Ladies and gentlemen, thank you for standing by, and welcome to the RH First Quarter Fiscal 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. Please be advised that today’s call is being recorded. I would now like to hand the conference over to your speaker today, Ms. Allison Malkin of ICR. Thank you. Please go ahead, ma’am.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2021 conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, as well as our press release issued today, for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today’s financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I’ll turn the call over to Gary.

Great. Thank you, everyone. We’re going to start with an overview of our shareholder letter, which highlights our results and outlook. And then, we’ll open the call to questions. To our People, Partners and Shareholders: Fiscal 2021 is off to a strong start, with revenues up 78% in the first quarter versus down 19% a year ago. Total Company demand increased 101% in Q1 and RH Core demand increased 109%, the strongest demand trends in our industry. We continue to set a new standard for financial performance among home furnishings retailers with adjusted operating margin increasing 1,260 basis points in the first quarter to 22.6% versus 10% a year ago. Adjusted net income increased 375% and adjusted diluted earnings per share increased 285% to $4.89 per share versus $1.27 last year. We generated $228 million of adjusted EBITDA in the quarter and $136 million of free cash flow. Q1 ended with total net debt of $382 million and trailing 12 months adjusted EBITDA of $896 million. Our expectation is to be net debt-free by the end of this fiscal year. Based on current business trends, we are raising our outlook for revenue growth in fiscal 2021 to a range of 25% to 30% versus our prior outlook of 15% to 20%. We now expect adjusted operating margin in the range of 23.5% to 24.3%, an increase of 170 to 250 basis points versus our prior outlook of 100 to 200 basis points, with ROIC in excess of 60%. As it relates to the second quarter, we expect revenue growth in the range of 35% to 37% and adjusted operating margin in the range of 25.9% to 26.1%. While fiscal 2021 will surely be a tale of two halves, there are many data points that lead us to feel optimistic that our strong performance will continue through the second half of 2021 with growth accelerating in fiscal 2022 and beyond. These include a strong housing and renovation market, both with pent-up demand and a long tail, a record stock market, low interest rates and the reopening of several large parts of our economy. Additionally, the unmasking of the general public could lead to a Roaring Twenties type of consumer exuberance. Town & Country captured that feeling perfectly on the recent cover of their magazine, titled, “Remember Fun? Get Ready for the Comeback!” Combine that with the largest new product introduction cycle in our history beginning this fall, and the launch of RH International next year, and it's going to be exciting. You should also rest assured that we have pressure tested our business assumptions and risks, and are confident in our ability to maintain an adjusted operating margin in excess of 20% in just about any economic downside scenario we can envision. We have spent decades building a brand and business model that generates industry-leading profitability and return on invested capital, and believe, like Bernard Arnault, “Luxury goods are the only area it is possible to make luxury margins.” With 21.8% adjusted operating margin in fiscal 2020, RH has eclipsed the operating margin of LVMH, and we now have a clear line of sight to 25%-plus adjusted operating margin over the next several years. As it relates to our business model, what is often overlooked is the simplicity and low-risk nature of what we have built. I thought it would be helpful to highlight some of the key attributes: No Seasonal Inventory: We don't offer seasonal categories like Valentine’s Day, Easter, Halloween, Thanksgiving or Christmas. Nor do we carry collections or color palettes tied to spring, summer, fall or winter like many home furnishings or home improvement retailers. We spent years eliminating those categories to avoid seasonal markdowns, enabling us to have a significantly higher margin business. Limited Fashion Risk: Our business is not driven by the fashion cycles found in retail models that require frequent discounting. The major trends that drive our business are tied to architecture and the dead. Architectural trends tend to change over decades, not years. As an example, many point to the 1997 opening of the Guggenheim Museum in Bilbao, Spain by legendary architect Frank Gehry, as the beginning of the recent modern movement. We launched RH Modern almost two decades later in the fall of 2015, when a critical mass of modern homes and condominiums was reached, establishing a sizable new market. As it relates to the dead, generations pass away and their belongings move through estate sales, which feed the antique markets, which drive the high-end interior design market, which influences the high-end reproduction market, and the trends continue to flow downstream. Membership: Moving from a promotional to a membership model, as we did in 2016, simplified and streamlined our business, eliminating the chaos and costs associated with a constantly changing customer proposition. Membership also deepened our relationship with our customers as the majority use our interior designers to furnish their homes. This evolved our business from selling products to selling spaces, driving higher average orders and lower customer acquisition costs as RH has become their top-of-mind choice for luxury home furnishings. Luxury Positioning: Luxury brands have proven to be less susceptible to economic downturns as their customers may temporarily pause their spending but do not lose the ability to spend. Additionally, investing in the home grows exponentially as customers accumulate wealth, acquiring more homes, which drives higher sales, resulting in lower advertising costs, and a more profitable operating model. We enter this new decade with a compelling vision for the future, a team passionate about bringing that vision to life, and the strongest brand and business model in our industry. We plan to launch an unimaginable amount of innovative new strategies designed to further elevate and expand the RH brand. As I did in my recent annual shareholders’ letter, I will outline the strategic separation we’ve created and the strategies we are pursuing as we continue our quest to become one of the most admired brands in the world.

Your first question comes from the line of Chuck Grom with Gordon Haskett.

Hey. Thank you. Good evening. Incredible results to the team. Gary, is there any way to size up the degree to which categories such as outdoor are supporting total sales growth, maybe the penetration of the category in 2018 versus where 2021 can end up? And are there any other categories that you believe you’re seeing outsized growth today, just exceptional results?

Yes. I think if you look at our demand trends, everything’s way up, right? So, outdoor is one of our best performing categories. I mean, we’re the most dominant outdoor brand at the high-end in the world today and have the biggest business in the world at the high-end for outdoor by multiple. So, you would expect that we dominate that category. Even though there are really long lead times, and we’ve been sold out for a good part of the past year.

Great. And is there any other categories you would highlight besides outdoor?

Again, if you take the core business at 109% demand growth in Q1, they’re all way up. So, business is strong across all categories.

Great. And then, in your shareholder letter last week, you wrote, we have to be willing to endure short-term pain to provide long-term gain. And you referred back to a lot of other growing pains in the business over the past few years. But, I was just curious, if there’s something down the road that you were referring to in terms of the future outlook?

It’s the mindset of investing with a long-term view to build one of the most admired brands in the world. And it’s not a path that most people take. Most of the world is focused on duplication and moving a lot of small rocks, and we tend to focus on big rocks that create big value, and those sometimes take multiple years to move and to bring to life. If you look at our guidance, it would indicate, we don’t see anything in the near future that could be disruptive to our results. Today, as we think about the investment horizon over the next several years, whether it’s international or digital reimagination or product elevation or any of the big moves we’re making. They’re all implied in our outlook and our guidance. But, from time to time, there may be a significant investment we have to make that’s going to leapfrog the business further into the future.

We ask that everyone limits themselves to one question and one follow-up question. Next up, we have Adrienne Yih from Barclays.

Good afternoon. Congratulations, Gary. My question is regarding the total addressable market opportunity, specifically the $5 billion to $6 billion sales target in North America and the $20 billion to $25 billion globally. Can you provide details on the number of galleries that support this in North America and, more importantly, the number of galleries globally? Are you only focusing on the home furnishings industry, excluding hospitality and B2B? I would like to get more insight on that. Additionally, as you plan to open stores internationally in various cities and countries, are you conducting any product market research or customization for each marketplace? Should we expect that each of these stores will achieve the same sales figures, or will there be variations among them? Thank you.

Hi Adrienne. That was a lot of questions in one question. Let’s see. The opportunity, as it relates to the $6 billion in North America and $20 billion to $25 billion in the current format, how many galleries in North America and how many galleries internationally? It’s an interesting question. Because in North America, I think we’ve always said about 60 to 70 galleries in North America to kind of penetrate North America. And you’ve got to think about the fact that we built North America while we’ve transformed the brand and transformed the business. We had a pretty logical footprint that was in all the major markets and all the major suburbs, and we've consolidated and transformed in our opening large design galleries and replacing the former footprints. The question is, do you need as many galleries internationally as the world continues to evolve and change? As consumers continue to be comfortable shopping online without seeing products, that’s somewhat unknown to us. If there are no indications today that we should have less galleries in North America, we wouldn’t penetrate the markets the way we penetrate the markets today with less galleries. Even though there’s kind of a migration online, you really got to be careful not to look at the channels independently. Being able to see brands and how big they are, what their assortment is, what they stand for, what the quality is like, what the taste and style is like, it’s critical. My sense is, is we’re building globally; we should have a footprint similar to North America. Regarding the products, the world is getting smaller and smaller. Our products come in all kinds of sizes. We’ll have the assortment that will be appropriate for the world, and I think our brand is going to translate very well.

Yes you did. Thank you so much.

The next question comes from the line of Steven Forbes with Guggenheim Securities.

Good evening. Hey Gary. Given your comments in the letter about maintaining a 20% EBIT margin in any scenario you can envision here, because I think we’re all living in the scenario land. I’m curious if you can provide some color on how you’re thinking about the potential paths of demand growth as we head into the back half? And if you can contextualize sort of the downside scenario, right, that you tested in the model, so we better understand the flexibility that you see or that sort of inherent right to the model that you have.

I believe anyone who isn't paying attention may overlook how certain factors generally increase without our control or remain elevated over time. The key question is how long these trends will persist and what the landscape will look like as we transition back to some form of normalcy. This isn't just a new normal. It's important to consider all the possibilities. Individuals who were pessimistic a month ago are likely feeling more optimistic now as they have gathered more data. Our organization is tracking various trends, including developments in the housing market, stock market, and remodeling industry, as well as the existing pent-up demand. When you consider home builders, for instance, the extended time it takes to complete homes means that furniture purchases are also delayed. Our business is essentially the final step in this process. Looking ahead, our long-term outlook suggests that previously we anticipated growth of 10% in 2020, another 10% in 2021, and an increase of 13% to 14% in 2022 as we began our international expansion. However, factoring in potential economic downturns or disruptions, if we were to lose about 20% of our business, we still expect to recover in the 20% range. We plan to take proactive measures to gain market share and implement effective strategies. I am confident that for investors with a long-term perspective willing to hold onto the stock for five years or longer, there is substantial profit potential here.

That was really helpful, Gary, I appreciate it. As a quick follow-up, I can't help but feel excited about RH International. I'm curious, since we’re less than a year away, what else needs to be done to ensure a smooth and seamless launch as you prepare for this grand opening?

Sure. All the things that you would expect. We’ve got to build the operational platform from a distribution and logistics and home delivery perspective, which we’re working on and building. We’ve got to make the inventory investments. And we couldn’t have launched this year because we wouldn’t have had any inventory. We have to have the inventory to build the inventory, and you’ll start to see that being reflected in our balance sheet as we build the inventory for international. And then, we’ve got to continue building the team. We’ve got several hundred people that have already volunteered from America to go work in Europe. If you came here and visited our center of innovation, we have a team dedicated to mapping out cities, volumes, populations, and things we have to do and where we have to go. So we’re working on all the things you have to do. This is all the things that we do here. It's not like there’s anything really new. The good news is they are all the things that we do here.

The next question comes from the line of Tami Zakaria with JP Morgan.

Hi, this is Tami. Thank you for taking my questions. My first question pertains to international openings. In your shareholder letter, you mentioned plans to open 10 locations in total over the next two to three years. I'm assuming that translates to about two to three international openings each year during that timeframe. Does this imply you aim to have an equal number of U.S. and international openings over the next couple of years? Essentially, I'm trying to get clarity on your gallery opening schedule for the next two years and how it divides between international and domestic locations.

Sure. Thanks for the question, Tami. The gallery opening cadence in North America will remain somewhere around, I’d say, three to five or so, maybe four to six, depending on how these deals come together. And then, international, I would look at it and say we’ve got two in the first year as long, as France opens and we can get work done there. Paris will either open in the fall of next year, but if we continue to have COVID delays it could go into the spring of the following year. Beyond that, some of them are much easier to open than others. They’re less complex. We’re going to invest less capital. We want to learn. We’re going to do a lot of shorter leases that give us flexibility but also keep them spectacular and build gorgeous things. I believe that we wouldn’t be wise if we said all we need is a store in the major cities in Europe. I just don’t think we capture the market share with these smaller footprints.

The next question comes from the line of Michael Lasser with UBS.

Gary, it seems like what you're suggesting is RH has spent the last 20 years or so building this unique luxury brand that hasn't existed in home furnishing. It now has pricing power and should command luxury margins, which we've seen you realize in the last several years. And COVID has allowed you to accelerate that process by raising prices and getting to the margin level that's appropriate for fitting a luxury brand in this market. Is there a case where you haven't gotten a great sense of elasticity in your core customer segment because of these unique conditions? And that could change on the other side of this? So that's the first part of my question. And then the second part is who is in the demographic that you've seen come in buying? What have they been coming to buy in the last couple of months to drive this level of growth?

I'll start with the second question. It's essentially the same core RH customer with no significant changes in demographics. We're seeing increased activity, with more people relocating from cities to suburbs or purchasing second homes. Additionally, many are refurbishing their existing homes because they've been spending more time at home and traveling less. Our service and experience are what enhance the brand, rather than the product itself. We've remained stable, and the price elasticity is consistent with our historical patterns. Our price increases have not negatively impacted our core customers. Mastery in any area comes from experience, and we have a robust pipeline of new products across various categories, including RH Interiors, RH Modern, baby and child, and teen products. We're focusing on the larger picture rather than the small details.

Your next question comes from the line of Steven Zaccone with Citi Research.

Maybe shifting to the margin side, given such strong performance here in the first quarter, is there any real change in thinking about the drivers of gross margin versus SG&A on a full-year basis versus the initial guidance you provided back in March. And then I guess specific to the second half of the year, given the momentum in gross margin, is there opportunity for gross margin to continue to expand?

Steven, I don't think anything has changed with respect to what we said in the last quarter. If you look at historically what's driven our operating income margin increases, it’s sort of 3/4 of it roughly coming up in gross margin quarter up in SG&A. And we expect that to remain consistent this year. There's always that opportunity for the gross margin to expand. It's important to consider that our model is built around elevating design quality, taking the margin of the goods up. While we do have a bit of an odd comparison in terms of growth rates from 2020, the long-term outlook for margins looks strong.

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

So Gary, you and your team are currently engaged in various exciting initiatives, especially the international expansion, along with numerous new product concepts. My question is, how are you managing your time? I assume you are highly involved in many of these activities, particularly the international expansion, and I would appreciate your insights on that.

It's a good question. We really do two things. We allocate human capital and financial capital. The most important one is human capital and how we allocate our time. We don't work on any things in this company that the cross-functional leadership team can't work collaboratively on. All the big initiatives we take involve the entire leadership team to move the major projects. Whether it’s product elevation or brand elevation, they're all big rocks. The most important things we do is debate and decide how to allocate our human capital because that is, by far, the most valuable resource in the company. And when you think about these, it seems like there are a lot here and there is — we've been working on this stuff for years. These are not new.

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

Maybe turning back to international, it might be a bit too early to evaluate this. But, Gary, how do you view the baselines or comparisons for some of these early markets you're entering, like London and Paris, where you have impressive locations and brand recognition? There are certainly a good number of people in those cities, but they are still new markets. What would your benchmarks be?

Yes. As far as international, we think about London like New York. The broader New York market and broader London market are profiled pretty closely. If you look at the UK, we think about the UK a little bit like we think California. There's 68 million people in the UK, and there's 39 million people in California, it should be bigger. The revenue opportunity can be quite significant. The reality is we’re opening some pretty spectacular places, with a brand that has worldwide recognition with our core customer. It's not like people don’t know the brand unless they haven't traveled to America or they don’t have friends in America who have. We just want to see how quickly that scales. The momentum and our success will tell us more once we open up; we’re excited about it.

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

So just staying on Europe, just curious on the margin side. What do you think profitability could look like versus the U.S.? And I think earlier on the call, you said that margins might actually be accretive. So just curious how you're thinking about GM versus SG&A and then just leverage on the overall business?

I don't think we're ready to talk about that level of detail. I think when I think about it directionally and strategically, we believe that we think it can be accretive to margins long-term and pull our model up as opposed to be dilutive to our model. We’re not going to duplicate many of the things that other businesses or brands have done. Our supply chain is significantly simpler than traditional retail businesses, and that leads us to believe we can achieve higher margins in the international sphere.

Got it. That's very helpful. And then just as a quick follow-up. On RH Contemporary with the continued supply chain disruptions, just how are you guys thinking about fulfilling what will probably be really strong demand?

Yes, good question. It's not that it's all special order. There will probably be a slightly higher special order mix to start. But we will stock a good portion of the product. The key is the supply chain catching up and what the current demand trends are going to be. We think we’ll be in good enough shape. We don’t see a need to rush. It's a good problem. We want a strong demand for contemporary, and a good outcome would be pushing it out further into 2022 because the demand trends are strong.

Your next question comes from the line of David Bellinger with Wolfe Research.

So just looking at all the success over the past few quarters through the membership model, how much have you seen your customer base grow over the past call it, 12 to 18 months. And more importantly, where can that number go over time as you build towards the $5 billion to $6 billion sales target for North America and a much larger opportunity on the international side?

David, our membership count is disclosed. Last year, while we saw an 8% revenue growth, membership went up by 4.6% to 434,000. That’s one proxy; clearly, sales in general tend to outpace with increased average order values, other things we've talked about.

Got it. Okay. And then just as you think about the trends here, it's incredibly strong throughout Q1, are there any regions of the country that you're seeing within that strength that are either outperforming or being held back in some way? And did you see any moderation trend in some of the areas of the country move closer to normal? Or is this more of just a broad-based strengthening throughout the entire business?

It's pretty broad-based. You had the core dense cities where you had more of an exodus of people, so those were softer. The second home markets were explosive. The suburbs were explosive. Now you've got the cities that people are coming back to life as the energy is coming back. We believe they will likely have a stronger later surge.

Next up is Cristina Fernández with Telsey Advisory.

I wanted to ask a follow-up question about Contemporary. Do you think this line will attract new customers to your business like Modern did a few years back? Also, how are you planning to present it in stores and what will the price points be? Could you compare this launch to that of Modern, highlighting any similarities or differences? That would be helpful.

Yes. We think it's going to be a lot like Modern. We think it will bring a new customer into the business. It's at higher price points like Modern was versus the Interiors business. So it's a higher quality. Our products reflect the elevation of the brand and should have a positive impact on average order values. This is about elevating not just the physical product but the overall experience. As we take the brand up the luxury mountain, we will continue to see more pricing power and leverage as a result.

That's very helpful. And then my second question is on the advertising source books as the business normalizes in 2022.

Yes. We used to do 11 or 12 a year. Now we've gone back to two. The world is changing. When you think about RH, all our galleries capture a significant amount of available traffic. So it minimizes our need to overinvest in advertising; we postal tout all time. So the success of our experience also lends itself to our ability to dial in our ad spend effectively. We anticipate returning to a new semblance of normal with our source books, but with time conscious of our overall gross expenditures in order to elevate our brand.

This concludes today's portion of the Q&A call. I will now turn the call back over to Gary Friedman for closing remarks.

Great. Well, thank you, everyone, for your interest in our brand. I want to thank our team for everything they do to bring our brand to life. We’re all excited about the kind of the unmasking of America and moving past this pandemic. We think it's going to be an exciting time, and we have a tremendous amount of innovation in our pipeline. We look forward to talking to you next quarter. Thank you.

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