Thank you for standing by. My name is Riana and I will be your conference operator today. At this time, I would like to welcome everyone to the RH First Quarter 2023 Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Allison Malkin of ICR. You may begin your conference.

Thank you, Riana. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2023 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 for joining, everyone. I'm going to begin with our prepared comments in our shareholder letter and then open the call to questions. To our people, partners and shareholders: Revenues of $739 million and adjusted operating margin of 14.9% exceeded our financial outlook in the first quarter despite a continued decline of the overall macro environment, especially for home-related businesses. With 30-year mortgage rates trending at 20-year highs, the possibility of continued economic tightening required to tame inflation, and uncertainty regarding the recent regional banking crisis, we expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year. Based on the above and current demand trends, we are now forecasting increased markdowns to clear discontinued inventory required to support our product transformation over the next several quarters. We are raising our revenue outlook for fiscal 2023 to a range of $3 billion to $3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes an approximate 150 basis-point drag due to the ramp-up of our global expansion. As previously mentioned, it’s times like these that businesses tend to move in herds, pursuing broadly adopted short-term strategies that lead to mostly similar outcomes. It’s also times like these that present opportunities to pursue long-term strategies that can create strategic separation and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That path for RH is our climb up the luxury mountain and our long-term strategies of Product Elevation, Platform Expansion and Cash Generation. Product Elevation: Our efforts to elevate the design and quality of our product are 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 climb as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs. While it’s a climb that becomes more difficult as we reach new heights, it’s also one we’ve been navigating successfully over the past 22 years. This year, we’ll be unveiling the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH Interiors, Contemporary, Modern, Outdoor, Baby & Child and Teen. These new collections reflect a level of design and quality inaccessible in our current market, 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 collections will be gracing the pages of a new Source Book design with the objective of creating a cohesive collection of titles reinforcing our design and quality leadership with our trademarked belief inscribed across 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 multi-billion 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 17th-century, 73-acre estate that will be a Celebration of History, Design, Food & Wine. RH England includes three full-service restaurants, The Orangery, The Conservatory and The 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 monolithic stone fire pits 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 RH Design Ethos, which is reflected in our Galleries, Interiors, and Gardens. The Gallery will also include The Sir John Soane Exhibition, honoring one of England’s greatest architects, in partnership with Sir John Soane’s Museum in London. We believe RH England, The Gallery at the Historic Aynho Park, will also represent RH’s greatest work, and will act as a symbol of our values and beliefs as we embark on our expansion across Europe. We will be unveiling RH England at an exclusive private event Saturday, June 3rd, and will open to the public on Friday, June 9th. 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 in Palo Alto and Cleveland, as well as opening RH Indianapolis, a 178-acre estate on a private lake, this year. RH Montecito, The Gallery at the Historic Firehouse will now open in 2024. 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 million 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. As mentioned, we will be focused on turning inventory into cash and continuing to optimize costs throughout the organization, further strengthening our balance sheet to maximize optionality. Outlook: We are raising our revenue outlook for fiscal 2023 to a range of $3.0 billion to $3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes an approximate 150 basis-point drag due to the ramp-up of our global expansion. We estimate the 53rd week will result in revenues of approximately $60 million. For the second quarter of 2023, we are forecasting revenues of $765 million to $775 million and adjusted operating margin in the range of 14% to 14.5%. The second quarter of fiscal 2023 includes incremental advertising expense of approximately $18 million versus last year for the new RH Interiors and RH Contemporary Source Books plus the opening of RH England, representing approximately 230 basis points of operating margin deleverage in the quarter. RH Business Vision & Ecosystem - The Long View: We believe, there are those with taste and no scale, and those with scale and no taste, and the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative, as we continue our quest to build 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 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 & 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 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 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 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 Collections, new Source Book design, new Gallery design, and the introduction of RH to the UK in an immersive and unforgettable fashion, will continue to demonstrate the imagination, determination, creativity, and courage of this team, and the relentless pursuit of our dream. Over 20 years ago we began the 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, Gary. At this point, operator, we’ll open the call to questions.

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

I wanted to start on the need to take the increased markdowns. So, Gary, I was just curious if you could comment on what you saw in the business over the past couple of months that led to this update in guidance versus factoring into your original outlook when you spoke to us at the end of March.

We've observed a growing challenge in demand and a slowdown in the turnover of our discontinued inventory. We've had to increase our markdowns to effectively manage this process and make way for new products. Additionally, we are estimating that the cost of transforming all our galleries will be higher than anticipated due to the markdowns needed to clear out inventory in this market environment.

Okay. Fair enough. Then the follow-up question I had was on the UK market opportunity. I think it was a couple of calls ago; you talked about the potential size of the UK market being as large as California. I guess, on the cusp of opening England now, how do you think about the opportunity now? Maybe how do you think about the competitive environment? How do you plan to merchandise this first gallery? Anything you could say would be helpful. Thank you.

Sure. We don't see anything that changes our perspective on the opportunity. The timing reflects a somewhat different macro environment, so our initial expectations are understandably more cautious. However, the competitive landscape has not shifted. As we deepen our market connections and our team gains experience, develops relationships with interior designers, and engages with the trade industry, we anticipate significant opportunities ahead. That said, entering a new country comes with many uncertainties, so we are adopting a cautiously optimistic approach as we start. It's important to note that our foray into RH England represents a unique market strategy aimed at fostering meaningful conversations rather than immediately aiming to maximize commerce. Our true commercial potential will unfold as we establish RH London and expand into other parts of the UK. Introducing a brand to the UK and Europe correctly requires a long-term positioning strategy. When reflecting on the global landscape of luxury brands, many of the most recognized ones originate from Europe, especially France and Italy. While there are luxury brands in the U.S., few meet the stringent criteria, with Tiffany standing out as the most prominent. This brand has maintained its luxury status without broadening its appeal excessively. Typically, the U.S. has looked to Europe for inspiration, often portrayed as followers rather than leaders. To cultivate a genuine luxury brand, one must be viewed as a leader or tastemaker. Therefore, we are taking an innovative approach to our market entry by opening a store in an unprecedented location and introducing the brand in a new way. This endeavor entails risks and demands courage as we transition from our current position to where we aspire to be, which we describe as climbing the luxury mountain. In a few weeks, we expect to unveil what we believe to be a truly unique and inspiring retail experience, potentially the most discussed and admired retail store anyone has encountered. Our focus is on fostering the right conversations before prioritizing commercial activities, which seems like the appropriate order to build the brand initially. This distinctive opening will also enhance our online market presence. Even though we're located an hour and 45 minutes from London, which might seem counterintuitive to some, it's crucial to remember that previous goals in retail have differed from ours. We are on a special journey, aiming to accomplish something unprecedented.

Thanks for the detail. Best of luck with the opening.

Thank you.

Your next question comes from Simeon Gutman with Morgan Stanley.

Hey, Gary and Jack. How are you? I have a two-part question. First, it seems like the domestic business is aligning with your forecast, except for a potential consumer recession. So, the change in guidance, aside from the markdowns, primarily relates to including Europe. For my second question, thinking theoretically about the EBIT margin with the mix of Europe, the U.S. rebound, and adding hospitality and luxury, getting back to over 20—will that take a long time, or how should we approach that? Thank you.

I think it depends on the macroeconomic environment. If we achieve stability and face any challenges, we need to reassess and establish a new baseline. The success of our next major product transformation will also play a significant role. Typically, we've undergone transformations like this every seven to eight years as we elevate our brand and enhance our product offerings. I believe that the work we're doing now is the best we've ever done, even though we're launching it into one of the toughest luxury housing markets I've seen in my career, with recent reports indicating significant declines and interest rates at a 20-year high. While there is some caution due to the macro conditions, I'm more optimistic than pessimistic about our long-term model. I see no reason why we can't achieve operating margins in the mid-20s or above in the long term. We must validate our European strategy and expansion, be strategic with our capital allocation, build our infrastructure wisely, and keep our approach straightforward. Our strategy is distinctive; we're not replicating corporate roles in Europe and don't view Europe as a separate business apart from our existing infrastructure, aside from the supply chain distribution, which also aligns with our U.S. operations. Our perspective on global expansion differs from what many before us have held.

Thank you.

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

So, coming along similar lines of Simeon’s question, Gary, I’d just love to hear an update on the contemporary line, fully realizing abnormal year, of course. But just in terms of how many galleries it's been rolled out to and what the reception has been for the ones where it's been in place for I guess, an appropriate amount of time where it could be judged in terms of the reception of the…

Yes, we're pleased with the response to the contemporary line, given the current market conditions. It has only been introduced in four galleries. We did not expand further because we have a lot of new products and options to consider for the business. We've held back some of it because I believe contemporary represents our least effective execution in terms of the value equation. That's an area where I would critique our performance. Some of the price points reached levels that may have been influenced by the market conditions during the pandemic when demand was high, leading to a significant shift from urban to suburban living and increased interest in second homes. We might have been too aggressive with pricing, perhaps overly confident. Therefore, we reassessed our approach, including sourcing, and questioned everything. As upcoming offerings are revealed, whether in interiors, contemporary, or modern styles, you'll notice a significant value connected to design and quality that will shift the entire trajectory, including the contemporary line. While contemporary has begun well compared to modern and similar lines, what we are about to launch will represent the next level of transformation from a product perspective.

Okay. Great to hear and really helpful. One other just quick follow-up. Gary, just curious to hear a little bit more detail on the format for Cleveland and Palo Alto.

Yes. In a lot of ways, it represents an aesthetic change and a freshening. You'll see us begin to evolve away from gray and create really the platform for where the goods are going. We've kind of ridden the gray wave for the last, I don't know, 14 years or so. There are big cycles in product. People ask me a lot, 'Hey, what's next? How do you know what's next? Where do the trends come from?' I like to say the trends in our business come from the dead, generations pass away their belongings going into estate sales, be it high-end or antique markets, those markets really drive the high-end interior design market, and then that goes into the high-end reproduction market and starts to trickle down from there. If you look at kind of the major trends, whether it’s the Belgian European look that we kind of exploded at a commercial level throughout the United States in 2009 to 2013, or if you look at the mid-century movement that started to roll through, you can time things back. The average life span and how old people are today, people are living longer, and if you look at the high end of the demographic that has the greatest access to healthcare, that's now pushing up the age of peak purchasing. What that does is it allows us to have a more significant market share at the high end as demand shifts.

Yes. And Curtis, it's Jack. One thing to add to your question about size. Palo Alto is basically the same size as Corte Madera. I think you mentioned 25,000, but it's actually about 48,000, and Cleveland is just around the same.

Okay. Very informative. Thanks. And yes, good luck for the rest of the year.

Thank you.

Your next question comes from Steve Forbes with Guggenheim.

I wanted to ask about regional trends during the quarter. Are you seeing any disparity by region, anything that either builds on optimism or caution right around the revised revenue outlook you guys provided?

Steve, there's always regional differences, just echo prior comments. We don't really comment on those unless they're so massive that they stand out like oil markets one year did. So, there's nothing that we would share to read into any trends on that.

Then maybe just a quick follow-up, given your comments around the holistic value equation and improving across the portfolio. Any comment on the potential magnitude of input or supply chain cost relief that you see on the horizon here?

On supply chain costs, look at specifically, you're talking about like ocean freight or…?

Any cost relief right, that would maybe help fund a better value proposition?

We have been experiencing that. Gary mentioned it during the last call when someone inquired about specific price adjustments. We have already observed some cost relief that we are passing on to product prices. From a supply chain and ocean freight perspective, we have moved past the negative developments of May 2022, and now we are witnessing a slight improvement in margins due to this positive news.

Your next question comes from Michael Lasser with UBS.

Gary, as you had mentioned before that you might have been too aggressive with increasing some pricing. And in the past, you've talked about pivoting to serve a more affluent consumer and that might eliminate your addressable market. Should we interpret some of your current thinking to be, hey, maybe we have to peel back to serve a broader community of customers at maybe lower price points because that would ultimately drive the sales of the business higher and in turn the profitability of the business higher?

I would say that focusing on design, quality, and value has been our key to success. We have the best design in the market, and that design is recognized for its high quality. The value we offer is highly competitive, often disrupting other players in the market. When we engage with manufacturers, it can significantly impact their businesses because our platform can transform their reach. However, it's crucial to ensure that what we offer is genuinely valuable. If it's not, customers will seek alternatives. Conversely, if they perceive our value as strong and trust us, they won't hesitate to choose us. In today's internet era, consumers have more visibility and options, making it more challenging to differentiate design and quality online. Ultimately, if customers purchase something they believe is a good value and receive a subpar product, they are likely to return it and not shop with us again. This will become clearer over time.

Thank you for all that. Just so we can calibrate our models and forecast properly, if you had to guess collectively, how much do you think you will roll back price? Is it going to be in the double-digit range, so on average, 10% across the assortment? Is that a reasonable guess?

I wouldn't say we’ll reduce prices broadly. We are going through a major product cycle. For example, will we lower the price on the Cloud Sofa? Yes, we will. We introduced the Cloud Sofa in 2015, so we are in our eighth year. Products that reach their eighth or tenth year tend to decline in popularity. There are many knockoffs of the Cloud Sofa available; it has become a well-known sofa. However, while it has supported us over the past decade, it won't carry us for the next ten years in the same way. I'm not suggesting people shouldn’t buy the Cloud Sofa; it's still a great product and will be available for years to come. But I don't expect it to perform as it has. It will find its new market position. We will be more competitive, and our manufacturers will be looking to maintain their market share. So I wouldn't describe it as a significant rollback. Instead, I see it as a spring forward due to the new developments. We need to focus on the direction of our products rather than their past performance, while also considering the current competitive landscape and what it takes to succeed.

Your next question comes from Seth Sigman with Barclays.

It's sort of a follow-up to that last question. But just thinking about last quarter, you announced some cost reductions, the $50 million in annualized savings. I guess, just in light of the markdown pressures and your demand comments and that this could just last longer, which is not unreasonable, how are you thinking about the potential for further cost reductions and maybe other levers or opportunities to maybe address any inefficiencies? Thank you.

Yes, we are always evaluating that. We experienced a notable change in demand, and with any significant shift—whether positive or negative—there will be a need for investments or cost rationalization. Each year, we assess the organization and aim to reorganize it according to where we think the business stands and its future direction. We consistently seek efficiencies and better methods of operation. However, we are aware that if there is a substantial decline externally, we will need to optimize the organization accordingly. That's what we have done. Should demand weaken again, we will make the appropriate decisions to optimize and refine our practices, as any responsible leadership team would do. Much will hinge on macroeconomic developments, such as whether the housing market starts to recover. The luxury housing segment has experienced a decline that's about 10 points worse than the overall market. These factors are critical. Ultimately, it’s about the products we offer. If we are on the right path in terms of product and strategy, we will likely see some form of inflection, regardless of headwinds. This product transformation could have varying impacts—5 points, 10 points, 20 points, or even 30 points. Historically, when we have pursued these transformations, we have more often been correct than wrong and have succeeded in improving the business.

Yes, no doubt. Can I just ask you a follow-up around the guidance? So you did raise the low end of the sales guidance for the year, modestly. Help us with the message there in light of some of the cautious demand comments? Do we just interpret that as confidence and visibility and optimism around new product or the expansion? Just help us frame that a little bit more. Thank you.

Really two things. One, what you just said, our confidence about the new product all samples got finalized, costing, negotiations got finalized, value equations got finalized, presentation, how we're presenting in the books, how we're going to present the stores, how we're going to cycle things, what the productivity per square foot of each area of our galleries are going to be? We get out to the detail level. We're replacing this product with this product. What do we think how did this product perform per week at what margin? What's the new product is going to perform per week at what margin? We try to figure out the arbitrage of every decision we make and to have some positives or negatives, right? Then, the aggregate of all those decisions gives us more optimism. What we’ve seen in the last seven weeks in the quarter confirms that. It should be hard. We'd have to have another meaningful economic macro event for us to consider the low end based on what we know today. So that’s how we feel about it now based on all the data we have. I think we're calling it straight down the middle. We hope that there's a lot of people who think that we're not at the end of the banking crisis. We're at the beginning of the banking crisis. Very smart people believe, okay, the balance sheet situation is getting corrected, but credit issue going forward with regional banks that could become a big problem. I don't know. Those people are smarter than I am. I’ve never managed a bank, and I'm not an economist. But I've been in business a long time and I've seen cycles. No one calls it right.

Your next question comes from Jonathan Matuszewski with Jefferies.

Gary, I wanted to follow up on your comments regarding the most discerning households being 10 times more valuable in terms of luxury home furnishing. Is there any color you could share on spending patterns across your income cohorts? Are there certain customer segments that are behaving differently lately versus others in the RH business? Asking just because the reference to giving away low-quality market share. So, curious about what percentage of your members you would consider to be maybe low quality and what that could imply for what the membership trial looks like long term? Thanks.

Yes. I think if you just study the wealth data in studying the ultra-high net worth people and you look at homeownership and people as they go up the economic ladder, they collect more homes. Home becomes the biggest source of investment. You keep buying a better home. You generally keep buying a bigger home, unless you're in downsizing mode. And then people buy multiple homes. Ultra-high net worth people have 3 to 5 homes, so. The data would tell you, at the high end of the market, the second home on average has twice the number of furniture as the primary residence. As people build up the economic cycle, those second homes are furnished beautifully, trying to impress their guests. You can see widely different variances in product performance between the luxury ranges. We’ll be showcasing innovative works, which I feel not only will attract our customers but will also carry forward into most lucrative sectors for us.

Really appreciate all that color, Gary. And just a quick follow-up. You had some helpful comments on the domestic competitive landscape before in terms of peers who are below you being more promotional. From our check, we're seeing more luxury brands and home furnishings out of Italy increasingly eyeing the U.S. after years of chasing growth in China and India and Brazil. Some of these brands are pursuing more sizable showrooms in key U.S. markets. Do you see this as a threat? Any thoughts there would be great. Thanks.

Yes. I mean, look, everything is a threat. So, we don't take anybody for granted. But I'd just say that our value proposition versus those brands is massive. Most of those Italian brands are focused on specific categories. There is not one that's integrated all the categories like we do and have a complete lifestyle point of view. Our value versus the brands that you are probably talking about, I think we're massively disruptive to those brands especially now that we're sourcing out of Italy ourselves. So, when you've got made in Italy versus made in Italy and you have a significantly better value proposition because of the size of your platform. No, they don't control their distribution.

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

Follow-up on England. I was wondering, Gary, if you could just give us a little bit of an update on how you're going to be dealing with the supply chain and logistics. Obviously, the furniture industry is going to be a challenging one from a logistics standpoint. How do you ensure that the customer has a great experience for your early customers that you get in the months ahead here? And then, I was wondering, Jack, if you can give us any color on how you're thinking about the financial impact from England in the second half, particularly from a top line perspective, what's baked into the guidance? Any color there would be great. Thanks.

Yes. Let me start with the supply chain. We feel really confident. I mean, we've had our team boots on the ground over there for 18 months to 2 years, working and training. We feel highly confident in the supply chain experience, delivery experience that our consumers are going to receive from RH. One of the keys is just making sure we figure out how to be efficient on reverse logistics. You'll always have some level of returns in any business and how we handle that, the ability to not have too many touches and liquidate efficiently through an outlet network and so on and so forth are all things that we're working on. There will be some things to learn where the demand is going to come from, some things to work out, but I feel highly confident. We've got a great team. A lot of people have been with us for years that are over there. I don't know if you want to…

And from a supply chain perspective, we have one of our best guys over there.

Yes. So, we feel highly confident that at every level we will execute well. But there are going to be things for us to learn. We don't know exactly where the demand is going to come from. We have to acclimate everybody to our brand, our services, and everything that we offer. So, we'll see how the ramp is. I'll tell you one thing, the response to the party invite has been incredible. We thought we were going to have x number of people. Now, just after a few days, we think we might have 2x the number of people coming. If anybody is on this call and you want to come, let us know quickly. At some point, we need to cap this thing. We're really worried like, we’re out here in the countryside, doing this opening party, we sent an email invite, how many people are going to come? It looks like everybody is coming, so.

In response to the second question, we haven't specified anything, Brad. It's a modest expectation. We will learn as we go. At one point, Gary estimated that first-year sales or demand in England could range from 50 to 250. The important thing is that we will gather information together and share data once we have it. However, it's a modest figure and not something we need to emphasize in our guidance.

Your next question comes from Brian Nagel with Oppenheimer.

I realize the call is taking longer than expected, so I will limit myself to just one question. My question is directed towards Gary. We often discuss the various interesting initiatives happening within RH, but when considering the broader macro environment—which has faced considerable challenges—how do you see your customers, both existing and new, navigating out of this challenging period? What key changes are necessary for the current obstacles to turn into positive momentum?

Yes, we need to determine where the bottom is. Things need to stabilize, including interest rates and mortgage rates, as we move through a cycle. Identifying the new baseline is crucial. Once we reach that bottom and have a new baseline, and the macro headwinds stabilize, history suggests we can begin to grow from that point. The critical question is what that baseline will be. If luxury housing drops by 50 because it fell to 45 last quarter, that indicates it might have gone from 38% down to 45%, suggesting the last month of that quarter was even lower. This is an unprecedented situation for us as we navigate the brand through this cycle while being positioned so high in the market. We've stepped away from the accessory business and eliminated most holiday products to concentrate on furniture. So, we may take more risks than others. The essential question remains: what is the new baseline? Are we finished with the tightening cycle? It's uncertain, as the markets suggest no further increases while some Fed officials hint at additional raises. Mortgage rates fluctuate between 7 and 6.2, and then back to 7. It’s perplexing.

Your next question comes from Max Rakhlenko with Cowen.

I'll just keep it to one. But how are you thinking about pricing products in Europe compared to the states? And just your latest view on how profitable those galleries could be at maturity? I think you previously thought once galleries matured they could potentially have higher margins than in the states. So just curious for an update there. Any differences in cost structures that we should keep in mind?

Yes. We believe that we're — it’s a lot of debate on pricing. We're going to write up to the wire — do the math on everything and make sure we understand it. But I believe that long term we could have an accretive strategy because I think we're also building everything on a clean sheet paper. It should be the most efficient from a supply chain point of view. There should be efficiencies and things just because it's all going to be new thinking and our best thinking. We'll learn a lot in the beginning here. The point is, are we strategically right? Because we'll improvise, adapt over time, modify as we get going. We're excited to just get going and start learning. So, more to learn.

Your next question comes from Seth Basham with Wedbush.

My question is around inventories. As you take these markdowns to clear excess inventories, do you expect your inventory to be clean by the end of the fiscal year?

Yes. I think we'll have everything in line by the end of the year.

Great. With the 70 new collections you are planning for this year, do you expect to have them in stock in significant quantities so that they can contribute meaningfully to the sales this year?

We do believe that. Yes. I think we’ll be in really good shape mid-second half. There is always a ramp-up of newness, different timings, different things as they go into production, and some delays here and there as they are going through final finishing and getting into ramp-up moving from sampling to production. But we’ll be in stock late third quarter. Again, think about our business. Our business will generate demand, even if we're not really in stock, as people are working on projects. So, but, I think we'll be able to understand what the inflection point potentially can look like by late third quarter. We’ll have a lot more data and information, and see where the consumer is really responding and what that looks like.

That's really helpful. My last question is just on your pricing strategy and architecture. As you move up to the very high end, you bump up against pricing from timeless designers. Do you see that being a challenge to convert high net worth customers to shop RH when they could buy the true designer piece?

Yes. I think we're pretty much a really good value against any of that. There are always going to be interior designers that will take some of these products and go to their local area upholstery guy and knock it off. For the most part, we're going to be against the showrooms and real luxury brands in the categories and stuff like that, where we're going to be a disruptive value. I think our competitors are going to be scrambling.

There are no further questions at this time. I would now like to turn the call back over to Gary Friedman.

Great. Well, thank you, everyone, for your interest. Hopefully, we will see some of you at the opening of RH England. Other than that, we'll talk to you next quarter. Thank you.

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