Thank you for holding and welcome everyone to the RH Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. I will now turn the call over to Allison Malkin with ICR. Ms. Malkin, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 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 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 will turn the call over to Gary.

Thank you and welcome everyone. We will start with the reading of our letter to our people, partners, and shareholders, and then open up the call for questions to our people, partners, and shareholders. Fiscal 2022 was another outstanding year for the RH brand. While revenues of $3.59 billion were below the pandemic peak of 2021, we finished the year with an adjusted operating margin of 22% and adjusted EBITDA margin of 25.9%, the most profitable business model in our industry. It’s clear that the stay-at-home restrictions of the pandemic created an exponential lift for home-related businesses, and it’s also clear that the lift, like the pandemic, was a temporal isolated event versus something structural or systemic. We believe the questions are what, if anything, has permanently changed? What brands and businesses are positioned to win over the next decade? And what data is important to determine who those winners will be? Those are not easy questions to answer in light of the massive backlog release and a return to discounting at most home furnishings retailers, which distort short-term results. Additionally, inflation that was thought to be transitory is now being persistent by the Federal Reserve, resulting in a record rise in interest rates triggering a dramatic decline of the housing market with luxury home sales down 45% in the most recent quarter versus a year ago. Add to that an underperforming stock market and a banking crisis no one saw coming, and the data points to business in our sector likely getting worse before it gets better. It’s times like these that businesses tend to move and hurt, pursuing broadly adopted short-term plans that lead to mostly similar outcomes. It’s also times like these that present opportunities to pursue long-term strategies that can result in strategic separation and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That unique path for RH is our climate for luxury mountain and our long-term strategies of product elevation, platform expansion, and cash generation. Product elevation. Our strategy to elevate the design and quality of our products is central to our strategy of positioning RH as the first fully integrated luxury home brand in the world. It is also the most difficult part of our plans as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs. While it becomes more difficult to connect with clients as we reach new heights, it’s also one we have navigated successfully over the past 22 years, but don’t expect this to waver from our vision anytime soon. This spring/summer we will be unveiling the most prolific selection of new products in our history, with over 70 new furniture and upholstery collections across outdoor interiors, temporary modern, baby and child, and teen. It represents a massive leap forward for our brands. These new collections reflect a level of design and quality that is accessible in our current markets and a value proposition that will be disruptive across multiple markets. We also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the second half of the year. The new thesis will be gracing the pages of the new Source Book design with the objective of creating a cohesive collection of titles to reinforce our design and quality leadership. The first of those titles, RH Outdoor, began arriving in homes last week with our trademark belief reflected on the cover. There are pieces that furnish a home and those that define it. Platform expansion. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multibillion-dollar opportunity. This summer, we will be introducing RH to the UK in a dramatic and unforgettable fashion with the opening of RH England, the Gallery at the Historic Aynho Park, a 73-acre 17th-century estate that will be a celebration of history, design, food, and wine. RH England includes three full-service restaurants, the orangery, conservatory, and loggia, plus three secondary hospitality experiences: the wine lounge, the tea salon, and the juicery. Guests will appreciate views of Europe’s largest herd of white deer grazing on the vast and scenic property from the 46 windows adorning the south-facing main building and can enjoy a glass of wine or afternoon tea service while sitting around a monolithic stone fire pit on the Grand Viewing Terrace. One of the most unique attractions at RH England is The Aynho Architecture & Design Library, featuring rare books from the foundational masters of architecture, Palladio, Scamozzi, and Alberti. The centerpiece of the collection is one of the first printings of De architectura, The Ten Books on Architecture by Vitruvius, whose work from the 1st Century BC inspired Leonardo da Vinci’s drawing of the Vitruvian Man, 1,500 years after Vitruvius sketched the original. The principles at the core of Vitruvius’s philosophy have also inspired the Design Ethos at RH, which is reflected in our galleries, interiors, and gardens. The Gallery will also include the Sir John Soane Exhibit, honoring one of England’s greatest architects, in partnership with the Soane Museum in London. The exhibit will touch on his life story and detail some of his most famous works, including Aynho Park. We believe RH England, The Gallery at the Historic Aynho Park, also represents RH’s greatest work and will act as a symbol of our values and beliefs as we embark on our expansion across Europe. Our global expansion also includes openings in Brussels, Dusseldorf, Munich, and Madrid, as well as an interior design studio in London over the next 18 months, followed by Paris, London, Milan, and Sydney in 2024 and 2025. Regarding our North American transformation, we will be introducing a new gallery design this year in Palo Alto and Cleveland, plus opening new galleries at the Historic Firehouse in Montecito and The Linden House, a 178-acre estate on a private lake in Indianapolis. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years. We also believe there is an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation. We have several existing locations that validate this strategy in East Hampton, Yountville, Los Gatos, Pasadena, and our former San Francisco Gallery in the design district, where we have generated annual revenues in the range of $5 to $20 million in 2,000 to 5,000 square feet. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Cash generation. We have demonstrated that those with capital in difficult markets are the ones who capitalize. That’s why we raised $2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation. Times like these also require us to have the discipline to say no to the things that are nice to do in order to focus our time and resources on what is truly important. That includes making the difficult decision to graciously say goodbye to team members whose roles are no longer essential in our new view of the future, enabling us to work in a more integrated and collaborative fashion, on fewer, more important priorities. Please know we have treated everyone with respect and dignity and appreciate the contributions all have made to our cause. Approximately 440 roles were eliminated as part of our organizational redesign, and we expect to achieve cost savings of approximately $50 million annually, inclusive of associated benefits and other cost savings. Concurrently, we will be focused on reducing inventories and generating cash, further strengthening our balance sheet to maximize optionality. Outlook. As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis, and the cycling of record COVID-driven sales and backlog reductions. Based on current trends, we expect fiscal 2023 revenues in the range of $2.9 billion to $3.1 billion and adjusted operating margin in the range of 15% to 17%, which includes an approximate 150 basis point drag due to the ramp of our global expansion. We estimate the 53rd week will result in revenues of approximately $60 million. For the first quarter of fiscal 2023, we are forecasting revenues of $720 million to $735 million and adjusted operating margin in the range of 13% to 14%. RH's business vision and ecosystem, the 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 is to position RH as the arbiter of taste for the home, which 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 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 products 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 experiences. 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 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 that deliver taste and time value to discerning, time-starved consumers. 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, 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. 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 Hermès, 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 plan to introduce this year, inclusive of our new product collections, new Source Book design, new gallery design, and the introduction of RH to the UK in an innovative and immersive fashion, continues to demonstrate the imagination, determination, creativity, and courage of this team, and the 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. At this point, operator, we will open the call to questions.

Certainly. Steven Forbes with Guggenheim Securities, your line is open.

Good afternoon, Gary and Jack. I wanted to expand on the new product launches. You mentioned the timing of these launches as an inflection point for the business. Could you contextualize what’s implied by the guide if you are sort of baking in a reacceleration in demand trends at the back half? And then more importantly, how should we think about in-stock versus special order mix and the potential revenue contributions of these new collections in the back half?

Sure. I think based on the times we are in and the uncertainty we are facing, whether it’s the continued rise of interest rates or the next bank or two that gets eased. It’s hard to be anything but conservative right now. And I think it would be foolish to not do so from the perspective of disappointing investors as well as ourselves and possibly making decisions in investments before we can see around the next corner. I can tell you it’s unsettling to be a person watching a basketball game, while the news cuts to a line formed around your local bank, while the banks were sending hourly emails trying to reassure customers that they are committed to serving us – it’s a very unsettling feeling, okay. Those of you on the East Coast who didn’t experience what happened here on the West Coast may not be as aware, but I, as someone close to it, have never seen anything like it. So, I don’t know how long it was between the fall of Bear Stearns and the fall of Lehman Brothers, and what’s going to be the next shoe to drop or pin to fall. That’s very unknown right now. So we believe there will be an inflection point in the second half. What we don’t know is what will be the economic environment in the second half, what will be the condition of the banking industry in the second half, where will interest rates be in the second half, where will inflation be in the second half. I think Powell has been very direct and consistent in addressing persistent inflation. All one has to do is Google the history of the federal funds rate and zoom in on the 1970s and 1980s to see how many times the Federal Reserve thought they had inflation under control, only to have to raise it twice as high, all the way to I believe 21%. If you look at those moves and zoom into that chart, you realize we are in uncharted waters today from an economic perspective. Very few people on the planet in positions of authority and responsibility were old enough to experience those times. I think that having a conservative view and being prepared, trying to see the whole board and all the moves – we like to say inside our team, don’t move until you see it. So our view is just to be conservative, be prepared and capitalize on the opportunities that may arise in moments of dislocation like we are experiencing now. Anyone who thinks it’s not a big deal that three banks went down, or that it’s not a big deal if the government directed 11 banks to lend $30 billion from mine to help save that bank, is living with a euphoric view of the world. I’ve been around long enough to know this is not normal and this is dangerous. So we want to navigate this period thoughtfully and position ourselves for the long-term. That’s what we have done in every past challenging time, whether you look at 2001 when I joined the company, or in 2007 and 2008, or the 2015-2016 period, when we had a slowing housing market and issues in the oil industry as well as internal challenges with the launch of RH Modern. Yet during those difficult times, we made a few very important moves that positioned the company to be where it is today. So that’s how we approach things. It may be different than others. We are not pushing the panic button with promotions. I wouldn’t call it a panic button; it’s really trying to hang onto the illusion of where business was during the pandemic, right? The pandemic has come and gone. Some aftereffects are lingering. We are acting as if it never happened. So whatever the giveback is, does it matter? If our business looks more like 2019 coming out of it, but it’s built on a strong base and foundation with an exciting long-term strategy and vision, that’s what we think is important. Not hitting the sale button or sending out promotional emails that flood the inboxes. A lot of people are saying we are not really returning to promotions. But the reality is if you’re sending me promotional emails every other day, or even multiple times a day, while marketing them as different events, it’s just promoting the same thing. Let’s see how it happens when they have to anniversary those promotions, right? Let’s see how many more promotions they have to run when they anniversary those sales. Long-term, their operating margins start to decline to where they historically were. That’s what’s likely to happen here. We’re not doing anything different with our operating margin this year. We’ve guided to a midpoint of 16, yet with a 150 basis point drag for international. We entered the pandemic with a 14.3 margin, right? So without changing anything, we are ahead of where we were. I don’t know if everybody else is going to end up in the same boat. Some new businesses that have grown quickly off smaller bases may not reflect that. Based on some of the sales growth you see, the operating margins aren’t where you think they would be. So I like where we are. We have thought deeply about our decisions, and I’m comfortable with the game we are playing right now. As for the stock versus full mix for these new collections, we anticipate being in-stock coming soon. Many of our products, particularly in upholstery, are usually special order business since customers want choice in fabric and color. Conversely, we typically stock our broader furniture collections. We are also planning to transform our galleries and our floor sets starting late second quarter into the third quarter when we can get enough products and collections. For us to put a single collection in a gallery, we generally order, I don’t know, 1,500 to 2,000 pieces of that collection. So getting factories to ramp up for that kind of change-out is a big undertaking. You balance decisions between stock and galleries. Our view is we want to flip the galleries sooner than later. The product we have coming this spring is the best work we have ever done. The breadth and depth of the assortment, along with the value proposition we are about to have, I believe will be disruptive not only at the high end, but across the market as we have the scale to buy and stock inventory. Many competitors don’t. The platforms out there today, such as Wayfair and others, they don’t take positions in inventory, meaning they can’t buy in volume. As a result, they can’t drive efficiencies. Hence people may ask, aren’t you worried about platforms? I think the platforms should be worried about us too. There isn’t a platform in existence that has made a dollar yet. I mean, Wayfair made money during the peak of the pandemic. I don’t know if they can maintain that profit after the pandemic. Regardless, I believe we have a great model and some of the best vision in our industry. We are striving to accomplish something that’s never been done. So, to sum it up, the stock versus special order mix for the business will be a relatively minor concern. Those are just nuances within the business. The key at this time will be what will happen—it's hard to communicate until you have seen the product. I don't know how many people on this call have seen the Outdoor product book, but visually speaking, it looks like a completely new brand. The Outdoor book has probably the smallest percentage of newness; yet, it features 10 new collections that many of our competitors don’t have across their collections. When you see what is going to happen, this is a big moment—it's the biggest move we have ever made in our history. It’s an incredibly exciting time for our company, even more uncertain than 2008-2009, as we are now dealing with the inflation crises that didn’t exist back then, along with political unrest. The inflation issue is particularly interesting and pertinent. If the Fed can navigate these issues with a positive outcome, what I’d call ANY kind of landing would be sufficient for the economy. A complete collapse would resemble the events of the 70s and 80s, taking over a decade to recover. A recession, which people are worried about, occurs every 7-10 years in this country, and we have had the longest economic expansion in history. So, my advice is not to fear a recession; they are temporary events. They usually last 12 to 18 months, maybe 24 at most. If you investigate the history of the federal funds rate from the ‘70s to the ‘80s, it will become evident that what we should be wary of is the occurrences of those losses.

Thanks, Gary. I’ll get back into queue.

Simeon Gutman with Morgan Stanley, your line is open.

Hey, everyone. Hey, Gary. Hey, Jack. Gary, has your approach to the next 12 months of promotional posture changed? Will it change if the environment worsens? What can we expect in terms of pricing and promotion?

Yes. Look, we have said that the biggest collection of new products in our history is coming through. We will have to clear existing products, so there will be some promotional activity and clearance activity in the business as we usually do; that may increase. Because of the uncertainty in the market, we may decide to expedite the turnover of items through our outlets and online, just to convert non-strategic long-term inventory into cash and maximize optionality during this time. Our focus is leading the business with a cash focus; there will opportunities we perhaps haven’t imagined yet, whether from a real estate perspective, business ventures that may present themselves, or opportunities to accelerate the transformation of our businesses in different ways. One noteworthy change is that we are probably the largest residential interior design business in North America and likely the world. It is becoming increasingly important to our long-term success. We want to attract the very best people in this industry, creating incredible offices and spaces for them to conduct business—rather than having to always be located in a storefront. Our design studios will forge a new path, and you will see the first one opening in London soon with community-driven concepts, perhaps with others following suit quickly. However, I don’t view our position as risky—in fact, it presents an excellent chance for us to take advantage of this time. Our balance sheet possesses no risk, nor does our operating model, other than perhaps making less money. We made significantly more money during COVID, and we saved that allocation. So, we are in a great position. I am not worried about the state of our business today, but I don’t mean that to diminish our efforts; rather, we are focused on what’s to come in the future. We have exciting plans to bring to life in the next 12 months, yet we are focused on our core strategy. If you recall, did you see me sell stock at $700 a share?

No.

The reason I didn’t sell stock at $700 a share is I firmly believe it’s going to be worth significantly more than that. We are playing a long-term game. If we are right, we will create exceptional shareholder value for this company. We are committed to accomplishing something that no one else has achieved. If something extreme occurs—something like what happened abruptly with COVID—we will need to adjust. But based on what we can see and expect today, I am confident we remain well-positioned.

If I can sneak in a quick follow-up to Steve Forbes’ question. You indicated a cautious approach to guidance. Are there adjustments made in the last two weeks, given the banking crisis? How does that factor into your guidance for growth expectations in the back half caused by new product releases?

Yes. There is back half improvement factor based on our launches. We certainly won’t launch without expecting some improvement. That said, we aren’t baking in any potential for better times. Instead, consider what was done in 2022 when we anticipated deterioration. So I’ll clarify: are we going to see significantly worse conditions? I don’t think so. I have never seen the luxury home market decline by 45% in a single quarter, not even in 2008 and 2009. So, I believe we are nearing the bottom. Could things worsen slightly? It’s possible, as we witnessed some erosion due to the banking crisis. However, our business has shown some signs of rebounding after an 8-point drop. We didn’t anticipate that decline would perpetuate throughout the rest of the year since it appears to fluctuate. I just cannot ascertain if banks are stable at this point; it’s conceivable there is still another 10-point drop if further destabilization occurs, but we can endure it. I believe our cost structure is in good shape and that we have levers to pull. We can dial back investments while increasing costs and investments if necessary. There’ll be instances where it’s more advantageous to repurchase our stock, which ultimately benefits long-term shareholders.

Thank you for those thoughts.

Max Rakhlenko with TD Cowen, your line is open.

Great. Thanks a lot, guys. So first, on the 15% to 17% EBIT margin outlook, how should we think about gross margin versus SG&A? Additionally, how should we perceive the four-wall gallery margins versus a lot of the investments that you will be making? So, I am pondering how to differentiate the core versus some of the growth initiatives?

We don’t break out the gross margin SG&A split. Although, clearly, with lower volume expectations for ‘23 versus ‘22, you can interpret what deleveraging would happen from fixed occupancy costs similarly to how we experienced in Q3 and sequentially in Q4. So I’ll leave that as it is.

I am interested in understanding our gallery level profitability now versus where we have been historically. In addition to this, regarding the new openings, could you provide insights on the timeline for openings in both Europe and the US this year? Also, how should we approach the new real estate prototype you are looking to roll out? How does it stand up against our regular gallery types?

Gary referred to timelines in the letter. We expect England to open in the summer, and the others will happen later in the second half of the year. We will update you when that unfolds. About the design studio, we will have more information when we are ready.

Got it. Okay. Thanks a lot, guys. Best regards.

Thank you.

Steven Zaccone with Citi, your line is open.

Thanks. Good afternoon, everyone. I wanted to follow up on international because it did look like you listed some new cities, and that included Sydney. I am curious about your timetable on that, and for international stores, how do you plan to merchandise them compared to the US galleries? Will you have RH Contemporary in the UK opening?

Yes. We are building a global brand. Unless we’re in markets that require drastic adaptations, we will maintain a consistent RH experience in all of our locations. With respect to Sydney, I have outlined the required timeline during our planning sessions. Those are substantial development projects. Sydney requires a new building, and we’ll be beginning construction soon once we get the necessary design approvals. As long as there are no unexpected delays, we hope to open on schedule. The bigger projects, like Milan and London, are under construction and progressing successfully. If you’re near Montaigne Avenue in Paris, you will see our constructions rising well ahead—it’s very visible. Milan is another exciting project, and there’s great momentum being built around it. We are moving forward with significant investments, and I anticipate our presence in Europe being highly recognizable in the months to come.

Great. Then the second question I had was, shifting focus to margins. How should I think about the margin outlook beyond this year? After all, we used to consider a 20% margin floor for the business. If we return to growth, would that mid to high teens operating margin level be a reasonable expectation as investment in growth remains a focus?

Yes. You must contemplate a 20% margin floor, just not during the worst housing crisis we’ve ever seen. The current housing market is an unprecedented one. In the third quarter, the luxury sector did not meet a fourth-quarter high, and luxury housing has been declining over the past year. We did see a drop of 18% in the first quarter of ‘22, 28% in the second, down 38% in the third, and most recently, 45% in the fourth quarter of ‘22. This means what we’re experiencing throughout these months might not merely turn around. We can expect volatility. Referrals at lower rates might have been close to 70% or 80% at certain times. The current state of the market is not something anyone anticipated, resulting from the pandemic and its impact on consumer demand and other factors. We are experiencing back-to-back as many disruptions. Therefore, it is plausible that our operating margins could naturally rebound to 20% when normalized. With the right challenges in pricing and promotions, this set of conditions feels completely atypical. There are factors that have resulted in cost fluctuations, and we need to navigate our growth path while continually positioning ourselves for better margins in the future.

Great. Thanks for your insights. Best of luck this year.

Thank you.

Seth Sigman with Barclays, your line is open.

Great. Thanks a lot. I’d love to follow-up on that last point, actually. Just thinking about your ability to maintain and continue to grow mind share in this environment? Whatever the scenario ultimately pans out to be, you mentioned the considerable level of newness lately. However, it’s leaning toward being more promotional, and many competitors are now reverting back to pre-pandemic promotional levels. How do you plan to cut through that noise? If you desist from discounting, is that just going to mean higher marketing costs that offset those margins? How do we think about that?

The approach is not different from how you would have thought about it in 2019. So, just ignore the pandemic! Those whose strategies are being altered based on the pandemic will quickly discover how challenging that can be once we resume normalcy. Many will return to their previous patterns. However, substantial shifts are said to have occurred, and most individuals will return to office work, although they may not be wearing masks in public as often anymore. I have had so many discussions with people about the impact of the pandemic and whether we are truly entering into a decade of the home, which may have changed patterns and perceptions for many. The fundamental reality is that lifestyles have shifted, and that’ll lead to an acceptance of the return of traditional norms into businesses and how they operate. While the pandemic has changed some things, it’s essential business reverts to baseline models of operations to meet consumer expectations. You will observe other businesses undergoing similar phases of recalibration here. We have established a strong fabric, and my goal is not to let panic draw us out further into distress. Should I force the promotional button in our business and initiate a few promotional campaigns? I guarantee you that our business would instantly jump by 10% to 20%. However, it would pressure margins and be difficult for us to sustain that level again over time. In other words, it is complex. If you want to confer on the importance of price stability, we must concentrate on product value rather than sales strategy when analyzing inventory, and what it currently represents in regards to overall company potential. The promotional focus isn’t entirely desirable; it’s fundamentally opposed to how this business was built. This philosophy has cultivated robust partnerships, but the risks remain—our competitors will be judged accordingly, both now and in the future. That’s how we will navigate through these uncertain times.

Okay. Thank you for that. I just want to follow-up on one point around the margin outlook. You discussed your philosophy about, I guess, maintaining or, I guess, not maintaining the 20% margin and why that makes sense for you right now. I’m just more curious if you could help bridge us to what is actually different from getting back to that 20% margin threshold to your actual guidance. I get that the 150 basis points of investments and the deleverage in the model could be a factor, but what else would be different to drive that delta?

Well, I mean, we set to inflect the revenue growth back, right? The housing market has to stabilize. The luxury housing market has faced dramatic fall—not only in the fourth quarter but throughout the year. The state of the luxury housing market down roughly 45% sorts the context for how our business connects to the economic environment currently installed. It’s worth noting this degradation has significantly impacted other sectors of the economy as well, including the refinancing market. We haven’t anticipated the depth of the current housing recession that has persisted with the added backdrop of various factors, which likely will not change for now. In more historically optimistic markets, we’ve seen considerable pressures due to factors such as inflation and rising interest rates. That’s not to say there aren’t opportunities, but the situation looks precarious owing to the rapid changes we are experiencing. If you look at the luxury market leading up to the pandemic, the housing market was already showing the effects of a recession, the desires of cyclical declines, and general unpredictability of these occurrences. Does that mean we will break even on profitability in the coming future? We remain cautiously hopeful while finding the observations quite concerning. The margins for growth will return, and soon, we hope, if we navigate the challenges appropriately.

Got it. Thanks for the clarification.

Okay, thank you.

Michael Lasser with UBS, your line is open.

Thanks a lot for taking my question. You mentioned that the Contemporary business is on pace to exceed the Modern business at a similar time frame, and you are guiding to a midpoint of mid-20s sales decline in the first quarter. So how incremental is the contemporary business, and how does that inform your thoughts about the incrementality of the launches later this summer?

It’s all factored into the guidance right now, right? It’s an atypical period. When thinking of incrementality right now, the context is essential, and we are currently navigating through uncharted territory. When you consider the greater challenges, they seem more apparent during times like this. The sales decline is comparative to previous highs and reflects how the business trajectory tempers downward based on higher sales levels last year. Ultimately, you can expect our revenue growth will resume as planned; launching new collections and pushing our unique value propositions should support that.

You have many investments you’re working to manage carefully. How are you approaching share repurchases? The stock is well below where it was a few years ago, will this be an opportunity to be even more aggressive with buybacks?

There is nothing different from what we said previously. We would like to gain some visibility and certainty as to where things are headed to enable us to decide how much capital to deploy in share repurchases. Additionally, I think it’s worth noting that our team reads some analysts’ notes expecting more shares to be purchased throughout the quarter. However, there are blackout rules governing our ability to repurchase shares for a certain number of weeks in each quarter. We can only repurchase shares for two weeks this quarter and usually five to six weeks depending on release timing. Share repurchases remain a possibility, along with many others depending on conditions. So, we will see what decisions we ultimately make as we monitor market conditions.

Thanks for clarifying that. Best of luck.

Peter Benedict with Baird, your line is open.

Thanks for taking the question. Curiously enough, how do you feel about CapEx and free cash flow expectations for this year? What are you contemplating regarding inventory reduction?

Could you specify the ranges?

Concurrently, as released in our 10-K, the CapEx for this year is projected at $275 million to $325 million. We will not guide regarding free cash flow until further progress is made. In terms of inventory, we see it positively trending downward off the peak we hit in Q2 last year and are looking at a sequential decline throughout the year as we adjust to a more appropriate level for the business.

What are your thoughts on the leverage of the business over the next 12 month? Are there any limits on your comfort levels?

Looking at leverage, we take a longer-term perspective. Temporal swings in leverage do not concern us right now. Importantly it’s not something we obsess over. Our focus is on longer-term themes and stability while viewing free cash flow profiles that contribute long-term foundational strength for our business.

Okay, understood. Thank you. Good luck.

Jonathan Matuszewski with Jefferies, your line is open.

Hey. Thanks for taking my question. I wanted to follow-up on your membership base. The number seems to have decreased to around 350,000 members at year-end. Are membership cancellations accelerating year-to-date? Any insights on this attrition?

Membership reflects our underlying business, and it lags behind sales and demand. Higher average order dollars and average unit retail might also factor into fewer members. Membership levels will reflect the size, and renewal rates have remained consistent for many years. We haven't seen any significant downturn in cancellations due to the economic backdrop. It’s simply noise.

I understand. I also wanted to touch upon your organizational redesign. How will the workforce reduction impact the areas you wish to scale back or delay?

Yes. I think getting into the specific details of our organizational shifts isn’t necessary for this call. However, methodology will focus on our top priorities. We clearly articulated those priorities while concurrently determining which areas are minimally essential. It’s an evolution toward improvement.

Thanks so much for the insights.

Thank you.

Steve McManus with BNP, your line is open.

I had a question on backlog relief. How significant was the Q4 contribution towards normalization, or is there still work to do?

There’s still a remainder to address. At the beginning of last year, we talked about a backlog exceeding $200 million over normal levels. We have processed around $100 million, meaning there’s another $100 million to work on. Moreover, it’s likely split evenly through the quarters we've analyzed. Given our new product launches, while we aim to overcome the high backlog, we know securing consumer demand won’t simply revert to how things were pre-pandemic.

Okay. Could you comment on advertising spending—specifically, its increased budget this year? Can you provide insight into planned cadence for Source Book circulation?

Like any business, we strive to balance strategic investments for optimization. At one time we spent 10% a year on advertising, but we recently ran it closer to 4-8%. Considering we are opening significant galleries, the need to raise brand awareness requires investment in advertising—particularly in small, regional markets where our presence is not as robust. We expect the advertising budget may need to rebound to levels closer to 120 million, historically. This budget is subjected to strategic assessments depending on our brand’s visibility. We didn’t see issues in our brand during COVID, but some investment adjustments may occur as we resume normal operating procedures.

That’s helpful. Thank you.

Seth Basham with Wedbush, your line is open.

Thanks, and good evening. I wanted to inquire more about the point you raised regarding the climatic challenges on your luxury mountain. Have you encountered new barriers over the past year that have surprised you, aside from the macroeconomic factors?

From a strategic perspective, it is always challenging to climb the mountain. Naturally, inflation and rising interest rates make this transition more difficult. The climatic state of luxury high-end markets has always presented challenges, though I’d say this particular state from time to time can become relentless. Our philosophy revolves around remaining innovative. Ultimately, our strategy involves fostering strong relationships and assuring our offering meets the expectations of the market. As we forge forward, remember, climbing the mountain is a unique experience, and the effort builds internal strength—it brings us closer to our aspirations. At the same time, it is crucial to recognize that many things can hamper revenue during transient moments due to adverse economic climates.

Understood, thank you for the thoughts.

Cristina Fernandez with Telsey Advisory Group, your line is open.

Thank you. Good afternoon. I have two questions. The first is on the strategic investments you are making on the global expansion. How should we think about that ramp over the next couple of years in relation to the 150 basis points, or $45 million this year? Should we expect that to be linear with store openings or are there many upfront investments that you’ve made now or last year?

If you consider those investments in relation to their pace and the number of markets involved, primarily it will be driven by our revenues. The spend will be consistent, and once revenues normalize, the percentage wouldn’t matter—we set out our 150 basis points regarding the baseline expectation, assuming you can back out dollars from it. Conversely, the timing of investment flow may fluctuate based on the market dynamics we witness. In other words, spending may remain constant despite variations in revenue.

Brad Thomas with KeyBanc, your line is open.

Hi, thank you so much. I just have a couple of housekeeping questions. First one, about the guidance for the first quarter. Gary, you mentioned that trends had decelerated by about 8 points since the banking news broke. Is your guidance reflective of the run rate, or how are things tracking at present?

Yes. I said it changed by about 8 points prior and then it returned somewhat, right? Right now, observations indicate stability in the market generally. Although, it’s importantly overshadowed by the uncertainty we previously discussed, as we aren’t completely sure yet how the situation will resolve. Given what we know today, we guided accordingly. There’s no way to calculate all of the potential fluctuations precisely until we have more data. However, it seems fair to stay optimistic this time.

Understood. One item we didn’t touch on much this call is the guest house. Can you provide any updates or insights you learned since its opening?

Yes, it’s open, and we’re proud of it. Experiences have followed expectations, and we appreciate the generated feedback. It has created the type of dialogues around our brand that we aspired to. Our next guest house is under construction in Aspen; we view it as crucial to fortifying our membership with growing brand synergy. We’re currently not marketing it aggressively, as we sent out an initial email, but anticipate this spring, we’ll begin communicating much more about what we offer, and it’s going well.

Understood. Thank you, Gary.

There are no further questions at this time. I will now turn the call back over to Gary Friedman for closing remarks.

Thank you everybody for your time and interest. We look forward to speaking with you soon.

This concludes today’s call. We thank you for your participation. You may now disconnect.