Thank you for joining us today for Restoration Hardware's First Quarter 2020 Q&A Call. I will now hand the call over to Allison Malkin from ICR. Please proceed.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2020 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook for our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q&A session. Operator, we're ready for questions.

And your first question comes from Michael Lasser with UBS. Please go ahead.

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

Well, I think I'd point you to if you look at our record – when we reported the kind of 2019 results, I think we – that was before COVID when we laid out kind of a bridge to expanding operating margins, nothing's really changed about the bridge. Just there's modifications based on a lower rate of sales than we had anticipated. And then we've made some modifications organizationally, as you would expect and as we articulated to our expense structure and our spending structure. And we've really tried to reimagine the business again. If you look at our history, our DNA is really kind of built for difficult times, right? We've had to kind of, from the very beginning, dig ourselves out of a hole of a business that was Restoration Hardware that was selling completely different products that was basically on the edge of bankruptcy and raised money three times in the first year to try to stay alive. We had to reimagine ourselves again in 2008 and 2009. And when everybody else was kind of yelling value, value, value and taking quality down so they could take prices down, we went the other way and reimagined the business completely and pointed higher and moved faster. And this is kind of another time, right? So – but at the base, so if you just think about the foundation of where we started coming into this, we said we had at least 200 basis points of operating margin expansion. So the key word there is, "at least." So if you start there and you think about – I don't know. Take Q1, we reported 10% against, what, 11.8% last year, right? So we hit a pretty tough Q1. Half of our stores were – all of our stores were closed for the entire time. We've got outlet stores and restaurants and things like that, that did zero revenue, have no online component. And we were able to kind of lead our teams, and our teams were able to lead their teams through – I've never seen a time like this, right? The most volatile, difficult time for retail business, restaurant business, whoever, all the businesses that have everything shut down, as you can imagine. And we were – we only lost 180 basis points of operating margin. And you can – if you read in our press release, we say the business has accelerated, right? So you can kind of take the numbers there and imagine what would be like in – and so if you just go back to that prior release, look at the bridge, it's got all the pieces: the outlet business, the – that moving from a single-source rug vendor to a direct source model, other things we're doing within the core business, elevating the brand, so on and so forth. We see a very clear path to now, I believe, 20% plus operating margins, right? It's – we are – as we continue to elevate the brand and we – you can see us emerging as a true luxury brand that generates luxury margins. And if you try to just stand back and think about that, you say, like, what other luxury kind of design furniture brands are there in the world, just ask yourself that question, vertically integrated covering all the categories, presenting a business like us that generates the kind of productivity that we do. There are a lot of luxury apparel brands. There's a lot of luxury jewelry brands. There's a lot of luxury car brands. There's a lot of luxury brands in every category. And in our category, I'd argue that you really can't point to one. You can point to somebody who might be a luxury sofa brand, upholstery brand, somebody who might be a luxury lighting brand, somebody who might have luxury pieces of businesses. But there's really not a business like us on any level anywhere in the world. And so – but look, it's a long – as I like to say, it's a long hike up the luxury mountain, right? And we have to earn our way there. We have to do such extraordinary work that we create a forced reconsideration of this brand. I mean, it's really interesting. I kind of made a face at our team at the table here because the conference call operator introduced us and said, "Welcome to the Restoration Hardware conference call." It's not the name of our company anymore. We're RH. But it's hard to shed old perceptions, right? No different than every analyst on this call. Most of you, I'd say not everyone, most of you still think of us as a furniture store. And you kind of compare us against Ethan Allen and other kind of people. And it's not even the same business. Like it's not even close, right? And so I think it's just going to take time for everybody to kind of, I think, see us in a way where we're going. And I think, look, we have to prove ourselves. And I remember all the reports that came out. When we had 11.4% operating margins a couple of years ago – actually, a little over a year ago. And there were a couple of reports that said, "Oh, they have hit 11.4%. And Williams-Sonoma at their peak was at 10.5%, and now they've eroded to 8.5%. And there's no way RH can maintain 11.4%. Short the stock." Right? And I had so many people that said like, "Oh, you can't maintain these operating margins." And then we went from 11.4% to 14.3%. And now people are actually saying the same kind of thing, "Can they maintain those operating margins?" I mean we're used to this, right? We're used to kind of having a lot of skeptics. And people don't generally believe something until they see it unless they're part of the team that's creating it, right? This is our vision, not anybody else's, right? So we – as our vision unveils itself, as our work becomes real, then people will see it and believe it. But I could probably tell you every detail right now, and you're not really going to understand how we're going to do it. You have to get on the inside.

Why don't you try it?

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

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

At least.

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

Sure. Understood. Let me ask a quick follow-up. The results that you've seen in May and quarter-to-date in June have been very notable. Has that been driven by the reopening? So your sales have grown by just more design galleries reopening? Or are you seeing increasing and accelerating growth inside of the design galleries that have been open for a long period of time?

Yes. I mean it's a combination of both. The – even as all stores were closed and galleries were closed, our business was building week over week as we started opening galleries incrementally, a few this week, a few that week. I don't know what our biggest week was. Maybe 10 or something in a week. Clearly, our business is way better with a gallery, with a retail store. I mean the people that think retail stores are going to go away because of the pandemic like are brain dead. So I mean is that – as everybody's pointed to, like, well, look, nobody needs a store anymore. So the retailers that use this opportunity to actually shrink their store base are going to shrink the company. It's an impossible move. So it's – I mean, to me, it's a very interesting time to just sit back and watch because people are asking – I've had people ask me, "So are you going to still open galleries? Are you going to still open your stores? Are you going to stop? Look what's happening with Amazon or Instacart or this or that." Like I got it. Yes, essential goods, ordering toilet paper, things like that. Yes, I think retailing that takes taste, and style and presentation and imagination and so on and so forth, humans – I don't know about anybody on this call. Did anybody like being home the last three months every day?

It certainly has been interesting.

Is anybody dying to get out of your house and go somewhere, see something, see some people? Is anybody like waiting to not have to wear a mask? Like everybody is. Like you see it on the TV, the reports. It's like they barely open certain places, and beaches are flooded. Bars are flooded with people and so on and so forth. So we're really optimistic about our business, our model. We've got a huge direct business. We're – we think we're very capable direct retailers, digital retailers, whatever you want to call it, web retailers. Everybody's got a different name for it. It's just another channel. And we're going to get better and better with that channel. We've got some exciting announcements that are coming as far as how we're going to reimagine our entire web platform. And part of it was in my annual shareholder, which parts of that are repeated here because you got to kind of keep saying the same thing a lot of times for people to get it. But you're going to hear soon about the world of RH, which is a portal that will take you into the products, places, services, and spaces of RH. And we're just going to keep getting better at what we do. And so we think that there's – the galleries are going to tend to be strong. I think the biggest question we have, and I think probably every retailer has, is as you reopen – I mean two things. One, as you reopen, how much pent-up demand is snapping back? And how much comes back? And how long does that last? And what does that look like? And then the second one is what are the seismic shifts in spending? I mean clearly, Wayfair goes from up 18 to up 19, right? A lot of reasons driving that. All their competitors At Home, Bed Bath & Beyond, a lot of people like that, like all the store-centric businesses shut down like it's driven to Wayfair. Wayfair has got a huge kind of kitchen, kind of the furnishings business. So if you go to Wayfair, I think they have, I don't know, like 20 pages of toasters, right, 600 toasters or something like that. And so that's like nobody was going to restaurants. Nobody was eating out, right? Like I can't tell you how much my significant other spent at my alma mater, Williams-Sonoma. And so – but the question is, okay, these seismic shifts and these lifts, which I think we're benefiting – clearly, people are staying home. They're looking around at their house going like, God; we're going to be here for a while. Why don't we make it look better? We're not traveling. We're not going on vacation. We're not doing all kinds of things. So there's a seismic shift to spending happening. And is that sustainable? Does that – is there a giveback? What does the timing look like? We don't know any of that. We can't tell any of that. There's no way to kind of really figure out that data. But we know long term; people are going to still live in homes. For now, they're going to still buy furniture and furnishings and lighting and so on and so forth. And if we have the best assortment in the categories that we're in, pandemic or no pandemic, presented the best way with the best value at the best service, we're going to do just fine. And so – and we're focused on the long term. So I – and I'm not – people ask me, like, is it going to – what about pent-up demand? What about this? Was that like – yes, I don't know. Like I don't know exactly. I don't know if we'd do anything different if we did. All we know is, like long term, we think we're going to build one of the most admired brands in the world. And that's what we're focused on.

Thank you very.

Thank you.

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

Good evening, just good afternoon. Thanks so much for taking the question. Gary, maybe I just want to touch quickly on – or maybe not quickly, on the RH Residence business. And just maybe go into a little bit more detail in terms of kind of why now, how long you've been developing the concept. What are the economics? Are you partnering, I don't know, I guess, with homebuilders to do it? I would just love to hear a little bit more about, I guess, the vision for, I guess, what you think looks to be a pretty big opportunity.

Yes. It's really – what we try to do is put out there our kind of big, long-term vision for the business, right? One that will outlive me. So I think we have a vision for this brand and this company that is going to be multigenerational, right? When you sit here and think about the – if you sit and think about what we wrote, yes, it's probably – throws a lot of people back. But if you think about it, it's all kind of connected in a very simple way. And if you start with the idea that there's those with taste and no scale and those with scale and no taste, the idea of scale and taste, we believe, is very large and far-reaching. And everything that we're going to do here is not in a silo, right? So it's all – it all amplifies and elevates and renders the core brand more valuable. So Residences is just that – it's just a space, right? If you think about spaces, we already do spaces. We build some of the most inspiring spaces in the world. If you think about what those spaces look like, we're obsessed with great architecture. We either find historical-grade architecture and readapt it or we build great architecture. And that great architecture amplifies the product. And we do great architecture. We have great interior design. We – if you look at our rooftops or our gardens, we have great landscape architecture. If you think about those categories because – let me step into it for a second. If you think about those businesses, there are – none of them are consumer-facing businesses. Where do you find an architect? Do they have an office that's reflective of great architecture? Not really. You don't even know where to go. It's like trying to find a dentist, right? You ask a friend. Where do you find a landscape architect? Where do you find an entire – interior designer? Someone will say, "Oh, you can find those things on house." And yes, you can, but there's no physical manifestation of the business. And we have a physical manifestation of great architecture, great interior design, great landscape architecture. So embedding a services business inside a business that stands for those things seems pretty logical. We've had great success with our interior design business and believe we can take that to a much higher level. We practice great architecture today. We build great architecture and design it and develop it. We design great sets and great rooms. We do great interior design. We do great landscape architecture, so that – we're really good at those things. So it's logical to have a services business, an expanded services business that provides those services in multiple businesses that are not consumer-facing. It's why we've been able to build RH because high-end luxury furniture, for the most part, is not consumer-facing. At least it hasn't been, right? The design districts, the design buildings, I used to say, behind the iron curtain of, right, to the trade design showrooms. You need to be an interior designer and have a resale license to get into those places. So same kind of things in these other businesses. You think about homes today. I would ask everybody in this call, if you get a second tonight, go on Zillow, go on Redfin, go on, pick your website for real estate. Go look at 100 homes tonight in a price range that you think we might play at. And tell me how many have great architecture, tell me how many have great interior design and how many have great landscape architecture. If it's 1% – if it's more than 1%, like you must live in a really great area. But even in the great areas, it's so low. How many friends' houses do you go to that you say, "Wow, this is beautiful architecture. This is great interior design. This is great landscape architecture"? Almost never. Almost never. It's like a completed – completely uncharted world. When you really look at the big homebuilders, they're kind of stamping out some – it's not a McMansion anymore. Call it whatever you want. But it's a stamp out, right? And it's a nice organized development, but there's no one providing completely turnkey homes. Like Eri says to me a lot, like they don't sell you a car without an interior. You don't go buy a beautiful Mercedes or whatever brand you like, and it comes without an interior and you got to figure it out yourself. I don't know how many people on this phone have tried to do their own interior design or furnished their house. It's a nightmare. It's a nightmare for me, and I do it for a living. I have a house in the Napa Valley that I finished remodeling like 3.5 years ago. It's not furnished yet. It's that hard. It's a pain in the ass. And so we know how hard it is. We know we're good at it. And we believe that if you – as to work – when I worked for Howard Lester at Williams-Sonoma, he used to say, "You sell the hole, not to drill," right? Don't sell them the drill. Sell them the hole because that's what the drill does, right? And in Williams-Sonoma, what they've been fantastic at, right, is selling you the idea of pizza, not the pizza pan. Selling you this idea of pasta or how to bake an apple pie. That's selling the hole, not the drill. And I sit here and I go, well, why can't we – we're really good at architecture, really good at interior design, really good at landscape architecture. I know we can design and build things and furnish that people will like. And I think there's – if you think about people with money, okay, and you think about just what's the most valuable asset, time, right? By far, the most valuable asset. Everybody on this phone can figure out – if you lose your money, you can figure out how to make more money. If you lose your time, you just can't get it back, right? So we think a lot about businesses that deliver time value will become more valuable. And I just bought a house in Beverly Hills. Why did I buy it? I walked in, it was fully furnished. It was designed by an architect and furnished by – the architect is also the interior designer. He does one house every five or seven years, and it's completely done. I walked in. I was like, I'm good. That's going to save me two years of my life. And we did a test house. I don't know if everybody knows, but if you can still go online, I think the video is still online. If you look up Eight Palms, RH Residence. And the video is still out there. We did a test house in the Napa Valley. We took – you can watch the video and look at what we did before and after. We did a – it took a house that was – kind of needed some love. We completely redid it and furnished it and sold it. So we have more of those coming. It's like anything we do, we'll test it. We'll try it. We'll work it. You got to perfect it. So it's not like we're going to stamp these things out. I mean again, the vision for the ecosystem is a big, giant vision. Like we – I think we're almost – I shouldn't say – we – or we – Dave is not on the phone right now. It's like – I don't know if we signed the deal yet. Like I don't want to sound like – Allison, did – yes, I can't say anything. But let's just say we have a place where we'll announce our first ecosystem, where we'll have an RH Gallery, an RH Guesthouse and RH Residences in a really very cool place. And it'll be a great test. We've been working on the deal and the vision for a long time. And people really love these first handful of houses that we do. I think we're going to have five – six residences, yes. The residences will be serviced by the guesthouse. So you want housekeeping. You want someone to set up and cater a meal at your residence and so on and so forth. This is not connected. It's not a vertical. We have visions for vertical ones and so on and so forth. But we'll see. We'll see how our guesthouses do. We think our guesthouses are going to create a new market for privacy and luxury. If you think about the idea of privacy, we think privacy is going to become a very big market. If you can stand back and think about privacy, it's the one thing everybody has given away on social media. And it's the one thing that the Internet has taken away. You could Google anybody. You can find out anything. It may not be true, but you can read a lot about almost anybody today. But I think we're in a world where it's so exploited. Privacy is going to become very valuable. And if you see what we're doing with guesthouses, when you see it, when we open in New York, I mean, the can keeps getting kicked down the road to something else. And then we have a pandemic, and we thought like, yes, even though we probably hope we can open it in the fall, like it just feels like bad luck to open a hospitality experience on the heels of a pandemic. So I think we're – we don't want to open all 10 up and close if we got shelter in place for another month. But we're going to create something, I think, extraordinary in hospitality. Not ordinary at all. Extraordinary. There's ideas in our guesthouse that have never been seen in the hospitality world. And we have to do things like that because we have to force the best in the legends of hospitality to tip their hat and respect us because it's another rung up the luxury mountain. And I think where we've got it. I think it's an entirely new market. I mean no one's addressing it like we're addressing it. And so you think long term, you think about, hey, if I can have guesthouses that work, if that works, that model looks really good. If I put 10 residences on top of the guesthouse, I can have a total ecosystem where our F&B and our restaurant services, the room services, the restaurant, you could – in our second guesthouse – have we talked about our second guesthouse – have we talked about our second guesthouse, where it is? Yes, we have. It's hit the news, right? Yes, it's in Aspen. So our second guesthouse is in Aspen. And in Aspen, we'll have our first RH bathhouse and spa in the basement. And you start thinking of these elements coming together and creating residential ecosystems that all kind of amplify, elevate and render each other more valuable in so many ways. And you come back to time and you think about businesses that deliver time value will become more valuable, and we believe that deeply. We think that's why our business is very successful today because you don't have to go to 10 different showrooms. You don't have to coordinate deliveries from everybody. You don't have to take the time and have the hassle. We're much simpler. We're much less friction, much less time. So all these elements of the ecosystem, we think we can do. There are things we already do in some way, shape or form. And we – the ideas we have for them are going to be very good. And I thought, look, this is a real crazy time right now, right? We're in a pandemic. We've got civil unrest. We've got global trade wars. We have all kinds of all kinds of crazy stuff going on. Like for us, there wasn't a better time to unveil our long-term vision, even if it's just for ourselves, even if it's just for our people. The world needs hope, needs inspiration, needs – it needs a positive thrust. It needs more light and less darkness. And so whether anybody believes in it right now, I don't really care. We believe in it. And the things we believe in, we usually bring to life. And we usually do them pretty well. So we're not going to give you a model in the residence right now. We've got the models. They're all some degree of wrong. The question is, are they more right than wrong? Because once you get going and you do something, that's when you really start learning. And that's where the learning curve accelerates, and that's when you begin to really improvise and adapt and shape it into the right direction and do the right thing. But I think our vision is a lot more right than wrong. Going to be some degree wrong. I think we're going to – as we do everything else, we – generally the things we do, we take a real swing at it. We do them relatively well. They don't all work. But if we're half right on this vision, it's a massive idea. If we're 1/4 right on this vision, it's – the company is going to be 10 times bigger than it is today. I sit back and I go, look, Elon Musk is doing electric cars, solar power, space travel, tunnels. I think humans – we don't tend to push ourselves to find out what's really possible. And so in our lifetimes here, we're going to try to do extraordinary work. It's what we live to do. It's what we're built to do. And it's what we believe in. And so I think we'll be more right than wrong. And as we prove it, it'll play out. So…

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

Sure.

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

Hi, afternoon. Gary, I'm going to keep on this theme because I think it really is revolutionary. It reminds me of Baccarat Hotel, right, taking that luxury brand and then turning it into a new business. I guess my question is, did you not have a test of this back in 2016 in Crystal Cove? It was at Newport Beach. How is that different? Were you only doing the interiors? And what did you learn from that? And then secondly, like what's the sort of timing of the launch of services to not necessarily this piece of the business, which seems far longer term, but the services that you talked about earlier? Thank you very much.

Sure. Sure. Yes, the Newport Beach Crystal Cove project was a project that our contract division – Contract and Hospitality division partnered with a builder. We were really hired to kind of do the interiors. And so there was a partnership. Kind of there wasn't really – we didn't control the architecture, the design of the homes and so on and so forth. So it's really more of an interior job. And they wanted to use the brand. And I'm always a little careful about that. We kind of let them use the brand a bit. It's like – I usually – and I hope the guys at Crystal Cove aren't on, but like there's not too much stuff that other people do in this kind of niche of architecture, interior design, landscape architecture that we believe people can do better than us. And so – and that's why we think it will work. When you think about the timing of the launch of services that will be unveiled. Right now, we're highly focused on elevating the interior design business and investing heavily in interior design. You saw in our press release where we swung the investment pendulum back the other way. And we're going to continue to invest aggressively into our future. And interior design, we think we can take it to another level of professionalism and capability. We will probably test sooner than later in a market. Maybe it's here in the Bay Area, somewhere where we test architecture and landscape architecture. Thinking about – like right now in San Francisco, we've got a big new gallery opening. We've got a real opening here in Marin. They're right here. Do we test it in those two galleries? Do we take our old San Francisco gallery? I don't know if anybody has seen it, it's one of the most beautiful little buildings in the middle of the Design District. It was built by Ed Hardy, who was one of the famous collectors and sellers of antiques, one of the key people at Sotheby's for years. And he built this beautiful palladium building, beautiful garden courtyards. It's what inspired us years back to do gardens and rooftop gardens. And so we're thinking, geez, do we just hang on to that building? We own it. It's a very small investment. Do we put our services business into its own offices in this beautiful building that represents everything and – because we can't fit at all into the galleries, right? You'll have a consumer-facing part. Like if you've been to one of our new galleries in kind of the middle and the back in one of our prototypes, we've got RH Interior Design, very visible offices that you see through a glass wall. And so eventually, that will become RH architecture, interior design and landscape architecture. So the vision is to have a kind of forward-facing integrated services business, right, that kind of catches people. But you can't really – you don't really want to operate a whole offices business out of – I don't think, out of the gallery and out of that space. I think it will – it won't fit exactly right, right? It's good for kind of a consumer-facing part to kind of interface, meet people, make the connection and then have an office, a true office for the services that's enter – so you really have the space for people to work and the right equipment and tools and so on and so forth. So you'll see us testing that. You'll see us testing – look, the residences will be coming very quickly, the first test in a market over the next couple of years. We'll be building out the ecosystem. You'll hear more about that and the one test market will be our first one. You'll hear – you'll start to hear about the services business. We'll be testing that. That's why we wanted to get the vision out here because you're going to hear more about them. You're going to see them. We'll start to be able to communicate more. And then we – look, the biggest thing we've got coming – in the short term, the biggest thing is RH International. And we've got – are the deals signed? How many are signed? We got one signed or two? One is like – they're almost all ready to sign. And we're like working out the details. Dave, you're not – is Dave on the call? He's not on the speaker line. He asked. Gary Friedman: He's not on the speaker line. Okay. Dave can't talk. He's like – he asked to be. Okay. He has like – he probably is talking right now. You guys can't hear it. We didn't give him a line to talk into. But Dave has really laid out an incredible beginning strategy in Europe for the brand. I think we're just going to – it's going to be incredible. I mean we – it's mind-blowing for us. So I can only imagine what it's going to be like for consumers. But the first gallery could be open in 2021, in the summer of 2021. We've got to move relatively quickly. And it's – the latest will be spring of 2022, but it could be 2021 x that we'll open to RH England. That will be followed by – unless something goes wrong with the deal in the last minute, but they're just basically done, but followed by RH Paris, RH London. We've got multiple other ones that I won't go any further. I don't want to jinx anything. I probably went too far. But those will – the next two will be 2022 or 2023. The complexity of the architecture on RH London depends on how far we go with it. It's kind of three buildings we're integrating with a beautiful rooftop and a restaurant and all kinds of things. It will be incredible. It will be one of the most exciting stores in all of London. The thing we're doing in England, which is kind of right outside London, mind-blowing. The most exciting – I mean, both of those will be the most exciting retail experiences we've ever done that – it's good or better than New York in their own ways. And one is just – you can't even imagine it. So at some point, one of the next decisions – I know we're going to hit the timing. We'll probably do it in an Investor/Analyst Day. We'll lay the stuff out, and we'll show you all the pictures. So everybody can kind of really, really understand it. But no one's ever introduced themselves into Europe like this. Ever. It will be the most incredible first impression a brand has ever made. And so we're just extremely excited about that opportunity. And that – you think about that, like 75% of our business should be outside of the United States. I mean that's what the model should look like. That's what the wealth model is. That's what LVMH and Kering and everybody else and Hermes' business looks like. So that's really the big, the – as you think about those pieces and how we go. But yes, it's all going to start happening, and that's why we put it out there. And we thought, yes, it's a really good time to be – try to be visionary and inspiring and so – for no one else but ourselves.

Hi, good afternoon. I also have two quick ones. One, can you bridge us how to pay the convert in July, the $300 million relative to the $70 million in cash at the end of the quarter? Is that mostly just from free cash flow coming here in the second quarter? And then a little bit bigger picture question. In retail, we've seen definitely a shift towards digital. It might be less so in your business, but you've also rolled out virtual design consultations in the quarter. So maybe just your thoughts on technology and consumer spending – or consumer habit shift, how that could impact your business.

So I'll start with the first question, Cristina. As we've said, we're going to repay it in cash, which means cash both that we've generated and cash borrowed on our asset baseline. So what you are going to see in the 10-Q that's going to be filed tomorrow is our availability on the line. And if you were to consider us repaying the debt as of today, for example, or as of, I guess, May 29th, is what we had noted, we still have availability of $170 million on the line. And so we will, obviously, with the business trends we have, continue to generate free cash flow from there.

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

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

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

Correct.

And the shift towards digital, I mean we're going to – we're making a lot of big investments. This year, we just hired a new chief kind of digital experience officer, who's someone we've been trying to hire for years. I think he's one of the most creative, smartest people in the space, we – consulted with us about 10 years ago, Eri? Yes. And will be joining us soon. And we're going to make some significant investments in completely reimagining the whole website, and it will kind of move from a website to a portal. And we've got some visions for it, and I'm sure it's going to change 100 times. And the gentleman that's joined the team is going to have, I'm sure, a huge impact. And we're also going to bring in other talent. We're going to try to bring collection of the world's best thinkers, best designers, best – just with internally and external resources to kind of create a leapfrog experience. Something that has never been done. That's equal to the strategic separation we have in the physical world today. So – and I think that's going to be harder to do, right, because the screen size is the same size. You're more in a democratic platform. But we've got a lot of good ideas that we've been thinking about for a long time, and now we're going to make meaningful investment, and we think we've got the right talent lined up. So the shift in habits, thoughts about technology or the shift in habits. I think that the shift to – it probably got accelerated. If you think about e-commerce world, I mean, you've got – clearly, you've got a forced shift in habits. And so I think we probably accelerated the shift to digital shift, to online by maybe three years or something or maybe five years. So what was total online business last year is what, 15%, 17%, something like that. So – no, it was the projections for this year. But – so maybe you get to 30%, three years faster, four years faster, something like that in total online business like on a sustainable business, sustainable way. So I don't think that's a massive change. I mean that's – I mean I think it's a massive change for a short amount of time. I don't think you're – this is not going to stick this level of spending. I mean it's very different. Again, if you're thinking about just basic essential things and putting them on a reorder with Amazon or whoever, shampoo you buy or wherever you buy, whatever thing you use, yes, all that stuff, there's been a forced shift and that will stick. I think a lot is going to be a lot like it was, just a little different, not a lot different for our business. It's going to be a lot different for some other businesses, right? But yes. I just think you're going to see – the biggest fallout here is the – or the biggest change is the best brands and the best kind of retail businesses will be much stronger coming out of this. And the people that were weak, that were on the fringe, the people that don't have a – I was talking to a very smart investor, one of the people – I think he's one of the smartest people I know on the planet. And he said, look, people who don't have a fully integrated multichannel business that's frictionless for the customer are going to be gone by 2022 that this is going to accelerate that. It's accelerating the weak retailers. Like Neiman Marcus was going to always go bankrupt. It's just are they going to go bankrupt two years from now or three years from now or they just went bankrupt now, right? And the weaker businesses, it just accelerates. So it's like a cleaning house. But history would tell you, every time there is a cleaning house, there is like newness that comes. There is new grass that grows. There is new ideas that come to the market. There is new things that evolve. And it's different, but it's usually just a lot better. I don't see – this isn't like when people were riding around in horses and carriages and all of a sudden, someone came up with a car. And now nobody uses horses for transportation. It's like this – it's not going to be all of sudden like no one's going to shop in retail anymore. It's not – I think it's just an acceleration of a shift to online in certain categories and businesses and behavior that just got accelerated a bit. So I think people get like overly focused on this. They're just going to do a poor job of allocating the capital because they're going to – like the trend's going to be, oh, everybody ought to be doing this. Like right now, it's a great time to be a consultant, right? Like that has some digital pitch. Like look what just happened in the world like here, spend millions with me. And it's just – it always kind of happens after times like this. The consultants will come out with a new thing like omnichannel, the next thing or the post-pandemic platform. And they'll sell a lot of air. So it's just a shift. Things are – things were going to be different. It just happened a little faster.

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

Great. Well, thank you, everyone. I do want to say to our team who has just done a remarkable job through this time, to our furloughed teammates, welcome back, and to the few that haven't come back, we'll all be – our center of innovation in headquarters, where the majority of the people that are not completely back, we're going to be able to open next week. And we'll be able to welcome everyone back to the team. And two, I'd just say in this time of civil unrest, too, just every person of color and every black person in America, this is a very difficult time. And to the African-American community and the people that work for us, they know how we feel. And we've communicated that, and we don't need to broadcast that to the world. We don't need the platform necessarily to grandstand for us. We're going to do our work and set our example inside our company. But let's say what we've said internally, we stand with you. We – you just have to have a lot of empathy for what's going on in the world and just a lot of leftover, really terrible bad habits of judgment and discrimination. And I just hope that the unrest we're going through, which I think is just needed, it's just needed, we've got to wipe it clean. And yes, is it messy? It is. Is it scary? It is. But it's also needed because sometimes you got to have fear in this world to get people to change. And you've got to fight for what you truly believe in. And there'll be people on the fringe that take advantage of it, whether it's the looting or the burning of things. That's not what this is about. That's unfortunately what's making the news. The 99% or 95% of the people that are fighting for the freedom that they deserve in this country and the respect that they deserve in this country, the words that are in the pledge of allegiance that we all grew up, putting our right hands over the heart – our hearts and talking about the land that has justice and liberty for all, not for some. We're still fighting that fight. But I just want to say that we're all affected by this, and we're all troubled by this. And we all want to think about what's the best way to help. And sometimes it's just letting people know you truly care. So we just want everyone to know we care, especially our African-American teammates, who – it's got to be a hard time witnessing this, being a part of this and having those things resurface. Just know we care and we are here. And anything we can do, and if you want to talk, know that your family is here. And we're standing with you, even if we can't be physically with you all the time. So anyway – but I just want to thank our teams for just an incredible job, incredible work, incredible imagination, incredible innovation going through the time we just went through. And we are just so much better. What doesn't kill you makes you stronger. So we're really looking forward to the time ahead. Whether we have another breakout in pandemic or not, we're ready. So team resto – team RH will be ready for anything and really excited about the future. So thank you.

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