Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Fiscal Year 2021 RH Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Allison Malkin, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 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 opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Great. Thank you, Allison, and thank you for joining us today. I will spend a few minutes discussing our shareholder letter, after which Jack and I, along with the rest of our leadership team in the room, will answer your questions. To our people, partners, and shareholders, we are excited to announce another year of record results, with net revenues increasing 32% to $3.759 billion compared to $2.84 billion last year, and up 42% since 2019. Excluding money-losing online businesses, this represents one of the highest two-year growth rates in our industry. Demand compared to 2019 increased by 49%, leading to an additional backlog of approximately $200 million in net revenues at the end of the year, which we expect to fulfill throughout 2022. RH continues to set a new standard for financial performance in the home furnishings sector, as evidenced by our adjusted operating margin reaching 25.6% in 2021, an increase of 1,130 basis points since 2019, showcasing the strongest two-year growth in our industry. Our performance illustrates the appeal of our elevated and exclusive product offerings, the power of our evolving ecosystem, the profitability of our fully integrated business model, and the significant strategic differentiation created by our remarkable physical spaces. In the quarter, net revenues increased by 11%, staying within our guidance range despite supply chain issues exacerbated by a virus variant in the latter half of Q4. We once again surpassed our adjusted operating margin forecast in the fourth quarter, achieving 25.2%, compared to 23.7% last year and up 780 basis points over two years. We generated $97 million in free cash flow for the quarter and $477 million for the year, including a $191 million increase in inventory, of which about $60 million is attributed to longer transit times, with the remainder aimed at reducing our end ship demand backlog. We ended the year with $90 million in net debt and approximately $2.2 billion in cash on our balance sheet, while generating a return on invested capital of 73% in 2021. As we've noted, 2022 will be a year of new beginnings. While many of our plans were delayed due to the virus, they were not disrupted. We have used these past two years to rethink and reinvent ourselves, and we believe that 2022 will mark the start of the next chapter of growth and innovation for the RH brand. This year will see the opening of RH San Francisco in the historic Besselhem Steel Building, our most exceptional bespoke gallery to date; the launch of RH Contemporary, our most compelling and potentially disruptive product introduction in history; the elevation and expansion of RH Interiors and RH Modern with new collections and enhanced quality; the introduction of our first RH Guesthouse in New York, a groundbreaking hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market; and the launch of two new culinary concepts, including an elevated Live Fire restaurant in San Francisco and the New York Guesthouse, along with a champagne and caviar bar at the New York Guesthouse this year, with expansion plans for these concepts in Paris, London, Milan, and Aspen. With average restaurant volumes nearing $10 million annually and a highly profitable four-wall model, we are making substantial investments to build a world-class hospitality organization and see endless opportunities to enhance and activate our places and spaces, creating unique, inspiring experiences for our members and customers that cannot be replicated online. We will also debut The World of RH, the first phase of our new digital portal, showcasing the interconnected power of our evolving ecosystem of products, places, services, and spaces, all intended to inspire customers to dream, dine, travel, and live in a world skillfully curated by RH, fostering a unique emotional connection with our customers. We are also excited about the launch of RH1 and RH2, our customized Gulfstream G650 and G550 private jets, available for charter later this year. The first has already garnered attention and praise in Architectural Digest and The Wall Street Journal. Additionally, we will debut RH3, our luxury yacht available for charter in the Mediterranean and Caribbean, which will be featured in The Rob Report and C Magazine over the coming months. The rollout of RH In-Your-Home provides a memorable delivery experience with brand ambassadors managing every detail of the delivery while extending the selling experience into the customer's home. Globally, we are expanding the RH brand, starting with RH England, the gallery at the historic Aynhoe Park, a magical 17th-century estate in the English countryside, which will introduce RH to the UK in a remarkable way. We have also secured locations for galleries in London, Paris, Munich, and Dusseldorf and are negotiating leases or purchases for galleries in Milan, Madrid, Brussels, and France. The opening of RH Palo Alto at Stanford Shopping Center will showcase the evolution of our highly productive prototype galleries. Now, regarding our business outlook. While we enter 2022 confident in our ability to elevate and expand the RH plan in the coming years, we acknowledge several external factors—such as record inflation, rising interest rates, and global unrest—that create uncertainty. Although we cannot predict macroeconomic outcomes, we have the business model, strategy, and balance sheet to seize opportunities during periods of economic growth, contraction, or disruption. While first-quarter sales and margin trends remain strong due to the ongoing alleviation of our backlog, we have noticed a decline in demand during the first quarter, coinciding with Russia's invasion of Ukraine in late February and the resulting market volatility. We think it prudent to adopt a conservative approach until demand trends normalize and provide the following outlook for the first quarter of 2022. We expect first-quarter net revenue growth of 7% to 8% compared to 78% last year, with an adjusted operating margin of 23% to 23.5% versus 22.6% a year ago. For fiscal 2022, we anticipate net revenue growth of 5% to 7% compared to 32% last year, with an adjusted operating margin between 25% to 26% compared to 25.6% in 2021. Our outlook includes the opening of RH San Francisco in late spring, the RH Guesthouse in early summer, RH England in mid-to-late summer, and RH Palo Alto in the fourth quarter. Now, let me discuss RH's business vision and ecosystem for the long term. We recognize that there are those with taste but no scale, and those with scale but no taste, and the idea of combining taste with scale is both significant and expansive. Our mission to position RH as the authority on taste for the home has proven to be both revolutionary and profitable as we pursue our goal of building the world's most admired brand. Our brand attracts top designers, artisans, and manufacturers, enhancing the value of their work through our integrated platform, enabling RH to curate the most compelling collection of luxury home products globally. Our commitment to expanding our collection will continue with the launch of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier, and many other new collections scheduled to debut over the next decade. Our plan to open immersive design galleries in every major market aims to unlock the value of our extensive assortment, generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion worldwide. Our strategy involves moving beyond simply curating and selling products to conceptualizing and selling spaces by creating an ecosystem of products, places, services, and spaces that establishes RH as a global leader in taste and place-making. Our elevated products gain additional value through our architecturally inspiring galleries, which are further enhanced by our interior design services and seamlessly integrated hospitality experiences. Our hospitality initiatives will continue to elevate the RH brand as we expand from our galleries into RH Guesthouses, aiming to establish a new market for travelers seeking privacy and luxury in the North American hotel industry. Moreover, we are developing unique experiences such as RH Youngsville, which integrates food, wine, art, and design in Napa Valley; RH1 and RH2, our private jets; and RH3, our luxury yacht for charter in the Caribbean and Mediterranean, frequented by affluent vacationers. These immersive experiences introduce new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This aligns with our long-term strategy to build a consumer-facing platform for architecture, interior design, and landscape architecture services within our galleries, enhancing the RH brand, amplifying our core business, and generating new revenue streams while redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, expanding from 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 that integrate services providing taste and time value to discerning consumers. Our comprehensive strategy will take shape digitally with the launch of The World of RH, an online portal for customers to explore and be inspired by the depth and dimension of our brand. We will further amplify our authority on taste through RH Media, a content platform showcasing the innovative and influential leaders shaping the architecture and design landscape. The global expansion of the RH ecosystem broadens our market opportunity to $7 trillion to $10 trillion, making it one of the largest and most valuable prospects for any brand today. Capturing just 1% of the global market represents a $70 billion to $100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, establishing an emotional connection that is unparalleled. Taste can be elusive, and we believe that RH is uniquely positioned to create an ecosystem that makes taste accessible, ultimately elevating our way of life. Climbing the luxury mountain and establishing a brand without equal is our ambition. Every luxury brand, from Chanel to Cartier, has originated from the pinnacle of the luxury mountain. Nowhere has a brand attempted to ascend, nor do the other brands welcome our presence. We know our work must be extraordinary to compel those at the top to acknowledge and respect us. This ascent is not for the faint-hearted. As we continue our journey upward, we recognize the increasing challenges ahead. Twenty years ago, we set out to transform a nearly bankrupt company with a $20 million market cap into the world’s leading luxury home brand—a vision driven by lessons learned, passion, persistence, courage, and resilience. The experiences that build character in individuals and organizations cannot be taught in a classroom or through business management; they must be earned by building something substantial or reaching the mountain's summit. Moving forward, team RH, seize the day. Now, operator, we will open the call for questions.

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

Hey, Gary, thanks very much. Good afternoon, everyone. First question, can you just elaborate a little bit more on the full year revenue expectations. So, the full year guidance, the $200 million of backlog demand being fulfilled despite all the newness in the business. Maybe just help us understand what you're seeing in terms of the softening that started in February and how that factors into your outlook for the balance of the year versus first quarter? Thank you.

The softness and newness are reflected in our guidance. We believe it's wise to adopt a cautious approach right now due to the disruption. Our business has experienced a slowdown since the onset of the conflict and the resulting market volatility. It's clear to everyone that inflation is not returning to 2%, despite what was claimed not long ago when it was at 4% or 5%. Just two weeks later, it increased to 7.5%, and now it's at 7.9%. Jerome Powell acknowledged that they delayed action for too long, and we should prepare for two years of rising interest rates. This situation is intensified by the war and invasion, with the conflict in Ukraine prompting people to reassess everything. We have observed a consistent slowdown of about 10 to 12 points in our business during this time. The return to normal is uncertain, and we can't predict how aggressively the Fed will act. Historically, when the Fed raises interest rates multiple times over an extended period, it often leads to a recession. We prefer to stay hopeful for peace while preparing for challenges. We enter this year with a strong position, featuring the most exciting initiatives and product experiences in our company's history. We have a solid strategy, a robust business model, and one of the best balance sheets in our industry, along with the highest return on invested capital in the sector. We're ready for whatever comes our way and are positioning ourselves for success.

Yeah, that's very helpful detail. Thank you for that. I had a question on just the margins for international. So I think you said in the past that Europe can be the same or higher than the margin profile for the US. How should we think about the profitability curve as you do some of these initial openings for the next few years? I guess, said another way, should we assume there's a little bit of dilution in the operating margin guidance you've given for this year just from UK opening and then Europe next year?

That's a reasonable assumption. However, I believe we are all going to learn together since this is our first attempt at it. There isn't much precedent for a business like ours expanding globally while maintaining control of the brand, as opposed to simply licensing it out, which is typically an easier route but may yield less profit and value for our shareholders in the long run. History has shown that many successful brands that license or franchise their names often spend years and substantial resources to regain ownership of their brands. We anticipate that this approach will enhance our earnings over the long term, as indicated by our analysis of similar business models. That said, we don't have a clearer understanding of how things will unfold than anyone else on this call; we will keep everyone updated as the situation develops. However, we are growing more confident each month and week as we approach our launch. As we engage with potential customers, we've noticed increased brand awareness and affinity, and there's considerable excitement about our upcoming opening in Europe. Our target consumers are relatively familiar with our brand, which gives us confidence. We believe this expansion will boost our operating margins over time. Currently, we are still growing our presence in the United States and are not in a position of downsizing or closing stores to optimize operations. We have many new galleries to develop and billions of dollars worth of potential projects in the U.S. With continued growth and evolution of our product line, we foresee our operating margins moving towards 30%. If international expansion can further enhance these margins, we could establish a long-term business model resembling some of the most successful luxury brands globally. For instance, when analyzing companies like LVMH and their individual brands, we find that many renowned brands achieve operating margins in the mid-30s. For example, Hermès, Chanel, and Louis Vuitton all fall within that range, while Gucci operates in the low to mid-30s. Furthermore, despite significant competition among luxury brands, the luxury home furnishings and design sector lacks a dominant, fully integrated brand at the peak of sophistication. The current landscape is quite fragmented, with many niche brands that lack scale and control over their distribution channels. Taking B&B Italia in North America as an example, they have numerous distribution points but only control a fraction of them. This situation dilutes their brand presence across various retailers.

Yes, that was great. Appreciate all the detail. Best of luck this year.

Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Your line is open. Check to see if your line is on mute.

Can you hear me?

Yes.

Yes, we can hear you, Steve.

Sorry about that. So I wanted to focus on the new product launches. So Gary, if you can, can you update us on the specific timing of the launches, Contemporary in the elevated collections, in Modern and Interiors? Any also color on the breadth of the new collections as we try to conceptualize the impact? And then whether the current supply chain environment has or is anticipated to impact these launches in any way?

The current situation is affecting our product launches. Everything is somewhat delayed and coming together in a fragmented way. We had hoped to introduce Contemporary in March; however, the variant that emerged in the fourth quarter caused disruptions. While it affected the US relatively quickly, countries like China and Vietnam, where we source significantly, experienced more significant delays. As a result, we're about a couple of months behind schedule. We also need to be cautious given the current economic climate. If the market is unstable, we must be careful, especially since we rely on a catalog business and don’t want to push into a challenging situation. We're reassessing our plans, and instead of launching with 450 to 500 pages in Contemporary, we're likely to have around 300 to 350 pages due to delays. The supply chain hasn’t recovered as many of us hoped; we may be fortunate to catch up by the year's end. The challenges span raw materials to transportation, complicating matters further as our vendors also face issues sourcing components globally. It's essential not to rush, as that can lead to mistakes. We're adopting a conservative approach and will see how aggressively we move forward with circulation. We've postponed Modern Interiors to the second half of the year to allow Contemporary to be prioritized in the first half, with a launch in May. We don’t want to release the book without having goods in stock due to the delays, contributing to our cautious outlook for the year. Regarding our gallery projects, the execution landscape has never felt so chaotic, involving construction, sourcing, manufacturing, and freight. Everything is somewhat out of sync globally, but we recognize that others are facing similar challenges. We aim to proceed intelligently, emphasizing quality, as there are no benefits to rushing. We prefer to slow down, be thoughtful, and focus on fewer but more significant decisions. This year is crucial for us with many significant moves on the table as we attempt to reduce chaos for our customers as well. The current situation is different from my last update; previously, we faced surprises like the Omicron variant and geopolitical unrest. While there’s an expectation that supply chains are improving, I don’t believe they have. Products are often stuck in transit, causing an average delay of about five weeks, which translates to both time and money. Some shipments arrive on time, but others can be 10 to 12 weeks behind. This complexity makes running our integrated business more challenging, but I expect everything on our current list for the year to materialize. If there's a significant risk, it may lie in Palo Alto's performance in the first quarter of next year, but that will not affect our overall annual results.

Gary, super helpful, right? Because I think as we try to contextualize the prudence of the guide, it almost appears like you're not incorporating a contribution from a lot of these year of the new factors, right? I mean, any comment on how you sort of build guide from a bottom-up standpoint or how you would define the prudence behind it? And you have a great track record here. So any thoughts on just the guide in a holistic context on just the prudence behind it?

Yes. It's probably one of the most challenging outlooks since 2008 and 2009. We're in the midst of the disruption from Ukraine and Russia, which has triggered a broader awareness. It's as if someone has rung the bell, capturing everyone's attention, and suddenly discussions about the Federal Reserve ramping up interest rates are causing concern. Housing prices are at record highs, and the sustainability of this situation is questionable. The current dynamics in the housing market and inflation levels are unprecedented. When Yellen mentioned returning to a 2% inflation rate, I was finalizing our new ocean freight contracts. I wonder if anyone at the Fed has reached out to business leaders to understand the real situation regarding inflation and shipping rates. There seems to be a lack of awareness about the impending inflation pressures because businesses are likely to face reduced profits or increase prices. There's uncertainty about how much prices will rise across various sectors, including restaurants and vehicles, and this could outpace consumer spending. We're facing a challenging and unpredictable environment, and it's crucial to be adaptable and prepared for anything. This isn't about being defensive but rather proactive. I wouldn't describe the current situation as optimistic; instead, it's more cautious. When we have a mindset of preparedness, we typically perform better, while excessive optimism often leads to negative outcomes. If the conflict in Ukraine resolves and inflation decreases unexpectedly, businesses will have the opportunity to adjust their freight contracts, but we’ve already seen significant hikes in container prices. This increase affects everyone, leading some to compromise quality to present better value or to raise prices, which could change profit margins. This isn't unique to us; it's a common issue across industries. I don’t want to cause alarm, but I remember a scene from The Big Short where one person points out that while everyone is focused on the discussion, their stock has plummeted. We aim for transparency and honesty, so our stock may react negatively based on this outlook. People might think I'm not excited, but in my 22 years here, I've never been more excited or more uncertain. It's essential to maintain a balanced perspective right now.

Super helpful. Thank you, Gary. Jack, best of luck.

Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open.

Hey, Gary, hey, Jack, thanks so much for the somewhat brutal honesty, but I think we have to hear it. I guess my question is, Gary, you talked about in the past two events that tend to impact your business, market volatility, high net worth, ultra-high net worth individuals. That sounds like you have baked that into the guide? And then the second would be deceleration in high-end housing, which we haven't necessarily seen yet, how much of that is potentially in the guidance? And then, Josh, on the $2 billion term loan that was taken out, what are the plans there? Thank you very much. And RH San Francisco is awesome.

Thank you. I wish I had more information to share. We’ve considered all our best insights, but there are many changes and developments happening. You have to consider where inflation might head next time it is reported and what the current situation really is. We're focused on creating a strategy that positions us for success. We've thought through everything we can, but we can't influence or predict major macro trends until they emerge. Even the Fed and Janet Yellen can't accurately forecast everything, and neither can anyone on this call. No one really gets these predictions right. However, if you are prepared, you can take advantage of any situation, and that's our goal. We’re aiming to position ourselves to seize opportunities when they arise and we’re willing to be patient, even if we appear somewhat slow to others. But when we decide to act, we generally do so decisively. Right now, it's difficult to see, especially when your business faces a sudden drop of 10 to 12 points overnight amidst ongoing global unrest. You have to adapt your approach; if you don’t change, nothing will change. So, we are making adjustments and improvising as necessary. We're eager to assist, but this is similar to the discussion I had with our Board. I opened by saying that in my 22 years, I've never been more excited about my career due to everything happening in the next 12 weeks, with a few developments expected in the fall. This is also influenced by rising interest rates, high inflation, and unrest, among other factors. As for the housing market, it’s experiencing some positive shifts. When things get too heated, they typically cool off. I don’t want to alarm anyone, but the numbers we’re seeing are significant. The last time houses received multiple offers and prices surged like this, the aftermath wasn’t necessarily favorable. Yet, circumstances are different now. We operate in a new economy with emerging businesses, new wealth creation, and varied productivity that are shaping the economy. I'm uncertain about the balance of positive developments, whether in our sector or elsewhere, that could help us avoid a recession or slowdown, and whether issues like the conflict in Ukraine will resolve soon. Perhaps we should be the ones soliciting your insights today. We’ve documented everything we know and would appreciate your perspectives.

And Adrienne, I think that also answers the plan for the term loan question. Look, we raised the capital to provide optionality to allow us to be opportunistic. And I think Gary summarized well sort of how we're thinking about not moving until we see it. So when we move, you'll know.

But any plans to retire the converts early?

There are a lot of factors to consider. For example, I have expiring options that require me to sell about 1 million shares of stock. It's important to manage these situations carefully to avoid conflicts. It wouldn't be appropriate for the company to buy back stock while the CEO is selling shares, right?

Yeah.

There are many factors to consider, and we don't have complete flexibility in making those decisions. However, I believe we will make sound choices for our shareholders. If I didn't have to sell the stock, I wouldn't. I thought there might be a way to extend the options, but it turns out that's restricted by IRS regulations, which only allow options to last up to 10 years before they expire. My options are set to expire in November of this year, and I think it's best to address this now so we can have more operational flexibility. My situation does limit us somewhat.

Got it. Thank you very much for all the information. It’s very helpful.

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

Great. Thanks very much for taking the question. So, yes, just, Gary, I guess, thinking about a lot of noise going on, obviously, as we've kind of gone through in a lot of detail here on the call, volatility, supply chain, malaise, all sorts of stuff. I guess, kind of thinking about the state of the industry and thinking about the premium and luxury end of things, at least in the US, it's still pretty fragmented. I guess, maybe sort of cynically thinking here, do you think you guys might have a bigger opportunity to take share? How do you think that plays out? How has that changed over the past, I don't know, couple of years thinking about the next, I don't know, two to three?

We are optimistic about the next two to three years. We believe we can gain market share in any situation. The challenges we're facing, such as the war and inflation, are temporary and not permanent. There are many issues happening concurrently, and we must navigate the supply chain effectively to avoid damaging our business model and making strategic errors. Everyone makes mistakes, and I remind the team that my mistakes tend to be more costly for the company. As a leadership team, we are responsible for the livelihoods of thousands of our employees, and we aim to make sound long-term decisions. We are committed for the long haul; I have been with the company for 22 years, as has Stef, our Chief Gallery Officer, while ERI has been here for 15 years.

16.

16 years. Jack, who's really been here 10 or 11, I mean, not technically. He was with BofA before...

Nine at RH plus three with...

Yes. Helen and Sandy have been here for 14 years, and our Chief People Officer is also part of the team. I see more people in the room now compared to before, and we've all been with the company for a long time. We're committed to the long term and are focused on making significant decisions that will positively influence our direction. I believe we've made some excellent choices, which is why our operating model is not just marginally better than our competitors, but significantly so. We're currently implementing major changes that will enhance our performance even further. We don't just look at our 25% operating margin and think it's the best we've ever done, so it won't improve. We believe there's potential for significant improvement, possibly another 5 to 10 percentage points in operating margin. Right now, I'm providing guidance based on the current situation, which is somewhat unclear. Anyone claiming otherwise is mistaken. It's essential to stay alert and be ready for any potential developments. For instance, the war could conclude, conditions might improve, and our business could recover. However, there are many uncertainties to consider, and rising interest rates are never favorable.

For sure. And certainly appreciate the long-term view. Just one quick follow-up just in terms of, I guess, pricing that you may be including in the guidance, right, probably from residual from price taken last year. As you mentioned, lots of new costs coming in or continued cost increases. So are the round of price increases included in the 2022 guide or no?

We've included everything in our guidance. Our business has been evolving over multiple years, selling higher-priced items to fewer customers in larger orders. We're transitioning into a luxury branded model, which is different from the norm. Contemporary products represent the highest quality and price points we've ever offered, and when we get those right, they become our best-selling items. Our most expensive sofa is currently our best seller. We are likely better positioned to increase prices compared to others since we have been gradually raising them for years. In our industry, purchasing tends to be event-driven—similar to buying a car, where you don't consider the price until you actually need it. Consequently, we believe we are in a better position than other industries regarding price hikes. We handle price increases with discipline, and these forthcoming adjustments will be significant. When faced with rising freight and raw material costs along with supplier price hikes, stating that we can absorb these impacts is misleading, as prices are rising across the board. If they don't, earnings will decline. So, the crucial question is whether to pursue a larger, lower-margin business by chasing sales or to focus on a potentially smaller, higher-margin business aimed at long-term success. This has been our perspective for nearly 20 years, accelerating over the last six or seven years. We began transitioning to a membership model six years ago and launched Modern, which had an average price point about 50% higher at launch, and in some cases nearly double. While it's essential to consider the intricacies of the model and guidance, I believe it's more important to focus on the significant movements and overall strategy. We are making the right choices with our big moves, and if we decide to reassess or pull back, we'll do so based on how conditions evolve. The landscape changed just a few weeks ago for us, and while we reported later, others may not have recognized these trends yet. I wouldn't be surprised if there's a broader slowdown in our industry impacting various sectors.

Fair enough. Much appreciate it, Gary. Thank you.

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

Good morning. Thanks a lot for taking my question. So Gary, when you say that you've seen a 10 to 12-point slowdown, presumably, that's on demand comp. So where are your demand comps trending over the last few weeks? Are they actually down year-over-year? And the counterargument would be that while there is a lot of uncertainty in the environment, your core customer came into this year in a very strong financial position, and the high-end housing market is in a pretty good spot. Is it your view that these purchases are merely being deferred, or is there a possibility that prices have been raised so significantly that the customer is now responding to that?

What do you think? I'm not sure. It could be influenced by various factors, including the distraction of the war. Our demand has dropped by 10 to 12 points, and we're not providing specific guidance on demand. I wanted to highlight that there has been a noticeable change, and there's a significant gap between demand and revenues. This situation is likely affecting everyone. We aim to be transparent and communicate that even if we report an increase, it doesn't necessarily reflect the true demand. I want to avoid returning next quarter and saying that our demand has actually been declining for several months without informing you. I understand this may affect our stock today, but we are focused on the long-term. I recognize that these are challenging times for all shareholders due to inventory issues. I'm here to share the truth and maintain transparency. We didn't have to disclose this, but we're among the first to discuss demand. Others might be talking about strong sales, but while our sales will remain relatively strong in Q1 compared to previous performance, the demand is not where it should be. We are unsure about consumer behavior at this moment, and if it will change in three months.

That's very informative. Are you noticing this slowdown consistently across different categories, or are there specific patterns emerging? You're not alone in this observation; Trager, the Grill Company, mentioned last week that they have experienced a significant slowdown in the last three weeks as well. This could indicate a broader trend, and it's important for you to highlight it. Can you provide any insights on what you are noticing by category and region? Additionally, how much flexibility do you have with your profit and loss statements? If this situation persists and worsens, could there be a risk to your operating margin target of 25% to 26% for this year, knowing that there will be opportunities to grow from that base in the long term?

If this situation persists throughout the year, I believe everyone in the industry will likely revise their forecasts downward. This seems temporary, as such declines typically don’t last. It really hinges on whether there are additional negative developments. We do have measures in place that will help mitigate this, including new products and initiatives that will soon be rolled out. This is what we have for now, but I expect we will have a clearer picture next quarter. Jack, would you like to add something?

Yes. On the categories and geographies, obviously, Michael, we don't discuss those kind of items. I think generally, no major headlines there. And then, I mean, obviously, if there's risk if the model sits down for an extended period of time, there is a risk to the margin, but that's just strong P&L.

Understood. Good luck. Thank you so much.

Okay. Thank you, Michael.

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

Thanks a lot. Just to continue on this theme, unfortunately. I was wondering, Gary, if you could compare and contrast some of the consumer behavior that you've seen in recent weeks to December of 2019 when your business potentially in the context of that 10% to 12% decline that you just cited.

A 10% to 12% decline is just that, a decline of 10% to 12%. Various factors contributed to this situation, and how these will unfold remains uncertain. However, our main focus is on the long-term and the significant steps we are taking. Regardless of short-term outcomes, we are confident that we will succeed, gain market share, and create disruption. We possess the best model, a strong balance sheet, and an excellent strategy. Our global expansion efforts are the most impressive work we've done to date. Even when facing challenges, we've navigated through tough times before, and we will continue to do so. I won't downplay the current situation, as that would be inappropriate. In comparison to 2018, while both periods saw declines, the circumstances and context were different, and we are a transformed company now.

Got it. I think we all appreciate your honesty. Just maybe a bigger picture on the brighter spot. You called out the $200 million TAM for RH Bespoke. Just quickly, can you talk on the ramp, how quickly you can build that out over the next, say, three to five years?

I don't know. Our first location is set to open soon, and I think it's exceptional. One thing we’ve learned is that when we create remarkable experiences, we always find a way to monetize them. This is some of the best work we've ever produced. Our second location in Aspen is set to follow a year later and shares many similarities. Both are essentially micro hotels, with 10 rooms in New York and nine in Aspen, featuring incredible accommodations that are unlike anything seen before. They are designed for privacy, which is something not typically prioritized in hospitality. We believe that privacy will become a significant market, especially since people have often forfeited their privacy on social media. This is a universal concern, and we think it’s a market with monetization potential. We're developing a concept that is truly unique in the hospitality sector. It's the kind of experience we'd all enjoy, priced at a different level now. If we achieve our expectations for room bookings, it could really be successful, but we are still uncertain because we haven't sold any rooms or opened the restaurant yet.

All really exciting stuff. If I could squeeze in a follow-up, perhaps a bit more dry, you all have had kind of different capital structures over the years and depending on if times are good or bad. Just to circle back on that question of the term loan. I mean, in this environment, with inflation where it is and the trends you've been seeing, I guess how do you think about what the capital structure should look like right now?

I think we've consistently indicated that we don't have a specific target capital structure. We take an opportunistic approach to our capital, its deployment, and our overall capital structure, and that remains unchanged. Our stance on this has been consistent for approximately nine years. We raised capital to create options and provide us with flexibility moving forward, and we were able to achieve that at a very attractive rate.

You certainly did. Great. Thank you so much.

Thank you. We had another question come in the queue. It's from Seth Basham with Wedbush. Your line is open.

Thanks a lot, and good afternoon. Not to belabor the point that's been brought up by some prior questions, but just in regards to thinking about the margin outlook for 2022, the more muted sales outlook. I'm surprised to see operating margins expanding in your guidance. I'm wondering if you are changing anything in your cost structure materially relative to when you last talked to us in December. For example, you're cutting back in some of the sources of distribution that you're planning or anything else along those lines? Thank you.

Since 2017, our revenue growth has been relatively modest, but we've seen significant expansion in our operating margins. We don’t anticipate stopping this margin expansion anytime soon unless we make substantial short-term investments that could impact it. Even with our recent initiatives in Europe, which involve considerable preopening expenses and investments, we recognize the importance of hospitality in our business. Our efforts include relocating teams to Europe and maintaining operations there, as well as managing substantial preopening costs for the Guesthouse. This illustrates our commitment to enhancing our hospitality vision, which has become even clearer and more confident as we move forward. Like, look, not too many years ago, we didn't know anything about restaurants. And it was the end of 2015, really beginning of 2016, we had our first restaurant build. We didn't even have a host because we thought no one was going to show up. There was part of it like, 'Okay, who wants to go eat in the middle of a furniture store?' And so the original if you look at the Chicago video, I think Brandon who we partnered with in the first few restaurants had said, like there's going to be no host, no this, now that kind of like we opened the first day and ultimately, we had a line out the door. And we had nobody seeding anybody who had customers hovering over tables waiting for the next person to leave. We started with just one restaurant, which was located far away in Chicago and operated by an external partner. Now, six years later, we have 13 restaurants that we fully own and operate. Our entire hospitality team is in-house; we haven't outsourced any part of it. We are responsible for developing them, from designing the restaurants and crafting the menus to shaping the overall platform. We've built the guest house from the ground up without any outside assistance, including the architectural work. We aim to evolve into a hospitality company, but it's not viewed as just another business for us. Everything we do is considered from an integrated viewpoint. We're not just managing a hospitality venture; we are creating a cohesive hospitality business that enhances both our core operations and our brand.

All right. Thanks a lot.

Thank you.

Thank you. Our last question comes from the line of Brad Thomas with KeyBanc Capital. Your line is open.

Hey, good afternoon. Thanks for taking the question. Gary, I was hoping to follow up on RH England and see if there's any more color you could provide on how things are shaping up from a supply chain and logistics standpoint, knowing you're new continent here. And what should the customers of there expect initially that might be different in terms of anything like delivery time or relative price points versus what we see here in the United States?

Well, look, Fernando just got back. I'm looking at him across the table. I mean, he's updated us that things look good.

Yeah, absolutely.

I think we're well-prepared on our end for the supply chain aspects. There are parts we don't control, so we will see how those develop. So far, it appears we will have the inventory we need to deliver and execute our plans. Construction, as is common these days due to COVID, is taking longer and is a bit more expensive. I see RH England as a living store, which spans a large 73-acre estate. Not everything needs to open simultaneously; we have three restaurants set to open on the property, along with a total of five or six different hospitality experiences. We have The Boulangerie Restaurant, The Conservatory, The Lodhi, and other features like the wine room and the tea room. We've got the juicery and we have weekend picnics planned. It's going to be a fun place. I don't think The Conservatory restaurant will be ready for this summer, but it might be available next season. This will be a really fun interactive experience, and if we execute it well, a lot of people are going to visit. It's an excellent environment to showcase our product in a beautiful setting with great light and stunning views. We have the largest herd of white deer in Europe and a deer park where they graze. You can enjoy a picnic while watching the deer, sitting in luxury and enjoying the views from The Conservatory or The Lodhi, both of which offer beautiful sights.

All really exciting stuff. If I could squeeze in a follow-up, perhaps a bit more dry, you all have had kind of different capital structures over the years and depending on if times are good or bad. Just to circle back on that question of the term loan. I mean, in this environment, with inflation where it is and the trends you've been seeing, I guess how do you think about what the capital structure should look like right now?

I believe we've consistently indicated that we don't have a specific target capital structure. We evaluate our capital, capital deployment, and capital structure opportunistically. This approach has remained unchanged and we've maintained this stance for about nine years. We raised capital to create options and flexibility for the future, and we achieved that at a highly attractive rate.

You certainly did. Great. Thank you so much.

Thank you.

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