don't have a – I was talking to a very smart investor, one of the people – I think he's one of the smartest people I know on the planet.

And he said, look, people who don't have a fully integrated multichannel business that's frictionless for the customer are going to be gone by 2022 that this is going to accelerate that. It's accelerating the weak retailers. Like Neiman Marcus was going to always go bankrupt.

It's just are they going to go bankrupt two years from now or three years from now or they just went bankrupt now, right? And the weaker businesses, it just accelerates. So it's like a cleaning house. But history would tell you, every time there is a cleaning house, there is like newness that comes. There is new grass that grows.

There is new ideas that come to the market. There is new things that evolve. And it's different, but it's usually just a lot better. I don't see – this isn't like when people were riding around in horses and carriages and all of a sudden, someone came up with a car. And now nobody uses horses for transportation.

It's like this – it's not going to be all of sudden like no one's going to shop in retail anymore. It's not – I think it's just an acceleration of a shift to online in certain categories and businesses and behavior that just got accelerated a bit. So I think people get like overly focused on this.

They're just going to do a poor job of allocating the capital because they're going to – like the trend's going to be, oh, everybody ought to be doing this. Like right now, it's a great time to be a consultant, right? Like that has some digital pitch. Like look what just happened in the world like here, spend millions with me.

And it's just – it always kind of happens after times like this. The consultants will come out with a new thing like omnichannel, the next thing or the post-pandemic platform. And they'll sell a lot of air. So it's just a shift. Things are – things were going to be different. It just happened a little faster..

There are currently no further questions at this time. I'll turn the call back to Gary for any closing remarks..

Great. Well, thank you, everyone.

I do want to say to our team who has just done a remarkable job through this time, to our furloughed teammates, welcome back, and to the few that haven't come back, we'll all be – our center of innovation in headquarters, where the majority of the people that are not completely back, we're going to be able to open next week.

And we'll be able to welcome everyone back to the team. And two, I'd just say in this time of civil unrest, too, just every person of color and every black person in America, this is a very difficult time. And to the African-American community and the people that work for us, they know how we feel.

And we've communicated that, and we don't need to broadcast that to the world. We don't need the platform necessarily to grandstand for us. We're going to do our work and set our example inside our company. But let's say what we've said internally, we stand with you.

We – you just have to have a lot of empathy for what's going on in the world and just a lot of leftover, really shitty bad habits of judgment and discrimination. And I just hope that the unrest we're going through, which I think is just needed, it's just needed, we've got to wipe it clean. And yes, is it messy? It is. Is it scary? It is.

But it's also needed because sometimes you got to have fear in this world to get people to change. And you've got to fight for what you truly believe in. And there'll be people on the fringe that take advantage of it, whether it's the looting or the burning of things. That's not what this is about. That's unfortunately what's making the news.

The 99% or 95% of the people that are fighting for the freedom that they deserve in this country and the respect that they deserve in this country, the words that are in the pledge of allegiance that we all grew up, putting our right hands over the heart – our hearts and talking about the land that has justice and liberty for all, not for some.

We're still fighting that fight. But I just want to say that we're all affected by this, and we're all troubled by this. And we all want to think about what's the best way to help. And sometimes it's just letting people know you truly care.

So we just want everyone know we care, especially our African-American teammates, who – it's got to be a hard time witnessing this, being a part of this and having those things resurface. Just know we care and we are here. And anything we can do, and if you want to talk, know that your family is here.

And we're standing with you, even if we can't be physically with you all the time. So anyway – but I just want to thank our teams for just an incredible job, incredible work, incredible imagination, incredible innovation going through the time we just went through. And we are just so much better. What doesn't kill you makes you stronger.

So we're really looking forward to the time ahead. Whether we have another breakout in pandemic or not, we're ready. So team resto – team RH will be ready for anything and really excited about the future. So thank you..

This concludes today's conference call. Thank you for joining. You may now disconnect..