Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 RH Q&A Conference Call. [Operator Instructions] I would now like to turn the conference over to Allison Malkin of ICR. You may begin..

Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter fiscal 2021 Q&A earnings 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 of 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 will turn the call over to Gary..

the introduction of RH Contemporary, the most meaningful new product launch in our history, inclusive of a 500 plus page source book, a freestanding RH Contemporary gallery, a dedicated website and a national advertising campaign.

The elevation and expansion of RH Interiors and RH Modern, inclusive of multiple new collections, enhanced quality and exciting new presentation and photography across our physical and digital platforms.

The launch of our global expansion with the opening of RH England, the gallery at the historic Aynhoe Park, a magical 73-acre estate designed in 1615 by the legendary English architect, Sir John Soane that will introduce RH to the UK in a dramatic and unforgettable fashion.

Additionally, we have secured locations for galleries in London, Paris, Munich and Dusseldorf and are in lease or purchase negotiations for galleries in Milan, Madrid, Brussels and France.

The opening of our first RH Guesthouse in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market, the unveiling of the world of RH, a new digital portal presenting our integrated ecosystem of products, places, services and spaces, all designed to elevate the RH brand and communicate our authority as a thought leader, taste and place maker.

The liftoff of RH1 and RH2, our customized Gulfstream G650 ER and G550 that will be available for charter, the former already garnering press and praise as featured in the pages of Architectural Digest, the Wall Street Journal magazine and the 20 titles of modern luxury, including Los Angeles Confidential, Manhattan Magazine, San Francisco Magazine, Boston Common, Dallas, Palm Beach and Aspen Magazine to name a few and also including the hundreds of thousands social media posts and reprints of all of these articles.

The christening of RH3, our luxury yacht that will be available for charter in the Mediterranean and Caribbean, where the wealthy and affluent visit and vacation.

The expansion of RH In Your Home, a unique and memorable delivery experience with furniture ambassadors, guiding every detail of your delivery and extending the selling experience into the home.

We entered 2022 with optimism and confidence that our efforts will continue to elevate and amplify the RH brand, creating significant separation emotionally, strategically and financially. The RH Business vision and ecosystem, the long view. We believe there are those with taste and no scale and those with scale and no taste.

And the idea of scaling taste is large and far-reaching. Our goal to position RH as an arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world.

Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade.

Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally.

Our strategy is to move the brand beyond curating and selling product to conceptualizing the selling spaces by building an ecosystem of products, places, services and spaces that establishes the RH brand as a global thought leader, taste and place maker.

Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.

Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry.

Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art and design in the Napa Valley; RH1 and RH2, our private jets; and RH3,our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation.

These immersive experiences expose existing and new customers to our evolving authority and architecture, interior design and landscape architecture.

This leads to our long-term strategy of building the world’s first consumer-facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams, while disrupting and redefining multiple industries.

Our strategy comes full circle as we begin to conceptualize in self spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning time-starved consumers.

Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.

The entirety of our strategy is designed to come to life digitally as we launch The World of RH, an online portal customers can explore and be inspired by the depth and dimension of our brand.

Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $100 billion opportunity.

Taste can be elusive and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. This is the time to be defined by our vision, not by a virus.

As we move forward past the dark days of the pandemic, let this be a time where we once again rise up, a time we expand and shine, a time we re-imagine and reinvent ourselves once again, a time, team RH unleashes the greatest display of innovation our industry has ever seen. This is the time to be defined by our vision, not by a virus. Carpe diem.

And at this point, operator, we will open the call to questions..

Thank you. [Operator Instructions] Our first question comes from the line of Steven Forbes with Guggenheim Securities. Your line is open..

Good evening or I guess good night everybody. Gary, you highlighted several exciting launches that are planned for 2022 in the letter, but I was curious if you can comment on the real estate pipeline here within the states.

How many leases are secured currently and should we expect the number of openings in 2022 to reaccelerate to that 5 plus level?.

Yes. At this point, Steve, we are silent on that just because there is so much kind of change in chaos happening in the world of construction and development on so many levels that we are going to wait till we have a little bit more clarity as we get through the fourth quarter to talk about what we think will happen in 2022.

So you will hear more about that in the – with our fourth quarter release..

Perfect. And then just a quick follow-up, it’s great to hear that RH Contemporary is still slated for launch next year, but would love to hear your current thoughts on how impactful newness could be to demand next year, maybe of a high level right as you think about the creation of the source book and just where you guys are.

I would love to just hear how excited you are about it? Any sort of comments on how impactful you think it could be to brand awareness and overall demand growth?.

Yes. I personally think it’s a complete game changer. I think it’s the best work we have ever done. I think it eclipses the work of RH Modern, which was huge, although Modern got off to a stumbling start from a production point of view. Modern has kind of changed the game for RH. I think this changes everything.

I think when people see the taste level, the sense of style, the quality and sophistication of Contemporary I think it opens up another entirely new market. I think it will attract some of the highest end interior designers to our brand. I think it will have the customers of the highest end interior designers point them to our brand.

I think it is one of those undeniable things that we are going to do that you can’t ignore it. It’s going to be a big deal in our industry..

Thank you. Best of luck..

Thank you..

Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open..

Thank you very much, Gary, Jack and the entire team, great navigating through very difficult times.

Gary, I wanted to see if you could give some color context on the quarter with regard to supply chain, freight, inventory and the backdrop there, the exposure that you had in the current quarter and what the line of sight looks like on these items into the first quarter? And then Jack, can you – or maybe Gary, can you talk about the timing of RH England? And when you say that you have identified the secured locations for London, Paris, Munich and Dusseldorf, could we expect those to be open in the latter half of 2022? Thank you very much..

Sure. Yes. Let’s start with supply chain and everything. It’s a mess, okay. It’s the worst we’ve ever seen. So it’s – it’s a time to improvise, adapt overcome.

It’s time to collaborate more deeply than you have ever collaborated with your partners, whether it’s on the manufacturing side, the freight side, what you are doing to the parts, what we are doing with just line haul, everything, right. There is execution issues everywhere. There is cost inflation everywhere.

And you have to be really smart and thoughtful, but to say everybody in our industry we are sure in a reactionary state, but with a leadership kind of mentality, how do we lead this to where it’s the best outcome. And we like saying company vision leads the leader.

It inspires and generates the energy within and leaders have to be comfortable making others uncomfortable, because you are taking people somewhere that you’ve never been, doing things you’ve never done, and this is one of them.

Navigating through this period is a tough one, but it takes real leadership and it takes real thought and we have to be reactionary, but we also have to spend a lot of time thinking until it hurts, until we can see what others can’t see, so we can do what others can’t do. And I am proud of the team and how we have navigated through this thus far.

I am grateful and appreciative to all of our partners around the world who have especially those in Vietnam, who have had to suffer through just a really, really difficult time from a health perspective, disabled that country worse than any others that we have worked with. Earlier, it was India who had such a challenging time.

But look, I think in our results and our guidance demonstrates our ability to navigate through times like these from an operational perspective and demonstrates the strength of our brand from a revenue generation and margin expansion perspective.

So despite it all, we have expanding margins against our best margins last year and we absorbed a lot of cost and lot of chaos. So, I think that bodes well as you look forward to, hopefully, things getting better. The – I don’t know it’s Omicron – I can’t say it, right, but yes, Omicron.

Who knows what the next variant is going to be, who knows how many variants we are going to have. The early data would say things are not as bad as Delta, might spread faster, but it’s – it doesn’t seem to have the same health risk. So hopefully, we will all be able to navigate through this and get to the other side.

When you think about the expected timing for the opening of RH England, we believe we will open RH England kind of early summer, late spring and you don’t want to open in the UK too early. We don’t open out in the English countryside where it rains everyday. And by the way, it rains almost every week. For sure, it rains every month in England.

So, we would like to open when the weather is nice. We would like to – you don’t get a second chance to make the first impression. And so we are on track to open, I think in the late May, early June and it could be a weather call, honestly. We are looking at the weather report and you go to your phone and you see rain everyday.

We are probably not going to open yet. But when we see the first few sunny days, we will kind of be ready and we want to open in a day that everybody is smiling and everybody is happy, including our people. And – but we will be open by early summer, unless we don’t see a clear day. That’s the only thing that might hold us up.

So, we have confidence about that. Could we expect other international openings this year? No. If we did, we’d be talking about them. You got to think about the kind of the complexity and size and dimension of the projects we are opening. They are not easy. They take years. These – what we are doing is not a quick rollout.

And we like to say extraordinary takes more time, requires more people, costs more. It takes more time, costs more money, requires more people working in a more complicated manner, but it’s worth it.

And so I think what we have learned in our journey here is that when you do extraordinary and remarkable work you can always figure out how to monetize it. And it’s really hard to monetize ordinary and unremarkable. And so – but extraordinary and remarkable, it takes more time. It costs more money.

It requires more people doing more things in a more complicated manner. And so it’s hard to actually forecast and predict when these are going to open. But I’d say the ones we have listed will have some opening in ‘23. We will have some opening in ‘24. We will have stuff opening in ‘25 and ‘26 and I feel good about the pipeline.

The way I think about it, by the way, is that we are not – it’s not like in the U.S. We are not opening markets. We are opening countries. And I can’t overemphasize that, not just to shareholders or the analyst community on the phone, but to our team and our partners around the world, we can’t look at these like one gallery.

RH England opens up England, opens up the United Kingdom, right. We – if we open in Paris, it opens up France. When we open in Milan, it opens up Italy. When we open in Munich or Dusseldorf, it opens up Germany. So, these are big economies. And one by one, we are going to open up countries.

And with the amount of business that is moving online and if you think about one of the long-term financial benefits of this virus is it made people a lot more comfortable shopping online and shopping online for just about anything. So, we like our timing from that point of view.

We are going to learn how many galleries we need in these markets and how we penetrate them correctly. But we are not to the – to our consumer at the high end, we are not unknown to the high end.

I think I might have mentioned on another conference call that there was a report – an analyst report that came out and said RH has really low consumer awareness in Europe. And we – and they ranked like Target, Walmart, IKEA and a whole bunch of people way ahead of us.

But that was a real firm grasp of the obvious, right, because our customers don’t shop those places and definitely, those customers don’t shop RH. We wouldn’t even be on the radar, right. But one of our really smart investors and they are probably listening to this right now, you know who you are.

They did research and researched interior designers in the UK. And how many – and what was the market awareness of RH in the UK, I think it was 90%, close to 90%. And what was the percent that had an intent to buy when we open in the UK, and I think it was somewhere around 80%. So, those numbers are off the charts, right. Those are off the charts.

So this dynamic of opening countries when you have the kind of brand we have and when you are so unique in a market and you open the way we are going to open, we are not opening like this company started – how this company started in the United States with little legacy stores with 6,000 square feet or 7,000 square feet of selling.

We are opening with our best work. So we have a running head start, because we have pretty good brand awareness with the right consumer.

We are opening extraordinary galleries like some of the most exciting things we have ever done, like I think almost every one of them is one of the most exciting galleries we have ever opened, incredible historical real estate that we are re-imagining.

So, when I think about the business and our team thinks about the business over the next 5 years, I mean, I think it puts us in a position to outgrow anybody in our industry..

That’s extraordinarily helpful, Gary. Kudos on the execution and the future obviously has tons of opportunity. Thanks..

Thank you..

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open..

Hey, thank you. Great results. My question is on deferred revenue and customer deposits, they are up sequentially. So I am curious if you have started to make any progress on bringing down the backlog levels. I believe at one point earlier in the year, they stood at about $150 million.

So, have you started to bring them down or how many quarters do you think it’s going to take for you to clear out some of that benefit?.

Hey, Chuck, it’s Jack. So, we gave you that update for the $150 million at the beginning of the year. We haven’t updated it and we will do that when appropriate. One thing you have to realize though, as we resolved some of that backlog, there is new backlog created.

So that’s what you are seeing is sort of sequential, if you look at our sort of sequential revenue and really the volume of revenue. And this is our highest revenue quarter of all time, obviously higher in the last quarter and higher than the prior quarter. So you are going to see a sequential build in those.

And again, I think as we get – as the supply chain and everything else resolves over time, we will get through it. But right now, it sort of reflects the size of the business. And as Gary mentioned about the supply chain, we are working, we are improvising, we are adapting and it’s all going to come together I think..

Yes. And I’d say right now, our view is the backlog won’t get all the way down by next year. There is a high likelihood we will enter the following year with the backlog..

Got it. Okay. Cool. And then you also referenced the new variant in your update. Sorry for the near-term question, but I’m just curious if you’ve seen any unusual demand trends over the past couple of weeks.

And then bigger picture, you talked about the supply chain still being a factor, curious if you’ve seen any changes in consumer behavior or willingness to wait for products or any uptick in the cancellation rates or maybe not?.

Yes. We have a lot of people coming in and wanting to buy masks. That was a joke. I would say – now in our business, you usually don’t get immediate upticks, right, like on furniture, things like that. Just kind of early news, but we will see how it shakes out.

And I think customers have been conditioned to wait right? And the key to how we all operate in this world is based on expectations. I’d like to use the example of you go to Disneyland. And if you want to get on the Star Wars ride or the Matterhorn or whatever, pick your ride, they have a sign that says 45 minutes from here.

And you see a line of about 400 people. And do I really want to get in line with my two daughters to get on the Matterhorn today even if it says 45-minute wait? Now you think nobody in the world would get in a line that says 45 minutes from this point. But the fact is you get in that line because you’re conditioned to get in that line.

And Disney because they execute so well, I’m one of those people that generally looks at my watch and then times it. And all the times I’ve gotten into the line at Disneyland it says when it says 45 minutes, and they are always 45 minutes. That’s where they put the sign up.

I haven’t been in the last 2 years because my daughter got a little older, but they actually want to go again this year. So – but you always get on the ride somewhere around 39 to 43 minutes. So they never make you wait longer than 45 minutes. And what we’re trying to do is be Disneyland. Don’t say 4 weeks if it’s going to be 5, if there is a risk of 5.

If there is a risk of 5, say, 6. And if we lose a little demand that might happen, but there is nothing worse than disappointing consumers. But I would say the bigger thing is consumers – we’re all conditioned to wait. I mean, try to get anything built right now. Try to remodel your house on time right now.

I think I read – actually just read a report that 50% of the people said they are waiting longer, and they are spending more money.

I’d love to know their contractors, the other 50% because I know nobody who’s getting anything built on time, and I don’t know anybody who’s not spending 50% to 100% more than they thought they were going to spend on any kind of remodel.

I mean, there is – everything is costing more on every level, and that’s the world we live in today, and we’ve all been conditioned to wait. And it’s almost like a crazy surprise if you get something on time.

So if the Postmates driver shows up on time with your meal or the Grubhub person shows up, you’re kind of like super excited because they are the only people who are kind of on time today..

Hey, Chuck, one thing to keep in mind too, and I think when a customer for any reason doesn’t want to wait, there is actually – there is plenty of in-stock, that’s what we talked about one of our strategic advantages is the in-stock inventory. And including on our website, you can shop in-stock.

And I was one of those design customers that, for one reason I need to – I want in-stock items fast. And I was able to get them, obviously, some items I wait for, but we have the ability to address both..

Great, thanks for the color. Gary, I think that the fast pass. It works pretty well. Good luck the rest of the year. Thank you..

Thank you. Our next question comes from the line of Anthony Chukumba with Loop Capital Markets. Your line is open..

Thank you so much for taking my question. Before I ask my question, I’m just going to provinces and say I was not the analyst who wrote that report about your low European brand awareness. So I just want to clear that up. I also wanted to mention that I recently went to your new RH Oakbrook store and it was just, I mean, spectacular.

I mean just absolutely positively breathtaking. But on to my question, so you talked in the – in your letter about how you’re expanding RH In-Your-Home. And I know white glove is very, very important. And obviously, you have the gross margin dollars in each transaction to afford that cost.

But I was just wondering, is there any significant cost sort of increase that we should be factoring in because of the expansion of RH In-Your-Home?.

There is going to be an investment we’re going to make. It’s a meaningful, significant investment. We think there is a good return on that investment. The math would say to go. I don’t know – Fernando is here. Fernando Garcia is our Chief Supply Chain Officer and President of Home Delivery. He’s kind of been the visionary behind RH In-Your-Home.

And he just had his leader of RH In-Your-Home, Dana Out, and we had an inspiring presentation. And I guarantee you, if any of you on this call were in the room, you’d want to be an investor in RH In-Your-Home.

So Fernando, do you want to mention anything in RH In-Your-Home?.

Yes. I mean RH In-Your-Home, as Gary refers to, a unique and memorable experience that requires an investment. However, the return of the investment is significant for the brand, not only from the demand that Gary mentioned, but from the customer experience and the desire for the brand the investment will create.

And we – over the last 2 years, we have been able to negotiate great contracts with our partners that have allowed us to consider financial investment in RH In-Your-Home..

Got it. That’s all very helpful. Thank you so much and keep up the good work guys..

Okay, thank you, Anthony..

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

Good evening. Thanks for taking the question. So a quick one on product launches. It looked like modern and incremental launch next year. I Just looking back to the last year later, I didn’t see it. And I guess just how incremental, I mean it’s obviously a big part of the brand. I don’t think it’s obviously bigger than kind of the core business.

But yes, what are your expectations for Modern? And I guess, what – how is the brand I guess, sub-brand evolving in terms of the evolving the product?.

Sure. Yes, Modern a meaningful part of our business today. And we think about – the way we think about the business today, we have RH Interiors, RH Modern, RH Contemporary. So Modern is now part of core. That’s how we think about it. It’s got to sound aesthetic, but it’s not new anymore.

But both Interiors and Modern will have the most amount of newness than they have had in years because we haven’t mailed the book in 2 years. And we have introduced a new collection in 2 years.

So you’ve got kind of 2 years’ worth of development kind of backlogged, and we think now is the time where the supply chain is caught up enough, Curtis to where you won’t disappoint customers and create longer wait times. We hope, we knock on wood, I mean nothing changes as far as the variants and what happens.

But Contemporary is going to feel massively new with lots of incremental new product that should make HR – excuse me, Contemporary will be all incremental. Well, not all incremental. Let’s put it this way, I would expect 50% to 60% incremental from Contemporary because it’s so new and differentiated.

The new – there is incremental new collections in both Modern and Interiors. Interiors is our biggest book. Modern is our next biggest book and biggest part of the business. And then Contemporary, we all now – we look at it and we think Contemporary could be bigger than modern and over time, rival Interiors and just lift the whole brand.

It’s just it’s a new sweet spot is how we think about it. And in some ways, we’ve made lemonade out of lemons through the pandemic, it’s given us more time to look at it, more time to dimensionalize it, more time to be critical of it, more time to tweak it and dimensionalize the idea.

And we kind of get more excited every week about it here because we’ve been able to continue to kind of innovate and expand and dimensionalize the idea. So that will be a huge piece of incremental business. And then there’ll be a percentage of both Interiors and Modern that will be incremental. Eri is sitting here.

Eri, anything you want to add that I’m missing out on?.

No, I would agree. I think the Contemporary point of view is absolutely fresh and exciting and very relevant right now. And like you said, I think it will rival Modern when we launch, and I think it could eventually eclipse that concept. And it’s exciting.

We’ve made the concepts and collections much, much bigger and elevated the design and quality all along the way..

That sounds very exciting. Maybe just a quick modeling question for Jack. Just look, I know you guys haven’t contextualized or given detail on price increases or anything like that. I’m not asking for that. But just kind of thinking through next year and the backlogs and how long it takes for inventory to flow through.

I guess, would it be fair to say that at least through maybe the first quarter or two next year, you still sort of see some uplift from price increases you’ve already taken or should we think about it differently?.

Another way to ask us for ‘22 outlook with that factor way. Look, I think based on – you can look at our source books online or you can – if you follow them, we’ve made no secret of having taken some price increases this year to address the supply chain. Will there be some revenues in the first part of the year? Sure.

Again, we’re not speaking in specifics, but I think that’s a good way to look at it..

Yes, I’m not even sure price changes are over yet. So yes, there is still price inflation happening. And so we’re going to continue to do what’s fair and right and – but we don’t want to do anything that kind of undercuts the margin structure that we have. So – but everywhere it’s happening.

Restaurants crazy price increases and a lot of the input costs, and we’re just doing what we believe is right and fair. As our price is going up, we’re passing them through.

And I think, because of the stimulus in the market and what the government is doing to kind of keep everything afloat and everything moving, it’s kind of balancing it all out, right? And in some good way that this pandemic is not isolated to any one country, and it’s a global issue, it allows every country in the world to print money and not devalue their currency in a massive way.

And so it’s never happened before. We’ve never seen this. We all sit here and go, what’s going to happen? And yes, who knows like how long everybody is going to print money for, how long prices are going to go up. What’s going to happen with inflation. Hopefully, you’ve got a dovish point of view on interest rates in the Fed.

I think everybody’s pretty happy. Powell is reelected. And so, so far, so good. I would have thought a lot of things would have gone wrong by now. But again, we’ve never seen this one. The world has never seen it. So I think price increases are going to probably be here for a while..

Sure. Okay, thanks very much. Appreciate the time and good luck on the rest of the year..

Thank you, Curtis..

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

Good evening. Thanks a lot for taking my question. Recognizing that there is a lot of uncertainty out there and there is some supply chain challenges, your fourth – or your implied fourth quarter guidance suggests that demand trends are slowing or at least your revenue trends are going to slow in the fourth quarter, especially on a stack basis.

So do you think that the affluent consumer, which has been maybe less mobile over the last 18 months is starting to get fatigued being at home, starting to shift spend to other categories and that might continue in the next year and that’s a sign that you’re already starting to see in the business?.

Well, yes, I think everybody just has to look at their own behavior. When you don’t have an ability to travel, but your income hasn’t changed. You’re either saving money or spending it somewhere else, right? And travel and leisure is 3x the size of the home furnishings market. And clearly, that part of the economy was shut down.

And that part of the economy has opened up. If you try to get a flight these days or try to book a hotel room at many places you might want to go, it’s a lot different than it was a year ago, and it’s massively different than it was 2 years ago at the beginning part of pandemic.

So the question is, I think, how has this affected the long-term view of the home, right? And how has this changed the perspective – it’s – I think there is a short-term cycle here that, yes, spending will shift back to travel and leisure and other parts of the economy. People are going to spend money on weddings. There weren’t weddings.

There weren’t events. There were – so many things went to zero, right? Nobody went to concerts. Nobody went to – some of you guys like I happen to be a fan of the Golden State Warriors. The last couple of years, you didn’t really want to go to a Warriors game and be one of 2,000 people in a 20,000-seat arena.

It just didn’t have a lot of energy and wasn’t a lot of fun. But now there is 20,000 people back in there, spending money on tickets, going to games, spending money in F&B.

It’s expensive night out no matter where you’re sitting in that arena and I would imagine arenas everywhere, whether it’s soccer games, whether it’s other events, whether it’s concerts that are happening now. So all travel, leisure, entertainment, so on and so forth, people are getting out.

Yet you would have thought there’d be a much bigger shift out of the home.

And I think what we’re learning is that this is – this may have created some kind of a permanent shift in the importance of the home, the amount of time people are going to spend at home, the way they are going to spend their time at home, the amount of entertaining at home they are going to do, the number of homes they want to have if you can afford to have that and just the threat of not only new variants, but another pandemic.

You don’t ever expect anything like this. You’ve never seen anything like this. But once you’ve seen something like this, you start saying, what happens if it happens again? Hey, honey, okay, got it. We made it through this pandemic. Everybody is healthy.

What do we do now? What happens if another 1 hits in 3 years and 5 years? How are we going to be ready? What does ready mean for another pandemic? Ready means having a second home. Ready means having a great backyard. Ready means making your home a place that you want to stay in.

I think the pandemic caught everybody off guard, right? We all had to spend a certain amount of time at home. We all sat around and saw all the things that maybe weren’t great in our home. We all kind of said, hey, why don’t we make our home better? We’re going to be here for a while.

And I think that if it wasn’t your home, there might have been a shorter term impact. But for many people, and especially upper end consumers, it’s the most important place you go. It’s where you sleep almost every night. And it’s where you eat most of your meals. It’s where you raise your family.

It’s now, for most people, if you’re working and you’re an affluent consumer, you have a home office, you have someone to work in home. You now have a habit of entertaining more at home. Anybody who tells me they haven’t cooked more than they cooked in the last 2 years – yes, you’re welcome, Williams-Sonoma, by the way. Everybody is cooking more.

It’s got to be good for the home. The new habits have to be good for the home. And I think the – we’re all surprised how long like I don’t know who coined it, one of you wrote it, wrote reports and there is stronger for longer. And I think it’s been stronger for longer because it’s the home. It’s not like you just bought a new car.

And you buy a new car and you don’t furnish the car. You don’t do anything to the car. Maybe you wax it and you clean it, but you kind of – you get everything you need when you buy a car. When you buy a home, you’re kind of furnishing it for years. You’re doing stuff to it for years.

And now that it’s even more important, and you’re spending more time there and you predict you might be spending more time there in the future. And there might be a risk of another pandemic. I think the home might get a permanent shift here. How big? Is it going to slowdown? Sure.

Like we are not going to see the same growth rates, I mean – but then again, if you saw our business plan for last year, it was a lot lower than how we performed because we thought there could be a big giveback after the lift of 2020. And we thought that we give back in 2021. Will there be a giveback in ‘22 I don’t know.

It’s so far or what did Maverick say in Top Gun? Looking pretty good so far..

Right. That’s very helpful. My follow-up question is understanding you don’t want to provide guidance for ‘22 yet. Can you touch on two factors that will impact the model? One is the start-up cost with all the various initiatives that you have coming up in the New Year? And two, you obviously just did a big recapitalization of the balance sheet.

Can you give us some indication of how that’s going to impact the model in 2022? Thank you so much..

Yes. Well, look, the recapitalization is pretty black and white, right? There is – we borrowed $2 billion. There is an interest rate on that money. That’s a one-time step-up in costs. And there is not a magic thing on the other side that makes that go away.

We think it’s an investment that puts us in a position to create a great return on that $2 billion. Exactly how that plays out and when that plays out, we will see. But we wouldn’t have raised some money if we didn’t have plans for it. But we’re patient. We want to be opportunistic. We don’t know what’s going to happen in the future.

So you’ll – but there is a one-time cost to that as it relates to other initiatives and things we’re doing, and Jack will add more color. Yes, we’re going to spend more money. We’re going to invest more money, and we’re going to open up countries. We’re opening up new DCs. We’re doing things like that, and there is an investment cost to that.

But I think we’ve been relatively good for a number of years now. Maybe the last 5 years have been relatively accurate in our – in how we guide the investment community and where we think numbers are going to be. And we tend to be more conservative than less conservative, and I think we will continue to be so. And we’re not guiding ‘22 yet.

So, a lot of things that we will learn in the next couple of months here and when we have a clear view of demand trends and other things, I mean we know what our investments are going to be as it relates to international, as it relates to RH In-Your-Home, as it relates to other things. And we’re going to invest with a long-term view.

I mean, we invest in this company like we own 100% of the company. And so we invest for the long-term, and that’s why we have the best operating margins in our industry by – not by a little. I mean, I don’t know what the high mark was in our industry besides RH. I think it’s probably around 15%, 16%. In the third quarter, were 27.7%.

So we’re probably 1,100 basis points higher than the next best person. How do you get results like that? You make the right investments. It’s not luck. You make the right investments. And you got to make those investments for the long-term view. The worst thing that could happen with this company today is if we start playing a quarterly game.

If we start like someone said to me at the end of the day in a meeting, you have to protect the brand.

Every company I have worked in, every time I’ve been around people that say you have to protect the brand is when brands start to erode because they stop playing offense, they stop investing with the same courage and passion and they stop having the same drive and energy to make things better and greater. So we’re allergic to the status quo.

We are passionate about finding big ideas. We don’t care where they are. We are so excited about RH In-Your-Home.

If anybody – like we should almost like repeat that meeting for this group, like if you guys – if everybody on this call could have seen that on tape, the team presenting RH In-Your-Home, like I seriously want to take money out of my wallet and say, can I invest personally in this? It’s going to be tremendous. But their start-up costs.

It’s not cheap, but you get what you pay for in this world. And expect us to make meaningful investments and expect us to not respect the status quo at all here. Expect us not to ever play defense and expect this to never try to protect this brand.

Expect us to build this brand and to invest in this brand and to make this one of the most admired brands in the world. Not the most admired home furnishings brand in the world, one of the most admired brands in the world. Put us up against anybody in the next few years. Within our pipeline is going to take this company to a whole new level..

Michael, it’s Jack. I think I would just add two things, obviously, not adding any specifics as to the numbers of the start-up costs. But keep in mind that much of the costs related to initiatives follows the revenue. So you have that aspect in terms of matching. And then I think the second thing I’d say is just think about our scale.

We have over $1 billion of EBITDA. And so whatever numbers you put around the investments, whether it’s launching Contemporary or it’s global expansion, again, I think relative to what we produce here currently, it’s still some ways modest, and to Gary’s point, needs to be material, and we need to be thoughtful about it as we always are..

That’s very helpful. Thank you so much and have a good holiday..

Operator, are we still there?.

I will check in with it..

Michael?.

You are here..

You are here. Yes, I don’t see Kwanda [ph]..

Did we lose the operator?.

I am here. Our next question comes from the line of Steven Zaccone with Citi. Your line is open..

Good evening, everyone. Most of my questions have been answered, but I wanted to just circle back on supply chain. It would be helpful if you could just quantify maybe how much the supply chain challenges weigh on revenues in the third quarter, maybe how much is that impacting you in the fourth quarter.

And then as we look to next year, like if supply chain continues to be this pain point for the business, talk about your ability to maybe diversify into some other areas, some other vendors, just what are the other options you can pull?.

I think if you go to diversify, you got to go to another planet, think for Elon Musk. But there is – you have a pandemic, you don’t know where it’s going to hit. You don’t know what country it’s going to hit.

You can move from Vietnam and that could be the worst thing you do, right, because Vietnam now it’s going to get on the other side of the pandemic, and you’re going to put yourself in some country that maybe is hit by the pandemic. So again, you can’t play short-term here. And we’re relatively diversified.

Can you take a company like Nike, I think what was it 40%, 50% of the business in Vietnam. Our business is 20-something. Yes, 20-something percent in Vietnam. Vietnam has great craftsmanship. They have high quality. They have a committed labor force and a great culture, and we get some of our best products in the world out of Vietnam.

We’re not going to leave Vietnam because there was a temporal issue like a pandemic. That would be a really bad business decision. The pandemic didn’t permanently damage Vietnam. It temporarily hurt Vietnam. It’d be like saying, our bedroom furniture business was down because of the pandemic. Let’s get out of bedroom furniture.

Like it’s not how we think about the business nor how we should think about the business. So as it relates to the supply chain, the supply chain is going to be what it’s going to be, every kind of business in the world is impacted by the supply chain. So, you kind of ride it out, you learn from it. You react intelligently.

You don’t panic and do dumb things. And so yes, we’re fine with this. This is like – there is always – in business, there is always a ship that goes wrong all the time. It’s not what happens, it’s how you react to it that matters long-term. So I wouldn’t make too much out of the supply chain. Like the news is making too much out of it.

Everybody is making too much out of it. So did we lose revenue in Q3? Of course, we did. Did we lose revenue Q4? Of course, we did. Imagine what our numbers would have looked like had the supply chain not blew up in Q3. I mean if you think about it, at the beginning of Q3, Vietnam shut down the entire country, 27% of our business.

By mid-Q3, it was up to 20% production. By the end of Q3, it was up to 40%. By mid-Q4, it’s up to 80%. Up to 80% doesn’t mean you’re really at 80%. It means production is at 80%. Everything that was at zero and then the 80% when you were at 20%, the 80% that didn’t get made and then the 60% that didn’t get made when you’re 40%, that’s all in the backlog.

So it takes months, quarters, a year to catch up, but that’s – it is what it is. It’s okay, life goes on, business goes on. It’s not strategic. It’s temporal. So I just wouldn’t make too much about it unless your clients are short-term hedge fund traders that just want to play us week-to-week or month-to-month or quarter-to-quarter.

Tell them don’t buy our stock..

Yes. Appreciate the color. Your details, though, do help to contextualize the situation. So I appreciate that. And then just to circle back on the capital raise, a follow-up on the previous question.

How do we think about some of the priorities for cash now? Like as you go international, do you think having a little excess cash on the balance sheet is more prudent for the business? Just how do we think about those priorities now as you kind of go global?.

I think everything we said in the press release, nothing has changed since we did the press release on the – as it relates to the $2 billion term loan. So nothing to say. We don’t need the money to go international. We don’t need the money to go global. We have a 70% plus ROIC. We turn investments into cash pretty quickly.

We’re going to throw off a lot of positive cash flow this year. And if things remain in some kind of current normal directionally, we will throw up even more cash next year. And so we – you read the press release, we will tell you exactly how we’re thinking about the $2 billion..

Fair enough. Thank you. Happy holidays..

Thank you. Happy holidays, Steven..

Thank you. Our next question comes from the line of Max Rakhlenko with Cowen and Company. Your line is open..

Great. Thanks a lot. Congrats on a really nice quarter.

So first, can you maybe help us sequence some of the major projects the team is working on next year, for instance, Contemporary, World of RH and some of the other concepts that you discussed in the letter, just so we can have a better cadence about growth throughout next year?.

Yes. Right. Contemporary will be kind of late spring time will be the launch of Contemporary.

Interiors, Modern, Eri, late spring, early summer?.

Yes..

Late spring, early summer, kind of sequence. Think about – I’d say those three books and collections will all kind of happen in the first half. It will be kind of staged a bit. Contemporary will come first and then and Interiors and Modern. And then the launch of the global expansion will happen kind of late spring, early summer with England.

The Guesthouse will kind of open late spring, The unveiling of The World of RH, late spring, early summer. About the time other things are happening, right, that will be coordinated with Contemporary and….

Guesthouse..

Yes, Guesthouse and RH1 and RH2 and RH3 and all this stuff goes on The World of RH..

The platform..

So, the platform – digital platform has to be kind of ready to go. So, when all that happened is The World of RH will happen. And then RH1 and RH2 and RH3 will be available for charter in beginning kind of the late spring time. I mean RH3 will be available some much sooner.

It’s about – we are stopping to see it in Miami on the way back, and we think it’s probably just about done, right, team. And so I am going to take the first cruise, so I am going to christen the boat. I am not really a boat guy, I get seasick. But I thought it’s better for me and I am paying full price, everybody knows, for the charter.

And so I would rather have maybe the guinea pig in case – like the boat hasn’t been out on the water for a couple of years with COVID. So, we use the time to kind of re-imagine the boat and take it to another level and tie it into the aesthetics of RH1 and RH2.

And so now they all look like a family and RH3 aesthetically is aligned with that, and we have made some major enhancements. So, if you have seen the video of RH3, that was up, it looks like a whole new RH3, it’s super cool now. It was a super cool boat when we bought it, but it’s really, really cool.

But we want to make sure the service is right, the food is right and all that. So, I will be the guinea pig on that over the holidays, but that will be presented on the website. And then RH in-your-home is happening. And we have such a great meeting, we kind of green-light it. As fast as the team can go, we will go on RH in-your-home.

So, it’s all happening sooner than later this year..

Got it. That’s helpful.

And then maybe one that’s a bigger picture, but how do you think about price elasticity for your shopper, unrelated to supply chain and the inflation-driven price increases? How do you view your ability to take pricing longer term and also continue to launch more and more higher-end products as you guys climb the luxury mountain?.

Yes, that’s exactly what it’s relying on, right. It’s relying on the taste and style uniqueness and differentiation, the desirability that’s driven by that. It’s driven by our ability to present it in a really beautiful and way that drives desire and the quality, right.

So, the design, the product and uniqueness of the product, the presentation of the product, the quality of the product should all – we should be on the same path we have been on the last several years.

We don’t think we are at a point where you say, “You have the quality everywhere is at its very best.” We think we can continue to evolve the quality and take it higher. We will continue to trim from the bottom, so we don’t over the long-term, look like some good, better, best assortment. We want the assortment to represent the very best in the world.

We think we are on that path. And we think as we continue the climb of the luxury mountain, and we continue to elevate everything, right, the perception of the brand.

When people – when you open or digest and you see a multipage story about this titled RH lifts off and you read about RH1 and our digest, which, by the way, the last jet they printed in the magazine was 25 years ago – 20. Yes, it was the Getty’s jet, the Jetty, which is 707 or 727 that was redone.

So, when I say the brand has what our digest kind of markets as one of the best new beautiful private jets that says something about your taste and style and thought leadership and creativity. And I think when people see RH3, it’s going to do that.

And I think the game changer and the dots don’t connect, it’s like most of the world has to see it to believe it. We say internally, we have to believe it to see it because it’s our vision. But it’s hard to – it’s hard for anybody who hasn’t seen what the Guesthouse is going to look like to really get it.

And when the world sees the Guesthouse and understands what we have done there, from a hospitality perspective, and not just the rooms, the rooms extraordinary. The world has never seen rooms like this. There is things that have never been done in hospitality and not different to be different, different to be better, right.

And there is things that are really extraordinary. And you kind of wonder like, why hasn’t anybody ever done this? Just because people start to do what they have always done, and then they try to protect what they have done and they stop inventing and innovating.

And so we think the Guesthouse could be the next new market, right, like no different than when intriguer invented the boutique hotels. This is kind of a completely new thing. There is nothing like it.

And when you look at the consumer-facing hospitality part of it, from a restaurant point of view, I really think it’s one of the most innovative new restaurants in America, not because we are trying to be fancy or fuzzy. It’s just the kind of food you can eat every day done in such an extraordinary level in a dramatic fashion.

You have never seen a restaurant like the Guesthouse restaurant or the Guesthouse kitchen or the Guesthouse dining room. We don’t know what to call it yet. But – and then we got another intimate experience. We have got a champagne and caviar bar that the world has never seen, that’s part of the Guesthouse.

And when we opened our second Guesthouse in Aspen, it’s got the first RH bathhouse and spa, and it’s a bathhouse and spa that the world has never seen. So, when the world kind of sees these things and those two will elevate the brand. They will change the perception of RH.

It will make RH more desirable even though a Guesthouse won’t have any of our furniture. The idea of the Guesthouse, the execution of the Guesthouse will elevate the brand and position RH in consumers’ minds, we believe, as a thought leader, as a place maker and a tastemaker. And that will make our brand more desirable.

No different, by the way, than our new galleries make our brand more desirable and render our product more valuable. It’s just a different way to communicate than most people do. We – like said inside our company, it’s not what we say, it’s what we do that defines us.

And although we are the only business of our kind that doesn’t participate in social media, we don’t have an Instagram account, we don’t have a Pinterest account, we don’t have a Twitter account.

Because of the work we do, we are the most Instagram brand of our kind in the world, the most brand of our kind in the world and the most tweeted brand of our kind in the world.

So – and I think these investments we are making and things we are doing and the halo we are going to create, like I think about it, we talked to someone the other day, about the fact that you think about a brand like Nike, right. And Nike celebrates great athletes and great athletics.

And they don’t really talk to you about the rubbers, the air sole or this thing or the shoelaces or they don’t market that. They have LeBron James wearing their shoes. They have Serena Williams. They have the best athletes in the world, and they celebrate athletes and great athletics. And they make a massive investment in those things.

And it defines and elevates their brand. Well, think about our galleries, think about our restaurants, think about our guesthouses, think about our residences, think about RH1, RH2, RH3, Think about our investment in creating integration of food, wine, art design in Napa.

When you see what we are going to do in Europe at RH England, today, we were out in the French country side and saw the most incredible chateau I have ever seen in my life, not that I am a chateau expert, but I haev seen a lot of pictures, let’s just say.

And like we might do RH France and people were going to go like, “Are people going to really go to shop there?” It’s – people are going to be inspired by it. And anything we have done like that in our – we have always figured out how to monetize those kind of things.

And the Guesthouse in the beginning, I never thought I would make my thought if I can break even in the Guesthouse and do a good thing. I think the Guesthouse is going to make more money with 10 rooms than a lot of our galleries, because it’s that good.

And so when you think about price elasticity, you have got to think about all of these things that we are doing and all these investments we are making that will render the RH brand more valuable, that will render our products more valuable and more desirable.

And yes, we think we are on a path in our industry that’s not too dissimilar to the path of Apple, the path of Nike, the path of Tesla, the path of people who really, really built the best brands of their kind in their industries, and they became the best brands in the world. So and that gives you a lot of pricing power.

Everybody thought the Apple phone was really expensive at $400 when the Razor flip phone was $69. Well, yes, you buy the new Apple phone today, and it could cost you $1,200 or more. Who would have thought people would spend $1,200 for a phone, who would ever thought people would spend $20,000 on a Birkin bag or more.

That’s all about – so we are just not anywhere near the top of the mountain. And when you get to the top of the mountain, you have even more pricing elasticity..

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital. Your line is open..

Hi, good evening. Great results, and I would add that the new RH Jacksonville store looks really nice, having had a chance to visit that.

My question was just going to be about some of the changes here in the leadership team and Gary, if you could address DeMonty’s retirement from RH and how the team is evolving after that?.

Sure. Well, look, DP and I worked together for 26 years. You got to remember, DP and I were together at Williams-Sonoma. And so, look, he will remain one of the most important figures in this company.

His quote will remain in my presentation when I talk about our values that the right people are our greatest asset and the wrong people, our greatest liability. And he has built an incredible team. When you look at three of the people at the table here with me today that have stepped up as DeMonty works through this transition at the end of the year.

But Stefan Duban is our new Chief Gallery Officer and really Chief Customer Officer and anything that’s customer-facing reports to Stefan.

Is it 21 years now?.

Today..

Today. Oh my God, it’s what – your timing is great, Brad. Stefan is right here today. We are all in Paris. And today is his 21st anniversary. Stefan started as a part-time Christmas seasonal in our Thousand Oaks store.

And he has worked his way, I mean he has been close to the customers any of us – more closer to customers than any of us, which makes them the smartest guy in the room. We would like to say those of us who have gotten farther and farther away from the customer generally get dumber and dumber.

And the only way we could not be obsolete to listen and learn to those people that are closer to the customer. The smartest people in the company that’s closest to the customer and Stefan has been one of the closest people to customers. He runs some of our most important galleries, and then took over home delivery, brand home delivery.

He helped get Fernando on the team which kind of changed everything. They are huge advocates of each other. And Stefan was our Chief Galleries Officer under DP, and Stefan has got his own unique vision for where this should go and as he should and things he could make a big difference.

So, he is not taking over as a caretaker, he is taking over as a visionary and a leader that’s going to take things to a whole new level and as DP would expect of him, right. And Fernando, who is sitting right next to him, whom he helped kind of get here.

You guys have heard Fernando story came to America with $5 in his pocket after the passing of his father.

He came from Colombia and worked as a landscaper, worked as a night janitor in Kmart and then figured out how to buy – saved enough money to buy a delivery truck and started delivering furniture, and then went on to build this name Fernando Garcia, and he went on to build FGO Logistics, which was our number one provider.

He had 550 trucks across 26 states. And Fernando joined our company, sold FGO Logistics, became a wealthy guy, doing that will become even more wealthy being at RH. But it’s not really about the money for any of us that are here, it’s really about the work and about making a difference in the world.

But again, he is, thus far, has been the greatest leader we have had in the supply chain. And now because he has the most experience, because he spent mostly home delivery, but he is the most resourceful person I have met.

He and Stefan and Sandy, who has stepped up, Sandy Poland, who is our Chief People Officer, 14 years with the company, Sand, was one of our field leaders and then went in under DP and ran our – she has been with DP the whole time, ran all of our customer care centers, and now leads all of human resources and the people functions in the company, another force in nature.

And another person like Stefan and Fernando that has her own unique vision for where that function on go? And so, it’s a new team and yet a very experienced team. So, they have Sandy, 14 years here, in our culture, Stefan, 21 years here in our culture, Fernando, only – what 2.5 years, 3 years in our culture now..

Yes, 7 years in our....

Yes. And then 7 years as a partner of RH, vendor, but a partner of RH with FGO logistics, so, he has really been here like almost 10 years. And so we feel really great about the team. And then we – now we just have like Eri and Jack and I have to keep up with these three.

The – we say in our company you have to ask yourself are you a fox or an ox, right. Like an ox had to have usually a cart behind them with a bunch of rocks. They are dragging up the hill. And fox has a bunch of rabbits that you are chasing. And these three are like rabbits. They have got new ideas, they got new – they have got a lot of energy.

They have their own visions, and they are making all of us step up our games and move faster, think harder and try to remain relevant leaders around – next to their passion, drive and determination. So, I would say team RH has never been in a better place. All this love and respect to DP. He will be a friend and a partner for life.

He will be available to us any time we want and so – but I love and respect DP and his family.

And he is a man that has given his life for his career, and it’s had an incredible career and been best for an area that some of the longest guest partners have ever had in my working history, and they both played a big part in getting this brand to where it is today. But in all things, everything evolves.

Someday, these guys will be running this without me. Not anytime soon, it’s based on my calendar, so just not a prelude to anything. But I don’t think any of us could be more excited in the team. And this team, we had our first kickoff as a team, a new small team were traveling together this week. We were together last week at an off-site.

We spent three days on our vision, values, beliefs and culture. And we are very much in sync. And I think everybody on this team renders every other member of this team more valuable..

That’s great. Thank you so much Gary. Congrats everyone and happy hours for Stefan..

Great. Thank you..

Thank you. Our next question comes from the line of Seth Basham with Wedbush. Your line is open..

Thanks a lot and good evening. I just want to circle back to discussion for about the near-term for starters, just making sure I understand some of the moving pieces. Jack, you said that the costs of initiatives will follow the revenues.

I am just wondering if you meant the opposite that the costs will precede the revenues, especially based on the fourth quarter guidance that implies that operating margins will increase on a 2-year basis at a much slower pace than the third quarter..

Well, I am talking about initiatives. So, if you open a store, you recognize the rent expense, for example, of that store, let’s say, it’s an international one. When you open it, you don’t – again, costs beforehand lot of times or many of the costs are capitalized.

So, as it relates to Q4 though, I think one of the things to keep in mind, if you just look at sequentially what we have in the quarter in terms of just the sheer revenue dollars, right, it’s a lower revenue dollar amount than Q3, it’s one of the dynamics that’s impacting some of the operating income.

And again, there is going to be some quarterly variability here and there. I think just focus on the year trends, the long-term trends in our outlook and where we are going. I think there is a little bit of noise here and there. There is going to be some timing differences here and there. I don’t think there is anything to read into that..

Got it. Okay. And just a follow-up, obviously, you are not giving guidance for 2022, but thinking about some of the additional costs that are shifting from 2021 to ‘22, like the source books now you are restarting.

Should we think about the revenues associated with the source books following the mailings such that there could be some cost pressure in the first half of the year?.

Yes. I mean that’s how it works. When we mail the books, you recognize the initial advertising cost, and then you generate demand following that. Again, that’s just quarter-to-quarter timing. Again, for the year, we are launching, as Gary said, in the spring and early summer.

So, I think as it relates to that investment for Contemporary for interior for modern, I don’t get there..

I think, I mean you won’t get 100% return on that investment in the first 12 months, like we really think about our source books like a 12-month investment, right. We will mail it and then we will mail it again in 12 months. Some years, we mail a second book. I think this year, we will probably mail one because we haven’t mailed in so lying.

But it’s generally in the past, we would have amortized the books over the life of the book and call these books 12 months books.

Because we are going to launch them kind of early spring – late spring, early summer, you won’t get really any revenues in the first quarter, and you will get some revenues in the second quarter, but you will take all the costs in the first half. So yes, so that will be a de-leverage.

And then revenues should start to ramp in three and four, and then you will get leverage in the first two quarters in the following year, right, because you will have it wrapping around and how it should also have to think about our business and just give the timing of demand and then you have timing of revenues, which will lag demand, because we have got a high special order business, and you have got to deliver the stuff at the customers.

So yes, I mean those are just kind of fundamental timing things in the business. Again, they are not strategic.

So, the worst thing than any company could do in the home industry coming out of this pandemic, cycling things, starting to invest again is even think about this shift, because you will start making short-term decisions and screw up your long-term strategy.

So, like I am not going to sit here and worry about the fact that ad cost is going to be massively de-levered in Q1, Q2, mostly Q2, depending on when the books get in and all of a sudden try to stagger mailings or do some weird thing like that. We want to create demand as fast as we can and as much as we can.

And we shouldn’t be sitting here going, “Oh, let’s wait three more weeks and mail the book at the beginning of this quarter or something like that.” That’s just dumb stuff, right.

And even Elon Musk has come clean on, “Hey, going to write letter.” I guess the people picked that up and produced to say, we are no longer going to try to jam all these deliveries at the end of a quarter and create costs that you would never have and kind of pack in deliveries at the end of the quarter and just pull revenue forward and do it at incremental cost.

And so we have got a really clean model. We don’t do stupid things. And again, we invest with a long-term view, and we are not a quarter-to-quarter business..

Completely understand. And then bigger picture, Gary, obviously, there are a lot of demand tailwinds right now, but there also has been some stock market volatility recently.

Do you see that at all being a demand risk or interest rate increases potentially being a demand risk into 2022?.

I think it all depends again what the Fed does and how this whole thing gets managed globally. And stock market volatility, the downside has never been good for our business. And the high end is not really good for luxury. It’s not good for big ticket. So, it is what it is. I don’t know how to control that.

And interest rates rising generally can slowdown housing and other parts of the economy. And that’s never really a good thing. But that’s what past history would say today. So, I am not telling anybody anything they don’t already know.

I think what really does happen to interest rates is the Fed correct that this is transitional inflation, is it going to go back down, will the supply chain issues go away, what will happen, I don’t know. Everybody has got their own guess.

We just try to build models and kind of a series of plans to say if this happens, what’s our move, if that happens, what’s our move, if that happens, what’s our move. And one of our scenarios will kind of unveil itself. So, we have got a plan for all the scenarios. We just don’t have a control on those kind of macro things that happen.

We just have to be prepared for whatever happens and be able to optimize and outperform other people doing what you are doing, take market share, grow and keep investing in the brand and build a better brand long-term.

And there is going to be tailwinds or there is going to be headwinds, just like there is going to be rainy days and there is going to be sunny days, like none of us have control over that. So, we can decide what to do on those days..

Of course. Thank you very much and happy holidays..

Happy holidays..

Thank you. Our next question comes from the line of Cristina Fernandez with Telsey. Your line is open..

Hi, good evening. Thank you for taking my questions. I wanted to ask about marketing. On the letter, you commented about a national advertising campaign, which I think is the first time I have heard you comment on that.

So, maybe any thoughts around that and marketing in general, if you have a lot of innovation next year, how you are telling your customers about those..

Yes.

You have seen us in the past when we do major launches, we usually do some kind of a print campaign with the kind of shelter magazines, because that’s kind of fishing where the fish are, most people who are designing a home building, a home – decorating a home, furnishing a home are looking at magazines or whether it’s a printed one, whether it’s a digital one and so on and so forth.

So, we will have some level of investment in that kind of marketing, print, digital and things like that, that tell people about Contemporary, because it’s really new. And so we want the world to know about it. I think it’s our best work. So, we will stretch that out and make sure as many people know about it, relevant people that know about it.

So we know, as some people ask me, why don’t you advertise in Vanity Fair. Well, it cost 2x or 3x more than a shelves or magazine. And it’s people that are remodeling or building new home or design a new home aren’t necessarily reading Vanity Fair for that reason. We have got a real defined market.

So, we would like to say we like to fish where the fish are. Almost everybody I know that’s doing anything in their home is they are looking – I mean, now there is more resources, there is interest, there is other things that people are looking for.

But still, everybody is doing a home, redesigning the home, they are looking at the magazines, whether it’s in digital format. They are looking at print format. They are still tearing things out or any things on their Pinterest board based on what they see and what they think the trends are so – and just as much.

So, based on what RH is presenting in source books or online or in our galleries, we just try to kind of make sure everybody who is somewhat interested in the home and is investing in the home, we have a net that will let them know you should really see this before you buy anything..

Understood. That totally makes sense.

And my follow-up question is on the inventory, sort of like, I guess slightly down from the second quarter, but can you comment on how much of that do you actually have on hand versus in transit in the water that you will get later on?.

Yes. Good question. Jack will answer that for you..

So, we have, as you know, we ended the quarter with $634 million, and $427 million of that is owned inventory on hand..

So, maybe you get the percentages of 2 year….

2-year percentage..

One way to look at this, because obviously, the comparability versus 2020 is – gets a little skewed here and there. The way we look at it is on a 2-year basis. So, I think if you look at Q3, our revenue was up 49% on a 2-year basis, and our owned inventory was up 27% on a 2-year basis.

So, still showing that we are behind from relative to growth of the business..

Thank you..

Thank you. I am showing no further questions in the queue. I would now like to turn the call back over to Mr. Gary Friedman, Chairman and CEO, for closing remarks..

Great. Well, thank you, everyone, for your interest and for your questions. I also like to just really wish everyone a happy holiday. Hopefully, everyone is going to get to spend time doing what they love with people that they love and hopefully without masks or Omicron, if I have even said it right.

But we wish everyone a happy holiday, and I just want to thank our team, not just across the United States, but around the world, that supports our business for all your really efforts to help position RH as the brand it is today. And we look forward to a great fourth quarter and an exciting 2022. So, thank you..

Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect..