Rh Q2 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the RH Second Quarter Fiscal 2021 Earnings Conference Call. The operator provided instructions. I would now like to hand the conference over to your first speaker today, Ms. Allison Malkin. Ma’am, please go ahead.

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

Great. Thank you, Allison and thank you everyone for joining us today. I am going to start with our shareholder letter and then we will open the call to questions. To our people, partners and shareholders, we are pleased to report another quarter of record results with adjusted net revenues increasing 39% to $989 million versus $710 million a year ago, up 40% compared to the second quarter of 2019. RH continues to set a new standard for financial performance in the home furnishings industry and our results now reflect those of the luxury sector as adjusted operating margin increased to 26.6% versus 21.8% last year. We generated $263 million of adjusted operating income in the quarter, up 70% compared to $155 million a year ago. Adjusted net income increased 105% to $252 million and adjusted diluted earnings per share reached $8.48 versus $4.90 in the second quarter of last year. This year’s adjusted net income benefited from an unusually low tax rate of 1.3% versus 16.1% a year ago due to an increase of stock options exercised in the quarter and the nearly 3x increase in our average stock price. If our tax rate in the second quarter was comparable to last year, adjusted diluted earnings per share would have been $7.21, an increase of 47% versus $4.90 in the second quarter of 2020. We generated $290 million of adjusted EBITDA in the quarter and $95 million of free cash flow. The second quarter ended with total net debt of $296 million and trailing 12 months adjusted EBITDA of $1 billion, a new milestone for RH. While inventory on the balance sheet increased 32% to $646 million, inventory on hand was $400 million, up 12% to last year as in-transit inventory of $163 million increased 85% compared to a year ago. Raising fiscal 2021 outlook, based on the continued strength of our business and the power of our operating model, we are once again raising our outlook for fiscal 2021. We now expect revenue growth of 31% to 33% versus our prior outlook of 25% to 30% and adjusted operating margin in the range of 24.9% to 25.5% versus our prior outlook of 23.5% to 24.3%. We are also raising our ROIC outlook for the year to 70% versus our prior outlook of 60%. Our demand growth has accelerated during the third quarter on a 2-year basis and has continued to build momentum despite cycling the most difficult comparisons from a year ago and the continued supply chain challenges that have been amplified by the spread of the Delta variant. We believe the data and current trends support the argument of a more long-term sustainable step change in consumer spending on the home. An important point to consider when analyzing the strong demand in the housing market is the migration of consumers to larger suburban and second homes. This trend is resulting in substantial square footage growth that is driving increased furniture and furnishings demand. Add to that, historically low interest rates, a record stock market and the reopening of several large parts of the economy and elevated spending on the home could very well have a long tail. Looking forward, several factors lead us to believe fiscal 2022 is shaping up to be the most exciting year on record for the RH brand as we are planning the largest new product cycle in our history, highlighted by the launch of RH Contemporary in the spring of 2022, plus our latest RH Interiors and Modern Source Books, which have not been mailed since the spring of 2020; the opening of RH England, The Gallery at the historic Aynhoe Park, a magical 73-acre estate designed in 1615 by the legendary English architect, Sir John Soane that we will introduce RH to the UK in a dramatic and unforgettable fashion; the unveiling of our first RH Guesthouse in New York; a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market; the launch of the World of RH, a digital portal presenting our integrated ecosystem of products, places, services and spaces, all designed to elevate the RH brand and communicate our authority as a thought leader, taste and place maker. As it relates to the ongoing supply chain challenges, the Vietnamese government recently ordered a shutdown of manufacturing facilities due to the rapid spread of the Delta variant. This began with partial shutdowns in early July and expanded to full factory closures by late July. We are currently expecting manufacturing to restart in Vietnam in October with production ramping to full capacity by the end of the year. Additionally, suppliers globally continue to experience a number of challenges, including sourcing raw materials and we are seeing price increases in the majority of our product categories. Shipping also continues to be a headwind with longer transit times and higher transportation costs. As a result of our accelerating demand trends and compounding supply chain challenges, we are delaying the launch of RH Contemporary until spring of 2022. Additionally, we are pushing out the mailing of our fall source books to enable manufacturing partners to focus on reducing the backlog of core products, while ramping and refining production on new collections to meet our elevated quality standards. Based on similar supply chain challenges and uncertainty of how the Delta variant will impact the hospitality industry this winter, we have made the decision to delay the opening of our first New York guesthouse — our first guesthouse in New York City — until spring of 2022. Our plans to open new design galleries with integrated hospitality in Chicago, Jacksonville and San Francisco this fall remain intact. The long view, the RH business vision and ecosystem. We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introduction of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our VAS assortment generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that establish the RH brand as a global thought leader, taste and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we expand beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art and design in the Napa Valley; RH1 and RH2, our private jets; and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority and architecture, interior design and landscape architecture. This leads to our long-term strategy of building the world’s first consumer-facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams, while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services to deliver taste in time value to discerning time-starved consumers. Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. The entirety of our strategy is designed to come to life digitally as we launch The World of RH, an online portal, where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an operative taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $100 billion opportunity. Taste can be elusive and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and by doing so elevating and rendering our way of life more valuable. The right people are our greatest asset. At RH, we believe deeply that the right people are our greatest asset. We value people with high energy who have the ability to energize others, people who are smart, creative and have a point of view, people who see the answer in every problem rather than those who see the problem in every answer, people who are driven, determined and won’t take no for an answer. We value team players, people who are more concerned with what’s right rather than who is right. DeMonty Price, our Chief Operating, Service and Values Officer, often says the right people are our greatest asset and the wrong people are our greatest liability. He also reminds us that the right people are a reflection of all 11 tenets of our people value above. I want to thank the right people who bring our vision and values to life each and every day. The 11 out of the 11s as DP would call them. Thank you for your energy, your point of view, for not taking no for an answer, and for being more concerned with what’s right rather than who is right as we continue our quest to become one of the most admired brands in the world. Carpe Diem. At this point, I will open the call to questions. Operator?

Thank you. The operator provided instructions. Your first question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Good afternoon, Gary, Jack, Allison. Gary, given the combination of supply chain challenges and rising cost pressures, which I believe is driving rising retail prices, curious if you could discuss at a high level whether you are seeing any changes in customer engagement or customer conversion trends as well as cancellation rates. The idea is just trying to gain a level of comfort on what’s driving your conviction to raise guidance yet again this year as we look towards the back half without this new product launch potentially stimulating more demand?

Yes. Well, Steve, I’d start with the fact that we have insights into the quarter. We are relatively well into the third quarter today and we have accelerating demand in the quarter month over month already. We can see that newness is going to add to a very large business we have here; it is not going to replace the very large business that we have. The underlying business is very healthy. We went through a period of our highest out-of-stocks and highest back orders that we ever experienced. Our inventory levels are starting to get better. Even though we are delaying the launch of Contemporary, we are delaying once again all the newness that we would normally mail for RH Interiors, RH Modern, RH Rugs — everything else, beach house, ski house — everything else we would normally mail. The guidance is our best view of what we see. If you look at the last four or five years since we reconceptualized the supply chain and moved to membership in 2016, I don’t think we have missed a quarter in five years. So, I don’t know how much more conviction or pattern recognition you would need. We have accelerating demand and our in-stocks are starting to get better. We focused flow of goods on our core business and our best sellers — the things that drive our business. The customer is not going to walk in and say they expected newness; our business is not an impulse business. Furnishing a home is planned; customers shop and work with designers over weeks and months to place an order. Even if newness comes in, there is multiple months of ramp. We sell the highest quality goods at scale in the home business and we are elevating quality further. You don’t rush quality; you wait for it and people pay for it. If someone thinks they want to measure us in a pandemic where there are many people sick in Vietnam, I feel terrible for what’s going on there. Their lives depend on manufacturing to feed their families and they can’t work. We are going to be okay here. Our business is strong. We are taking market share and expanding operating margins. I would just focus on the big picture: demand is building, we have had some of the best business in the industry, and we feel blessed. If something drastically changes in the world or with new strains of the virus, we will reassess, but based on what we know today, this is our guidance and we are confident.

No, that’s helpful. And then just a quick follow-up — as I think back to the first quarter letter, there was commentary about the broader international pipeline. I think it was five leases were signed, five in final negotiations. Any update on how that pipeline has come together? Any update you can provide would be helpful. Thank you.

Yes, nothing really new or we would have talked about it in the letter. It’s a little difficult to travel and negotiate an international business right now, and coordinate meetings and conversations. But nothing has changed. We still have about five deals that we are moving forward with. We are looking at more and the pipeline will continue to grow. Our galleries are very unique; you cannot just walk to a street and find the building that we need. We are confident we are going to be able to scale the brand. We are one of the only specialty businesses in Europe that can sell up multiple levels and multiple floors and use gardens and rooftops. Our focus to launch the brand is the number one priority in the company right now, and the expansion of our product is also a priority. Our hands are a bit tied on the product because of supply chain and less tied on the international expansion, but unless something else drastically changes in the world, we feel very confident that we are going to deliver everything that we have just put out in this letter. This is our best thinking today. The Delta variant was not much of an issue when we last spoke. The world is changing quickly and we have to improvise, adapt and overcome. I am extremely proud of the team for our execution thus far. If you would have asked me a year ago when we were running 47% comps in August if we would continue to deliver, I would not have been confident. Based on the fact August is in the rearview mirror and the first couple of weeks of September looked really good and our in-stocks are improving, we have flow of goods coming. Our back orders were four times normal at peak and are now lower, and should continue to improve because we have prioritized production and flow. Our business is accelerating and I believe our third and fourth quarter 2-year growth will be exceptional. We are not going to chase every sale; we are focused on the long term and doing what’s right for the business and for people affected by the pandemic.

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

Good evening. Thanks a lot for taking my question, Gary. Are you planning for your path over the next few years from a sales and a margin perspective to be linear? You have all these initiatives in place, some of them are being delayed from this year to next year, that’s going to mean some costs shift from this year to next year. So, should we be modeling your business that sales and margin over the next few years will continue to build year after year?

Michael, we are not giving detailed guidance over the next couple of years. Where we have new business investments and infrastructure investments to launch Europe, of course there will be an initial period to ramp. When we open in a new country you must be prepared to execute whether the first year is $50 million or $250 million. California is an example: there are 39 million people there. If we had new exciting design galleries in California, it could be a $1 billion business. The UK could be a similar size. These estimates are directional. Our galleries are unique and we already have strong recognition among interior designers in the UK and France. We will launch with a great website, intelligent marketing and a dominant assortment. I do not know whether first-year sales in the UK will be $50 million or $250 million; that is our range. We will learn a lot when we get going. We are being honest and cautious; yes, there will be variability, but directionally the opportunity is very large.

Understood. That’s helpful. My follow-up question — you are articulating a lot of enthusiasm and confidence for the back half of the year in part because of the quarter-to-date trends, the demand comp the 2-year accelerating based on what you experienced in the second quarter. Can you give us what the second quarter demand comp was so we can have a calibration for our models on how that metric unfolded?

It’s just too crazy right now. I don’t want to make it a habit. We gave demand comps during the most chaotic time of the pandemic in the first year, but I don’t want to give demand comps for the rest of our lives. We have a pretty good track record of doing what we say we are going to do; we don’t have a track record of guiding aggressively. Q1 looked aggressive when we reported; we took numbers up and our stock jumped significantly. We don’t base guidance on a recommended sheet handed to me. I sit with 20 people for hours going through categories, trends and every detail of our business. We turn over every rock, gain clarity and alignment on where we believe the numbers are going to be. We have been doing this long enough that we have gotten pretty good at it even in a time like this. We were one of the first companies to start giving an outlook. Many companies did not give directional guidance, but we did because we know our business. If something massively changes in the world, we will reassess, but based on the data we see today, this is our guidance. Generally it is not too aggressive.

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

Great. Thanks a lot. A couple of bigger picture questions. First, Gary, what do you think is your share of the luxury segment of the market today? You had a comment in one of your recent letters that your competitors are closing or downsizing their stores. With RH continuing to transition the galleries, longer term, where do you think your market share could go over time?

I would say we have a clear line of sight to $5 billion to $6 billion in North America. That could be bigger depending on product innovation and elevation and the concepts I have articulated. If we continue to transform galleries to design galleries, launch contemporary, expand and upgrade our product assortments across categories and add new categories, and if we are directionally right, $5 billion to $6 billion is achievable. To do that we have to take market share. I’ll give an example: RH Marin — our old gallery was about $18 million, and we opened a new gallery nearby that is trending around $50 million. It’s a combination of creating a new market and taking share from others. Our design galleries create a new, more aspirational presentation of product and an environment that inspires customers. Over time, many smaller regional competitors can’t compete with our scale and format. In Europe, the competitive landscape is significantly weaker than in the U.S., so we expect to be even more disruptive and differentiated there.

Great. That’s very helpful. Can you discuss your cash deployment priorities? You’re now sitting with almost $300 million of cash on the balance sheet. With free cash flow set to accelerate over the coming years, you’ll have a lot of opportunities. How are you thinking about reinvesting back in the business versus M&A or ramping up share repurchases? Thank you.

Thinking about all of the above. Jack?

Yes. We are considering all those options: investments into the business and innovation, M&A to strengthen positioning or elevate our brand, share repurchases, and other strategic moves. We tend to be opportunistic and patient. At the right time we will make the right moves on our cash chessboard; for now we are contemplating many options and have not committed to anything specific.

Thank you. Your next question comes from the line of Adrienne Yih from Barclays. Your line is open. Please unmute your line.

Hello. Can you hear me? Congrats on the consistency of the success and the progress. Gary, I wanted to continue to focus on the European opportunity. The $15 billion to $20 billion outside of North America — can you talk about specifically the TAM in Europe? And as you shift into the international market, do you feel the target household income or demographic is materially different than where RH has been over the past 5 to 10 years? It seems like there is greater appetite and appreciation for luxury brands and goods when crossing the pond. Thanks so much.

We have looked at the global opportunity in many ways: wealth, consumers, housing markets, high net worth ratios, and luxury brand penetration. Our analysis is directional and gives us confidence. We are focusing on Europe first and breaking down each country — understanding real estate strategies and where iconic retail and luxury nodes are located. We have expanded our team and have a leader who knows Europe well. We are not copying an existing company; there is no true comp. But there are enough similarities to give us confidence in the market opportunity. The demographic will evolve; over time we expect to shed some consumers at the bottom of the funnel and grow consumers at the top of the funnel, where spending is exponential. The brand will become more aspirational, and more people will save to buy our products. There will be younger consumers with less affluence but great taste who prefer quality pieces over a lot of lower-quality items. History shows people generally move toward better quality over time. We think we are going in the right direction and will be fine.

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

Good afternoon. Nice quarter. Gary, just curious on the long-term opportunity as you see it for RH Guesthouse. In your prepared remarks you spoke to the migration to larger homes and the demand that’s driving. Is there a way to contextualize the size of that demand?

I don’t think anyone has precise data, but there has been an exodus from cities and migration to suburbs and second-home markets like Napa, Aspen, the Hamptons, and Palm Desert, where homes are larger. The simple math: moving from a 2,500 square-foot apartment to a 6,000 to 10,000 square-foot house equates to 2-3x in square footage, and those rooms will be furnished if customers can afford it. That has helped our business: even without newness for almost two years, our two-year comp is growing. Our back orders at peak were four times normal; they have come down and should improve further with prioritized production and flow. We delayed newness, which has given us more time to refine samples, improve quality, and reduce returns and damages when we ramp up. When newness does launch, we will have multiple seasons’ worth of new product and I believe it will be our best newness introduction ever — contemporary in particular looks excellent and will open up the brand’s aperture. We’ve had more time to refine and the presentation will be extraordinary. We are excited about the product pipeline and expect strong consumer reaction. I will also add that the broader economy and technology have changed patterns and productivity, which has supported strong demand. We have made some inventory decisions in the past that have created higher back orders, but we are learning and adapting. Overall, I am optimistic about the long-term demand for our products driven by changes in housing, spending patterns, and the elevated value consumers place on home environments.

Thanks, Gary. My follow-up — RH Residences: how will that be implemented and what’s the timeline? Any more color would be interesting.

Residences is a long-term project. We will test concepts in Aspen where we can have a controlled ecosystem. These initiatives benefit the brand and place-making, and help us learn to solve new problems and build organizational capabilities. New initiatives also energize teams and enable exponential learning. Many ideas come together when we find the right partners and leaders; if the right person joins the team to lead residences, you will see progress sooner. We are exploring opportunities and may announce developments as things come together. We want to learn and scale thoughtfully.

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

Good evening. Just a product question on RH Antiques. That seems new. Can you give a sneak peek in terms of what you envision for this collection and how you might integrate it with the entire offering?

Walk through one of our new galleries and count how many antiques and artifacts are in them — there are many, and customers want to buy them. We have to say no to many offers, but we do curate antiques and artifacts that render our product more valuable. RH Antiques & Artifacts will be limited by nature — you cannot manufacture antiques — and scarcity is part of their value. We are good curators and have warehouses of antiques and artifacts; we may be among the largest buyers in the market for certain types of items. Antiques make homes unique and help designers close more sales and drive higher furniture purchase. We are thinking about how to integrate first-dibs and prioritized access for designers and clients, and we want to make the haystack out of needles so customers can find special pieces more easily. The collection is intended to be highly curated and integrated with our design services to create unique finished spaces.

Thank you. Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open.

Hi, Gary, Jack and everyone. I saw some of the convertible notes were moved to the current liability section of the balance sheet. Are these redeemable in the next 12 months?

The convertible notes became convertible once we exceeded a certain percentage of the convertible price, so they have been convertible for a while. With redemption requests that have come in, those will be settled momentarily. You’ll see on the balance sheet remaining converts of $652 million, but with requests coming in, that will be reduced to approximately $411 million as of today.

Got it. And second, can you talk about the design services market in Europe and the opportunity for RH? Do you plan to offer complementary design services in Europe as you launch?

Our model in Europe will be almost identical but modified for local market needs. Being a beginner in a new market allows us to avoid legacy constraints and ask fresh questions about our approach. We expect the brand to be very recognizable, and in many ways the launch will be the best version of us. RH England, RH London and RH Paris may be the most interesting galleries we’ve opened — they are unique and strategically separated from competition. We will have design services and initially plan for them to be free, though we reserve the right to evolve the model as the business develops. Long-term, there could be RH Bespoke interior design or other premium services as we continue to elevate the brand. In Paris, for example, we will have a rooftop garden and a champagne and caviar bar with views toward the Eiffel Tower; the facilities and placements are extraordinary and should create a remarkable consumer experience. We will adapt where appropriate and deliver a superior execution of our design services in Europe.

Thank you. Your next question comes from the line of Steven Zaccone from Citigroup. Your line is open.

Great. Good afternoon Gary and Jack. I had a question on the RH Guesthouse. How do you think about the opportunity there relative to the competitive landscape in the hotel industry? How do you see the TAM opportunity for guesthouses over time?

We are creating a new market for travelers seeking privacy and luxury. Privacy has been eroded by social media and the Internet; there will be demand for private, exclusive experiences. Our guesthouses are small — nine or ten rooms — and designed to offer privacy, luxury and a singular design point of view. Our first guesthouse in New York will have nine rooms and a residence; it will be unique and incorporate hospitality features no one has done before. The guesthouses elevate the brand and position RH as a tastemaker and place maker; they are not intended to be showrooms for furniture. We design extraordinary experiences and believe we can monetize them. We do not model a very large footprint initially; we expect a handful of guesthouses in key markets like New York, Aspen, Miami, Malibu, St. Barts and select European locations. The goal is to create a differentiated offering that commands premium pricing and creates a new hospitality niche for affluent travelers seeking privacy and design-led experiences.

Appreciate the detail. Thank you and look forward to seeing it in person.

Thank you. Your next question comes from the line of Brad Thomas. Your line is open.

Hi. Thanks for taking my question. Gary, you alluded earlier to being interested in potential acquisitions. I believe the last one was Waterworks in 2016. What did you learn from that acquisition and how do you think about what might fit as an incremental piece of the puzzle here for you?

We have learned a lot from the Waterworks acquisition. It is a strong, admired brand in its space and integrating a business that is in a different location required adjustments; you can’t walk down the hall and collaborate as easily. We have learned from each other and have deep respect for the Waterworks team. Initially we had to write down most of its book value, but over time performance has improved significantly. Waterworks is now on the right trajectory and is set up for a record year. It benefits from our shared resources and vision, and I think many pieces will fit together over the next year to elevate both businesses. We continue to look at acquisition opportunities that strengthen our brand and offerings.

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

Thanks a lot. Good evening. My question is about Europe and the roadmap for operations and infrastructure to support as much as $250 million in sales in the first year. Can you give more color on the building blocks and how that’s coming along?

The key building blocks are demand creation and how to fill demand. We believe we have the right initial real estate and the ability to launch a strong website. We are testing marketing approaches beyond our primarily physical and print marketing in the U.S. We will launch with the World of RH digital portal and a simplified user experience with strong functionality and navigation. We need to execute home delivery, small-package delivery, reverse logistics for returns and damage handling, and outlet platforms. Many third parties already deliver furniture in Europe, so execution is feasible but requires careful management of partners to meet our standards. We will prepare for a range of outcomes from $50 million to $250 million in the first year and scale accordingly. We are building a leadership team on the ground and transitioning personnel to base in Europe. There are no parts of the business we cannot execute with the team we have; we will learn and adapt as we go and share more details when we have them.

Thanks. Quick follow-up for Jack: on the operating margin outlook for the balance of the year, can you give color on how to think about gross margin versus SG&A?

We are not providing guidance at that level of granularity. We have delivered specific gross margin and SG&A variances in prior results; advertising timing has been a significant driver. We commented last quarter about our advertising plan and the change in our book mailings this year. Please keep those timing differences in mind when modeling gross margin and SG&A.

Thank you. Your last question comes from the line of Cristina Fernandez from Telsey Advisory Group. Your line is open.

Good afternoon. Thank you for taking my questions. On supply chain, particularly Vietnam, can you comment on how much of your product is sourced from the country? Do you expect any product categories to be particularly impacted by the manufacturing delays and shutdowns going on right now?

We have disclosed Asia exposure in the past and have broken out China. I don’t believe we have disclosed Vietnam specifically, but we have meaningful production in Vietnam, and it has grown as tariffs in China have encouraged migration. Vietnam has high-quality factories that we have developed relationships with over the years; many categories that are impacted by tariffs in China now are stronger in Vietnam and other Southeast Asian countries. Vietnam is a meaningful part of both newness and core business, which is why the launch of Contemporary was pushed to spring 2022. The shutdowns are meaningful but we expect manufacturing to restart and ramp through the end of the year. We are managing priorities and flow to protect the core business while refining production for new collections.

Understood. My follow-up: can you quantify how much revenue shifted from 2021 into 2022 due to the delay of RH Contemporary and related items?

The effects of those delays are reflected in our guidance for this year; we are not providing specific 2022 modeling at this time. Contemporary was originally slated to launch in fall and is now planned for next spring, so it is not zero for this year but was deferred. We will share more when we provide future guidance.

There are no other questions in queue. I will now turn the call back over to Gary for any closing remarks.

Great. Well, thank you, everyone, for your interest, and thank you to our team who is leading the charge and bringing our vision and values to life. We could not be more proud of the work everybody is doing and the effort everyone has put through. We feel super blessed and fortunate to be in the position we are in and our hearts go out to those suffering in Vietnam and others around the world affected by the pandemic, and to people here in the U.S. who have recently suffered through hurricanes and devastation. It’s hard to feel good about the business when so many are suffering. This is the time to have a lot of edge and a lot of empathy. To our people, thank you for making this company more exciting, more innovative and more magical than at any other time in our history. I think we are going to rewrite history as we go forward. Great job, everyone. Thank you. Operator?

You’re welcome. This concludes today’s conference call. Thank you all for participating. You may now disconnect. Goodbye.