Good day, everyone, and welcome to today's RH First Quarter Fiscal 2024 Earnings Q&A Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. Please note that this call is being recorded and I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to Allison Malkin. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2024 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 our 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 the reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Great. Thank you, Allison. Good afternoon, everyone. We're actually calling you live from New York at our guest house as we just got back from our opening at RH Madrid last night. I'm going to start with our letter to our people, partners and shareholders and then we'll open the call to your questions. To our people, partners and shareholders, we are pleased to report that our demand trends inflected positive in the first quarter and continue to build momentum despite operating in the most challenging housing market in three decades. We believe our investments in the most prolific product transformation and platform expansion in our history has positioned RH to gain significant market share in North America, while building the foundation for our long-term global expansion across the United Kingdom, Europe, Australia and the Middle East over the next several years. Our results for the first quarter largely reflected expectations with revenues of $727 million, adjusted operating margin of 6.5% and adjusted EBITDA margin of 12.3%. Demand was up 3% in the quarter, slightly below our guidance as growth softened when interest rates once again exceeded 7% post the hawkish Fed commentary throughout April. While aggressively investing during a downturn has put pressure on short-term results, it also positions us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. Those opportunities are beginning to materialize as a growing number of online furniture brands have ceased operations as the vast majority have demonstrated difficulty reaching profitability. We do expect the constantly changing outlook regarding monetary policy will continue to weigh on the housing market through the second half of 2024 and possibly into 2025. Nonetheless, we remain confident that our continued investments towards transforming our product and expanding our platform will generate significant long-term value for our shareholders. Every act of creation is first an act of destruction, Pablo Picasso. We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry. Our product transformation plans for 2024 include the launch of our new RH Outdoor Sourcebook, the most dominant collection of luxury outdoor furniture in the market, which arrived in homes in the first quarter with 14 new collections. Outdoor trends continue to remain strong and we expect to gain significant market share in fiscal 2024. The unveiling of our new RH Modern Sourcebook arrived in homes throughout early June with 30 new collections across living, dining, bedroom and bathroom. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of fiscal 2024. The second mailing of our new RH Interiors Sourcebook is now planned to be in home starting in July with new collections and improved in-stocks, which should also provide an additional lift to demand in the third quarter and continue to build through the remainder of the year. We will be mailing an updated RH Contemporary Sourcebook in early August with new collections and a compelling value proposition, which we believe will also accelerate demand trends. A second mailing of the RH Modern Sourcebook and third mailing of our RH Interiors Sourcebook are expected in the second half of 2024 with additional new collections, refreshed Galleries and improved in-stocks. These mailings will result in a doubling of our Sourcebook circulation and customer contacts in 2024 versus 2023. Our data would suggest the increased number of contacts alone should provide another lift factor for our business. As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past eight years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of their revenues from the trade market, selling to architects, designers, developers and builders. While RH has a meaningful trade business, the vast majority of our revenues are generated by consumers. We believe there is a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we've expanded other trade focused businesses and brands over the years. Our plan is to launch with a 3,500 square foot Waterworks Showroom in our largest new Design Gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid-to-high teens EBITDA margin that we believe has the potential to be a billion-dollar global brand on our platform. Let me shift your attention to the expansion of our platform. Our plan to expand the RH brand globally, address new markets locally, and transform our North American Galleries represents a multi-billion-dollar opportunity. Our platform expansion plans for 2024 include the opening of five North American Design Galleries, including Cleveland and Palo Alto, which are now open, plus Raleigh, Newport Beach, and Montecito, all with integrated RH Interior Design Offices, Restaurants and Wine Bars. The opening of two international galleries in Brussels, which opened in the first quarter and in Madrid where we hosted a well-attended opening event last night. Both galleries are located in beautiful historic buildings that elevate our product and render our brand more valuable. The opening of our first RH Interior Design Studio in Palm Desert, California. We 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 as we've done in East Hampton and the Napa Valley as well as augmenting some of our Design Galleries in larger markets with additional design services and standalone Design Studios. Outlook. While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our business trends to accelerate throughout fiscal 2024. As previously communicated, due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately four to eight points until we read and react to the new collections, reduce backorders and shorten special order lead times. Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024, so shareholders and investors can accurately analyze our business. We believe it's also important to note that we are forecasting to end the year with an increased backlog of approximately $110 million to $130 million due to revenue lagging demand throughout fiscal 2024, which will negatively impact operating margin and adjusted EBITDA margin by approximately 140 basis points. Additionally, investments in start-up costs to support our international expansion are estimated to be an approximately 200 basis point drag for fiscal 2024. We continue to expect demand growth in the range of 12% to 14% and revenue growth of 8% to 10% on a 52 versus 52 week basis. We are forecasting adjusted operating margin to be in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%. For the second quarter of fiscal 2024, we are forecasting demand growth in the range of 9% to 10% and revenue growth of 3% to 4%. We are forecasting adjusted operating margin to be in the range of 11% to 12% and adjusted EBITDA margin of 17% to 18%. RH Business Vision and 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 there is no one 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. Never underestimate the power of a few good people who don't know what can't be done. For the past 23 years we've heard others tell us what can't be done, and for the past 23 years we've failed to listen. We avoided bankruptcy while being accused of lunacy. While others have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world. When Wall Street didn't think our stock was worth buying, we bought 60% of it ourselves. When everyone told us we should be working from home, we were in the Center of Innovation working on rebuilding our new home, and it's almost ready for primetime. From the largest product transformation in our history, to the most inspiring retail experiences in the world. From couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels, guesthouses. From Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich, and San Francisco to Sydney. Soon the world will be within our reach. Never underestimate the power of a few good people who don't know what can't be done. Especially these people. Onward Team RH. Carpe Diem. Now, operator, we'll open up the call to questions.

Thank you. Our first question will come from Steven Forbes with Guggenheim Securities. Please go ahead.

Hey, Gary, Jack, Allison. Obviously, Gary, nice to see the business returning to growth here. So I was curious if you maybe can help us contextualize the success of the new collections as you see it today realizing it's early. But can you speak to sort of how many collections are showing signs of resonating with the consumer? And what maybe some of the early learnings are around the designs themselves as it relates to sort of product expansion opportunities or sort of broadening out the exposure right of the designs to different pieces?

Sure, Steve. As it relates to resonance, first, we have a lot of new collections being introduced. We are reading and responding to all of those and trying to put them into context. We have many more coming just in the Modern book alone, which is just now getting into homes and we're getting some early read on that. I think the best news is we have a few collections that are new number-one collections, big broad collections. I tell the team here, you get a new number-one collection generally once every seven to 12 years. Something that really is a market mover that resonates broadly across the entire platform. Those things permanently move the business. The way we think about our business and assortments, we talk a lot about the thirds. We talk about the top third in any part of our assortment—not just overall, but within dining, living, bedroom, outdoor, lighting, rugs, et cetera. We simplify it down to what's in the top third, what's in the middle third, and what's in the bottom third, and how to think about those thirds. If you can introduce newness in the top third that will lift the entire company. If you introduce newness in the middle third, you're going to mostly be neutral unless it's in the top portion of that middle third. If you introduce anything in the bottom third, you're likely to pull down the company's business. The great news is the vast majority of the newness is in the top half and a big percentage is in the top third. In some cases, there are top collections in the top third and that's what's really going to pull the business forward. So we really like the early reads of the business. You'll always have a top third, middle third and bottom third, so you've got to be disciplined. If you have many new collections, they will fall into those thirds. Our initial reads are quite good and we're excited about the vast majority of what we're introducing. Then as we think about how you dimensionalize the best collection, the key is how you optimize it. You optimize it by moving from the books and online into the galleries; that gives us the biggest lift factor. Then you look at things like: is the collection fully dimensionalized? Is it in all the finishes it could be? Is it in all the silhouettes and functions it can be? Are there other variations you can create within that collection? Or even for key items: how many finishes, how many fabrics, how are we presenting it, how many times are we presenting it, how many sizes is it in, and so on. There's a lot of work to do. The work doesn't stop with just launching new product. One of the biggest ways to grow the business is dimensionalizing and optimizing that product. Since our new book started really meaningfully hitting the market and the new collections launched last year, we've been reacting to dimensionalizing and optimizing the assortment and getting the stock in those items. That's a meaningful lift factor. So lots of things to think about. We don't just watch it; we're analyzing and reprioritizing and reacting to it in terms of how we dimensionalize and optimize the best work and anything in the top half, which will move the business.

That's helpful. And then maybe just a quick follow up, right? There's so many different contributors to demand this year and the idea of sort of scaling it as we move throughout the year. I don't know if you can maybe, like, help us digest the visibility into demand scaling into the back half. Like how many sort of factors do you have a large degree of confidence around? How many factors or what percentage of the demand scaling is still sort of a large forecast? You think about like RH Modern's contributions to demand scaling like any way to sort of just shore up the confidence in the demand revenue build into the back half for investors here?

Of course. Good question. First, you have to think about year-over-year and seasonality—first half versus second half—and how to think about the lift factors. There are seven significant lift factors that we're focused on, and those factors have multiple dimensions. First is the Sourcebooks year-over-year and circulation year-over-year. We have more than doubling of the circulation and contacts year-over-year, which is meaningful. You're not going to see that many times in the growth of a business. Think of it as we're not in the early stages of the brand, but we're in the early stages of a product transformation and platform expansion. We had pulled back during COVID with little newness and limited circulation. Now we're past the midpoint or at about the two-thirds point of the product transformation. Modern is just now getting into homes and is going to impact the second half. You also have the Outdoor book, where we had 14 new collections—meaningful in the second half. Many think of outdoor as a first-half business, but we're a year-round outdoor business in a good portion of our galleries, which present 24 to 36 collections year-round. So the outdoor business for us is not purely seasonal. The seven lift factors: Modern book, Interiors book mailings, Contemporary book, second mailing of Modern, second mailing of Interiors, doubling of circulation and contacts in 2024, and the increase in store months in the second half versus a year ago. We have 48 new store months in the second half of this year versus 12 new store months in the second half of last year, which is a fourfold increase. This is unusual. If you compare to other home furnishings retailers, they may introduce a couple of collections year-over-year; we are introducing a massive amount. Also important is in-stocks year-over-year. We've introduced a lot of newness and we are reacting to dimensionalizing and optimizing the best collections and getting stock in those items. You rarely have perfect plans; you adjust as you go. For example, when a collection becomes a hit, you may not have enough inventory to move it to galleries right away. We have introduced what we believe is likely the cloud sofa of the wood furniture business—an item that could be a market mover. When something performs well, you dimensionalize it into more sizes, finishes and fabrics, which drives additional growth. This is a mature company making very big moves. The lift factors suggest a build into the 20-point range in demand, and it could be larger depending on how quickly we move, how well we dimensionalize and optimize the assortment, and how aggressively we market it—store presentation, finishes, space in Sourcebooks, advertising, email campaigns, and more. So think about these lift factors together; we spend a lot of time doing the math and dimensionalizing the potential impact.

And our next question will come from Steven Zaccone with Citi. Please go ahead.

Great. Good afternoon. Thank you for taking my question. Maybe to follow up on Steve's question, I was curious for commentary on pricing. Gary, you've talked about it in the past that pricing had gotten too high and more broadly, the industry has gotten promotional. How do you feel about pricing now on the new product? Where are you seeing some customer adoption? And do you feel like some of the pricing challenges for the business are in the rearview mirror?

Yes. Hi, Steve. Good questions. We've been doing a lot of work around value. The way we think about our business and how consumers respond is we're in a portion of the market where price is not the first thing on the consumer's mind. No one engages our content thinking the design is ugly and buys it because of price. People come to RH because we are a design-driven, curation-driven business and an integrator of the end result. We sell the whole, not the drill. We look through a lens of design, quality and value, in that order. If the design is great and the perceived quality meets expectations, customers then calculate what price represents good value to them. Value is therefore the result of design and quality. When design and quality are strong, there is room for pricing. There is price elasticity—lower price can appeal to a bigger market; higher price may appeal to a smaller market but provides margin. We've done a lot of work and feel we are in a good place; for our design and quality, we believe we're at strong values and in some cases disruptive values. Fast followers and knockoffs occur quickly in today's world, but you cannot always perceive quality from a knockoff. Our customers value editorial curation and integrated services that save them time. Higher-end customers often pay more for that time and convenience. We curate and integrate experiences, including full-house interior design services, project coordination and sourcing. Regarding past pricing mistakes, about a year and a half ago we had some products priced in a way that created a smaller market than we intended—some sofas introduced in very high-end fabrics and only available in that fabric made certain sectionals quite expensive and limited the addressable market. We learned from that and have evolved. We'll use that data and won't repeat the same mistakes.

Transitory.

Okay. I appreciate all the detail. Hopefully, a quick follow-up here. But from a macro perspective, what are you most focused on here? The engagement in the category return? We've seen somewhat of an inflection in luxury-priced home turnover. I mean is that the key metric you're looking for here? Anything else you could steer on the macro would be helpful.

It's funny, I don't know what metric everybody is looking at because they vary greatly. There's reports showing different things. I don't think there has been a meaningful sustained move in luxury home sales; you may see small ticks. I think the housing market will likely remain muted until interest rates come down meaningfully. Earlier this year, many expected six rate cuts; the Fed signaled fewer, and market expectations have shifted. We believe the Fed will be very data dependent and may be behind the curve on cuts. Our view is somewhat more negative than a quarter ago—rate cuts may not materialize soon—and a sustained inflection in luxury home sales at current interest rates is unlikely. Home prices rose substantially post-COVID—roughly 50% to 60% in many markets—and affordability is the key constraint now with interest rates around 7% versus the low single digits previously. Be cautious about some reported metrics, like cash sales, which can be misleading. Overall, the macro outlook is noisy and we are watching data closely.

Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Thank you. It's Simeon Gutman. Guys, I want to ask about the gross margin outlook. And if I can segment it into two pieces, first, the new product lines and launches and then everything else. Curious if gross margins are roughly stable and then thinking about the guidance and the torque in the back half, is it simply better sales and then better expense leverage? Or is there some variability that could still happen with gross margin of the business? Thank you.

I would say gross margins are relatively stable. We do have a lot of new goods coming in. You'll be right on some and wrong on others. In this housing market, there's a higher promotional environment across the industry and you'll need to react to that, which can affect margin. You're likely to carry a higher percentage of promotional mix during market times like this to keep inventory moving. We are confident about what our margin mix is going to look like unless we are meaningfully wrong on demand, in which case margins could decline. Conversely, if demand is meaningfully better than expected, margins could improve. So we don't see significant margin risk in the second half absent sizable demand changes.

Simeon, as you build models and look at our margins, note that we're seeing growing variability in our quarterly revenue. Fixed occupancy means gross margin can appear variable quarter to quarter as revenue shifts. There is a nuance between product margins and gross margins, which include fixed occupancy. When a quarter is lower, fixed costs weigh more heavily; so in modeling, be thoughtful about how revenues move through the structure.

Yes. That's helpful. So I guess, just related to that, and I'll include the follow-up. I guess I meant that there isn't some piece of clearance that has to occur with older legacy lines. Like we're through that part and now the normal cadence of the business will be promotions with current product, but we're through the worst of whatever clearance that you were trying to do to clean up the portfolio ahead of all these new launches and then?

We're going through the biggest product transformation in our history and are in the middle of that process. I wouldn't say we're through the worst of it; we are still in the transformation. Clearance in our category behaves differently than apparel or other categories. Clearance is limited because people don't buy another bed simply because it's on sale; home products are often purchased when there's a real need. That means clearance takes longer to move through and cycle.

Our next question will come from Max Rakhlenko with TD Cowen. Please go ahead.

Great. Thanks a lot guys. So first, just curious, how much of the assortment in galleries today comes from the new launches over the past year versus the legacy product? And then when will we get more of the Outdoor and the Modern products inside the galleries? And then just how should we think about the evolution over the years as far as the new products being shown in the galleries?

We're at about 50% to 60% newness in the bigger galleries and roughly 50% in our legacy galleries. Generally, we don't buy a lot of newness upfront for galleries unless we're confident a collection will be a sure winner because big upfront buys can negatively impact margins if you're wrong. We read early response to books and online, and then decide how much to buy for galleries. Modern is just getting out there; the book began mailing at the start of the month and takes a couple of weeks to reach homes. We get early reads online and through the books, and it usually takes us about three months to reach full run rate on new introductions. Early bets are made around weeks six to 12, but actual vendor lead times and ramp capacity can extend that. Some vendors open additional factories to meet demand. So roughly 50% of gallery assortments are new today, and we will continue to transition and optimize as we see what performs best.

Got it. And maybe just a follow-up to that, but some of the books are coming out a bit later than you originally planned and 1Q demand was a little softer than you thought. So given the timing of the Sourcebooks and the business choppiness, how confident are you that you'll be able to maintain the full-year demand guide? And separately, it doesn't look like you stopped releasing the outlet revenue. So if you could share what that revenue was in the first quarter, that would be great?

We usually don't provide one-off outlet revenue disclosures. Regarding postponements: Modern was delayed by about a month and that pushes Interiors slightly; we delayed to improve the execution, and we view that as worth the short delay. For the full-year guide, our lift factors look good—doubling of circulation, the multiple mailings, new galleries and increased store months—and we feel confident the numbers are achievable. If we receive macro tailwinds, the results could be even better. We have a lot of historical data on similar transitions when converting galleries and opening new galleries; those data points help us model expected outcomes. We feel confident in our guidance today but continue to monitor the macro environment and execution as we go.

Our next question will come from Curtis Nagle with Bank of America. Please go ahead.

Great. Thanks very much for taking the question. So maybe just changing gears slightly, Gary. Just curious if we can get an update, I guess, on the progression and the timing of the Aspen ecosystem? And then the concept more generally, I don't think that's something we've talked about on the call in a little bit.

Aspen is progressing more slowly than we originally anticipated. Our development partner jokes that it's easier to develop on the moon than in Aspen—COVID caused disruption, turnover in the planning group slowed approvals, and a few issues remain. Our Mountain House—the large gallery we're building on a prominent corner in Aspen—remains on track and is expected to open next year. It will be a three-level experience with two retail levels, restaurant and hospitality programming, designed for a global affluent customer who visits Aspen. The guesthouse has experienced some permitting back-and-forth around whether certain walls are historic; we believe they're not, but that slowed us. We're also pacing timing on residences given market uncertainty and higher interest rates; as a developer, our cost of capital has increased and we want to be thoughtful about timing. Overall, the portfolio's long-term value remains strong; we've made significant investments pre-COVID and those assets have appreciated. We're excited about the Aspen ecosystem, but construction and approvals are taking longer than expected.

Okay. Great to hear. And then just a quick follow-up. I just want to make sure I caught your comment correctly. It sounded like, Gary, that in terms of just new products alone that could grow the business 20 points or more. Could you clarify that range?

When you take all lift factors into account—doubling of contacts, multiple Sourcebook mailings, product dimensionalization, increased in-stocks, and the fourfold increase in new store months in the second half—you can see lift factors that could drive demand growth in the 20-point range. The outcome depends on execution: how quickly we dimensionalize, optimize assortments, and put the right marketing behind them. Additional launches such as the Waterworks showroom in Newport Beach and other platform investments will add to the lift. So yes, the combined effects of product and platform initiatives could produce demand lift on the order of 20 points or more depending on execution and macro conditions.

Our next question comes from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you so much for taking my question. Gary, are you getting as much of a lift from the newness and innovation that you've been introducing as you might have in the past? And does it make sense to delay further some of the introduction in light of how challenging the market is because maybe you would not get as much credit now or recognition now from your customer given what's going on?

Mike, great question. We are getting strong lift from newness—sometimes even better than in the past. You generally get a new all-time number-one collection once every seven to 12 years; we now have such collections emerging. We get some things right and some things wrong, as in any creative business. Regarding delaying introductions: we generally do not delay unless we see a material opportunity to improve execution. We did delay the Modern Sourcebook by about a month to deliver a much better product. We had a creative director from Madrid work with us, and we felt we could make the book significantly better, so we delayed it. That four-week delay will improve the long-term presentation and impact of the book. When we're innovating, better execution typically justifies a short delay. The timing of a book can shift some demand between quarters, but if the book is significantly better and elevates the brand over its life, it's usually worth it. We try not to introduce unnecessary delays, but we will take the time required to actualize a concept when it meaningfully improves the finished product.

Got you. My follow up question is, it sounded like earlier that you mentioned the consumer is buying more on promotion. So a) is that right and b) if that persists, does that change how you think about the path to RH's long-term margin aspiration?

In down markets like this, you will see a higher degree of promotional activity across the category. When demand is slower, markdowns increase to keep inventory moving. That is factored into our short-term margin guidance but does not change our long-term margin aspiration—those long-term goals are driven by the strength of the brand, product mix and operating leverage when demand recovers. In periods of very strong demand, like during and immediately after COVID, margins expanded significantly. Post-COVID and with the current housing market, margins will be pressured relative to peak periods. But the long-term margin targets remain intact; timing to achieve them depends on demand recovery and the success of our transformation.

Our next question will come from Jonathan Matuszewski with Jefferies. Please go ahead.

Hey, good evening, and thanks for taking my question. Gary, can we get an update on how the brand is resonating with the end consumer in Europe? I think on the last call, you mentioned satisfaction with some of the momentum with trade customers, so acknowledged a bit slower progress with the end consumer. So anything you could share in terms of what your customer insights group has seen as it relates to brand awareness or intent to purchase or overall perception would be helpful? Thank you.

We just returned from Madrid and had time in England, spending several hours with the team to listen and learn. After one year in the U.K., we're where we expected to be. We opened in the Cotswolds with an elevated conversation-first gallery—an inspiring 17th century estate with restaurants, a tea salon, architectural exhibits and a design library—which was intended to build awareness and conversation rather than optimize immediate commerce. That approach creates a high-quality first impression. The galleries in Brussels and Madrid were opportunistic openings in attractive historic buildings where we could elevate the brand; they weren't necessarily the strategic sequence we would have preferred if optimizing commerce, but they were strong opportunities. We're learning a lot about consumer awareness, merchandising, product assortment and supply chain lead times for different countries. Madrid set a new standard for presentation and styling, and the team there gave great feedback on how to build awareness and improve gallery traffic that will help across Europe and in the U.S. We expect Paris and London to be transformational openings; Paris could open next spring and London by the end of next year. Those openings should markedly increase brand awareness and the compounding effect of customer referrals and global visibility.

That's really helpful. Thanks, Gary. And then just a quick follow-up. In the prepared remarks, you mentioned a growing number of online furniture brands that ceased operations. Based on our observations, it felt like disruption was more concentrated at the mid-tier price points. So are you seeing super-premium online brands in your space vanishing? Or was that comment more so foreshadowing disruption that you see on the horizon for upscale competitors?

We're seeing disruption across the landscape, more pronounced among mid-tier and some higher-end online players that targeted trade or higher-end consumers but lacked the capital to get to profitability in a tough housing and capital market. Many of those brands were regional or online-first and now face a difficult environment with much tighter access to capital. Even some established regional retailers have faced challenges. The market disruption creates opportunity for RH because we are better capitalized, have scale, and a differentiated platform that integrates product, places and services. As more undercapitalized competitors struggle, we expect to capture share in certain segments.

Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.

Thanks a lot and good evening. Just to clarify, Gary, you've seen a little bit more negative on the macro than a quarter ago, but it didn't reduce the outlook for the year financially. Is that just because you see more benefits from some of your initiatives? Or is there something else?

We haven't reduced the full-year outlook; the macro can cause quarter-to-quarter noise but the underlying lift factors and initiatives—product transformation, Sourcebook circulation, gallery openings—are the drivers of our guidance. We expect the housing market to remain muted and do not count on a quick or material macro improvement in the near term. The guidance reflects our best view of execution and the investments we are making. If the macro becomes more favorable, results could be better; if it deteriorates significantly, outcomes would be more challenging. But our view is that the macro will likely be range-bound and our initiatives will drive the expected improvements.

Got it. That's helpful. And just a related clarifying question. You previously talked to peak inflection, our peak year-over-year growth first in Q2 this year. Now I'm not sure if it's back half of '24, whether you actually see the peak sometime in early 2025?

When I refer to peak inflection I mean the major moves from our product and platform transformation—sans macro. Given the newness and the pipeline, it increasingly looks like late 2024 to early 2025 could be when we see marked inflection, but this is not a single event—it's a process. Europe and new galleries will compound awareness, and as we get Paris and London, plus additional product iterations and dimensionalization, the compounding effect can accelerate growth. So late '24 into early '25 is a reasonable view for a significant inflection assuming execution and macro are stable.

Helpful. Makes sense. Thanks for the color. And if I may, one last quick one for Jack. With the delay in the Modern Sourcebook, what was the impact on margin in the first quarter from lower Sourcebook mailing costs? And will there be any negative impact in the second quarter from the delay relative to your prior expectations?

The impact was minimal. The majority of the advertising spend associated with Modern fell into Q2, so Q1 effects were minimal and there is no material negative impact to Q2 beyond the planned advertising cadence.

And our final question will come from Brian Nagel with Oppenheimer. Please go ahead.

Hey, guys. Good evening. So I have a couple of really quick questions. It should be quick. So one, just—and again, this is a follow-up, too—but Gary, you talked a lot about the tone of the business and your leverage. You mentioned the strength in Europe. Should we interpret the better trends lately as a direct reflection of the new products you have in the stores? Is that what's happening? And then the second question I have, just what explains the widening gap between sales growth and demand growth?

You're right: new product is a major driver of the inflection—whether that new product is in the books and online or also presented in stores. Another critical factor is in-stocks: if a new product is a hit, inventory often lags and it takes time to get product into galleries. Many of our new collections have very strong demand, and vendors need time to ramp production. We're a large business at the high end; ramping factories and logistics takes time. Backorders and special-order lead times contribute to the gap between demand and reported revenue. External factors, like having to reroute shipments around the tip of Africa due to Red Sea disruptions, can also add weeks to transit times, further delaying revenue recognition. So the widening gap is primarily a function of backorders, lead times and supply chain friction while demand has improved.

That's very helpful. I appreciate it. Thank you.

Thank you. That was our last question, right? Okay. Well, thank you, everyone, for your time and attention today. We're really excited about this transformation in our business and the evolution of the brand and the platform. We think we're doing some of the best work we've ever done and there are people that are just doing an incredible job bringing this new vision to life. We think very soon our shareholders will feel really rewarded for this work that we're doing and we appreciate all of your support. So thank you and we will talk to you next quarter.

And this will conclude today's conference. Thank you for your participation and you may now disconnect.