Thank you for standing by. My name is Riana and I will be your conference operator today. At this time, I would like to welcome everyone to the RH First Quarter 2023 Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.

I will now turn the call over to Allison Malkin of ICR. You may begin your conference..

Thank you, Riana. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2023 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 opinion 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 Gary..

Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to.

We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect.

We also appreciate that this climb is not for the faint of heart, and as we continue our ascent the air gets thin, and the odds become slim.

We believe the level of work we plan to introduce this year inclusive of our new Collections, new Source Book design, new Gallery design and the introduction of RH to the UK in an immersive and unforgettable fashion, will continue to demonstrate the imagination, determination, creativity and courage of this team, and the relentless pursuit of our dream.

Over 20 years ago we began the journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world.

The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations.

Lessons that can’t be learned in a classroom, or by managing a business, lessons that must be earned by building one, or, by reaching the top of the mountain. Onward Team RH. Carpe diem, Gary. At this point, operator, we’ll open the call to question..

Your first question comes from Steven Zaccone with Citi. Your line is open..

I wanted to start on the need to take the increased markdowns. So, Gary, I was just curious if you could comment what you saw in the business over the past couple of months that this was updated in guidance now versus factoring into your original outlook when you spoke to us at the end of March..

Sure. Well, I think what we've seen is an increasing headwind from a demand point of view.

And a slowing of our cycling through our discontinued inventory, as we've increased our markdowns to begin to cycle through this product to be prepared to move the old product out and bring the new product in, and then just projecting what it may cost us to cycle through transforming all of our galleries.

Remember, we've got product in all of our galleries that we have to kind of do sell -- floor model sell-off and transition through our outlet business. We now believe it's going to cost us more from a markdown perspective to move through that inventory in this environment..

Okay. Fair enough. Then the follow-up question I had was on the UK market opportunity. I think it was a couple of calls ago, you talked about the potential size of the UK market being as large as California.

I guess, on the cusp of opening England now, how do you think about the opportunity now? Maybe how do you think about the competitive environment, how you plan to merchandise this first gallery? Anything you could say would be helpful. Thank you..

Sure. I don't think we see anything that's different from how we've always viewed the opportunity. I think the timing is from a -- the macro environment is somewhat different. So, our initial expectations are more muted as you would expect. And from a competitive environment, I don't think anything has changed.

Just as we become more connected to the market, as our people have been there longer, working, training, et cetera, developing early connections and relationships with interior designers, the trade industry and so on and so forth. We believe it's going to be a huge opportunity for us. But there's also a lot of unknowns in a new country.

So, we believe we're being cautiously optimistic as we dip our toe in the water and begin. And I'd just remind everyone that RH England, it's really -- it's a unique kind of move in the market, a unique play in the market where our goal is to create the right conversation.

And not -- I wouldn't say RH England is our play to maximize commerce originally. That will happen as we continue to open RH London and in other parts of the UK. But how do you think a brand and introduce a brand to the United Kingdom and broader Europe in a way that positions the brand correctly for the long term.

And if you stand back and think about the world and think about the world of luxury brands, I mean, basically, all the luxury brands in the world are from Europe and the UK, mostly France and Italy. And if you look at what are the true luxury brands in the U.S., you can argue who really makes that cut.

I would argue that the brand that's most clearly identified as a luxury brand from the United States is Tiffany, right, because they haven't pushed their brand down or to broader markets as others may have. And the French just bought Tiffany a few years ago, right? So, I wouldn't say we're particularly seen as -- the U.S.

is seen as the place makers of the world. And because we've usually looked to Europe for inspiration, and the U.S. brands, I'd characterize are more followers than leaders. To build a true luxury brand I think you have to be seen in respected as a leader, a thought leader, a place maker, tastemaker, however you want to characterize it.

So we're approaching our introduction in an entirely unique and one-of-a-kind way, by opening store somewhere no one has ever opened a store, introducing a brand in a manner that no one has introduced the brand. And there's a level of risk to redefine a brand.

There's a level of courage that's required to kind of go from where you are to where you want to be. And in our case, as we characterize it, climbing the luxury mountain. And so, what the world will see in a few weeks here is, I think, the most unique and inspiring retail experience anywhere in the world, or none.

And I think it has a chance to be the most talked about retail store and the most admired retail experience of anything anybody has ever seen. And prioritizing, creating the right conversation versus maximizing the commercial activity in the market initially, we believe is the right sequencing to build the brand. So, it's very unique.

It does open the entire market from an online point of view. But we're an hour and 45 minutes outside of London, right? On many levels, people would say this makes no sense.

But that would only be looking backwards and saying, well, no one's ever done anything like that before, why would it work? Why would -- everyone has had different goals than we've had. Again, we're on a one-of-a-kind journey here. We're on a climb that no one's ever attempted to make.

And we're coming from a place that has only had -- the biggest economy in the world, you can argue, we only have one real luxury brand and now the French own it. So, it's a different path. And I don't expect it to be understood initially. I do believe it will be respected and it will inspire people eventually..

Thanks for the detail. Best of luck with the opening..

Thank you..

Your next question comes from Simeon Gutman with Morgan Stanley..

Hey, Gary and Jack. How are you? So, I have -- maybe I'll make a two-part question, one question. Just to confirm, it looks like the domestic business seems to be hitting your forecast or bottoming outside of a potential, let's say, consumer recession. So that the change to the guidance other than the markdowns is mostly the Europe inclusion.

And then my second question, this is more theoretical thinking about the EBIT margin of the business with the mix of Europe, U.S. reaccelerating and then hospitality and luxury coming into the mix, getting back to, let's say, 20 plus, is that going to be a much longer time frame? Or how should we think about that? Thank you..

I think it depends on the macro. If we get stability and there's any kind of the headwinds, stop and decide, you're going to have a new baseline. And I think it depends on how well we've executed this next major product transformation. I mean, we’ve -- we went through a transformation like this.

We generally do in every 7 or 8 years as we've continued to elevate the brand and expand and just move the assortment upwards. So today, I'd say this is the best work we've ever done. We're launching it into maybe the worst home environment at the high end that I've ever seen in my career.

I've never seen luxury housing down at the levels we've seen from recent reports and we're at 20-year high interest rates. So there's some level of caution. I can't -- we can't control the macro. But I'd say, I'm more optimistic than less optimistic about our model long term.

I don't see any reason that we can't return to 20% plus mid-20s operating margins long term. We have to prove out the European strategy and expansion. I think we have to be smart how we allocate capital and how we build that infrastructure and how we keep things simple. I think our strategy -- I think it's unique.

We're not duplicating corporate roles in Europe. We're not looking at Europe as a separate business with a separate infrastructure besides our supply chain distribution piece, but that too is even an extension of what we do in the U.S.

So, we look at the world differently than I think most people before us and historically have looked at a global expansion. I mean, we kind of look at countries in Europe like states in the United States, suppose, except there's -- the borders are different. There's some uniqueness there. But we've run our business very well in North America.

And from our view, we're building really a global leadership team and kind of a global organization that will lead and oversee the business in an identical way that we do in North America, except that there is some unique differences within the countries. So, we try to keep it simple.

And if we get any kind of reasonable demand and business, we should be able to begin to leverage the initial investments in supply chain and so on and so forth that are -- that create some deleverage initially. I think, we have a whole new whiteboard really to kind of address how to physically open the brand in the U.S.

So, we don't have to reverse engineer that. We don't -- when I began here, we had 106 legacy stores that weren't designed for the vision of the business that we had.

And so, we've had to reverse engineer the thing and go from taking a -- really nothing about the infrastructure was correct for the brand with -- here we've got clean slate building the right infrastructure for the brand. They deliver furniture in Europe. That's not unique to North America. Furniture gets delivered every day.

There's all kinds of things that happen. So, what we're not entirely sure of is just the consumer is generally aware of our brand at the high end. But human -- we're creatures of habit. So we have habits of shopping different places and going to different places when we think about our needs and wants.

And so, we have to kind of change those habits and identify RH as a more inspiring and attractive place to allocate capital from a consumer point of view. And we think our assortment, especially as you see us go through this transformation, over the next several months, we think it's unmatched in the world.

We think our design leadership, our quality and then the value equation for that design and that quality, we think our value equation is as disruptive as ever.

And if I look back and I'd say, where did we maybe kind of not optimize our business the last couple of years with the tariff hits from the cost level, the supply chain, costs that went up all through COVID, the price changes that we're taking. And then, when you have the easy business, I think our value equation suffered.

And I think our value equation is going to be swung in a direction where it will be unmatched in the marketplace. And that's really important, no matter what country you're in, right? People first look at the design of a product. If the design of the product is not good, you just don't walk up to it or you turn the page.

So, you have to have great design. People have to see and be attracted to the product or nothing else matters. The next thing you have to win on is you have to win in quality. And so, consumers are going to look at the design, if they love the design, they're going to get closer. They're going to look closer.

They're going to walk up to it, touch it, interact with it, and they'll make a perception about quality. And then, the next thing they'll do if they're interested is they'll look at the price. And for that design and that quality, do they perceive that product is a good value, a great value or not a value.

And then that will create the decision to purchase or not purchase, right? And that's why everything we do is through a lens of design, quality and value.

And I think if I look back and critically look at what happened over the last, call it, three, four years with all the conflict with China, the tariffs, all the dislocation of supply chains and all the increase in freight, increase in raw materials, increase in product costs, so on and so forth, and then, an easy demand environment.

I think the world took prices up, and we all know that because inflation went to 40-year highs, right? And that is going to affect things. And I think we're probably somewhat too arrogant in our ability to raise pricing in an easy demand environment.

And as the easy demand environment has waned, and it's required us to kind of really challenge, is our value equation going to create the level of demand that we believe is right for the business. And so, that's -- I think people are going to really respond to this new product transformation. I think it is the best design we've ever done.

The quality is really outstanding, the level of detail and the work we've has gone into it, and because we've now had some experience with Italy, with Italian upholstery, Italian sofa, so on and so forth.

In other places, people see that we actually can scale and have the ability to create efficiencies at the higher end of the market that our value equation is going to be significantly better, at very high margins. So I wouldn't say the value equation is going to result in a lower margin structure than we've run.

It may result once we've cycled through just the discontinued product that we have to move through to transition to this next kind of climb and step up the luxury mountain for our brand. I think it's going to be the best value proposition we've ever had because we've really worked on it.

And we've really just -- in super critical thinking and really challenging and really looking at the competitive environment and the current environment from a broad point of view, like up and down the food chain and to make sure that we are disruptive not just at the high end, we're disruptive -- I'm not saying going all the way down to the low end, but in some of the cases, I mean we're disruptive everywhere.

And I think when you do that, it's -- that's when you can get a real outsized share of the market..

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

So, coming along similar lines of Simeon’s question, Gary, I’d just love to hear an update on the contemporary line, fully realizing abnormal year, of course.

But just in terms of how many galleries it's been rolled out to and what the reception has been for the ones where it's been in place for I guess, an appropriate amount of time where it could be judged in terms of the reception of the….

Yes. I'd say, we're happy with the response of contemporary, considering the environment. It's only been rolled out to four galleries. And the reason why we didn't push it further is because we have so much more newness and so many more choices to think about moving into the business.

So, we've held some of it back because I think contemporary, I’d say, is our worst level of execution from what I'd say the disruptive value equation, right? I think that's where I'd be most critical of us.

Some of the price points just hit highs that, again, maybe in a tailwind and a COVID, everybody is buying everything and everybody wants everything tomorrow, and you're in the biggest migration from cities to suburbs and second-home markets in any history we've seen.

I think we're just too aggressive with the pricing, too arrogant maybe to some degree. And so, we relooked at that. We looked at the sourcing. We challenged everything.

And I think as you see how -- what's coming, whether you're looking at interiors or contemporary or modern, you're just going to see a real meaningful value equation connected to design and quality leadership that will change the trajectory of everything, including contemporary.

So contemporary, look, if you looked at it with the context compared to modern, things like that, off to a really good start. But if you look at it compared to the work we're about to unveil, you go, oh, it's just the next level of transformation from a product point of view. I think it's kind of -- it's like having a trump card.

And again, it's just going to win, we believe. So yes, I look at contemporary not just in isolation, but integrated with the broader thing, I think everything, every interiors and modern are going to look entirely new and different. Contemporary is going to also look pretty new and unique. There's a lot of new collections contemporary.

Collections -- contemporary really only -- what do we have, 5, full collections? Four full furniture collections. And that will -- I think it more than doubles, right? Yes. Yes. So contemporary, you're really seeing this next phase of a much more robust assortment..

Okay. Great to hear and really helpful. One other just quick follow-up. Gary, just curious to hear a little bit more detail on the format for Cleveland and Palo Alto. I know Palo Alto, I think, is a little smaller, 25,000 square feet. But anything else in terms of perhaps out with sorted, layup at the field.

Just curious, yes, to hear more about that format that you mentioned..

Yes. In a lot of ways, it represents an aesthetic change and a freshening, you'll see us begin to evolve away from gray and create really the platform for where the goods are going. We've kind of ridden the gray wave for the last, I don't know, 14 years or so. And there's big cycles in product.

People ask me a lot, "Hey, what's next? And how do you know what's next? And where do the trends come from?" And I like to say the trends in our business come from the dead, generations pass away their belonging to going into a estate sale to estate sale, be at the high end, be the antique markets, the antique markets really what drives the high end interior design market, then that is -- goes into the high-end reproduction market and then it starts to trickle down from there.

And if you look at kind of the major trends, whether it’s what I call the Belgian European look that we kind of exploded at a commercial level throughout the United States in 2009, 2010, 2011, 2012, 2013, the -- we made probably the biggest move in modern.

If you look at the mid-century movement that started to roll through, and you can kind of time things back. If you look at when are consumers generally in their peak buying years for furniture, it used to be 40 to 50s because there was a shorter lifespan. Lifespans have gotten longer.

If you look at the high end of the demographic that has the greatest access to healthcare and are more focused on longevity and fitness and eating well. I think it's now up to 87 years old, right? And so, what that does is it pushes up as people get older and more wealthy, there's more focus on the home until they can't really use their home.

They get to an age where they're just not really mobile and they can't enjoy as much. But if you look and say -- if you look back in the 1950s, you'd say 40 to 50 really the peak buying years for furniture, for real furniture.

People get to an age where they're in the second or third home in their life stage and they've done well financially, and they can afford to furnish a home. And then, if you look at the average life span and how old people are today, well, now those people are really old, right? So that cycle has now moved through.

Mid century, modern is a waning trend. The next cycle that went through was actually called contemporary. That's why we launched contemporary. The contemporary trend has really happened in the '70s and '80s and then in the later '80s, that trend has moved to kind of eclecticism and mixing more contemporary things with antiques and so on and so forth.

And so, if you just look at those cycles, the cycles tend to come back through. And so, what you want to think about is what is the right platform for kind of those -- kind of trends or those influences.

And not that we have a brand that's a trendy brand because everything gets filtered through an RH point of view and how we interpret the trends and how we present the trends.

But you -- I'd say -- as I looked at retail throughout my career, one of the things I've been critical of others is I've just seen people create a retail concept and then roll out 300 stores and 7 to 10 years later, they are all old and tired, and it becomes a dead concept.

And the platform that you place your product in is either going to render that product more valuable or less valuable. And so, as we look at our product transformation, and this is really the largest product transformation in the history of our brands, is our platform prepared to render that product more valuable.

Now the good news is, from an architecture point of view, they're beautifully architected and timeless buildings and they're perfectly balanced and symmetrical. They have fresh air, natural light. They're proportioned correctly, all the things. You wouldn't change anything to the building.

So a lot of the buildings we built, I mean, can arguably stand up to great historical architecture, it's all the same principles. But the way we skin them, different than what are the surfaces, the finishes, the colors, the background and how they're presented, what does that canvas that background look like is very, very important.

So, in a lot of cases, it's kind of an aesthetic surfacing kind of feelings that will be, I think, a more relevant and exciting canvas and background to amplify the product. But the logic of our galleries and how they're laid out is very scientific and architecturally timeless and relevant. So -- but it will look very fresh and new to a consumer.

No different than when do we do, like 2009, 2010, -- 2009, 2010, we took all of our galleries from silver sage paint and white trend and blond maple floors, and they went to all gray with gray wash floors. I mean that was 14, 15 years ago.

So I always think about the cycles are generational, right? And if you -- the definition of the generations is 15 to 20 years, right? And so, every 15 years or so, there's -- I think there's generally a major move to make. And every 7 or 8 years, there's also in between cycles of refresh.

So, this is the next major move from a product point of view and just making sure everything is presented on the right platform and the right canvas that renders the product more valuable.

So you'll see these new ones start to happen, then you'll see us go through the platform over the next several years and update, I'd say, every gallery to aesthetically just colors, walls, paint, finishes, possibly replastering the outside of galleries from gray to a beautiful buff color that we think is the right canvas for the next 10 to 15 years..

And Curt, it's Jack. One thing to add on your size question. Palo Alto is basically the same size as Corte Madera. So, it's -- I think you mentioned 25,000. It's not that, about 48,000 and Cleveland is just around the same….

Okay. Very informative. Thanks. And yes, good luck for the rest of the year..

Thank you..

Your next question comes from Steve Forbes with Guggenheim..

I wanted to ask about regional trends during the quarter.

Are you seeing any disparity by region, anything that either builds on optimism or caution right around the revised revenue outlook you guys provided?.

Steve, there's always regional differences, just echo prior comments. We don't really comment on those unless they're so massive that they stand out like oil markets one year did. So, there's nothing that we would share to read into any trends on that..

Then maybe just a quick follow-up, given your comments around the holistic value equation and improving across the portfolio.

Any comment on the potential magnitude of input or supply chain cost relief that you see on the horizon here?.

On supply chain costs, look at specifically, you're talking about like ocean freight or…?.

Any cost relief right, that would maybe help fund, right, a better value proposition?.

Well, we've been getting that. And that's -- I think Gary mentioned that at the last call or the prior call that and someone asked about select price changes. But we've already been seeing some cost relief that we're putting back into product prices.

From a supply chain and ocean freight perspective, I mean, we're at a point, given our turn and given the way our team approaches getting the best rates for the sailings.

We're in a -- it's accretive -- or on the other side, the ocean freight contracts, we’re past the bad news of May 2022, and we're into sort of a lift now, a slight lift in the margin from that good news..

Your next question comes from Michael Lasser with UBS..

Gary, as you had mentioned before that you might have been too aggressive with increasing some pricing. And in the past, you've talked about pivoting to serve a more affluent consumer and that might eliminate your addressable market.

Should we interpret some of your current thinking to be, hey, maybe we have to peel back to serve a broader community of customers at maybe lower price points because that would ultimately drive the sales of the business higher and in turn the profitability of the business higher?.

I'd say -- again, I start with the lens of design, quality and value, right? And I think we've been most successful when we won with design. We have the best design in the market. That design is at a quality level that's appreciated and respected. And for that design and quality, the value of equation is disruptive, clearly to the market above us.

If you look at any people left and right, massively disruptive and even disruptive to slightly below, just because we really have the biggest platform, right? So, we have the ability to have real scale.

And I think as we launched contemporary, been moving the brand up, when demand is easy, like it was through the event of COVID and the migration that happened because of COVID and the focus on the home because people can't travel and the shifts in spending big market segments.

When demand is really easy, and you can get higher prices, you tend to take them. And then, all of a sudden, it blips and it makes you reevaluate.

So, as we reevaluate just where our pricing was and has been, I just think through -- you got to remember, we went through a big pricing cycle increase because of tariffs, right? And then, we went through a massive supply chain disruption and raw goods, raw material costs going up, labor going up, everything going up, freight going up that massively impacted pricing.

And so, I'd say, probably we as probably anybody in our industry, optimize what you could get. And I think that you're going to see some people repricing things and trying to optimize whatever market you're going after.

So, ours is a little trickier because we're moving up, right? And we're trying to get a more affluent consumer and get a bigger piece of their wallet because they spend exponentially more in the home, not a little bit more, exponentially more. I mean customers above aren't worth a little bit more. They might be worth 10 times more.

You think about the peak of the pyramid. It's like flipping the pyramid upside down when you look at spending on the home at the really affluent levels. And so, we are still going after those customers. We've got to win there on design and quality.

And our value will be massively disruptive there because we're only -- the only platform with scale in the entire world in these products. And so, when RH creates a relationship with anybody from a manufacturing point of view, it's a big deal to those people because we can change their lives.

And if they put their product on our platform, it changes everything. But we've got to always think about that's a great value. If it's not a great value, people will look around. But if it is a great value, and they trust you for that value equation, they don't even have to think about it.

And I think in the age of the internet, you have so much more visibility, so many more prices -- so many more choices, it's harder to distinguish, I'd say, both design and quality online.

And -- but I think that all works its way out at the end because if you buy something and you thought it was really a great value and you get a piece of crap in the mail and the quality’s crap or the finishes crap, and it's not good, you're going to return it. You're never going to shop there again.

So that will all shake out over time, like all the marketplaces and all this other stuff. I think those will all really serve branded products that you know like consumer goods and things like that. You know you're buying some toothpaste or whatever you're buying, you know it's from the brand. It's what you buy.

And -- but when you have a lot of blind products, and our industry is, I'd say, more blind product than branded product. it's sometimes it's a little confusing for a customer. But it all works itself out. Like, if you go on to name your marketplace, there's just an endless aisle of choices. One, they're not curators.

Two, from a design point of view or not from a quality point of view and not from an aesthetic case point of view. So, our platform really is unique in the world today. And I think what we're doing next is going to prove that. So I think you're always -- every business is going like how big is that market? And where do I go and so on and so forth.

I think it's really difficult -- I think it's difficult for any of us in this home industry where all of a sudden, boom, your demand goes up 40 points, then it goes down 40 points then it goes up 40.

And all of a sudden, you can't -- you have too much goods, and you don't have enough goods and anything you can throw out there, customers want -- can you furnish my house next week and so on and so forth.

And then all of a sudden, you get on the other side of COVID, and then you compound that with the inflation, which required the fastest rise of interest rates in history, which firm grasp of the obvious, that's not good for mortgage rates or the housing market. And you go -- it makes you reexamine everything, which you should.

And so, I think, the key becomes how do you act on that other side? Like, for instance, people ask me about this all the time. Oh, you might be losing more market share, this and that.

Like, well, you have to say, what's the quality of the market share? Could we push a promotional button today? Can I start sending out sale emails like everybody else does? And does it matter whether you're doing whatever promotions you're -- call it site-wide promotions, everybody is trying to kind of create a veil of kind of non-transparency out there, you know what they're doing.

If you're promoting the business and you're sending sale emails, like you're going to be known as a promotional business. And you're also creating, I'd say, a layer of long-term low-quality revenues, right? Those will never be high quality revenues.

You've got to put categories on sale or whatever on sale to get those revenues, right? Well, you've got to put all those products on sale.

So, how many people would have bought your product at full price at really healthy margins? And then for the incremental lift, how much margin did you have to get back across everything that you mark down, whether it's site-wide or category or if it's only bed and bath or it's lighting? Now you're doing a lighting sale or now you're putting all this on sale.

I mean, interesting, not relevant, but what are your e-mails say? Like, just look at the e-mails and look at the sale banners on all the emails and look at the things -- Memorial Day sales, this sale, this sale, that sale, all hitting you right now. Those people are all going to affect their model long term.

I'd rather give away lower value market share long term, low quality market share long term, hold to our pricing integrity and our messaging that's more about design and quality and just transform the business for the next cycle. And if we're successful, which we've been -- I don't know, this is my 23rd year here. We’ve done this a lot of times.

We've transformed a lot of times. We've been through all kinds of cycles here. This is not a new leadership team. So, we like what we see next, but you just have to take a longer-term view. So, that's why I always say people ask me, should I buy your stock, and I ask them, are you a trader or are you an investor.

If you're a trader, you're looking for short-term episodic moments and ups and downs and trying to optimize. And if you're a trader, don't buy our stock because we're making long-term moves. If you're long-term holder and you want to be on a winning side, I mean, look at our performance over 20 years.

Look at our performance even over the last five years, and be a happy shareholder. Look at our performance. If you bought us during COVID or different times and you thought everything was going to stay that way forever.

Well, okay, maybe you're someone who hadn't been through cycles before, maybe you didn't understand the dynamics of COVID or you read the press and it said, it's the decade of home, it wasn’t the decade of home. That was like a god dam pandemic. That's what it was. It’s a temporal thing. So -- but now we're on the other side of it.

Now we’re in interest rates. What are the choices people are making and what are going to be long-term choices and what are going to be high-quality choices.

If I was worried about the stock price on a quarter-to-quarter, year-to-year basis, I don't know some CEO that had a short-term view and wanted their stock options to divest and sell out at the right time, I might push the promotional button. But I'm the largest shareholder of the Company. It's taken me a long time to get here, not going anywhere.

And we're going to do the right things that are going to reward long-term shareholders and investors. So just a different game, how we look at it and how we think about it. And we'll make tougher long-term decisions than other people will. We'll be an outlier sometimes on the lower end like right now.

We're clearly somewhat underperforming to other people because we're not pushing promotional button. But over the long term, I think you'll find we're going to be a big winner. And we're very confident about that. It's just during times like these, we look different. And then over the long term, we also look different..

Thank you for all that.

Just so we can calibrate our models and forecast properly, if you had to guess collectively, how much do you think you will roll back price? Is it going to be in the double-digit range, so on average, 10% across the assortment? Is that a reasonable guess?.

I wouldn't say we’ll roll back price at a broader level, right? It's -- again, we're going through a major product cycle.

Like, do you see us lowering price on the Cloud Sofa? Yes, we'd lower price -- we have -- when did we introduce the Cloud Sofa? 2015, right? So, we're in our eighth year, right? So, things in their 8ht or 10-year, like that, they start to wane.

And you're going to have more -- there's -- I mean, how many dupes of Cloud Sofa? Who doesn't get an e-mail every day of another Cloud Sofa knockoff on TikTok or on this thing or it's a famous sofa. So -- but it's also -- it's a sofa that carried us the last 10 years. It's not the sofa that will carry us next 10 years.

And not that I'm telling people don't buy cloud sofa. It's a great sofa. It'll be there the next 10 years. But I don't expect it to perform the same way. It will just find its new level, so. And we'll be more competitive.

But we also -- our manufacturers will be -- sharpen their pencils and everybody sharpen their pencils because they want to keep as much market share as possible. So I wouldn't think -- I wouldn’t call it a big rollback. I'd say -- I think of it really about a spring forward because there's so much newness.

You really got to kind of look at where the product is going, not where it's been. And so, -- and then also look at what is the current competitive environment and what does it take to be -- to win. And winning on a large scale generally means being disruptive.

And again, you have to kind of really look at it through the lens of design, quality and then value based on that design and quality. And I think based on the design and quality that we have coming, I think we're going to be massively disruptive, so..

Your next question comes from Seth Sigman with Barclays..

It's sort of a follow-up to that last question. But just thinking about last quarter, you announced some cost reductions, the $50 million in annualized savings.

I guess, just in light of the markdown pressures and your demand comments and that this could just last longer, which is not unreasonable, how are you thinking about the potential for further cost reductions and maybe other levers or opportunities to maybe address any other inefficiencies? Thank you..

Yes. I think we're always looking at that. So -- but look, we had a meaningful change in demand.

And whenever you have a meaningful change in demand, whether it's to the positive or the negative, there's going to be investments or you're going to rationalize costs, right? You're going to constantly -- we look at the organization every year and we try to rearchitect the organization based on where we think the business is and where it's going.

And we try to always look for efficiencies and always look for better ways to do things, so. But we had always known, look, if there's a meaningful step-down on the outside of it, we're obviously going to have to optimize the organization at that time. That's what we did.

So if look, if demand weakens again and so on and so forth, we'll make the right decisions for the business and try to optimize things and sharpen our pencils just as any good leadership teams would.

And I think a lot is going to depend on what happens with the macro, does the housing market begin to recover? And again, when you think about the housing market for us, you've really got to look at the luxury housing market, which has taken like a 10-point greater hit than the overall housing market, right? So, those are the key things.

But you really got to -- the key is, I'd say, it's about the goods, right? That's what we sell.

And if we're right -- if we're directionally right with the product and where we're going, we'll see some kind of inflection, headwind or no headwind, right? Is -- this product transformation, is it worth 5 points, 10 points, 20 points, I don't know, 30 points. Look at our history, when we've done these things.

When we've done these things, we've been a lot more right than wrong. And we've been able to inflect the business, so. And then, you've got to kind of put it in context with just this COVID cycle, the downside of COVID and then compound it with the rising interest rates and the collapse of the luxury housing market.

And say, when we hit bottom, okay, what does it look like as we come off the bottom? I mean there's history in cycles, right, everyone can look at. And so -- we really like where we are. I mean, yes, it’s a tough time. We have to make a lot of tough decisions and redesign the organization and part with some people, we did.

And those are tough decisions that you have to make in business. But the key is like what does it all look like on the other side? How are we positioned on the other side? Did we make good long-term decisions. We don't have to cycle all the sale emails that everybody else does. They have to cycle all those promotions.

They have to cycle all those sale emails. We don't have to cycle one of them. We have a lower base? We do. Could that mean we have a higher rise off a lower base? You'd think so. That's possible. We have a massive amount of new product coming. It's revolutionary from anything we've done. So, we really like how the horizon looks.

I wouldn't feel that way if I've been promoting for the last 6 or 12 months or however long everybody -- when -- it pivots back to promotional emails. But just -- you guys collect emails from everybody in our industry, I'm sure just line them all up. You haven't seen a sale email from us in over 2.5 years, close to 3 now.

When did you start getting sale emails from everybody else? When are they cycling those? How challenging is that going to be? How many more sale emails are they going to go to next? What are they going to do next to drive demand? Yes.

So, I think that -- yes, the next 12 to 24 months for RH is going to look very different than the next 12 or 24 months for everybody else in our industry..

Yes, no doubt. Can I just ask you a follow-up around the guidance? So you did raise the low end of the sales guidance for the year, modestly.

Help us with the message there in light of some of the cautious demand comments? Do we just interpret that as confidence and visibility and optimism around new product or the expansion? Just help us frame that a little bit more. Thank you..

Really two things.

One, what you just said, our confidence about the new product all samples got finalized, costing, negotiations got finalized, value equations got finalized, presentation, how we're presenting in the books, how we're going to present the stores, how we're going to cycle things, what the productivity per square foot of each area of our galleries are going to be? We get out to the detail level.

We're replacing this product with this product. What do we think how did this product perform per week at what margin? What's the new product is going to perform per week at what margin? And so -- and we try to figure out the arbitrage of every decision we make and -- positive or negative, right? And then, what's the aggregate of all those decisions.

And we feel more optimistic as we spend more time on -- looking at what's coming and what's new and how -- what we're going to transition. And then look, it's going to cost us more to cycle through the product. So, we're going to have to take deeper markdowns than we thought because of the greater headwinds that have developed.

And so, that's going to provide a lift. So, you're going to get some lift from the higher -- the greater markdowns. So, the low end of the guidance we gave, we think it would be hard.

We'd have to have another meaningful economic macro event for us to kind of consider the low end based on what we know Today, based on what's happened in the last seven weeks and the quarter. And what's happened in the last -- since the last quarter, we've talked to you, the last three months.

I mean -- so that's how we feel about it now based on all the data we have. And I think we're calling it kind of straight down the middle. We hope that there's a lot of people who think that we're not at the end of the banking crisis. We're at the beginning of the banking crisis.

Very smart people believe, okay, the balance sheet situation is getting corrected, but there's going to be a whole credit issue going forward with regional banks. That could become a big problem. I don't know. Those people are smarter than I am. I've never ran a bank, and I'm not an economist, but I've been in business a long time and I've seen cycles.

And what I've seen is that nobody calls it exactly right. And it’s just -- if you said, what am I most worried about? It just seems a little odd that banks get seized over weekends. And my bank basically gets seized and sold for nothing to JPMorgan. And oh, it's all over now. It's all better. It just seems kind of strange.

Like, so everybody thought it was all better back in the other banking crisis and then more banks fell. So, I'd say that's -- if you ask me what am I worried about.

I'm most worried about what's next in the world of regional banks, which could have a further impact on a lot of things, lending to small businesses, the economy, support of innovation and invention, massive tightening of credit, more banks to get fees, government have to get more involved and just general uneasiness by the consumer, so.

But we can take another hit, and I think we'll still be in that range. If there's a big hit, if there's another big macro move, I think things will change for everybody. So, we're giving you what we can see. But I don't think there's anybody out there that's completely at ease with the regional banking issue. And if they are, I'd say, well, be careful.

I think it's a good time to pray for peace and plan for war. And so that's how we're kind of positioned. We think no matter -- again, no matter what the macro looks like, even if there is a bigger banking crisis, our new product will create some level of inflection, that I'm sure of..

Your next question comes from Jonathan Matuszewski with Jefferies..

Gary, I wanted to follow up on your comments regarding the most discerning households being 10 times more valuable in terms of luxury home furnishing.

Is there any color you could share on spending patterns across your income cohorts? Are there certain customer segments that are behaving differently lately versus others in the RH business? Asking just because the reference to giving away low-quality market share.

So, curious what percentage of your members you would consider to be maybe low quality and what that could imply for maybe what the membership trial looks like long term? Thanks..

Yes. I think if you just study the wealth data in studying the ultra-high net worth people and you look at homeownership and people as they go up the economic ladder, they collect more homes. So, home becomes the biggest source of investment. You keep buying a better home, you generally keep buying a bigger home unless you're in a downsizing mode.

But -- and then people buy multiple homes. They buy a second home, then they buy a third home. Ultra-high net worth people have 3 to 5 homes, so.

And not only those -- the data would tell you that at the high end at the wealth, the second home on average has twice as many furniture -- twice as many bedrooms as the primary residents, right? And as people build up the economic cycle, those second homes are furnished beautifully because they're trying to impress their guests and they're trying to create a hotel experience.

So, you're not going into second homes that have like a bed frame pushed against the wall with a cheap headboard and some crappy sheets. And look, you can go on Zillow or Redfin and just look at homes, right? Go to second home market and look what's on the market.

Your first second home, maybe not spending that much on it, maybe stretch for the second half. But again, when you go up the economic ladder, people spend exponentially more on the home. That is where the money goes. It goes into more real estate, you have more rooms to furnish.

You're now furnishing with better and more expensive furniture because that's how people are defining themselves, defining their success and their place in the world. I'd like to say -- and they go beyond that, if you kind of get silly rich, you buy a plane and if you get stupid rich, you buy a yacht.

And that's where we have our planes that are also available for charter. And we've done RH1 and RH2 and RH3, because we're trying to communicate to those consumers. And if we can get them -- and we have some of them.

I mean, -- one of our big projects, the one I'm talking about, I can't say the names, but it has, how many bedrooms, 30, 28 bedrooms?.

In that range..

It's 28 to 30 bedrooms, a second home..

Yes..

We're doing the entire project. I mean, we do -- we have some of those clients. We're earning that respect. Our guest house is being visited by the very top of the economic pyramid. It is being talked about at the very highest end. It's a very, very top of that ladder.

People are aware of our guest house and visiting, staying, touring, asking for tour, so on and so forth. And we're demonstrating what we're capable of. And we're beginning to speak to those consumers. What people will see at RH England is another -- entirely another level for our brand.

We're going to speak to people in a way that they've never been spoken to. And by the way, RH England -- now every investor and analyst on this call is going to want to come to the opening. RH England is going to have all the newness, almost all of it. It's -- if you want to see the new products for the first time, go to RH England.

It's being flown there. It's being framed in through windows. But that will be the first view. So we're introducing the brand in an entirely new way with entire new assortment. Do we have some of the legacy product? We do, yes. Some of the key items, best sellers, best collection, but it's -- like what percent is new? 70% of that gallery is new.

So -- and how many rooms do we have -- over 60 rooms -- 60 furnished rooms. Yes. So you want to see the new -- you want to get a head start and everybody else come to the opening party. But, yes, I’d say the lower quality -- you're always -- we've been shedding customers for the 23 years I've been here. Like, we're building a luxury brand.

That's just going to happen. It's just going to happen. But if you do it right, you're going to have a positive arbitrage, which we've always had. And that I think that you're going to -- we're going to have it again. So, I think this move is going to create another positive arbitrage.

I think people are going to look at the design and quality of the goods at the highest end and they're going to go, "Oh my God, this is incredible." And they're going to look at the price and think like this is such an incredible value, do my whole house. Yes.

And we just did another -- I can't say names, person's house, they just -- and they did 100% RH Contemporary. And the conversation is starting to really happen at that next level, but you got to stay with it. You got to keep investing.

These things like -- the places we build, whether it's the galleries in RH San Francisco, our most recent one or a guest house, which our restaurant and our guest house just was -- just made the MICHELIN Guide. Tell me another retailer in the world. that has restaurants, that has a restaurant listed in the MICHELIN Guide.

We didn't get a start, but we have MICHELIN Guide. We had one of the best chefs -- arguably the best chef in the entire world at our restaurant two nights in a row and said they could have -- they could dine there two or three times a week and thought the food was outstanding. Gave us some feedback.

You expect the best chef in the world to give us a feedback on what might be better, a little bit more saltier, this, that. But for the most part, a glowing review.

And so, again, this -- all those things, all those conversations with people at the top of the mountain, starts to change the conversation, the perception, the image, the respect of a brand. And it takes a long time to earn it, right? And we're working and earning that respect, getting the tip of the hat.

And if we do it well, we will have higher quality, higher value, more discerning consumers that just spend multiples, consumers that are just a click or two down from them, a lot more, not a little more because they have a lot more money.

And I would argue, if you look at it, the baby boom generation is -- look, luckily studies are saying, if you're at the high end and you have access to health -- and health care and you take care of yourself -- say the average age is like 87 lifespan now, right? That's up from 77 for lower economic demographics.

And so, what are people going to do as they're living longer? I don't know if they're going to save money. I think they’re going to spend money.

I had someone really say something to me, that's like, "Oh, did you fly private to get here?" And I said, yes, and they said, "Well, good, because if you don't, your kids sure will." And I thought that was a really funny comment. It's like -- people that I think -- baby boomers, they're living longer. It's the biggest pot of well.

There's going to be the biggest wealth transfer. But I think there's likelihood we're going to see an acceleration of spending, people are going to say, I don't have that much longer to live. And I think they're going to loosen their pocketbooks. So I like all these kind of sub things underneath this main trend. I like coming out the other side.

I like where we're positioned for the next 5 to 10 years. I think we get through the cycle here over the next, I don't know, 6 to 12 months. I don't see it lasting much longer than that. I think, ‘24 is going to look a lot better than '23.

And I think if we get inflation under control and whatever happens in the banking thing -- like you got to kind of let it happen. Again, I wish they just say they guaranteed all the deposits or something. So, they just stop everything. But we still do have credit reckoning that's got to come through.

I mean there's no way those banks lend like they were lending, right? So that's going to have some effect on the economy. But nonetheless, no matter what happens, the path we're on, I think, is a path to a really profitable model and a really enduring and lasting brand..

Really appreciate all that color, Gary. And just a quick follow-up. You had some helpful comments on the domestic competitive landscape before in terms of peers who are below you being more promotional. From our check, we're seeing some more luxury brands and home furnishings out of Italy increasingly eyeing the U.S.

after years of chasing growth in China and India and Brazil. Some of these brands are pursuing more sizable showrooms in key U.S. markets. Do you see this as a threat? And any thoughts there would be great. Thanks..

Yes. I mean, look, everything is a threat. So, we don't take anybody for granted. But I'd just say that our value proposition versus those brands is massive. And they also -- most of those Italian brands are two things.

One, they're just mostly category focused, right? They either are upholstery brand, selling sofas, sectionals, chairs, they’re lighting brand or they're a category-specific brand. There's not one that's integrated all the categories like we do and have a complete lifestyle point of view and can furnish and design a home.

And they don't have the size or scale to have our value creation -- our value proposition. So, our value versus the brands that -- the ones I think you're talking about, I think we're massively disruptive to those brands and especially now that we're sourcing out of Italy ourselves.

So, when you've got made in Italy versus made in Italy and you have a significantly better value proposition because of size of your platform.

And the one other thing I’d mention is they don't control their distribution, right? Some of the brands you're probably talking about, the most famous one, I think, has 800 points of distribution in the U.S., and they control, I think, four points of those 800 points of distribution.

And so, there's a whole kind of convoluted platform and pricing discrepancies. They don't really get to control price. They've got a lot of dealers representing them. And so, it takes them a long time to kind of build what we've built. But nonetheless, look, they're great brands. They've built great products.

I like our positioning way better than theirs, way better..

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

Follow-up on England. I was wondering, Gary, if you could just give us a little bit of an update on how you're going to be dealing with the supply chain and logistics. Obviously, the furniture industry is going to be a challenging one from a logistics standpoint.

How do you ensure that the customer has a great experience for you, especially these early customers that you get in the months ahead here? And then, I was wondering, Jack, if you can give us any color on how you're thinking about the financial impact from England in the second half, particularly from a top line perspective, what's baked into the guidance? Any color there would be great.

Thanks..

Yes. Let me start with the supply chain. We feel really confident. I mean, we've had our team boots on the ground over there for 18 years -- 18 months to 2 years, I mean, working training. But we feel highly confident in the supply chain experience, delivery experience that our consumers are going to receive from RH.

And then, one of the keys is just making sure we figure out how to be efficient on the reverse logistics.

You're always going to have some level of returns in any business and how we handle that, the ability to not have too many touches and liquidate efficiency -- efficiently through an outlet network and so on and so forth, all those things that we're working on.

There'll be some things to learn where the demand going to all come across the UK, some things to work out, but I feel highly confident. We've got a great team. We've got a lot of people that have been with us for years that are over there. I don't know if you want to….

Yes. No. We in our England gallery, we're going to have 8 folks on the gallery side and another 5 for hospitality that are from RH in the U.S..

And then from a supply chain perspective..

And from a supply chain perspective, we have one of our best guys over there..

And so, we feel highly confident that in every level that we will execute well. But there's going to be things for us to learn. Like we don't know exactly where the demand is going to come from. We don't know exactly -- we have to just acclimate everybody to our brand, our services and everything that we offer. And so, we'll see how the ramp is. Yes.

I'll tell you one thing. The response to the party invite has been incredible. We thought we were going to have x number of people. And now all of a sudden, just after a few days, we think we might have 2x number of people coming. So if anybody is on this call and you want to come, like let us know quickly. At some point, we got to cap this thing.

It's -- we're really worried like, gosh, we’re out here in the countryside and we're doing this opening party, sent an e-mail invite, how many people are going to come. And it looks like everybody is coming. So, as long as they're in town, it looks like everybody's coming, so..

On the second question, we haven't said, Brad. So it's modest. And I think we'll all learn together. At one time, Gary had projected that first year sales -- or demand of England could be 50 to 250. The point is there, we'll learn together, we'll share data when we have it. But it's a modest amount. It's not worth highlighting it in our guidance..

Your next question comes from Brian Nagel with Oppenheimer..

So, I know the call is running long. So I'll keep it to one question. But the question I have, I guess for Gary. We talk obviously a lot going on internally with RH and a lot of the really interesting initiatives you have. But, if you look at the macro environment, and there's been a lot of talk about kind of the macro environment, the headwind.

And you know your customers and your new customer. What -- to get out of this malaise -- a lot of backward drivers to become a tailwind versus the headwind currently.

What needs to change most? I mean, what are the key factors there?.

I don't know if I got that quite great. Your connection wasn't the greatest. Maybe just kind of repeat the question, just make sure we get it right..

Yes, I apologize. So just from a macro standpoint.

As you think about your customer and the headwinds, the macro headwinds, to get out of this malaise, what needs to change? What do you think is most important from a macro standpoint to really start to change or to drive for your customer?.

Yes. I think we just got to find out where the bottom is, right? Like, things just have to stabilize somewhere. Interest rates stabilize somewhere, mortgage rates stabilize somewhere and just get through a cycle. So, we're -- what's the new baseline. I think that's the key.

And then, generally, once you -- you've kind of hit whatever bottom is and there's a new baseline and we've got the macro headwinds get stabilized. And history would tell us you start to grow off that new base, right? And so I think the key is what's the base. Is the base luxury housing down 50, because it hit down 45 last quarter.

And -- that means if you look at the sequential kind of from quarter-to-quarter, that would tell you it went from 38% to down 45, probably means the last month of that quarter was down 50 or 54, I don't know, somewhere around there, like I've never seen this kind of stuff.

But then again, too, I've never -- like the first time we're navigating the brand through a cycle like this, where we've been positioned so high in the market, right? So -- and also, what I'd say what's different about us today is we've eliminated -- we're not really in the accessory business in a meaningful way. We're not in the tabletop business.

We're not -- we're not in the holiday business. We're not selling anything for Easter or Mother's Day or Christmas or anything, right, go in and see all the Christmas decoration stuff stocking stuffers anymore. When we had -- when the Company had a bigger mix of accessories and stuff like that, you're not going to get hit as hard.

But today, we're basically all height of it, right? We're really furniture-focused between indoor and outdoor furniture, the lion's share of our business. And then you've got rugs and lighting and bedding and bath towels and things like that. But we're not -- we're really a furniture-focused business today.

So, we're going to swing a little farther than other people during these times. But really, the key is what's the baseline, what's the new baseline? When are we done with the tightening cycle? Are we done? I don't know the markets are saying, they're betting there's not another raise.

And then there's -- you've got some Fed people staying there, there might be another raise. And all of a sudden interest rates on 30-year mortgages hit 7, then they went back to 6.2. Now, they're back to 7. Like, why? What's that telling you in the 10-year? They believe interest rates are going up.

I think it's just got to kind of go, okay, have we have we hit the bottom from a housing point of view, specifically luxury housing on this cycle is -- are we done with the regional banking issues, is inflation tamed? And are people willing to buy? I mean it's -- people aren't putting houses on the market because they can’t afford to trade up.

And so, you just don't have a lot of inventory to buy. And look, that's better for the new housing market, right? 90% of the market is the resale market, 10% is the new housing market. The only -- they only have inventory to sell. They have -- so they're putting it all on the things. So, it's going to be a tailwind.

There's going to be some level of tailwind to new homes because they have inventory. Resales don't have inventory because the owners don't want to sell into this market.

And so, once everything gets stabilized, like if interest rates stabilize as I said, it kind of says we're done, for now, that we've got inflation under control and interest rates stabilize, federal funds rate stabilizes at 5 or whatever number and then interest rates can stabilize.

And once you cycle that and you're through that cycle for a year, you've got a baseline. And then, things start to look better, and they start to loosen that will obviously -- that will obviously help. But you still have other things that are kind of people worried, right? You've got the commercial real estate market.

I mean, you don't want to be in the office building business right now. I feel bad for my friends that own office building. So, this is -- like this thing -- that's not over yet, right? And so, that's going to have a wealth effect.

There's people out there that invested in funds that own commercial real estate and people that own buildings, things like that.

I mean, people are already starting to give keys back to the bank -- to the banks on commercial real estate offices because there's people don't want to go back to those companies, but working from home and those people don't want to go back to work and strikes at Apple and Microsoft, that's kind of crazy, right? But what's going to happen with commercial real estate? There are some things that still have to be kind of worked out.

And I'd say, the luxury customer is the most aware of the issues. They have the broadest view of economic challenges and where things are going and interest rates and all that kind of stuff. And when they're going to start buying the houses again, when they're going to decide to start selling their houses that will create activity.

And I think once everything stabilizes, people kind of go, okay, this is the new reality, let's go back to normal..

Your next question comes from Max Rakhlenko with Cowen..

I'll just keep it to one. But how are you thinking about pricing products in Europe compared to the states? And just your latest view on how profitable those galleries could be at maturity? I think you previously thought, once galleries made sure they could potentially have higher margins than in the states. So just curious for an update there.

And then just any differences in cost structures that we should keep in mind?.

Yes. We believe that we're -- it's a lot of debate on pricing. We're going to write up to the wire -- do the math on everything and make sure we understand it. But I believe that long term we could have an accretive strategy because I think we're also building everything kind of on a clean sheet paper.

So, it should be the most efficient from a supply chain point of view. There should be efficiencies and things just because it's all going to be new thinking and our best thinking. And we'll learn a lot in the beginning here. So, I'd just say, look, every plan we have generally is some degree of wrong. Are we more right than wrong? That's the key.

Are we strategically right? So, we're going to be -- we're going to be wrong on a lot of things at launch, whether it's pricing, like -- and the point is, are we strategically right? Because we'll improvise, adapt over time, modify as we get going. So we're excited to just get going and start learning.

So like -- but look, there's debate, like right now, where should we price this or should price that, who are our competitors over there and what does it look like? And so, more to learn. I'd say directionally, I feel exactly the same way. But we're not in the game yet. So, ask us in six months, we'll have a much better view..

Your next question comes from Seth Basham with Wedbush..

My question is around inventories.

As you take these markdowns to clear excess inventories, do you expect your inventory to be clean by the end of the fiscal year?.

Yes. I think we'll have everything in line by the end of the year..

Great.

And then, similarly with the 70 new collections you are planning for this year, do you expect to be in stock in meaningful quantities so that they can be additive -- materially additive to the sales this year?.

We do believe that. Yes. I think we’ll be in really good shape mid-second half. There is always with the ramp up of this much newness, different timings, different things as they go into production, and some delays here and there as they are going through final finishing and getting into ramp up moving from sampling to production.

But will be -- kind of some things will be in stock, end of second quarter , some beginning of third quarter, some mid-third quarter -- I think mid-third quarter. Yes, late third quarter, will be really good, late third quarter -- as far as shipping, right? And, again, think about our business.

Our business will generate demand, even if we're not really in stock as people are working on projects. So, but, I think we'll be able to understand what the inflection point potentially can look like, I think by late third quarter.

And we'll be -- we'll have a lot more data and information and see where the consumer is really responding and what that looks like. And, for us, look, we've got to play certain bets and we got to buy goods long-term because if -- uncertain things, that's our job, right, is to know what's going to be great.

And, again, we never buy anything 100% right, ever, in my entire career. The point is, are we directionally right on the investments, on the buys. And some of these things are going to be really big, right? So we've got to make big bets, we got to buy inventory, kind of out there, because furniture can't scale.

You just can't ramp up furniture production fast, not at these quality levels. So, we'll learn a lot and we’ll cycle through. And -- but that's why we're really, really excited about '24. Because we'll have some really good data by the end of the third quarter, and we'll be making a lot of much better decisions as we look out.

And then, we have another layer of newness that is going to come as we cycle into the spring, a lot of newness kind of coming through, either late this year, some of it might come -- or will hold it for next spring, and you know what the responses are. But -- so, yes, fingers crossed..

That's really helpful. My last question is just on your pricing strategy and architecture. As you move up to the very high end, you bump up against pricing from timeless designers.

Do you see that being a challenge to convert high net worth customers to shop RH when they could buy the true designer piece?.

Yes. I think we're pretty much a really good value against any of that. So, there's always going to be interior designers that will take some of these products and go to their local area upholstery guy and knock it off.

But for the most part, we're going to be -- I mean, against the showrooms and against the real luxury brands in the categories and stuff like that, we're going to be a disruptive value. And so, I think our competitors are going to be scrambling..

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

Great. Well, thank you, everyone, for your interest. And hopefully, we'll see some of you at the opening of RH England. And other than that, we'll talk to you next quarter. Thank you..

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