Hello. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Restoration Hardware Second Quarter 2022 Earnings Call. I would now like to turn the call over to Ms. Allison Malkin of ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2022 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 reliable disclaimer that we will make certain statements 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. Hi, everyone. We are live from RH New York, the RH Guesthouse in New York. And for those of you in town, hopefully, you'll come by over the next few days and come to say hi. I'll be here through next week, and it is a place you should come by and see. We have the best breakfast by the way in New York City. So anybody looking for a good place for breakfast, lunch or dinner, particularly, you usually can't find good breakfast in this town. At least that's what I believe. I'm going to start with our letter, as I always do. To our people, partners and shareholders, we are pleased to report better-than-expected results as revenue increased to $992 million versus $989 million a year ago, up 40% on a 2-year basis from revenues of $709 million. Results exceeded our revised guidance due to faster backlog relief despite a deteriorating macro environment. Gross margin expanded 350 basis points in the second quarter, primarily due to an increase in product margins as we continue to resist promoting the business as demand trends continue to slow. As we've mentioned, there continues to be widespread discounting across our industry. While there may be a short-term risk of market share loss as a result of our choice not to promote, we believe there are certain long-term risks of brand erosion and model destruction once you begin down that path. It's that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry, and our results continue to reflect those of the leading luxury brands as we delivered 24.7% adjusted operating margin in the second quarter, also exceeding our outlook. Our results are inclusive of investments related to the launch of RH Contemporary, the openings of RH San Francisco and RH Guesthouse, the development of RH International and the rollout of RH In-Your-Home, which led to approximately 400 of the 530 basis points of SG&A deleverage in the quarter. Our business generated $23 million of free cash flow in Q2, ending the quarter with $2.1 billion of cash on our balance sheet, total net debt of $446 million and trailing 12 months adjusted EBITDA of $1.1 billion. We purchased 1 million shares of our common stock in the second quarter at an average price per share of approximately $255. We also spent $82 million in cash to repurchase $18 million and $39 million of the 2023 and 2024 outstanding convertible notes in privately negotiated transactions. Following these transactions, there remain $44 million of convertible notes outstanding as of July 30, 2022. Let me move to our fiscal 2022 outlook. As noted in our updated outlook provided on June 29, 2022, our expectation is for continued softening in our business trends during the remainder of fiscal 2022 as a result of ongoing weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated interest rate increases and the cycling of record COVID-driven sales levels in 2021. Additionally, due to the construction and approval delays, we are pushing the opening of RH England to the spring of 2023. While disappointed to miss the peak summer/fall season in the English countryside, we believe waiting until we can open with a full expression of our brand is the right long-term decision. Additionally, RH Palo Alto, which we planned to open in the fourth quarter of 2022, is shifting to the first quarter of 2023. Based on our current trends, the uncertain macro environment and the shift of RH England to spring of 2023, we are providing the following outlook for the third quarter and fiscal 2022. Third quarter net revenue in the range of down 15% to down 18% with adjusted operating margin in the range of 18.5% to 19%; fiscal 2022 net revenue growth in the range of down 3.5% to down 5.5% with adjusted operating margin in the range of 21% to 21.5%. While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift and shed less valuable market share as we continue to raise our quality and navigate through the multiple macro headwinds, we believe our long-term investments will enable us to continue driving long-term industry-leading performance. 2022, the year of the new. As we've mentioned, while many of our plans have been delayed by the virus, they were not disrupted by it. We continue to believe the important investments and introductions we are making in 2022 will mark the beginning of the next chapter of long-term growth and innovation for the RH brand. 2022, the year of the new, includes: the May opening of RH San Francisco, The Gallery at the Historic Bethlehem Steel Building, our most extraordinary new bespoke gallery to date. The launch of RH Contemporary, the most compelling and potentially disruptive product introduction in our history. RH Contemporary has been recently expanded to RH New York, and the initial results look promising. We plan to expand RH Contemporary into more galleries as our inventory levels improve in the first half of 2023; the elevation of RH Interiors and RH Modern inclusive of new collections and enhanced quality. The September 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. We believe we began accepting inquiries for a stay at RH Guesthouse yesterday as our website, rhguesthouse.com, went live, and The Dining Room at RH Guesthouse New York, our new live-fire restaurant, is now open for breakfast, lunch and dinner. We plan to unveil The Champagne & Caviar Bar at the RH Guesthouse New York next week. The introduction of an elevated new live-fire restaurant at RH San Francisco and the RH Guesthouse in New York. Since opening our new live-fire concept, RH San Francisco is significantly outperforming our original Gallery restaurants, and we are now planning to expand the concept to our new Bespoke Galleries in North America and Europe. With the September debut of our first Champagne and Caviar concept in the RH Guesthouse New York, we now plan to expand this offering to future galleries in Paris, London, Milan, and Aspen. We will have more to report on the exciting new concept by next quarter. The premiere of The World of RH, our new digital portal, highlighting the connective power of our evolving ecosystem, which we believe will begin to properly shape and position the brand in the minds of our website visitors, especially as we launch the brand globally. The lift-off of RH1 and RH2, our customized Gulfstream G650 and 550 jets that will be available for charter later this year. The christening of RH3, our luxury yacht that is available for charter in the Mediterranean and Caribbean where the wealthy and affluent visit and vacation. The rollout of RH In-Your-Home, a unique and memorable experience with Brand Ambassadors guiding every detail of the delivery and extending the selling experience into the home. Let me move to our RH business vision and ecosystem, kind of our long view. We believe there are those with taste and no scale and those with scale and no taste. 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 the most admired brand 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 introductions 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 vast 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 establishes 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 extend 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 in 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 while adding new revenue streams and 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 that deliver taste and time value to discerning time-starved customers. The entirety of our strategy comes to life digitally with 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 arbiter of 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, making it 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. 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. 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. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermes, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top nor do the other brands want you to. We are not from their neighborhood nor invited to their parties. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim. We believe the level of work we have introduced this year, inclusive of RH Contemporary, RH San Francisco, RH1, 2, and 3, plus the opening of the RH Guesthouse New York, begins to demonstrate the imagination, determination, creativity, and courage of this team and our relentless pursuit of our dream. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations, lessons that can't be learned in a classroom or by managing a business, lessons that must be earned by building one or by reaching the top of the mountain. Onward, Team RH. Carpe Diem. So we'll now open the call to questions.

Your first question comes from the line of Steve Forbes with Guggenheim.

Gary, just wanted to start really with your high-level thoughts around the value, as you perceive it, of the real estate pipeline given the delays today. So really, can you talk through the anticipated 2023, 2024 opening cadence? I mean can you speak about any of the projects in a little more detail? And any sort of time frame on when we should expect you to get back to a more normalized opening cadence?

I’m not sure what “normal” will look like for us given the types of projects and experiences we are creating. While I understand the desire for more normalcy, that’s not how we operate. We don’t typically launch stores in the traditional sense, like 10,000 or 20,000 square foot locations in malls or soulless, windowless spaces with standard glass fronts. Each of our projects is unique and complex, requiring significant approval time, human resources, financial investment, creativity, and determination. This complexity contributes to their greater value compared to generic developments, making it challenging for us to produce identical stores. We've moved away from using the term "prototype" because I’ve observed that retailers who establish prototypes often find themselves with outdated stores after several years. In a rapidly evolving world shaped by social media and swift distribution of images, adhering to a prototype could be detrimental; innovation is accelerating, and duplication could jeopardize brand integrity. Our objective is to produce truly extraordinary work, and through that journey, we’ve consistently found ways to monetize these efforts. It’s difficult to profit from average or uninspired work. Our productivity per square foot compared to competitors highlights the creativity and courage needed to create something previously unseen. If we aim for unprecedented outcomes, we must pursue approaches that haven’t been tried before. I appreciate your suggestion about rushing to open in England, but although it could be considered remarkable by others’ standards, it wouldn’t live up to our vision. Quality and greatness can’t be rushed. I often reflect on innovators like Elon Musk; we aspire to establish the most admired brand globally, producing work that inspires various industries, recognizing this requires time and effort. The timeline for innovation is hard to quantify. Thomas Edison once responded to a journalist asking about his failures with light bulbs by saying he learned thousands of ways not to make one. This journey of innovation is about originality, leading to extraordinary results. We hold a significant strategic advantage over competitors. Although some people ask about market share comparisons from 2019 to 2022, while we may have had smaller percentage increases, those companies have not captured more revenue or improved their operating margins more than we have. Yes, they may gain temporary satisfaction from our market presence, but this will eventually reveal their average businesses. We aim to create something far more remarkable. Regarding RH England, this location will offer a one-of-a-kind experience with multiple hospitality options, including three full-service restaurants and additional unique experiences. We have an exceptional outdoor space with innovative dining choices, all positioned to provide stunning views and elements, such as the largest herd of white deer in Europe.

Just a quick follow-up. It's been 18 months since the JV investment. So just curious if you could give some high-level thoughts on how the partnership is going. Has it evolved at all, whether in line or how it's helping the process through the whole real estate process?

Yes. It's really been completely additive, and it's opened up another level of innovation. Our partner is incredibly creative, intelligent, and resourceful. The ability to source real estate that we likely would never have found has been massively incremental. We just got one of the last palaces in Madrid. And when you see what we're doing in Indianapolis, I mean, it's exceptional. We have a 178-acre estate in Indianapolis next to Butler University with an incredible home on a lake behind this wall. We also recently closed on 856 acres in the Napa Valley, probably the most beautiful piece of property in all of Napa, which was the site of the historic Soda Springs Resort from the 1800s, still has the ruins, where we'll build a guesthouse, residences, and a winery. There's just a lot of creative things happening. We're closing on an incredible property in Europe that you'll hear about, and we continue to see both unique guest house opportunities and so many other things that we might not have discovered without this partnership. Now that we’re here, we have the unique opportunity to maximize the value of the creations we are developing without building typical strip center retail properties but instead, bespoke properties that resonate with our clientele. The strength of our brand continues to impact the value of real estate we pursue.

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

So first, can you provide just any more color on Contemporary demand in New York and San Francisco? Any early reads or anything to call out? And then with the supply chain pressure easing, is there an opportunity to get it into maybe some more of your galleries faster? Because I think the timeline has actually been pushed out a little bit from what you noted last quarter. And given all this, is 1Q '23 or maybe even 2Q of '23 the first few quarters where Contemporary is going to have a meaningful impact on your top line?

Yes. Sure. Well, one, we're really happy with how Contemporary is performing, both in San Francisco and in New York. In San Francisco, we've been really pleased. In New York, it has meaningfully changed the direction of the business. San Francisco went from a tiny store to a much larger store with a restaurant, while in New York we have kind of an apples-to-apples comparison. New York is not completely done. It's probably another month or so until we finish this project, and we'll also plan to redo the restaurant to freshen it up and tie it into the whole new aesthetic. Regarding the supply chain ramping, these are all new goods, so we can’t ramp too fast. The great thing is right now we’re getting some early reads on what our best sellers are, and how our design teams can adjust on the orders to expand and dimensionalize those ideas across our collections further throughout the galleries. We’re really excited about it. I've never been more excited. Some say, are we in a recession? We’re in a recession. Anyone who thinks we’re not is mistaken. The housing market is entering a recession, and it’s probably going to be a difficult 12 to 18 months in our industry. But these are times you can really capitalize on. I can say the big moves we’ve made are all directionally and strategically right. Whether it's Contemporary or what we’re doing in Europe. We’re ready to play offense when others may be playing defense. Lots of opportunities ahead.

Max, it's Jack. Obviously, when we relieve a backlog, we're generally also building it at the same time. But I'd say if you think about even just the revenue beat versus our expectations, as Gary noted, that was backlog relief. I think through the first half of the year, we'll call it probably $50 million to $75 million through it. So relative to that $200 million we originally noted at the beginning of the year, we still have that work left ahead of us. While supply chain constraints and other issues are easing, we’re still not back to pre-pandemic levels, which complicates the backlog situation. We'll see. There's a chance to get through it by the end of the year, but if not, we’ll continue to chip away at it until it normalizes.

Your next question comes from the line of Adrienne Yih with Barclays.

Gary, I kind of want to stay on the topic of how the brand is shifting. It seems like the DNA of the brand is actually shifting. I'm just wondering if that's the right way to think about it. Is the company still rooted and founded, the foundation being home furnishings? It seems like future CapEx are hotels and real estate property and physical assets. And while you're still opening stores, they're more experiential. So how do you think about the root DNA of the company? Then, Jack, just really quickly, next year as we think about 1H '23 SG&A dollar growth because a couple of the Palo Alto and England are opening then, how should we think about that dollar growth?

Sure. I'd just tell you, if you have our shareholder letter in front of you and if you just go to the RH business vision and ecosystem, the long view, everything that we're doing is designed to elevate and render the core business more valuable, everything. If you read it carefully, you'll see it. 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. We're going to a new market designed to elevate and render our core business more valuable. So this is just a different way to communicate and build this brand than anyone else has done. It's the same as innovation in other fields. We're embracing a level of creativity which finds value. This isn’t merely about selling furniture. This is about adding experiences across every aspect, creating a new market presence and positioning our brand as a luxury experience. We have to be strategic still as we move forward. And then, Jack?

Adrienne, on the SG&A dollar growth, there are variable components in there. I think you're asking about the fixed investment we're making because clearly, it will change based on the variable side as our business has grown. We're making investments in international, and there are pre-opening costs associated with San Francisco and Guesthouse this year. Those will repeat in some fashion next year as well. There are several other elements in play, so on that front, we haven't guided specifically, but this gives you some perspective for modeling.

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

So I guess the first one I wanted to go to was just going back to Contemporary. Great to hear after a really promising start. But yes, just kind of thinking about this brand kind of further outlook, I think, Gary, you said this is potentially the next billion-dollar brand, right? Presuming that still stands. What do you think the timeline is in terms of like how that ramps, what that does to other brands? Is it additive? Is it cannibalistic? And what level do you think you get which, I guess, gets to a mature level? Does it take 2, 3 years? How do we think about the ramp of that brand?

Yes. I mean it'll take about 3 years to ramp or so. We'll keep expanding it and dimensionalizing that part of the business. Everything you do is somewhat cannibalistic. While it’s hard to tell at this early stage, one factor is customers will trade up. But for the most part, I think it's going to be more incremental and will open up a new market, especially among high-end customers with more significant spending power. We'll expand the possibilities that the brand represents. The way we can encapsulate these ideas allows them to get noticed in the market, much like we did with RH Modern. The biggest debate inside our company in 2014 was whether to integrate RH Modern into the core brand or isolate it. Last minute, we decided to isolate RH Modern, enabling it to break through much more effectively. This will allow us to create that evolution from our brand. We’re constantly discussing these additions, weighing if they render the brand more valuable or not, and those discussions are crucial.

I believe that addresses your question, Adrienne.

It does holistic, for sure, and all that makes total sense. And I just got to ask a question on the buyback. I think it was the first time you've been in the market, I think, in like 12 quarters, right? Kind of why now? You've had a lot of cash on the books for a while. So yes, I guess what triggered that? What do you see in the business? Is it the valuation and the certainty in the long-term growth? Should we expect it to remain in the market? Yes, just very curious about that.

Yes, yes. Well, first, we only have very small windows when we can be in the market, right? I think sometimes people aren't aware of that. We generally have multiple weeks when we can be in the market, we have those weeks. Once we announce, we have a 5- or 6-week open window. So most of the quarter, we can't buy our stock. But we’ve been looking at what's on the table and weighing all options: our stock and what the environment looks like, where we think things are going to be, whether it’s a good time to buy our stock based on where we see the value. It’s not the most important thing we are doing; our focus is really on building the brand and business. We have capital options that help us respond to opportunity effectively even in down markets like the one we’re entering. We want to be strategic about our capital deployment as we navigate through this market.

That's my next question because you have been very thoughtful and disciplined. I thought it was worth highlighting your restrained approach. How did you arrive at that decision point?

Yes. I mean it's not the most important thing we do. Building the most admired brand in the world is our primary objective. When we look at the market, we try to gain clarity on all options and decide what fits best. We aren't rushing blindly into anything. We’ve spent time evaluating various options and how our capital can be best utilized and what businesses look like strategically. We’ve been looking toward the future, and we've done investments with Waterworks that have paid off that we had planned for 22 years. When the timing was right, we acted decisively. We'll be looking for similar opportunities in the future as they arise, and we’ll share those with you as they come through.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

A little bit of a near-term question, so pardon these. First, when you lowered the guidance, it was June, and it sounds like that might have been the low point for a lot of retail. I realized you're catering to different clientele and customers in a different end market, but curious if anything picked up. The bigger question is, I guess, how much are you willing to sacrifice in terms of market share? The down 15 to 18, I don't know if that's a representative run rate beyond. But I guess when do you step in with price? And is that a '23 decision or could be an end of '22 decision?

Yes. Like I think I said last time, there's not really a plan B regarding that. I don't think we're going to need to do that. It doesn't mean that we're not always going to be cycling through inventory, right? There's always a level of inventory that we're going through. If the market gets really bad, we might cycle through the bottom part of our inventory more quickly. So we may burn a couple of hundred basis points of margin to not lose market share, but we're not going to promote across the brand. I don't see that needing to happen. I don't think other players will encroach on our market share because they don't have the same quality product or brand positioning. A lot of people talk about Our House being competitive, but if you visit their store, you'll realize what they're offering is different. Our business performance is reflective of all this – we're doing 3 times the productivity per square foot compared to others in our space. This isn't a matter of arrogance; it's just the data. For example, we've not promoted for Christmas or Labor Day sales. That approach is in line with luxury brands. You can't win sustainably in a promotional environment.

As a quick follow-up for international, I forget; was there anything embedded in sales guidance for contribution? And how much, I guess, gets pushed if there was?

In fiscal '22? Yes, yes. You'll notice we took a bit out of revenue, about 1 point. So you can view that as a combination of international and the Palo Alto project coming out of the forecast essentially.

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

Thanks for all the helpful information. I guess my question was on RH Guesthouse, which sounds spectacular. How do you think about the potential financial implications of that? How does that kind of work through the model? I mean I know it's mainly about advertising for the RH brand, which makes perfect sense to me, but I was just wondering how we should think about the financial implications, particularly given those room rates.

Yes. Check with us next quarter. Let's see what the demand is like, what the restaurant does. The San Francisco restaurant is just – it feels incredible. This restaurant, if you combine it with the Champagne and Caviar Bar, which is 32 seats underground, between those two, I think it's going to be the highest volume food and beverage experience we've ever done. Many people think it’s just a room model, but our restaurant business is a street front concept that benefits from having excellent food offerings that are resonating with our high-end clientele. Normally, hotels struggle with F&B, but we're coming at it from a different angle. Most of the hotels have rooms under 100. We claim that we aren’t opening a hotel; we’re establishing a guesthouse. This guesthouse is gesturing toward privacy and luxury. It will have features that let us price this experience higher than most. If we do hospitality right, it will generate a lot of money and enhance our brand. It's not just about the 6 rooms; it's about the entire experience with a capacity to serve a large audience and creating extensive visibility on platforms.

How do we think about pricing in the back half and into 2023? And do you still see opportunity to take price increases even though demand has weakened?

I think we're always thinking about price input and outputs, and we've seen freight rates coming down overall. Raw materials stabilize but are still elevated compared to historical norms. We need to track them closely. As we make decisions, we will communicate or observe changes that may occur. We're confident we can maintain our margins due to the brand's strength. We have more pricing flexibility since we cater to a higher price point clientele. Our customers typically don't shop for home furnishings every day. They might not even notice small price increases.

We continue to have pricing power, given the brand, so we'll approach our pricing thoughts in that framework. We're watching supply chain costs closely since they are coming down. Should they stay elevated or go back up, we indeed have pricing as a lever to enhance or maintain our margin. Yes. Look, our earnings power indicates that even if revenues go down 20%, we believe our operating margin will remain above 20%. We expect to navigate through and maintain that baseline margin, although it has many variables, including preopening costs and other dynamics in the year.

Given the third quarter guidance, should we think about demand comps trending down in the 20% range? And you ended last year with around 450,000 members. That should provide a good leading indicator on the trajectory of the business and the movement to higher price points, which may result in a bit of market share loss but allows capturing more per customer. So what is the recent trend of membership?

There are a couple of factors to consider about our customer base. We've seen significant shifts as COVID impacted various markets differently. The luxury home market was inflated during COVID and is now coming down as a result of reduced transactions. The luxury housing market suffered a setback of 18%, which will impact us now. The luxury homes, which vary significantly among different groups, were the active participants in transactions before. During this period, we'll expect membership numbers to decline; they will come back as opportunities arise.

Michael, just to clarify. We're not providing guidance on demand. The 20% comment was yours. Our guidance indicates a decline of 12% to 16% at the midpoint, but I wanted to clarify that.

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

Follow-up on the Guesthouse. Gary, can you just remind us, at this point in time, how many locations you think might be candidates in the United States and globally for Guesthouses? I know you're going to know a lot more in another quarter, but just wondering initially what your thoughts might be, and then maybe what metrics you're looking at most closely to figure out what could be a more bullish end of the range.

I think you've really got to wait until the next quarter or so. The data will guide us. I’m really glad we had the courage to initiate this approach in New York; this has benefited us remarkably. I think we already have a second one teed up in Aspen, which further reinforces our chosen route. If this first one performs well, it will create implications for other locations like Paris or London. The positive reception of our guesthouse will set the stage for more to flourish, and if it succeeds, we may transition to larger ones on other available properties.

Brad, we don't guide for 2023, at least not at this time. However, if you're building a model, keep in mind that we are not promoting our brand and climbing the luxury market. As such, in your revenue model, the product segment reflects our brand, and this will affect margins moving forward. We will let you know if there's more guidance later.

At this time, there are no further questions. I would like to turn the call back over to Gary Friedman for closing remarks.

Great. Thank you, everyone. Thanks for your time and your interest. Especially in these uncertain times, I want to thank our team who continues to drive us up this mountain, making the climb. To everyone out there, our internal team, external partners, and shareholders, if you get a chance to be in New York, come take a peek. Ping us, and we'll get you a seat in the restaurant. Come quickly; the place is filling up. I might not be able to give you a tour of the property because it is about privacy. We are welcoming clients this week, and privacy is of the utmost importance. So thank you for your time and our team's hard work, support, persistence, and determination. Thank you very much.

This concludes today's conference. You may now disconnect.