Good afternoon. My name is Chantel and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter and Fiscal 2016 Q&A Conference Call. [Operator Instructions] Cammeron McLaughlin, you may begin your conference.

Thank you. Good afternoon, everyone. Thank you for joining us for RH’s fourth quarter and fiscal 2016 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer and Karen Boone, Co-President, Chief Financial and Administrative Officer. Prior to this call, we posted a video presentation to our Investor Relations website, ir.rh.com highlighting the company’s continued evolution, recent performance and future outlook. 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 for our business and other matters referenced in our press release and video presentation 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 opinions 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 our call today, 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 it over to the operator to take our first question.

[Operator Instructions] Your first question comes from Oliver Chen with Cowen and Company.

Hi, thank you. Thanks for the details. Regarding the inventory for the year ahead, what quarter will that be a source of cash? And are there any parameters about the magnitude in terms of the opportunity there to drive cash? And as we do model net working capital, are there any puts and takes we should think about on the net working capital in terms of use of cash? And our second question was the details on back-end optimization, where you feel like you have the biggest opportunities and how that will factor into either top line in terms of the traffic or comps and margin opportunities? Thank you.

Sure. Hi, Oliver. I will take the inventory question and then Gary and I will tag team on the network optimization. On the inventory, we have said that inventory is going to be a source of cash this year, which implies it’s going to go down actually versus last year. We are not giving a lot of color on timing and cadence with the exception of the fact that we have said that a lot of our SKU rationalization efforts are going to be in Q1 and into the first half. So, you should see some good progress there, but part of that’s also versus where the inventory levels were last year. So, it’s one of our key initiatives this year. It’s something we are very focused on and we will continue to provide progress updates, but we are not really giving details by quarter at this point. And then with respect to working capital, we have talked about the fact that we are trying to make progress in the past on vendor terms and that’s something that – it’s something that will work in concert with our inventory. When the inventory goes down, AP is not necessarily going to go up in that way, so that could be an offset. No other items really of note to point out there though. Then on the network optimization...

Yes, can you repeat – you had quite a few questions in that, 1 or 2 questions, but I heard about 6 or 7 of them, so maybe if you could repeat the question again?

Yes. I was curious about the back-end optimization in terms of the opportunities you see there and how that will interplay with just the sales and margins and what kind of strategic improvements and how that links to what kind of opportunities you have on the income statement. And Gary, hospitality seems like a game changer. It would be great to have your thoughts on how that will also evolve to impact the core too?

Sure, sure. I think we have communicated all year this past year that we believe that there is an opportunity to redesign our supply chain network and simplify the business, which we believe will have a meaningful impact on the ability to get lower inventories and reduce working capital in the company, while also increasing in-stocks and optimizing our inventories and our customer experience. Secondly, the other big opportunity we have articulated is really around the home delivery experience and the belief is we believe by taking more control of that experience than less control and using our own customer-facing people in many cases, it can greatly enhance that experience. I would characterize our business today, if I stand back, I would say we really get it – we are in the process of transforming the brand from call it a mid upper tier brand to a kind of a luxury brand experience. And we have made significant progress on the product side, on the customer experience front end side in our galleries with our Source Books and online. But our home delivery experience is really still architected the way it was 10 years ago. And while we are making some small steps of progress, I think you will see us take some big steps. And we have a – we have a pilot that’s just beginning here in the Bay Area where we are taking full control of the delivery experience from the people to the trucks to the entire in-home experience, which I believe we should be taking more control than less control. So, we think both can be significant – significantly impact the business in multiple ways, both from a top line point of view by improving the experience from an asset turnover point of view and working capital point of view and a return point of view. And then the ability to simplify the supply chain network and operate the business out of fewer facilities versus more facilities, we told you we are able to forgo building a planned distribution center that was going to open in 2017. That’s saving the company a meaningful capital investment in ‘16 and ‘17 as well as significant operating cost. And you will see us – I think we have got a still a long way to go, but big opportunities here to really move the needle financially for the company and enhance the experience in a significant way for the customers.

Thanks, Gary. And just lastly on hospitality, it seems like a game changer and how do you see that like impacting the core business? And do you have thinking along the lines of hotels and how do you brainstorm about how do you continue to evolve the luxury brands across a paradigm of touch points to the consumer?

Yes. You have seen our first effort from a hospitality experience in Chicago. And what we worked along and hard at there was trying to seamlessly integrate a hospitality experience into a retail environment. And not just as – there is – we are not the first people to put a restaurant or food and beverage in a retail store. It’s – that’s been around for as long as I can remember when my mom would take me to a department store when I was a kid and they would have a restaurant or a café. I think what we have done differently and where we are kind of leapfrogging that previous experience that might be out there today is, in many cases, the hospitality experience was disconnected from the retail experience. And you might have walked through a shoe department to get to a restaurant or went to the top floor and the business – the restaurant had nothing to do with the retail experience. It just happened to be convenient. And that was something we weren’t really interested in. Just having a porthole that walks into – walks from a retail store into a restaurant is I think no different than stepping back out into a street or a shopping center and walking into a restaurant. For us, it was really taking the idea of home, the business we are in and saying in a home, in your home, you would be hospitable, right? You would have people into your home. Probably one of the first things you do is you offer them something to drink. You might offer them something to eat. You would make them feel welcomed in that experience and you’d try to connect with them. And that’s really what we are trying to do.…

Thank you. Very helpful. Best regards.

Thank you.

Your next question comes from Matt Fassler with Goldman Sachs. Your line is open.

Thanks so much and good afternoon. I have got two quick questions. I will ask them at once. First of all, can you talk to us about your plans for merchandising holiday at retail next year, given some of your learnings from this past fourth quarter. And then secondly, if you could kindly run through the cadence of mailings here in 2017 relative to last year and how we should think about that as we model out the cadence of the year from a sales and expense perspective? Thanks so much.

Sure. As it relates to holiday, we are still in the planning stages and aren’t ready to unveil our plans there yet, Matt. We did get back more business than we thought last year and we think there is an opportunity this year. And as our plans come together, we will share them with everyone, so not too many comments on holiday at this time.

Okay. And on the mailings for ‘17?

Yes. Mailings for ‘17, we just communicated that we – our outdoor book is in the mail, was in the mail the last two weeks and now, it’s substantially in home. And modern will mail late in the spring and that will be the second mailing to modern. And at this time, we do plan to mail an interior book in the fall. But I would also just say that one of the things that we have learned here is that we should put our work out in the marketplace when we – when our work is ready to be put out into the marketplace. And I don’t think because of our business and our business is not necessarily a fashion business like apparel and that we are trying to hit seasons with – the only seasonal part of our business is really outdoor and the holiday part of the business. The rest of the business is pretty much season-less. And our focus is to introduce our books and put our work into the marketplace when we feel great about it. And if it takes an extra month or two months or – I am not really too concerned about that. And I am not really – I don’t want to focus on why was the book late a month or is it early a month. Look, I think Apple puts out the iPhone, the new iPhone when the new iPhone is ready. And we are going to put our collections out there when our collections are ready, when we feel our work is truly great and is going to move the brand forward. And if it takes us a little longer to refine the collection, to make the book great, to fine tune our plans, then it does. And…

And I guess kind of follow-up, there is a fairly narrow revenue range, $100 million from the low to the high end, presumably the base case there for that range is the mailing schedule that you originally discussed, just to be clear on that, you are contemplating that the books go out at the time that you specified rather than with some variability?

Correct.

Okay, got it. Thank you so much Garry. I appreciate it.

Thank you, Matt.

Your next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

Good evening. Just to my question, so the first question I had just with respect to the first quarter guidance, I understand the mechanics there, so looks you are telegraphing a pretty significant pickup in sales growth going from Q4 to Q1, but then there looks to be a lack of flow-through to the line on that, so I just the question I have one that is what are the drivers behind that better sales growth, how much of that, if it’s any, is it one-time in nature and then why, if I am interpreting it correctly, there is not as much showing up on these lines follow-up or something else?

Sure. So on the top line, two things that we pointed out on the video, I just want to make sure they are very clear. As it relates to Q1, we do have incremental growth. This is the last quarter where Waterworks is not in the base. So we have five points of top line growth from Waterworks. And then we have also called out that we will have incremental growth from both the outlet business and we plan to have warehouse sales in April. So those two factors are what are driving some of that top line growth. The residual…

I mean nature that’s…

That’s one-time in nature that won’t – will then anniversary Waterworks in May, with the acquisition of that business. And then we don’t expect to have similar – we are still kind of looking at how the inventory optimization efforts work out or what that plan will be. But those are two things that are driving outside top line growth that won’t necessarily continue into the rest of the year. With the outlet and warehouse sales, absolutely those have a cost on gross margins and earnings. So the flow-through on that is not there. And then we have also talked about the fact that we are having investments relating to hospitality and related to some supply chain efforts, so those start in Q1.

Yes. This is Gary. I would also say as it relates to the outlet and the warehouse sales, we may have some of that drag into Q2. We are trying to just optimize the business right now. We are managing the business for cash. And so there may be decisions that as we look at optimizing the inventory and designing the supply chain network, to simplify the business and optimize the business for the long run. We may continue to have accelerated outlet sales in the second quarter also.

Right. Maybe if I can just follow up, if we go to the buyback, since you announced $300 million buyback in late February, the numbers today suggest you got out it pretty quick, bought out pretty aggressively buying back a lot of stock and it seems like the last month or so, the question I have there is discuss the fund you know of what’s been bought back so far and how should we think about the pace of buybacks over the balance of 2017?

Yes. So the purchases to-date have been funded with our cash and investments on hand. And we are not really other than providing the number of shares we bought so far, we are not really giving a lot of specific guidance on how much we are going to buy, when we are going to buy it. A lot of that is dependent upon our future plans and we will be continuing to look at that. We do believe our shares are undervalued and we will be weighing that against other alternatives we have to invest in the business.

Thank you.

Thanks.

Your next question comes from Steven Forbes with Guggenheim Securities. Your line is open.

Good evening. Gary, to start met with eight next generation galleries in place and then considering the learnings right, from the recent RH Modern rollout, has the thought process pertaining to space allocation within the next generation galleries panned for this year changed at all or should we kind of think about the percentage allocation between modern interiors, teen, baby, child, outdoors to be similar to what the previous class was. And then maybe on that as well, where does Waterworks fit into that whole perspective as well?

Yes, good question. We continue to refine our space allocation model as we learn here. So I would anticipate that it’s going to be constantly evolving as we are expanding categories and expanding businesses and testing new categories and businesses. So the galleries we are planning to open in ‘17 will have some adjustments from the ones we opened in ‘16, as those had adjustments from the ones we opened in ‘15. So I would just expect us to keep learning and keep evolving and keep making adjustments that makes the space more productive and the outcome better from a profitability point of view, as you think about the square footage. As it relates to Waterworks, it’s a very new partnership right now. Our number one goal was to not to goof it up, if you will. And it’s a great business. It’s a great brand. And we think our platform can help amplify that brand in many ways. We are still learning. We are learning about their business. We are learning about how we can best support and amplify their business. And if we have more to report, we will share that with you.

Okay. And then just as a quick follow-up, maybe a two-part question here, if free cash flow were to immediately [ph] improve right, as you have kind of outlined here over the next couple of years, can you just kind of list your prioritization of the use of those funds, I mean clearly, I would imagine investing in the business is first and foremost, but as we kind of think about other alternatives. And then on that as well right, if you think about the revolving line of credit and the maturation date of it, are you guys in the process of revisiting the – that option as well?

Well, I think that that option is still pretty far out, right. You have got ways for the debt option. But we are always evaluating our balance sheet and we are always going to put our balance sheet into the best position to support our business and support the opportunities that we see. So nothing to say right now outside of what we articulated in the press release or in the video. We feel very good about how the balance sheet is positioned. We feel very good about the choices we are making today. We feel very good about coming around against probably what was one of the most difficult decisions I think a retailer in our space has ever made and that was moving off the promotional cadence of the business on to a membership model. We are very pleased with that and we are going to continue to invest in the business where we believe we have the best returns, so nothing more to report than that. I don’t know Karen, if you have anything to add?

No, I think we have talked about the real estate transformation being one of the biggest value driving strategies we have. So obviously that will be at the top of the list. And we have some investments to make in the back end as well that we have talked about for this year.

Yes.

Thank you.

Thanks.

Your next question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.

Hi, good afternoon. Just a clarification question for Karen to start, could you talk a little bit about what your expectations are for comparable brand revenue for the first quarter, just given all the noise and the growth that you have and non-comp business and how you are thinking about the 2017 as well would be very helpful? Thank you.

Yes. So we don’t – Brad, as you know, we don’t give guidance on comp brand growth. But I would just remind you the three biggest things that are not in there that will drive growth certainly in Q1 are Waterworks is not going to be comp until the end of May and then our outlet and warehouse sales, we never put in comparable brand revenue. And then the one thing that will stay outside of comp all year is any new galleries. So both the four that we opened in ‘16 and the five that we are opening in ‘17, we have a 14-month comp assumption. So that we open for 14 months so that will certainly be some revenue and growth that’s non-comp related our real estate transformation, those are the big pieces.

Got it, okay. Well, maybe than as a follow-up, could you talk a little bit about how RH Modern has been performing since you expanded its assortment across your real estate network, what’s the response been and what’s baked into your guidance as you think about the lift that you might see when you mail the second modern book? Thanks.

We don’t report RH Modern broken out. We think for competitive reasons, we are going to kind of limit the amount of information we give around that brand, except for the fact that we – I believe I said in the video that we think it’s going to quickly become $1 billion brand. So we are very happy with it. We are investing aggressively into the brand, investing aggressively into the square footage and the retail footprint that RH Modern is getting in the marketplace and we will invest aggressively in the brand from a source book point of view and from a website point of view. So we are in very early stages. We just launched 18 months ago and we learned a lot. We think you will see the second book that we mail will be a significantly optimized book. And we are getting smarter with how we are merchandising it at retail today and what collections and how to optimize the floor space and the allocation. So I think about it as it’s a very new business. It’s in an early start-up stage. We are going to learn and test and grow and evolve very quickly. But the early indications and the early numbers in RH Modern and the way it’s trending today would tell you that this is going to be a significant business for the company. It’s opened up an entirely new market for the brand.

Great. Thanks Gary. Thanks Karen.

Thanks Brad.

Your next question comes from Janet Kloppenburg with JJK Research. Your line is open.

Good evening everybody. Congratulations on the progress being made. A couple of questions given the outlet business, the revenue expected from that in the first quarter and maybe some carryover into the third quarter, just that we should be expecting compressed gross margins in the first half and then a nice uptick in the back half or how should we be thinking about that trend in the back half in particular. Also it sounds like the interior book is doing very well Gary, the fall book and I wondered if you could talk a little bit about the success there and if there are some learnings there as you go into the fall season with the new book that is being launched. And just lastly with the in-home delivery objectives, I am wondering if that – what pressure that puts on margins, if any, in fiscal ‘17 and how much it might help in fiscal ‘18? Thank you.

Okay. Janet, I will start with gross margin. We are not giving guidance on gross margins, but I will just say that in Q1 just as a reminder last year, we had some [ph] of those temporal factors we have been talking about all of last year were really heavy in Q1 was the period when we had the customer accommodations related to RH Modern. So that’s something that we anniversary this year. So even though we have some negative gross margin impact certainly and the flow-through is not what we would like on those incremental sales. The gross margins in Q1 will be benefited by not having some of those issues from last year. And then again we will continue to give a little more color as the year goes on with margins, but not providing formal gross margin guidance for the balance of the year.

Okay. Thank you, Karen.

So on the interiors book, I will turn it to Gary.

We are very happy with interiors book and the early reads on how it’s building and we expect that book to continue to impact the business all the way throughout the year. As I think as you know, we mailed it somewhat late in the year last year. And it got, the vast majority of the books got in too close to holiday, we felt. So we knew that the ramp is going to come later and the ramp has come and it continues to build. I would say I piggyback on that point, don’t forget and don’t overlook the investment we made into RH Design Services and rollout of Design Ateliers and the doubling of our design team in the field organization. We believe that’s going to have a significant impact on the business short-term and long-term. We are building bigger orders, longer tails to them. Those customer relationships are more sticky over time and more valuable over time. So we feel very good about that investment as well. But the big key investments we made, whether it’s the redesign of the interiors book, so the investments we made in RH Design Services and the Design Ateliers, we believe are going to impact the business throughout this year and years to come. So we feel very confident about this.

Right. And on the in-home deliveries, Gary?

Yes. I don’t if I have anything else to say except that we will – we will make the necessary investments to deliver the kind of quality experience that a customer would expect at the level of the brand that we are building. So there will be investments there. We will communicate with you as we make those investments. Right now, we are still at a learning and a testing stage, but we feel very confident we can make a big impact there. And my sense when we stand back and look at it, well there may be a significant investment, there is going to be a significant opportunity from driving increased revenues, reducing returns and damages, all the things that you would expect as you improve performance in that part of the business.

And are you happy with the renewal rates on the RH membership program?

Yes. We are very pleased with how our membership is evolving in the business. And as we look at early renewal rates and customer acquisitions, they are all in target, all within our plans. So we feel great about membership. We feel great that we were able to hold hands, if you will and march into hell for a heavenly cause. I think there are – I tell people who have never worked inside a retail company. From the outside, you look at a retail company and things can look beautiful. The stores look beautiful. The displays look beautiful. The interactions could be great. Behind the scenes of most retail companies, its chaos, because you are running a business that’s many times is week to week, month to month, promotion to promotion. You see it keeps getting worse in our industry, right. I mean for the first time ever, I saw promotions for St. Patrick’s Day, 17% off, right, on the 17th. I mean I am like, how many more promotions can people make up and how many more cornball ideas can there be and how much more chaos can be created. And I would just tell you that the one thing that nobody probably really understands and the value that’s going to be created, not only is this going to streamline and simplify our business and improve so many things operationally from the business, from suppliers to our supply chain and all the way through, but just the reallocation of our time, right, our ability to think, our ability to kind of step back and see the bigger picture and see the bigger moves that can be made and play a much more strategic game. The difference between playing chess and playing checkers, right. And seeing the moves ahead and being able to make the big moves that are going to really have an impact on our business long-term, it’s – I can’t even tell you how different it is for this team and how we are navigating today. And I can tell you, I can almost guarantee you there is not too many people – there can’t be anybody that would ever want to leave here and go back into the chaos that exists in a typical retail business that’s on a promotional cadence. I mean I know I never would want to go back. So we feel great about membership and we feel like our performance is going to demonstrated that it was the right decision for our shareholders.

Great. Lots of luck.

Your next question comes from Michael Lasser with UBS. Your line is open.

Good evening and thanks a lot for taking my question. First, if the temporary item cost you $1 of earnings last year, could you size what you think the temporary items that are going to impact your business this year will be?

Yes. We are not doing that this year, Michael. We are – it’s all reflected in our guidance. I think there are certain things we are still working through. As Gary mentioned, we have a pilot for the home delivery. How that ends up in our P&L, you will notice we have a wider range on our earnings. Part of that reflects the investments we are making. And we want to maintain some optionality on what those – how those play out throughout the year.

Does that mean you would push them deeper that [indiscernible] in terms of profitability leaves you sort of satisfied with the results?

We want to maintain optionality depending on what those results are and what we think we need to do to get the results on our back end service experience. So we don’t know exactly how much it’s going to cost. There are things that we are testing. And depending on the results of those tests, we will roll them out accordingly.

I think if you look at a lot of the initiatives that we have now, you have to invest before you get returns, right. And so whether it’s the investments we are going to make in the supply chain network design. The investments we are going to make in home delivery, investments we are going to make to architect decision data throughout the organization that’s going to amplify the quality of our decisions and the speed of our decisions throughout the company, the investments we are going to make to have a metric driven quality process in our company, we would make those investments unless we thought there is going to be returns that would be – that would have a hurdle rate that would be worth investing to. So we feel good about all the things that we are going to invest in. Whether we speed up the investments, it depends on the magnitude of the returns, right. You will see us invest more aggressively where we think there is going to be greater returns and we think they are going to have some may take longer to materialize, but that’s true and in any part of our business, whether it’s new business, new category, new product, new systems, new service all through the business. So we are – look, we believe we are going to be a long-term growth company. We are an investment platform. And we think we keep getting smarter and we are going to be better allocators of capital as we go forward. And so we believe the returns we are going to get – continue to get better, but there may be some times where there is lumpiness because we decide to invest more aggressively into something that we think is going to have a greater long-term impact or opportunity. But I think as I articulated in the past, we are going to invest like we own 100% of the company. We are here for the long run. We are not going to play a quarter-to-quarter game. We are going to play for multiple years and a long-term view, and no different than the decision and the investment we made moving from a promotional to a membership model. These are long-term decisions.

Okay, that’s helpful. And my second question is based on your first quarter sales guidance and your full year sales guidance, it looks like you are embedding either that your brand comp remains stable or potentially even decelerate as you move over the course of the year despite the fact that the comparisons will get easier and you’ll have more design galleries mature your role in Waterworks and you will have all of these Source Books be a little bit more mature. So how should we think about that?

That’s more of a function, Michael, of the items I mentioned that are in Q1 for sure. And we are not sure how much outlet and warehouse sales we will have through the year based on what we want to do with our inventory, how much we want to accelerate some of those efforts with, what we want to do with our DCs. And then again, Waterworks will come up against itself in May. So you have two items that are sort of anomalous on the growth front in Q1 that won’t necessarily continue into the back half. I wouldn’t say that we are necessarily implying a deceleration, but I would say we are being sort of cautiously optimistic as we think about the retail landscape.

But the outlet sales are not in the comp is that correct?

Right. Yes, and again we haven’t given any guidance for comp. We only give revenue growth guidance.

Okay, good luck with this year. Thank you so much.

Thank you.

Your next question comes from Peter Benedict with Robert W. Baird. Your line is open.

Yes. Hey, guys. It’s actually Justin Kleber on for Pete. Thanks for taking the questions. I just wanted to first clarify the comments regarding the DC that was originally planned for 2017. Has this been pushed out to 2018 or have your inventory optimization efforts and some of the back end work allowed you to delay this facility for the foreseeable future?

The latter, I’d say it’s for the foreseeable future, certainly not in I wouldn’t even say in ‘18.

So within that long-term $4 billion to $5 billion revenue target, how many more DCs do you envision needing to reach that level?

I think a lot of that depends on how much progress we make this year. We do think that with the SKU rationalization efforts and some of the duplicative inventory that we had at too many DCs, we will be able to reassess that and kind of revise the plan, but certainly, we are a lot better off than we were even at this time last year as far as how we were thinking about our long-term plans and space and capacity needs.

Okay. And then just as it relates to kind of the back-end platform and what you guys have going on, what areas are I guess most in need of improvement in your view? And who is leading these initiatives? Is it internal folks or are you guys leveraging outside expertise? Thanks.

Yes. Look, we believe great companies are architected from the inside out and that’s the only way you build next practices. Otherwise, you just have best practices. And so what we articulated in the video and our press release is we are cross-functionally architecting the entire operating platform. And so we are breaking down silos within the business. And we are spending time and that started with the appointment of the Co-Presidents last year and began to breakdown the silos in the business and begin to look at the companies of one holistic business model and not just individual functions. So more to come on this, but I think what we are doing is we are seeing big moves that a lot of times people don’t see when they are just looking at it inside a silo or just looking at the distribution network from a distribution point of view. But when you look at it from a business model point of view and you consider the entire business, you see things that you couldn’t have seen. And in my past, I have only seen it done the other way. I have only seen it designed and implemented in silo and a lot of times you have optimization in one part of the business and you de-leverage other parts of the business and you play whack-a-mole. So we are taking a different approach. It’s going to take more time. It’s going to take more effort. It takes cross-functional integration and leadership in collaboration to do it and we think we are going to design a model that nobody has ever seen before, no different than the assortment we have developed that nobody has on the planet, the galleries that we have designed that nobody has in the world, hospitality experience that we have designed that’s unlike anything in our business. We believe we are going to build an operating platform that’s unlike anything in the industry. And we are going to do it from the inside out. We are going to design it ourselves. And nobody will be able to copy it, so more to come. We are excited about it. And I am personally leading the effort just so you know, that’s what I am really excited to do.

Alright. Thanks for all that color, guys.

Yes.

Your next question comes from Adam Sindler with Deutsche Bank. Your line is open.

Yes, thank you. Congrats on the great results. First question, Karen, I think in the past, you had spoken about that as you leverage or as you anniversary Grey Card, you are expecting potentially about a $20 million delta in revenues in 2017 versus 2016, including some benefit from Grey Card itself and then from lapping the extended selling cycle. Is that still an appropriate estimate?

Yes, that’s in the ballpark. And just to be clear, the $15 million is kind of one of those items from last year and that’s purely just the deferral of membership revenue that will flop into this year. The incremental amount is what we expect for new members and renewals.

Perfect. And then on some of the initiatives from 2016, I know in the past, you have spoken about wanting to use design services more, the integration of Waterworks helping you become one of the only company that truly can address the entire home. As you look at some of the data, can you talk about maybe what you have learned from those two things? How many percent of orders are using design services? Maybe what percent of orders are using Waterworks? Yes, just on those two would be great.

Yes, those aren’t things that we have traditionally disclosed nor do we plan to start. We will just say that you will see that our efforts are only going to continue in expanding the Design Ateliers and the design services and that should be an indication of that it has, in fact, been successful.

Okay, perfect. I appreciate it. Thank you.

Thanks.

Your final question comes from Cristina Fernández with the Telsey Advisory Group. Your line is open. Cristina Fernández: Hi, thank you. Gary, I wanted to go back to the back-end system. In the video, you talked about this being completed in 2019. Can you talk about – I guess your phases over the next 3 years? And should we think about the investments being front-end loaded or pretty similar over the next couple of years?

I don’t think we can really articulate all of that right now. I would say a lot of it is – a big part of it is just time allocation by the leaders in the company to tell you the truth to architect and align around the strategies to uncover the big opportunities and simplify. I think that so many people talk about systems as the solution to problems. Generally, what I have learned in my career is when you – if you don’t take the complexity out of the business and simplify the business, if you try to take a complexity and you then try to solve it with a complex system, you have created a double complexity and that usually doesn’t work very well. All the companies I have ever been involved with and studied, most of the time when they are launching a big system or they are opening a new facility, if something drastically goes wrong and that’s because they haven’t first simplified it and our effort here is going to, first and foremost, simplify our business and then support and amplify that simple solution with simple systems. And when I have been involved in projects like that, those have worked very well. But – and when you see – I think when you see what we are going to do in this kind of first year – and what we already began doing last year and our efforts this year from a supply chain network design, a big part of that is just simplifying it, quite frankly. I think I have articulated that our previous strategy was compounding distribution centers. And we had 4 furniture DCs, on its way to 5, on its way to 6. Our fifth one would have been open this spring.…

Yes, that’s just really a function of last year. We only had one book and it was late in the year. And then this year, we have the book kind of the fall book last year wrapping into this year, plus Modern plus another book in the fall. Cristina Fernández: Thank you.

There are no further questions at this time. I will now turn the call back over to Gary Friedman.

Great. Well, thank you everyone for your interest in our business and in our brand. We are very excited about the year as we look forward into 2017 and beyond. And we look forward to talking to you at the next quarter. Thank you very much.

This concludes today’s conference call. You may now disconnect.