Hello and welcome to the RH Third Quarter Fiscal 2024 Earnings Call. All lines have been muted to avoid background noise. Following the speakers' comments, there will be a question-and-answer session. I would now like to hand the call over to Allison Malkin of ICR. You may begin.

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

Great. Thank you, Allison, and welcome, everyone. I will start with our shareholder letter that was released in the last hour to our people, partners, and shareholders. The positive inflection of our business continued to gain momentum with third quarter demand increasing 13% despite operating in the worst housing market in 30 years. Our vector is increasing in both magnitude and direction, with November demand up 18% as the most prolific product transformation and platform expansion in the history of our industry continues to unfold. Our industry-leading growth is being driven by the RH brand, where November demand increased 24% with the introduction of our new RH Modern Sourcebook and has continued to accelerate into December with month-to-date demand up 30%, demonstrating the disruptive nature of our product transformation. The performance of the RH brand reflects market share gains of 15 to 25 points in Q3, accelerating to 25 to 45 points in Q4 based on our current trends and the expectations of furniture-based retailers. We believe our collections reflect a level of design and quality inaccessible in our current market and a value proposition that is disruptive across multiple markets, positioning RH to gain significant market share for the foreseeable future. Our Contract, Outlet, Baby & Child, and Teen businesses should benefit from our product transformation in 2025 as the new assortment becomes more widely available to support our Contract Business, returns of the new product drive our Outlet Business, and the most successful designs are translated into smaller sizes for Baby, Child, and Teen. We are also pleased that our results for the third quarter reflected our guidance with revenues increasing 8.1%, adjusted operating margin of 15% versus 7.3% last year, and adjusted EBITDA margin of 20.8% versus 12.4% a year ago. Based on current trends, we are raising our fourth quarter and full year guidance to Q4 total demand growth of 20% to 22%, and revenue growth of 18% to 20%; Q4 adjusted operating margin of 12.2% to 13.2%, and adjusted EBITDA margin of 18% to 19%; fiscal year total demand growth of 9.9% to 10.4%, and revenue growth of 6.8% to 7.2%; fiscal year adjusted operating margin of 11.5% to 11.7%, and adjusted EBITDA margin of 17.2% to 17.4%. 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. We believe the important investments we are making during this depressed housing cycle are creating a level of strategic separation in our industry that rivals the most important brands in the world. Our product transformation plan for the remainder of 2024 and select 2025 highlights include the second mailing of our new RH Modern Sourcebook arriving in homes in November with 54 new collections across furniture, upholstery, lighting, rugs, and textiles. Based on our demand trends and confidence in the new offering, we increased our advertising investment by approximately $6 million in the quarter to further expand both page count and circulation. The quarter-to-date demand leads us to believe that this investment will prove to be a wise decision over the course of the fourth quarter and into the first half of 2025. As a reminder, post analysis of our circulation data, we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern Sourcebooks to optimize overall mailing depth and efficiency. Mailing fewer, more meaningful books enables our brand to break through the compounding clutter across the consumer industry, and is aligned with our Gallery strategy of fewer, more immersive, and brand-defining physical experiences. The introduction of our new RH Interiors Sourcebook is now planned to be in homes early February with 89 new collections across furniture, upholstery, lighting, rugs, and textiles. The new collections and improved in-stocks should further increase our vector and market share gains in the first half of 2025. The introduction of our 2025 RH Outdoor Sourcebook, featuring the most dominant assortment of high-quality outdoor furniture in the world, is also planned for early February. The new Sourcebook will include eight new outdoor furniture collections, an exciting new outdoor textiles offering, plus a significantly improved in-stock position to start the season versus a year ago. 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 to further elevate the brand and build a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of its revenues from the trade market, selling to architects, designers, developers, and builders. While RH has a meaningful trade business, the vast majority of our revenue is 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 have expanded other trade-focused businesses and brands over the years. This week, we will begin to introduce the Waterworks brand across the RH platform beginning with a 3,000 square foot Waterworks Showroom in our largest new Design Gallery opening tomorrow in Newport Beach, California. Our interior designers around the world will now be able to specify Waterworks in their design projects and customers will be able to view and purchase Waterworks on RH.com in the next few weeks. We also plan to test a Waterworks Sourcebook in the second half of 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 become a billion-dollar global brand on our platform. We also have plans to unveil RH Couture Upholstery by Dmitriy & Co. in the first half of 2025. We purchased Dmitriy & Co. in 2020 with a vision of making the most exquisitely designed and crafted upholstered furniture in the world, previously only available to the trade, accessible to consumers on the RH platform. While there has been much speculation regarding how we might change Dmitriy & Co. to address a larger market, our plan is just the opposite. We believe that by not changing anything, we will change everything. Like Waterworks, we believe transitioning some of the most admired brands in the world from a solely trade-based to a blended consumer and trade-based business model is a very big idea, and one that can result in exponential growth for these highly desired brands. Additionally, we plan to introduce a significant new brand extension in the Fall of 2025 that we believe will meaningfully expand the market size and share of the RH brand. This new brand extension will include a new Sourcebook and have a significant website presence on RH.com. We expect to present the product in our Galleries in early 2026 and will share more details of this exciting new venture in the new year. Lastly, we do not expect a negative impact on margins as a result of the most recent communications regarding the potential for increased tariffs in 2025. We have been proactively moving sourcing away from China over the past several years with the expectation of fully exiting the country by the end of the second quarter. We are also transitioning products manufactured in Mexico and believe we can successfully reposition our sourcing with no disruption to the supply chain. Let me shift your attention to the elevation and expansion of our platform. We continue to open the most inspiring and immersive physical experiences in our industry and some would say the world, spaces that are a reflection of human design, a study of balance, symmetry, and perfect proportions; spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality; spaces with garden courtyards, rooftop restaurants, wine and barista bars; spaces that activate all of the senses, and spaces that cannot be replicated online. 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 plan for the remainder of 2024 and 2025 includes RH Newport Beach, opening tomorrow with over 90,000 square feet of indoor and outdoor space spread over four floors with views of the Pacific Ocean. This will be one of our most dramatic, immersive, and brand-defining physical experiences to date, and will replace three legacy Galleries in the region. RH Newport Beach, The Gallery at Fashion Island features the RH Ocean Grill, a 270-seat Indoor-Outdoor Rooftop Restaurant with uninterrupted views and dramatic sunsets over the California coastline, two Wine & Barista Bars, our first Waterworks Showroom, an Interior Design Atelier, and the most expansive Luxury Outdoor Furniture assortment in our industry. We believe RH Newport Beach will be an inspiring destination in the Southern California market and has the potential to become our second $100 million-plus Gallery. RH Montecito, also opening this week, is a reimagining of the Historic Fire House in the charming enclave perched above Santa Barbara. The Gallery will feature The RH Firehouse Grill, an indoor-outdoor Courtyard Restaurant with fireplaces and fountains, a Wine & Barista Bar, plus an Interior Design Atelier. The first RH Interior Design Studio is opening this week in Palm Desert, California. Our goal is to establish RH as the leading interior design firm in the world, as we've moved the brand from simply curating and selling products to conceptualizing and selling spaces. The Palm Desert location is a unique test of a consumer-facing interior design firm, not a Gallery. Our theory is that by presenting RH Interior Design in a singular fashion, as a professional interior design firm, we will attract the highest caliber interior designers, and therefore, the highest value consumers. We believe this might be one of the most important strategies to elevate and distinguish the RH brand as a global design authority at the highest end of the market. We are also developing an RH Design Ecosystem in Palm Desert with plans to add a 10,000-square-foot RH Design Gallery and a freestanding 5,000-square-foot RH Outdoor Furniture Gallery on the same street. Additionally, we are considering a freestanding RH All Day Cafe to complete the ecosystem in the near future. RH Raleigh opened in November of this year with 50,000 square feet of indoor and outdoor space over three levels. The Gallery includes a Rooftop Restaurant, Garden Courtyards, a Wine & Barista Bar, and an Interior Design Atelier. We plan to open seven North American Galleries in 2025 including Montreal, Manhasset, Detroit, Oklahoma City, Los Gatos, Palm Desert, and Aspen. Additionally, we plan to open two International Galleries in 2025, RH Paris and RH London. We anticipate an inflection of our business in Europe as we begin to open in the important brand-building markets of Paris and London in 2025, and Milan in 2026. It is then we will gain scale to support the advertising investments necessary to build our business across Europe. We are pleased with the second-year growth trends at RH England as the Gallery is up 42% from July through December, while the web business is up 111%. Current demand trends would indicate the Gallery would reach approximately $31 million in its second full year, with the web demand reaching $7 million in its second full year. To put these results in proper perspective, if an RH Gallery in the English Countryside, with an estimated population of 100,000 in a 10-mile radius, almost two hours outside of London, can generate $38 million of demand in its second year, what can an RH Gallery in the center of Mayfair, the most exclusive district of London, a global city with a population of 9.7 million, do in its second year? We believe exponentially more. We are also making meaningful investments to elevate and differentiate our online experience with plans to upgrade our website in the fourth quarter of 2024 and throughout 2025. Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market. We plan to file for design patents on several of the user interface and presentation designs and will begin to discuss the new website strategy in more detail as we roll out the new functionality. Leaders have to be comfortable making others uncomfortable. Leadership is about pursuing a vision, leading people somewhere they've never been, doing things they've never done. As creatures of habit, changes are uncomfortable for humans. But for the people and partners of Team RH, a culture of invention and innovation is at the core of who we are, and reflected in everything we do. We've grown comfortable making ourselves and others uncomfortable for over two decades and we plan to continue doing so for the foreseeable future. It's what leaders do, and how we know we're on the right path. Whether it's investing in the most prolific product transformation in the history of our industry while others are hunkering down during the worst housing market in three decades, or opening the largest and most immersive physical retail experiences in the world while others are shrinking or closing their stores and moving online. By refusing to follow the herd into the anything but social world of social media, you won't find us on Instagram, or paying strangers, influencers, to say they love our brand on TikTok. We chose to, in the words of Ralph Waldo Emerson, go instead where there is no path, and leave a trail. We aim to craft our own unique identity, one built on a foundation of innovation and invention, truth and trust, taste and style, leadership and love. Over 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business that had a $20 million market cap and a box of Oxydol laundry detergent on the cover of its catalog into the leading luxury home brand in the world. The lessons and learnings, the insights and intricacies, the sacrifices made, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral qualities that build character in individuals and form 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. In a world that rewards duplication and penalizes the inherent bumpy road of innovation, especially for companies in the public domain, we the people and partners of Team RH will continue to drive ourselves to destroy today's reality so we can create tomorrow's future, while remaining completely comfortable making ourselves and others uncomfortable. 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. At this point, operator, we'll open the call to questions.

Your first question comes from the line of Michael Lasser with UBS. Please go ahead.

Good morning. Good afternoon. Thank you so much for taking my question. Your outperformance relative to the industry has obviously been very wide. So, how are you thinking about taking advantage of this, such that would you further accelerate some of the investments that you're making in 2025? And if that were the case, would you be willing to trade some margins, even if it meant that you were still accelerating your sales? Thank you so much.

So, Michael, I think that's always a question for business leaders, and what does an investment cycle look like? What does the harvesting cycle look like? And how are you thinking about the business long-term versus short-term? I think it's an interesting time in our industry. There's multiple people pursuing different paths generally. A time like this is either a hunkering down or harvesting time, and people pull back investments. If you looked at our history, this has always been an investment period because the other side of a downturn in a housing market usually leads to the potential to gain significant market share on the other side. Yeah. So, as we look forward, I would say today, the view would be that most of the significant investments are behind us. The early investments into Europe, not that we don't have more, but the initial investments into Europe to just put in a platform to be able to launch a business there is pretty significant. We do have some significant investments with RH Paris and RH London and Range Milan. But most of that cash spend is behind us, right? Even as we think of the investments we've made to transform the product over the last 24 months, because the real effort began a couple of years ago. So, the ramping up and building the muscles that you need to operate at a level that we are today is really behind us. If you think about the new significant brand extension we're discussing, most of that product is in the pipeline. I mean, we could technically launch it today; we're just polishing it up. So those investments are mostly behind us. But our company is based on invention and innovation. It's based on investing into the future and it’s based on kind of endless growth, if you will. So, one of the things that generally happens to retail brands over time, I'd like to say that a retail mall is nothing but a graveyard for short-lived ideas. That's because most retailers open a new concept, they get enough right, they expand it. They don't evolve it, they don't innovate. They kind of get a model of we're going to open 20 of these a year or 40 of these a year, and pretty soon you blink and seven years go by, and somebody has like a range of 100 to 300 stores and they're all kind of dated and they're all tired because there hasn't been a focus on invention and innovation, there's been a focus on rollout and duplication. And that's why most retail brands don't even last the full term of their lease. If you consider a retail mall today and compare it to 10 years ago or look ahead 10 years, about 65% of malls change every 10 to 15 years. Many retailers don’t survive through their lease terms. Our situation is different; we’ve been on this journey for 24 years, transforming a business that was essentially bankrupt. We started from the ground up and have been working to build a luxury brand, which required significant investment. Currently, we have a solid platform in place, and our previous heavy cash investments are now behind us. Looking ahead, I expect substantial growth in cash flow over the next few years. Future capital investments will be minimal, mostly focused on iconic brand-building projects. The bulk of our financial investments have already been made in key locations like Paris and London. However, there will be some impact from depreciation as a result of our prior investments. Therefore, as you consider our future model, it’s essential to focus on adjusted EBITDA margin and cash flow generation. This perspective is similar to how Amazon operated in a prolonged investment phase while building an unmatched platform.

Got you. Very helpful. My follow-up question is, as we look ahead over the next couple of years, should we assume that as the housing market improves, it will accelerate the recent trend of your business that we have observed? Should we factor that into our modeling for next year and beyond? Additionally, considering the margin decline RH has experienced over the past few years while sales have been under pressure, is that the appropriate context for understanding how margins will recover in line with the pace of sales growth, similar to what you've seen recently? Thank you.

I believe that's generally correct. The key question is the true value of the housing market. It's not just a matter of it being worth 5% when it rebounds; it could actually be more like 30%. This growth could compound over a few years. It may begin at a 10% increase, then grow to 15%, but we could also see a sudden spike with the housing market potentially experiencing 30% or even 50% growth. Considering how depressed the market has been for so long and the pent-up demand from people wanting to move—expanding families, relocations, and individuals transitioning to renting due to the significant disparity in interest rates—there are many factors at play. The timing of these changes is somewhat uncertain. Honestly, sometimes I express a desire for the housing market to remain flat for another year. It would mean fewer competitors for us and allow us to capture more market share. So, I'm not necessarily eager for the housing market to rebound because a challenging market for a brand like ours, in its current position, could be beneficial for our future. Many competitors that easily raised capital over the last several years—particularly before and after COVID—may struggle in this environment, given the recent challenges faced in the home business.

Thank you very much, and have a good holiday.

Thank you. You too.

The next question comes from Christopher Horvers with JPMorgan. Your line is open.

Thanks. Good evening, everybody. So, I'll keep my question to a two-parter. The first question is, is you're guiding the fourth quarter below what you're seeing quarter-to-date, is that just caution on your behalf? Is there some sort of seasonality of the business to think about proceeding through the quarter? And then the second part is, you've put a lot of clearance in the past few years to introduce all of this newness, 80% newness this year, is it your expectation that over time that you can get that clearance margin back? Thanks very much.

Good question. We believe our guidance is accurate, but it will depend on how December and January unfold. Approximately 75% of our business falls between 73% and 76%, primarily driven by our core RH brand. The remaining quarter includes our other brands like Contract, Outlet, Baby & Child, Teen, Waterworks, Dmitriy, and others. When we take a step back, we see that these other businesses are not growing as quickly as our core brand. I mentioned in my letter that many of them should see an uptick. Waterworks won’t be affected by our product transformation, and our platform will allow them to pursue opportunities they previously couldn’t, similar to how we scaled other businesses. In terms of markdowns, looking at our core business history, around 80% of our third-quarter business is sold at full price, while about 20% involves markdowns. This ratio can vary from 20%-22% markdowns; in a strong housing market, it might even drop to 90%-10% for full-price sales. While our competitors would be pleased with an 80%-20% mix, the clearance segment may face more pressure in a weaker housing market but will certainly expand during downturns. These are just straightforward observations. Additionally, as I mentioned in my letter, we’re taking a more aggressive approach with our brand, which you’ve seen in our strategies over the past couple of years. We believe we can capitalize more on the current situation by focusing not just on clearing inventory, but on design, quality, and value. Our aim is to disrupt the market through these aspects. While this may initially put some pressure on our margins, our growth will bring inherent efficiencies and scale. Considering our current demand trends, our product ordering, and the leverage we will gain along with our manufacturing partners, future orders could potentially yield higher margins. We are focused on capturing market share, creating leverage in our business model from a revenue perspective, and making necessary investments to ultimately improve margins. Although we don’t fully own our manufacturing platform, we treat our partners as part of our team, exploring how we can enhance margins and pricing through scale. Currently, investing in disruptive pricing to outmaneuver competitors seems wiser than simply maintaining lower sales. Different approaches are being taken by various companies—some are choosing to give up market share in favor of maximizing operating margins. While we could choose that path as well, we prefer to maintain a strong growth trajectory in our core business rather than sacrificing share for lower sales. By aggressively growing our business, we will gain significant leverage and strengthen our market position in the long run.

Thank you so much. Have a great holiday.

Thank you.