Rh Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the RH Fourth Quarter 2020 Conference Call. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Allison Malkin of ICR.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2020 Q&A conference call. Joining me today are Gary Friedman, Chairman and CEO; and Jack Preston, CFO. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, as well as our press release issued today, for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results released. 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 for opening remarks.

Great, thank you. Good afternoon, everyone and thank you for joining us. We're going to try a different format for this call. It's been recommended to us that many of you sometimes are scrambling and don't necessarily get a chance to read the letter before the call starts since there's only an hour between we put out the release, and we've had a suggestion to start with the letter and read it. That way, everybody's grounded in what we just said, and it might elevate and improve the quality of the dialogue as we go forward. So I'm going to start with reading the shareholder letter that we just released. To our people, partners and shareholders, as we anniversary what has been one of the most difficult years in recent history and as we begin to see the light at the end of the dark tunnel of this deadly and disruptive virus, we do so with a greater appreciation for our freedom and the simple gestures in life like a handshake or a hug. We also turn this corner knowing that we used our time wisely to reimagine and reinvent ourselves once again. In times of turmoil, humans tend to move in herds, hunkering down and finding comfort in conformity. Even those who analyze and report the news seem to find reassurance in replication, trying to fit everything into predictable pandemic piles of headlines we've all been reading. For example, we have been put into this 'there's no place like home' pile. Others have been placed into the 'e-commerce is everything' pile. Both are actually good piles because every one of those you are looked upon favorably whether you're on the top or the bottom of the pile. I believe many on Wall Street are managing their portfolios in piles—looking through the reading glasses when they really need a microscope and a telescope. A microscope to search for the details and differences in those rare brands and businesses that belong anywhere with the pile and a telescope to see the opportunities that they will exploit post this pandemic. Since we, the people of team RH, generally move in the opposite direction of the herd, are allergic to hunkering down and surely don't fully believe we belong in the pandemic pile. We've taken a shot at four simple headlines that require neither a microscope nor a telescope. The four Ps that give you insight into what you might expect us to do next because while most of the world spent this past year sheltering in place, we've spent that time reimagining and reinventing ourselves at a pace never before seen. So let me talk about these four Ps: our product, our performance, our prospects, and our people. Our product; we are building the most comprehensive and compelling collection of luxury home furnishings in the world. The desirability and exclusivity of our product amplified in our inspiring spaces have enabled us to gain significant market share with RH demand up 36% in the fourth quarter. Our demand has accelerated sharply with February up 73% and the first two weeks of March up 96%, prior to cycling the closing of our galleries, restaurants and outlets a year ago. Adjusted gross margin increased 480 points in the quarter, 540 basis points for the year and 1,210 basis points on a three-year basis versus fiscal 2017, again demonstrating the desirability of our exclusive offering and the pricing power of our brand. The strategic separation we've created will continue to grow as we further elevate and expand the RH Brand with the introductions of RH Contemporary in 2021, plus RH Color, RH Couture, and RH Bespoke over the next several years. Additionally, our plan is to unveil The World of RH, a digital portal presenting our products, places, services, and spaces this fall. We will begin to bring the different parts of our integrated ecosystem to life with rich content that we believe will enhance our brand and connect with our clients on a much deeper level. Our performance; we continue to build the most productive operating platform and business model in our industry, with adjusted operating margins increasing 750 basis points to 21.8% versus 14.3% last year on only an 8% revenue growth. Let me say that again, 750 basis points on only 8% revenue growth. It's an operating margin never seen before in the furniture home furnishings market, and more than 50% better than the closest competitor. Our ROIC of 53% in 2020 also puts us in a class of our own. Our results represent a systemic lift that is not merely a temporal pandemic shift due to an unsustainable revenue gain. Remember, virtually 100% of our core business is direct-to-customer, with less than one-tenth of 1% being cash and carry from our stores, which is basically floor model sell-offs at the end of the season. That is where our demand to revenues lag; our demand to revenue lag is much greater than other home furnishings retailers who have seasonal assortments and large cash and carry businesses. It's also important to note that due to the virus and due to supply chain disruptions, approximately $150 million of demand that was generated in 2020 will be recognized as revenue in 2021, while the majority of the selling costs to generate that demand were absorbed in 2020. If those revenues were recognized last year, our adjusted operating margin would have reached 23%. I often quote Bernard Arnault, the Chairman and CEO of LVMH, as he says luxury goods are the only area in which it's possible to make luxury margins. At 21.8% adjusted operating margin in 2020, RH has now eclipsed the operating margin of LVMH, and we have a clear line of sight to 25% plus operating margin over the next several years. With less than $3 billion of net revenues, you can imagine the leverage we should experience as we scale. RH has also become one of the top-performing consumer stocks of the past decade. Since our IPO on November 2, 2012 at $24 per share, RH has outperformed Apple, Amazon, Google, Facebook, Nike, Starbucks, LVMH, Home Depot, Hermes, and just about everyone else but Tesla. Warren Buffet says time favors the well-managed company. We believe our performance has and will continue to prove that point. Let me move to our prospects. We ended 2020 with just under $3 billion in net revenues and believe the data supports the RH brand reaching $5 billion to $6 billion in North America and $20 billion to $25 billion globally. We believe that number will continue to grow when you consider our opportunities in hospitality and home building as we continue to expand the RH ecosystem with the introduction of RH Guesthouses and RH Residences. We're tracking to begin our international expansion in Europe with the opening of RH England and RH Paris in 2022. We are planning to open our first guest house in New York City this fall, followed by our second guest house in Aspen, which will include our first RH Bath House & Spa in the fall of 2022. We are currently in design development for our first RH Residences as part of our larger Aspen ecosystem and have already received multiple unsolicited proposals to purchase our homes sight unseen or to place deposits and reserve a home. We have not put anything out there and we've said nothing but put out the original press release. We probably could presell every single home today. We believe the revolutionary design of both the Guesthouses and Residences have the potential to create entirely new markets in their respective industries while also positioning RH as a thought leader, taste maker, and place maker. We also plan to open four new design galleries in 2021, all with integrated restaurants and wine bars; RH San Francisco, the gallery at the Historic Bethlehem Steel Building; RH Dallas, the gallery at Knox Street; RH Oak Brook, the gallery at the Center; and RH Jacksonville, the gallery of St. John's Town Center. We talk about our people. I believe we are the most resourceful team in our industry, and again, not by a little. Tony Robbins talks about resourcefulness being the ultimate resource. It's not about time, money, or technology. It's about passion, persistence, vision, and values. Starting with no resources, we transformed a nearly bankrupt business selling nostalgic discovery items with a $20 million market cap into the leading luxury home brand in the world with a market value in excess of $10 billion. History has proven that men and women will work for a dollar but die for what they believe in. We say inside our organization, this is not our company. It's our cause. It's an authentic reflection of who we are and what we believe in. Some people say don't take it personally. Those people are not our people. Make no mistake. This is very personal to us. We believe brands with more control will become more valuable. We have always invested in controlling our brand from concept to customer, avoiding intermediaries who will never care as much as we do. That's why we've avoided partnerships, sponsorships, franchising, or licensing, and continue to believe brands with more control will become more valuable. The easy path of expanding the brand rarely pans out to be the best path. The road to global expansion is littered with brands that put their trust in others only to spend years negotiating repurchase rights decades later after the damage is done. That's not to say there won't be exceptions where there's an outstanding partner in a challenging country. But it will be a rare exception as we expand the RH brand around the world. We also continue to invest in taking more control of the customer experience and have been testing our RH in-your-home in Los Angeles and San Francisco markets, and they're extremely happy with the early results. As Fernando Garcia, our President of Furniture Operations & Home Delivery describes it, RH in-your-home is not a different or better experience. It's a unique and memorable experience as we extend the gallery into our customers' homes. With furniture ambassadors managing every detail, it creates an impression with our customers that can last a lifetime. Additionally, we are opening a new 1 million square foot furniture distribution center in Southern California this spring. The new facility will allow us to reduce delivery times by 7 to 10 days for both outdoor furniture and special order upholstery in most major markets. 2021 has all the signs of a very good year. While 2021 will surely be a tale of two halves, the fact that we have a booming housing market, a record stock market, low interest rates, the expectation of a rebound in the economy and jobs market combined with recent further acceleration in our demand trends is feeling more rather than less optimistic that it might just turn out to be two very good halves. While we expect to face continued difficulties ramping vendor production to meet demand, and we don't see the challenges with ocean freight or port congestion resolving themselves anytime soon, it's hard not to forecast first quarter revenue growth of at least 50% and adjusted operating margin in the 20% range. With the momentum in the business, we believe it's safe to say 2021 should result in revenue growth in the range of 15% to 20% with adjusted operating margin expanding 100 basis points to 200 basis points and ROIC in excess of 60%. We have made the decision once again to delay the mailing of our Source Books and the launch of RH Contemporary until the fall of 2021 to enable our manufacturing partners to catch up to the increasing demand trends. This decision should also support a strong second half as we have held back new collections for the past year, which will result in one of our largest new product launches in our history. Our RH Outdoor Source Book filled with 10 new collections is scheduled to be in-home starting this week, with the digital Source Book and new outdoor collections live on our website today. This is a time to be defined by our vision, not by a virus. As we move past the dark days of the pandemic, let us remember our resurrection, a time we reimagined and reinvented ourselves once again. A time our results redefined what is possible for a home furnishings brand, a time when our performance forced the rest of the world to remove us from that pandemic pile and see us for who we truly are: a team of people who don't know what can't be done. This is a time to be defined by our vision, not by a virus. Carpe diem. Okay, I'll turn it over to you, operator to open the call for questions.

And your first question comes from Steven Zaccone from Citigroup. Your line is open.

Congrats on the strong results and happy to be a new addition to the earnings call. Gary you have a lot of momentum in the business right now and significant amount of product newness; you're growing the hospitality offerings and the margin profile significantly outpacing your early outlooks for the business. With all of this momentum in mind and thinking about how the world has changed from a global pandemic standpoint, where have you gained more confidence in the long-term growth potential of this business?

I don't know if anything's really changed for us based on the pandemic. In fact, I don't think as much has changed as most people think or believe. I mean, look you just start with the fact that our business is basically a 100% direct-to-customer platform. So we've been channel neutral our entire existence here. We don't really care where anybody places an order—whether it was through the pandemic when orders shifted from stores to online or virtually with our people. As soon as our galleries reopened, our business looked pretty normal and I know there's a lot of talk about how this is going to accelerate the growth of the Internet by 10 points over the next several years. That may or may not be true. I would say we're indifferent to that. We're really indifferent with the inherent channel shift that is going to happen over the next several decades. We've anticipated that. We knew that was going to happen. We're indifferent to that happening. People are reframing their models and closing stores at an accelerated rate due to the fact that there's been this channel shifts and that may be true because their model was architected just for a retail business and they have more recently got into a direct customer business and have had a rush online without strategically thinking about all the implications of it. We built this business beginning 20 years ago as a channel-neutral business and it's a platform looking ahead at the next 20, 30, 40 years and saying we can see the world going there. So whether it gets there - whether it goes 5% or 10% faster and there's a greater shift or slower shift, we're completely indifferent. It doesn't change anything about our real estate strategy or online strategy or anything we're doing. We believe great physical experiences in this physical world we live in are going to remain relevant. If anything, I think we're going to be even more relevant post this pandemic because I think it scared a lot of people out of investing into the physical world. It has motivated many to follow the herd into a rush to be an online business, rush to be a digital-first business, rush to be a digital-first business with a few stores. I know where everybody is rushing to, and we only rush to some place that we figured it all out. We thought about it deeply. So I'd say nothing has fundamentally changed about our strategy based on the pandemic. We're indifferent to the pandemic; we're solely focused on building the most compelling product assortment presented on the most inspiring immersive platform in the world with the most incredible service that anybody can have in this industry. We think those are the right things to focus on, not chasing shifts in the business. That's very tactical. Others will shift online—great. If you didn't see it coming until now, you're way behind.

Great. That's very helpful detail. Just a question on the margin outlook for the 100 basis points to 200 basis points expansion; how should we think about that from a gross versus OpEx leverage standpoint? And specifically on the growth side, you've had two strong years of your product margin expansion. Do you expect that strength to continue this year? Thanks very much.

I'll let Jack take that one. Go ahead, Jack.

Yes. Well, like you said, in the last couple of years our margin expansion has been primarily driven on the gross margin line. So for fiscal '20 of the 750 basis points increase, three quarters is nearly where gross margin. And so I think on balance, you're going to see that quality of that margin increase continue. And while we're not guiding specifically to say what exact portion of the 100 basis points to 200 basis points is going to come from gross margin, I would characterize it as at least half, if not more.

Yes. And let me build on Jack's point. I think as you asked that it makes me think about probably what is probably not obvious if you're outside of this business because people have seen us reposition products. It tends to take pricing. But I think it's probably not clear that as we evolve this brand and continue our climb up the luxury mountain, the product quality is going to continue to move substantially. And the pricing will move with the product naturally; but the value equation will get stronger, not weaker as we get smarter here and develop better and deeper relationships with our key manufacturing partners. So what might not be clear is as you take the prices up and you get product margin in that equation, you also get leverage throughout the supply chain. And that's probably a simple mathematical equation that maybe not everybody is connecting the dots on. But it's relatively simple if you think about it. And if you just try to capture the essence of Bernard Arnault's quote that only in luxury products can you have the ability to make luxury margins. It would be very hard to build a model like ours if you're playing in the middle of the market.

And due to time constraints, we do ask that you please limit yourself to one question and one follow-up. Your next question comes to line of Adrienne Yih from Barclays. Your line is open.

Wonderful news on the momentum continuing. Gary, we've spoken before about demand creation, how it's no longer a single number on the P&L like a percent of sales but a confluence of the investments you're making in Aspen, London, RH3, etc. It seems RH is building more of a desire creation and a pipeline of future customers. So who wants the RH lifestyle, right, and everything that comes with it? So how should we think about that advertising demand creation line in and of itself going forward? Thank you very much.

It's a really good question. And so the right way to think about it. Building one of the most admired brands in the world, desired brands in the world—whichever adjective you want to use, really takes a different path, it takes a different way to communicate, and I think we're in a world where it's harder and harder to get your message out because there's so much information out there. I read a study about a year ago that humans are consuming 700% more information than they were 20 years ago and it's an astonishing number if you think about that from 20 years ago—consuming 7 times more information because of all these devices we have and the amount of platforms we're communicating on and the ease of communicating with us. So the way to break through, right? Steve Jobs said something if you watch his original kind of YouTube presentation on his return to Apple in his shorts and flip flops on a little Apple stage, when he was talking about reintroducing Apple and the 'Think Different' campaign, and he said we live in a really noisy world and it's going to be hard for anyone to remember anything about any of us, and that it’s so important to connect with people about values. He talks about some of the great brands. He talked about Nike being one of the great brands in the world. They’re selling a commodity—selling tennis shoes for the most part. But he said in their advertising they don't talk about the shoe, they don't talk about the sole, they don't talk about the laces. They celebrate great athletes and great athletics. And he talks about how Apple believed people that are passionate enough could really change the world. And that Apple brand, the 'Think Different' campaign, was a campaign that was more than anything else about the absence of the product. You didn't see an iMac, you didn't see anything in the campaign.

Gary, that's very helpful.

I consider it one of the best questions I got in a long time.

Yes. Well, look, you're going to see the same dynamics in terms of the supply chain constraints. For the same reasons that the demand growth exceeded revenue growth in Q3 and Q4 were with the strength in business you're going to continue to see that in Q1 and the potential acceleration given the strength and acceleration in demand.

Yes. And again, the key word is 'at least.' Is 'at least.' Right? So we give you 'at least'—how many times over the last few years, 'at least' this, 'at least' 18% operating margins, then it's 'at least' 20%. Then it's—so we tend to kind of give you 'at least.' We want to make sure whatever happens, we're going to hit the 'at least.' But we generally beat the 'at least' pretty handedly.

Your next question comes from the line of Curtis Nagle from Bank of America. Your line is open.

Gary, perhaps a bit of a piggyback question on Adrienne's, perhaps just a little bit more specific just thinking about the ecosystem that you guys are rolling out. I just go two questions. How meaningful do you think that could be as a brand enhancer for RH over the next three to five years? And as a standalone business, how important that—as a revenue and profit contributor or as I guess kind of the former points more important, how should we think about that?

Yes. Well, I think it's going to be a meaningful brand enhancer. If you would have asked me five or seven years ago, we started working on this, I would have told you it's going to be a meaningful brand enhancer. Now, I look back and I go, that wasn't very good at all. We were working five, seven years ago because we keep making things better. The great thing about having a vision is that you you really learn when you start doing. You start accelerating your education and connecting more dots to see around more corners. I think what we're about to unveil in New York and Aspen—nobody has any idea what it is. I really don’t. I have been fortunate enough in my life that I've been traveling since I was a relatively young man and I've seen a lot of places. I've been to most of the Aman Resorts in the world, and I think when you see what we’ve done in the Guesthouse, there are things that no one has ever done in hospitality. Most of the innovation in the world happens outside industries—not inside industries. We've never opened a guest house before, and when we see our website launch in the west—and when we open, the first thing you're going to read on the website, it says this is not a hotel because it’s not. It's a completely new way to think about an experience like that. And I think when you do work like that, it has a great chance of getting people at the top to tip their hat because they haven't seen it. When you think about who lives there—who has the biggest house? Bernard Arnault, right? And I joke around, and I say, look, Bernard Arnault just bought Belmond for $3 billion. Nobody thinks we're impressing Bernard Arnault. I guarantee you, when he sees this guest house, he's going to be forced to tip his hat because nobody’s seen anything like this in the world. And that brings in the conversation. That’s what changes the perception of the brand—a brand that started underground, had to dig its way out of the grave and start climbing a mountain - that’s never been climbed before. So you have to do things that people can't imagine, and I believe our work will be respected, growing more attention and consideration.

Your philosophy is always welcome. Jack, a really quick one. Actually, this one is 73% and 96% demand growth translates—and then we have—we're now in the part where the stores were closed. What—to at least 50% revenue growth, is that due to port congestion or lack of inventory? It seems like the spread between those two numbers would be tighter.

Yes. Well, look, you're going to see the same dynamics in terms of the supply chain constraints. For the same reasons that the demand growth exceeded revenue growth in Q3 and Q4 with strong performance, you're going to continue to see that in Q1 and a potential acceleration given the strength and acceleration in demand.

Yes. And again, the key word is 'at least.' You have at least how many times over the last few years—at least this, at least 18% operating margins, then it's at least 20%. We tend to give you at least what we're going to hit to ensure whatever happens.

Your next question comes from the line of Anna Schaffer from US Capital. Your line is open.

Gary, perhaps a bit of a piggyback question on Adrienne's, perhaps just a little bit more specific just thinking about the ecosystem that you guys are rolling out. I just go two questions. How meaningful do you think that could be as a brand enhancer for RH over the next three to five years? And as a standalone business, how important that—as a revenue and profit contributor or as I guess kind of the former points more important, how should we think about that?

Yes. Well, I think it's going to be a meaningful brand enhancer. If you would have asked me five or seven years ago, we started working on this, I would have told you it's going to be a meaningful brand enhancer. Now, I look back and I go that wasn't very good at all. We were working five, seven years ago because we keep making things better. The great thing about having a vision is that you you really learn when you start doing. You start accelerating your education and connecting more dots to see around more corners. I think what we're about to unveil in New York and Aspen—nobody has any idea what it is. I really don’t. I have been fortunate enough in my life that I've been traveling since I was a relatively young man and I've seen a lot of places. I've been to most of the Aman Resorts in the world, and I think when you see what we’ve done in the Guesthouse, there are things that no one has ever done in hospitality. Most of the innovation in the world happens outside industries—not inside industries. We've never opened a guest house before, and when we see our website launch in the west—and when we open, the first thing you're going to read on the website, it says this is not a hotel because it’s not. It's a completely new way to think about an experience like that. And I think when you do work like that, it has a great chance of getting people at the top to tip their hat because they haven't seen it. When you think about who lives there—who has the biggest house? Bernard Arnault, right? And I joke around, and I say, look, Bernard Arnault just bought Belmond for $3 billion. Nobody thinks we're impressing Bernard Arnault. I guarantee you when he sees this guest house, he's going to be forced to tip his hat because nobody’s seen anything like this in the world. And that brings in the conversation. That’s what changes the perception of the brand—a brand that started underground, had to dig its way out of the grave and start climbing a mountain—that's never been climbed before. So you have to do things that people can't imagine, and I believe our work will be respected, growing more attention and consideration. Yes, we'll figure out how to kind of do a little. We’re thinking like we don’t know how to do a launch party in a 10-room hotel. You can't have people walking around the hallways, right? And we thought we might do a week of sleepovers where we get invited for a sleepover, but we can only have two people in a room times 10 rooms, so we have 20 people a night. We can get the right influencers and the right people. We'll try to open this. We think coincide with Fashion Week. Yes, we think people will be traveling again in September. It could be like the greatest coming-out party and some of the who's who may want to come for a sleepover to see something no one's ever seen. We start the right conversation. We think a good time to do an investor meeting in New York and bring everybody up to speed and do a tour of the guest house right before we really open it to the public because once it's open, you can't tour anybody through it, right? Because privacy is taken. So we hope to share what it looks like before we open. Yes, we want to do something extraordinary. And building magnificent spaces, connecting with designers and creating detailed focus that's engaging. Our product collection is growing and a deep connection with customers. We want to weave that together and lay the groundwork for the brand moving forward.

Your next question comes from the line of Max Rakhlenko from Cowen & Company. Your line is open.

Thanks a lot, guys, and congrats on the incredible quarter. As we think ahead about the 100 basis points to 200 basis points of EBIT margin expansion in 2021, what do you see as the biggest buckets of opportunities? And then longer term, as we look ahead to the 25% plus—what do you see as additional opportunities beyond 2021?

Yes. Well, look, the—we've kind of said a 100 basis points to 200 basis points; we also kind of put some dots out for you, right? We said, hey, of that $150 million had shifted this year, we would have been at 23 to start with. We're 23. And so then we got another 100 basis points to get you to 24 which is 200 basis points higher than 2018. So you can get there pretty easily. It's not a lot of moves. And some of it will depend on just how much revenue flows here. We don't need a lot of revenues to kind of get to where we're pointing you. If for some reason these revenue trends continue—we've - I've never seen anything like this. I've been through the Great Recession and I've been through multiple recessions in my career. I've been in the home category now for, how many years? 34 years. Just like Jack reminded me it was my 20th year anniversary here. He goes, Oh, gosh, I'm sorry and I missed your anniversary. He didn't even know my anniversary. So yes, I've been here 20 years, at Williams-Sonoma 14 years. I’ve been in the home business for 34 years. I've seen a lot of cycles during that time. I’ve never seen anything quite like this. I tend to, when there’s really good news like this, be the pessimist in the company. I tend to be the one that says whatever demand you think we’re getting right now is not going to stay. Don’t architect the business for this. This is going to go away, and it hasn’t gone away yet. I’ve talked to some pretty smart people that have given me different insights into that. And it’s really tied to—the pandemic shift of out of cities and into suburbs or into second home markets, which, by the way, is a fantastic advantage for us. Because 80% of our business is in the suburbs. The move to the suburbs is not just a move to the suburbs; it’s a square footage expansion by—they believe it’s two times or more square footage expansion for the consumer. I hadn't thought about that before, and that was a really interesting point. This real lag that exists right now will benefit us. Like, they believe our business was going to accelerate because of the lag because of this massive shift.

Your next question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Gary, you mentioned getting more control right in the business, and I was hoping you could maybe expand on that theme, right, where your mind is at? What other aspects of the business are you looking at, gain more control over whether it be manufacturing, whether it be the whole design process? I think RH In Your Home experience? I'd love to just hear your thought process on some of the ideas around control.

Yes. So Steve, this is a good question. As we think about it strategically, right, our model is going to throw up a lot of cash here. And what are we going to do with that cash? I mean, clearly, you can invest it in the business; you could buy back your stock; you can pay dividends, or so on and so forth. But if you look at our model, look at it over the next five years, you've got to get out in front of it and say what should we do and where do we see the biggest opportunities to create more value—and one of the biggest ones we’re discussing is this idea of controlling more of the brand. We’re realizing as we scale the luxury mountain, there’s so much fragmentation and I always like to say that products of this quality have never been made in these quantities. Taking more control of the product pipeline, whether that might mean manufacturing, whether it’s sourcing, whether it’s—there are so many aspects of it; whether it’s raw material procurement—do we take like most of our furniture is made with four species of wood, right? I don't know, do we take positions in certain woods to give us a competitive advantage, meaning if we’re as big of a platform as we are in outdoor furniture securing teak is one of the challenges, and should we own outdoor furniture manufacturing, so we have access to more control over raw materials that could give us a massive competitive advantage? Other parts of the business we've done—we have our own furniture upholstery manufacturing in North Carolina; it's not very big, but we've learned a lot doing it.

We anxiously await them. The—maybe just a quick follow-up, given the unsolicited proposals for the residences out in Aspen. It sounds like it has you thinking, right? The idea is bigger, maybe not bigger than you originally thought, but I'm curious if those proposals indicate something bigger about the opportunity maybe a quicker maturation behind it or where the mindset is on just the residences as a whole?

Yes. I don't think we've got to kind of rush here. I think we've got to kind of rush to learn and conceptualize the right model. I don't think it's going to be hard for us to build beautiful homes and sell them. I think we can do that. But what is the right model? How do you do it? Where you say, let’s say we want to really do this—kind of create this brand, and we get really good at it. Yes. We're kind of always unsatisfied, always in the move. We rarely celebrate. It's not that we don't at all. We celebrate. But constant students, we learn. If you keep learning, keep seeing more, and if you can see more, then you're just never satisfied with where you are. So—and that's kind of our culture.

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

Thank you so much for taking my question. And, Gary, I'd just like to say as a sell-side analyst who has had a buy rating on the stock left 300 points, I don't want you spending your time thinking about what you're going to Tweet later today either. So I just wanted to kind of get that sense.

Thanks, Anthony. That’s good.

Yes, Anthony. So, I think historically we've talked about very strong results as far as product on the product margin side as it relates to gross margin. And so Q4 is no different than what we talked about in Q3. It's about three quarters of the pickup is in our product margin which had a number of things that we've talked about regarding the decline in luxury markets, the increase in the quality of product, cycling the rug business, operating the rug business at a higher margin among other things; the outlet business as we talked about in MD&A and our filings. Obviously, it’s at lower promotional levels. So, that's where you're seeing the predominant amount of it. And as far as CapEx for the year is concerned, you'll see in the 10-K when it's filed next week, the range that we're getting is $250 million to $300 million, which is a little higher than last year; we ended up at sort of adjusted CapEx, you need to look at because a portion of it ends up in the op section of the cash flow. But this year, we ended up at $180 million. So, then what I'll say about the elevation of the CapEx is there's a number of development hills happening this year that will monetize in a future period. And then just finishing one store—we are opening one that was on a land lease. So, there's just a number of factors that are driving higher CapEx this year including starting to spend money internationally.

The next question comes from the line of Michael Lasser from UBS. Your line is open.

Thanks a lot for taking my question. Gary, there's been a sharp increase in the profitability of many of the players in the home furnishings industry. So do you think that the sector is now just structurally earning higher margins? And how does that inform how you think about your margins profitability in the second half of the year, where when you talk about the two halves, you will be facing some unique factors and much more difficult comparisons?

Sure. Yes. Good question. I think to answer that you really got to look at what's the revenue growth that the businesses have experienced in 2020, right? And that's why I made the point and I repeated the point in the letter that we hit 21.8% operating margin on 8% revenue growth, right? So we had 750 basis points of margin expansion on 8% revenue growth. So that's the first part of it, right? So you can kind of bank that. That's not going away because that's got nothing to do with the pandemic. That's got nothing to do with home furnishings tailwinds. So that's structural and we would have, by the way, it’s about what we thought we were going to earn before the pandemic. Our model was about 22% what we thought we'd make and then the pandemic hit. But with the pandemic hit, I mean, what it did is it turned it into two halves. Now did we optimize a little bit here and there? We did, but our plan was to have revenue growth slightly higher. But what we came out right about there. So if you've got people that have grown faster in 2020 than they had historically, you've got to kind of say how much of that sticks? How much of the leverage sticks? And then there's a really important one to kind of figure out where everybody's going to land here is what the price structure and the promotional structure of the business. So we didn't get less promotional. We are not a promotional business, right? The only thing we have is we have things that we are discontinuing out of the assortment but we are not a promotional business. So there's businesses—if you study our industry—there's businesses that have pulled back on promotions as they should and they pull back on promotions and they can have X amount of demand or revenues when the world cycles, at some point, can they maintain a non-promotional stance? Because I'm sure people have picked up 200 basis points maybe 300 basis points of product margins because they used to be really promotional and now they don't have to be promotional because there is this increased demand. That—to me—that's the open switch. How much of the revenue sticks? So what happened to their margin in our industry is tied to an increased revenue having ours which is not because our revenues didn't shift.

And, Michael, it’s Jack. I did want to add just one point when you asked about the H2 profitability just not giving specific direction here. But if you think about advertising, I just want to clarify. In 2020, we mailed books in the spring but not in the fall. So most of the spend happened in H1 versus H2. Obviously, the opposite is going to happen this year. We'll clearly mail an outdoor book. But the main books are going to be mailed in the fall. So you are going to have a flip flop of advertising.

Yes, it's a big shift of advertising that we should probably kind of map that out for people so they can get their models right.

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

Gary, I was hoping you could tell us a little more about the world of RH. And is this going to be a redesign of the RH website? Is this separate? How do you think about making your web presence better as a transactional site and the importance of that? And just any more color on the world of RH.

Yes. Yes. It's really a rebuild of the entire website and kind of digital platform of the business. So it’s starting from scratch, thinking about it across all the dimensions of these kind of new aspects of our business and brand. And think about it beyond just a website. But we think about it as a portal into the world of RH, right, that can take you through to our products, our places, our services, and our spaces. So it's you know all the products and categories. Right. We have RH Interiors, RH Modern, we have RH Contemporary coming in. We have RH Baby and toddler. We have RH Teen. We've got RH Outdoor. We have RH Rugs, RH Beach House, RH Ski House, RH Colors coming in. RH Couture is coming; RH Bespoke is coming in. So when we look out and we think about just the product world of RH, how do you architect that? How do you have someone navigate through that? How do you get credit for all of that on a flat screen? Right. And then we think about our places. It's really galleries, guest houses, restaurants and residences. Right. And so those are all our places. So thinking about how someone can navigate through those areas, how do you get a reservation in one of our restaurants? How do you connect to the guest house? How do you learn about the residences that we have in development? How do you look at our galleries, and what are the aspects and explore galleries online? Lastly, we're looking at technology on multiple levels to create the right experience and interaction. So that's our products, that’s our places, our services. I think this is an opportunity that could create a brand that might never have a paradigm shift, pushing the boundaries of indoor and outdoor living; an experience rather than merely commerce.

And there are no further questions at this time. I will turn the call back over to management for some closing remarks.

Great. Thank you very much everybody for your time and attention today and your interest in our business and brand. We know it’s been a crazy and difficult year and we just want to thank all of you, thank all of our customers, thank all of our people around the world that not only just work for our company that work on behalf of our company and making the products and delivering the products and making the supply chain work. This is just a year like none of us could have imagined and a lot of people made a lot of sacrifices to a lot of risk to kind of keep everything going in this world and we sure are thankful and we couldn't be more excited about the future and about the opportunity. So thank you, everyone, and we look forward to talking to you at the end of the first quarter.

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