Jack Preston: Max, can you hear us? We might be having audio issues. Max, can you hear us?
Max Rakhlenko: Yes. Okay, great. And then my follow-up question is, can you speak to how you’re balancing the chart price points with maintaining elevated product margins? And then, just how much are your vendors stepping up and then the opportunity to expand product margins over time at the current level?
Jack Preston: One second, Max. Repeat the question because we were just recognizing that the line was sounding like it had gone dead for a bit. So, repeat the question for both me and Gary, please.
Max Rakhlenko: Okay. Yes, no problem. Can you speak to how you’re balancing the chart price points with maintaining elevated product margins? How much are your vendors stepping up just directionally? And then the opportunity to expand product margins over time in current levels?
Gary Friedman: Yes. Again, I wouldn’t — we’re not a price kind of focused, price first business, right? I think I spent a lot of time earlier in the call talking about design quality and value in that order. And we think about those things, from those three dimensions always. And we try to look at the bigger picture and say, what’s going to be a compelling value? And we don’t have vendors, we have partners, right? So, that’s why my letter is addressed to our people, our partners and our shareholders. And, so we try to work with people as partners and it’s not necessarily so much as, are they stepping up? It’s more, are we together thinking about how to win the market, right? Like, if it’s one person that wins, one person that loses, that’s not a partnership, and that never works long term.
So, we try to take a real strategic view with our partners. We spend a lot of time with them. We talk to them directly about how we’re thinking. We try to understand their business deeply and where their leverages and opportunities are. And we try to stand back and say, hey, look, your manufacturers without stores and we’re shopkeepers without factories, so how do we partner and how do we win? And so, but we have no intention in taking margins down, margins have to be looked at holistically, not just at the product level. And I think that’s probably what your point is. We’re going through a massive transformation, re-architecting, the assortments and positioning things. And I think as you think, see things unfold here, we believe if you’re thinking about operating margins and so on and so forth, that operating margins, over the next few years can return to the 20% range and that our model is going to be a great model.
But from a timing point of view, we’re going through a product transformation and we’re building an international business from scratch. And so there’s investments and there’s going to be margin pressure and based on investments we’re making on both of those pieces. And that will create some different periods of higher, lower margins or not. But I wouldn’t say there’s anything different strategically at all. I think how we’ve built the company and, keep on that path, but that’s not about like, hey, getting the next nickel out of a vendor. I mean, maybe people that have vendors do that, to us, it’s about the next idea. Let’s get the next big idea, whether that’s a product idea, positioning idea, market idea. And if you can get all the brains of the game and the egos out of the room, if you truly believe that none of us are smarter than all of us, you’re going to work in a partnership and one plus one is going to equal a lot more than two, if you do it that way.
That’s how we work with everyone. We just try to share all the best information and perspective and we try to listen to them, and we try to really think about how do we win in the market. That’s it. And so I wouldn’t say, hey, long term, do we think there’s lower margins at our age? No, not at all.
Operator: Our next question comes from the line of Seth Basham with Wedbush Securities. Your line is open.
Seth Basham: My question is just thinking about your comment earlier about opening your aperture a bit more without compromising what you’re trying to build. Can you elaborate on this, Gary? Are you trying to win back customers that you “fired during the pandemic?” And are you dipping low in terms of the customer income demographics that you’re targeting?
Gary Friedman: Yes, we’ve never fired customers. So I don’t know, maybe that’s your words, not ours. Nothing I’ve ever said. I’ve said, look, you’re going to like, if you think about where we started in the journey we’ve been on for 24 years, yes, like we shed customers and transition to other customers. Yes, of course, like, the bestselling sofa in this company used to be a 999 chenille green sofa. We don’t have 999 chenille green sofas. Not even if you attach inflation to it, maybe a $2,000 chenille green sofa. We don’t have those. We don’t have a lot of things that we used to sell. So of course, when you’re building something, when you’re trying to become something that you never were, and you’re, you’re going to, you’re going to evolve and acquire new customers.
And some customers might come with you and some might not, but there’s no intentional firing. But there is an awareness that, as we’re heading in certain directions with certain categories, things will evolve and change. Through that journey, we’re always going to get data and we’re going to learn, and we’re going to adjust and improvise and adapt. And always, always in a state of change, right? And we’re in an evolutionary world, so the world’s evolving and you’re either evolving faster than the world and gaining, acquiring knowledge and capabilities and market share, however you want to think about it, or you’re evolving slower and getting behind. And so, I moved to say, I think —
Operator: Are you still there, Gary?
Gary Friedman: Seth, can you hear us now?
Seth Basham: I can hear you now. Yes. I think I got most of your answer. I appreciate that. And just a follow-up question, along the same lines, you’re sharpening your value edge, as you’ve referenced. To ask the question differently than it’s been asked before, I assume you’re not taking quality out to lower price. And if not, why should merchandise margins, excluding freight, be the same or better on new products now versus the product you were selling in ’22?
Gary Friedman: I’m sorry, I don’t know if I get that. Give me that question again, towards the end that why would, or what would the product margins be or something, say that again.
Seth Basham: Yes. If you’re not taking quality out, to be more sharp on price, as you sharpen your value edge, as you call it, why should the merchandise margins excluding freight be the same or better on a new product relative to what you were selling and, and earning in 2022?
Gary Friedman: Sure. Well, it’s about how you buy it and the commitments you make and the long-term view you take and working in a partnership with your manufacturers and figuring things out together. But yes, it’s just when you do that, well, you can have a better feel, when you have a platform as large as ours, you have the scale and you control the platform, you can be really disruptive. So, yes, we didn’t just take pricing down on things we have, right. You think about it as all the new products that’s coming in, the value equation that’s coming in. And so there’s no intention to ever take quality out, not at all, not at all, ever. So yes, that’s not part of our strategy. That’s nowhere in that one pager, right? In the long view and I think you’ve ever heard us talk about that at all in my 24 years here, it’s about taking, elevating the design quality and value of the product.
That’s all we focus on. So, yes, but it takes, yes, it takes thinking and creativity and partnerships and being smart about what you’re investing in and what you’re leveraging and what you’re buying. And yes, that’s how we got here. So, I think my prior comments were through a period of multiple cost increases because of trying to tear us. And we had a pretty big content back then coming out of China, much smaller now. And those price increases that we needed to take, and then the price increases we needed to take through the COVID period and through the COVID period for a two-year period, I mean, everybody had leverage, right? Like meaning that there’s only so much product. When you have more demand than you have supply, prices can go up and margins can go up.
And when you have lower demand and supply, if you want to move your inventory, prices are going to come down. It’s no different. And it’s no different than, during this period, right. It’s the down housing market and same thing we’re doing with investments. So you’re looking at gross margin. Well, inside of the gross margin, there’s a lot of investments that aren’t necessarily just product. Right. And so, but yes, there’s no, intention here to be crystal clear about taking quality down to take price down, never been uttered in our company and get the opposite. Yes. So that’s what people are thinking that they’re just dead wrong. There’s no value engineering.
Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is open.
Jonathan Matuszewski: First one was on gross margin for 2024. Imagine you may have some elevated clearance lingering early this year, but then you should have some good margins with all this newness that you mentioned. So how does that all net out for the year? And does the year over year trend in gross margin sequentially improve each quarter as product launches build upon each other? Thanks.
Gary Friedman: Yes. We’re not guiding to gross margins quarter-by-quarter. But yes, you can
Jack Preston: And we no longer got gross margin on the year. So, we’ll talk about it as a result of both. But the guidance is through [indiscernible]
Gary Friedman: Yes, it’s all inside in the operating margin and EBITDA guidance.
Jonathan Matuszewski: Got it. And then, Gary, you recently hired a new Chief Real Estate Officer. How should we think about changes to the real estate approach going forward with Jarrett on board? And, and should we expect any changes to other development related aspects in the company, like food and beverage or anything like that? Thanks.
Gary Friedman: Jarrett, how long have you been here now?
Jarrett Stuhl: Eight weeks.
Gary Friedman: Yes. Jarrett’s been here eight weeks. And so, he’s a very bright guy, very creative guy, strong point of view, learning the business and we’re excited and happy to have you here. And I think, why don’t we all give a little bit of time to really assess the situation and the opportunities. And at some point you’ll likely meet him and he can kind of share his thoughts. But I think it’s going to be a big step up for us. I think he’s going to prove to be the best leader we’ve ever had in this part of the business on multiple levels. So we’re very excited about him being on the team and, yes, that’s about it for now.
Operator: Next question comes from the line. Next question comes from the line of Michael Lasser with UBS. Your line is open.
