Jack Preston: Yeah. I think — look, I think transition out. Yeah. Look, starting the year, we’re going to be in a better position than let’s say, the start of the quarter, but I think we’ll be going through continuing to sell through the markdown goods by the end of the first half, that’s probably…
Gary Friedman: Yeah. I mean we’ll always have some level of markdowns, right? But what you want to think about what does the overall mix look like? So the mix is going to be a heavier markdown mix in Q4, and you’ll have some of that move into Q1, it will quite lighten up and to lighten up in Q2, as we sell down. And you’re going to have — as the quarters go, you’re going to have a higher mix of new higher-margin products. Yeah. So what I said in the letter, over the short term, it’s margin — the transformation we’re making is margin dilutive. But long term, it’s margin accretive. It’s mix shifts, as inventory rebalances. So…
Chris Horvers: Got it. And then one of the questions we also get from investors is trying to think about, there’s a lot going on with all the new galleries and the accelerations of the books, the Source Books back to what it was, pre-COVID. As you think about what’s implied here or the third quarter SG&A dollars is like, is that the right base? I guess said another way, does advertising — is there any reason advertising steps up again next year? And if you think about the complexion of the openings next year with more International, are we just sort of naturally raising the expense base given those two factors?
Gary Friedman: Yeah. I mean when I see perfect time to guide next year, we’ll guide next year. So we’re not in next year right now. But look, there’s always going to be certain start-up costs, right, when you’re ramping up new countries and things like that, and investments to get the galleries up and running to get people trained, to get restaurants opened to get the home delivery network set up and operating and people trained and then you’ll cycle those things, right? So are we going to have some cycles to get around as we open different countries? Yeah, sure. But once businesses ramp, you cycle those things. So, yeah, we have a lot of confidence in the long-term margin of the business and the model. So I don’t think there’s any reason why this — why this business and brand doesn’t get back into the 20% range, as we cycle through.
I mean, you’re not going to get there in one of the work housing market. This is — I mean, we compared the exact numbers to 2008 and 2009, but this is — if it’s not the worst, it’s the second worst in my career. And I think I’ve been doing this as long as anybody leading the company in this industry. There might be some people that have been doing longer than me. I don’t not too many. But I haven’t seen a market like this and how to navigate through a housing market downturn like this. So I can’t remember when people were locked into low interest rates and they can’t step up different interest rates. So you got to kind of look beyond this kind of temporal time. I can’t believe that we’re going to be in this lockup like this forever. Like, could it go through ’24?
It could. So what? It doesn’t change the long term. And we’re — the good thing is we’ve now cycled around. So we didn’t bite on the promotional drug like everybody else did. So we gave away some market share because we didn’t do that. But at the same time, we’ve sharpened our value proposition at regular price, and we’re going to be tough to compete with, even if people go on sale. Yeah, people don’t — they just don’t have the buying power of the platform to present it that we do. And so I wouldn’t want to be on the other side of this big move we’re making.
Jack Preston: And Chris, you asked about Q3 being a base. We don’t look at it as a single quarter as a base. You’ve heard me talk about, if you’re going to try to read some trends on the base and look for a full four quarters, given the — given the cadence of the advertising timing and the — you can’t just use the quarter.
Gary Friedman: Yeah. I mean we used to be able to mail a book and we amortized it over six or 12 months. Now you e-mail a book and the day you drop it is the day the ad cost is. So — and obviously, the book is more valuable than that single period. But there’s just an accounting rule change that is going to make a business like ours kind of lumpy, right, from quarter-to-quarter, based on the ad bus hitting when the book drops. No amortization of the ad cost which doesn’t make sense. You’re not going to get all the sales that we…
Operator: Your next question comes from Curtis Nagle of Bank of America. Your line is open.
Curtis Nagle: Great. Thanks very much. Just kind of a quick one more of a clarification than anything else. So just in the share letter, there was a comment about reaching kind of a peak inflection point in second quarter of next year. Is that in terms of kind of ramp? Is that demand trends? Flow through revenue? Just if you could specify that a little bit more from that would be really helpful. I’d appreciate it.
Gary Friedman: Yeah. That will be demand trends, which will turn into revenue and there’s going to be just continued step-ups. There’s going to be step up since we get in stock. There’s going to be step up since we finished the Gallery transformation. There’s — anytime you have big moves like this, you’re going to have some things, some collections, that are just wildly better than you could have thought, and you’re not going to have — we have a collection here that is the best collection in the history of RH by probably 40%. We’re not going to catch up on the inventory until March, April, somewhere around there. So there’s — and you’ve got all these imbalances when you have these much units. So you’ve got to kind of right-size all that.
You’ve got to get in stock, because things like that and other collections and things are selling so well, you can’t even put them in the stores, right? So you’ve got too much demand, so you’ve got to fill the demand. So some of the products that you’re planning to transform the Galleries with now, is blown out. And then you’ve got to let the manufacturing base, just get their legs underneath them with all this newness, right? And they’re going to get more efficient and things are just — the flywheel is going to be running. Yeah, we will then have — we’re going to have the second round of the book mailings, which is going to have another, well, I mean, Modern is going to be massively new, but then all the books will remail in the first half.
We — Modern because we’re pushing a little later may go in the third quarter. But all those books will have another — probably an average 20% to 40% more newness, based on what’s in the pipeline. So it’s like we usually have 15% to 20% newness. And so it’s — basically, the entire brand is going to — is going to transform and the assortment is going to expand on top of that. And so you just got to kind of get it all dialed in, get all the inventory balance, get everything set, some things you planned, you’re going to put in the galleries in the retail galleries. And all of a sudden, the demand doesn’t look good and you’re like, no, let’s swap that out with something else. And so you’re reading and reacting to real data now. And so we like what we see in the data.
