RH (NYSE:RH) Q4 2022 Earnings Call Transcript

RH (NYSE:RH) Q4 2022 Earnings Call Transcript March 30, 2023

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

Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2022 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinion only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today’s financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I will turn the call over to Gary.

Gary Friedman: Thank you and welcome everyone. We will start with the reading of our letter to our people, partners and shareholders and then open up the call for questions to our people, partners and shareholders. Fiscal 2022 was another outstanding year for the RH brand. While revenues of $3.59 billion were below the pandemic peak of 2021, we finished the year with an adjusted operating margin of 22% and adjusted EBITDA margin of 25.9%, the most profitable business model in our industry. It’s clear that the stay-at-home restrictions of the pandemic created an exponential lift for home-related businesses and it’s also clear the lift like the pandemic was a temporal isolated event versus something structural or systemic. We believe the questions are what if anything has permanently changed?

What brands and businesses are positioned to win over the next decade? And what data is important to determine who those winners will be. Those are not easy questions to answer in light of the massive backlog release and a return to discounting at most home furnishings retailers, which distort short-term results. Additionally, inflation that was thought to be transitory is now being persistent by the Federal Reserve, resulting in a record rise in interest rates triggering a dramatic decline of the housing market with luxury home sales down 45% in the most recent quarter versus a year ago. Add to that, an underperforming stock market and a banking crisis, no one saw coming and the data points to business in our sector likely getting worse before it gets better.

It’s times like these that businesses tend to move and hurt, pursuing broadly adopted short-term plans that lead to mostly similar outcomes. It’s also times like these that present opportunities to pursue long-term strategies that can result in strategic separation and significant value creation for those teams willing to take road less travel and pursue their own unique path. That unique path for RH is our climate for luxury mountain and our long-term strategies of product elevation, platform expansion and cash generation. Product elevation. Our strategy to elevate the design and quality of our products is central to our strategy of positioning RH as the first fully integrated luxury home brand in the world. It is also the most difficult part of our clients as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs.

While it’s a client that becomes more difficult as we reach new heights, it’s also one we have navigated successfully over the past 22 years, but don’t expect this to waiver from our vision anytime soon. This spring/summer we will be unveiling the most prolific selection of new products in our history with over 70 new furniture and upholstery collections across outdoor interiors and temporary, modern, baby and child and team. It represents a massive leapfrog for our brands. These new collections reflect a level of design and quality and accessible in our current markets and a value proposition that will be disruptive across multiple markets. We also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the second half of the year.

The new thesis will be gracing the pages of the new Source Book design with the objective of creating a cohesive collection of titles, reinforcing our design and quality leadership. The first of those titles, RH Outdoor, began arriving in homes last week with our trademark belief in spreads 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 multibillion-dollar opportunity. This summer, we will be introducing RH to the UK in a dramatic and unforgettable fashion with the opening of RH England, the Gallery at the Historic Aynho Park, a 73-acre 17th century estate that will be a celebration of history, design, food and wine.

RH England includes 3 full service restaurants, the orangery, conservatory and the loggia, plus 3 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 pit on the Grand Viewing Terrace. One of the most unique attractions at RH England is The Aynho Architecture & Design Library, featuring rare books from the foundational masters of architecture, Palladio, Scamozzi and Alberti. The centerpiece of the collection is one of the first printings of De architectura, The Ten Books on Architecture by Vitruvius, whose work from the 1st Century BC inspired Leonardo da Vinci’s drawing of the Vitruvian Man 1,500 years after Vitruvius sketched the original.

The principles at the core of Vitruvius’s philosophy have also inspired the Design Ethos at RH, which is reflected in our galleries, interiors and gardens. The Gallery will also include the Sir John Soane Exhibit, honoring one of England’s greatest architects, in partnership with the Soane Museum in London. The exhibit will touch on his life story and detail some of his most famous works, including Aynho Park. We believe RH England, The Gallery at the Historic Aynho Park, also represents RH’s greatest work and will act as a symbol of our values and beliefs as we embark on our expansion across Europe. Our global expansion also includes openings in Brussels, Dusseldorf, Munich and Madrid as well as an interior design studio in London over the next 18 months, followed by Paris, London, Milan and Sydney in 2024 and 2025.

Regarding our North American transformation, we will be introducing a new gallery design this year in Palo Alto and Cleveland, plus opening new galleries at the Historic Firehouse in Montecito and The Linden House, a 178-acre estate on a private lake in Indianapolis. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years. We also believe there is an opportunity to address new markets locally by opening design studios in neighborhoods, towns and small cities where the wealthy and affluent live, visit and vacation. We have several existing locations that validate this strategy in East Hampton, Yountville, Los Gatos, Pasadena and our former San Francisco Gallery in the design district, where we have generated annual revenues in the range of $5 to $20 million in 2,000 to 5,000 square feet.

We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Cash generation. We have demonstrated that those with capital in difficult markets are the ones who capitalize. That’s why we raised $2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation. Times like these also require us to have the discipline to say no to the things that are nice to do in order to focus our time and resources on what is truly important. That includes making the difficult decision to graciously say goodbye to team members whose roles are no longer essential in our new view of the future, enabling us to work in a more integrated and collaborative fashion, on fewer more important priorities.

Please know we have treated everyone with respect and dignity and appreciate the contributions all have made to our cause. Approximately 440 roles were eliminated as part of our organizational redesign and we expect to achieve cost savings of approximately $50 million annually, inclusive of associated benefits and other cost savings. Concurrently, we will be focused on reducing inventories and generating cash, further strengthening our balance sheet to maximize optionality. Outlook. As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis and the cycling of record COVID-driven sales and backlog reductions.

Based on current trends, we expect fiscal 2023 revenues in the range of $2.9 billion to $3.1 billion and adjusted operating margin in the range of 15% to 17%, which includes an approximate 150 basis point drag due to the ramp of our global expansion. We estimate the 53rd week will result in revenues of approximately $60 million. For the first quarter of fiscal 2023, we are forecasting revenues of $720 million to $735 million and adjusted operating margin in the range of 13% to 14% RH 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 and design in the Napa Valley, RH1 and RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation.

These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture. This leads to our long-term strategy of building the world’s first consumer-facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes and 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 are not from their neighborhood, nor invited to their parties. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect.

We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim. We believe the level of work we plan to introduce this year inclusive of our new product collections, new Source Book design, new gallery design and the introduction of RH to the UK in an innovative and immersive fashion, continues to demonstrate the imagination, determination, creativity and courage of this team, and the relentless pursuit of our dream. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations, lessons that can’t be learned in a classroom, or by managing a business, lessons that must be earned by building one or by reaching the top of the mountain.

Onward Team RH. Carpe Diem. At this point, operator, we will open the call to questions.

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

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

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Q&A Session

Gary Friedman: Sure. I think based on the times we are in and the uncertainty we are facing, whether it’s the continued rise of interest rates or the next bank or two that gets eased. It’s hard to be anything conservative right now. And I think it would be foolish to be not just from a perspective of disappointing investors, but disappointing ourselves and possibly making decisions in investments before we can see around the next corner. I can tell you it’s someone the unsettling feeling being a person on a Saturday afternoon who is watching the Warriors basketball game of the news cut to align formed around your local bank, while the banks were sending hourly e-mails trying to tell you that they are committed to serving you, it’s a very unsettling feeling, okay.

And those of you maybe on the East Coast that didn’t experience it what happened here on the West Coast maybe aren’t as close to it, but I, as a person that was close to it, have never seen anything like it. So I don’t know how long was it between the fall of Bear Stearns and the fall of Lehman Brothers, what’s going to be the next shoe to drop or pin to fall, that’s very unknown right now. So we believe there will be an inflection point in the second half. What we don’t know is what will be the economic environment in the second half, what will be the condition of the banking industry in the second half, where will interest rates be in the second half, where will inflation be in the second half. I think Powell has been very direct and consistent about addressing persistent inflation.

All one has to do is Google the history of the federal funds rate and zoom in on the 1970s to 1980s and look how many times the Federal Reserve thought they had inflation under control, lower the federal funds rate only to have to raise it twice as high all the way to, I think, 21%. If you look at those moves and you look closely, zoom into that chart, you realize that we are in uncharted waters today from an economic environment perspective. There is not many people on the planet in levels of authority and responsibility that were old enough to experience those times. And I think that having a conservative view and being prepared, having a strong balance sheet and trying to see the whole board and all the moves, we like to say inside our rates don’t move until you see it.

And so, our view is just to be conservative, be prepared and try to capitalize in the €“ capitalizing the opportunities that avail themselves in times like these, times of dislocation, because this is the time of dislocation. Anybody that thinks it’s not a big deal, the three banks went down, where they don’t think it’s a big deal if the government directed 11 banks to lend $30 billion from my bank just to say that bank is living with a euphoric view of the world. I’ve been on the planet for long enough to know this is not normal and this is dangerous. So we want to make sure we navigate this period in the most thoughtful way that we can and position ourselves €“ to position ourselves to really capitalize long-term. And that’s what we have done in every past time like these, whether you look at 2001 when I joined the company, 2007 and €˜08, the 2015-16 period, where we had a slowing housing market and some issues in the oil industry as well as an internal issue with the launch of RH Modern.