Ladies and gentlemen, thank you for standing by, and welcome to the RH Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Allison Malkin, Investor Relations. Thank you. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2019 Q&A 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 for 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’ll turn the call over to the operator to begin our Q&A session. Operator, we’re ready for questions.

[Operator Instructions] The first question is from Michael Lasser of UBS. Please go ahead. Your line is open.

Good evening. Thanks a lot for taking my questions. So it’s a two-parter. If you look at the low to mid-40% run rate decline that you experienced in closing your stores, do you think that there’s a realistic run rate beyond this? You guys have a realistic run rate to kind of model the business as long as those stores are closed? And given the dynamic, how should we think about the profitability of the business if this run rate continues? . Thank you.

Sure, Michael. First, let’s just say, I think, we’re way too early to comment on any realistic run rates. I think, we’ve had – what have we been closed for 11 days now?

It’s right. Yes.

Yes, 11 days. So, I wouldn’t necessarily commit to anything. We’re in such a time of change and uncertainty. It’s – this is a time where things are changing, not weekly, not daily, but changing hourly. If you just step back and think for a second, the President of United States on Friday, I believe, said that the country will reopen on the 12. The President of United States on Sunday said the country is now going to be closed through the end of April. There’s so many things changing right now. The important thing is to pay attention at what’s changing. The important thing, I think right now is to quiet the noise. It’s not a time to rush. It’s not about the amount of decisions you make. It’s about the quality of the decisions you make. And we believe, it’s a time to do less and think more, so we can do more. And again, this kind of, I try to motor up and see the whole Board, if you will, from a chess point of view and try to take the most recent data and information that’s available and try to establish patterns and try to look ahead. But look, two weeks ago – a little over two weeks ago, nobody knew every store in the country was going to be closed. So, this is the unimaginable time to be leading a business to be leading a company. And we’re not going to kind of rush to try to figure everything out. I don’t think you can. I think, you’ve got to kind of look at kind of the big picture and make the right big decisions right now. And everything that we put in our press release, everything that we wrote in the letter is what we can see and what we know today. Beyond that, it would just be unwise to comment beyond any – anything that we’ve already said.

Okay. And in your letter, you did mention you’re planning to pay down $300 million in this summer. Can you give us a sense for what the burn rate or the cash burn rate of the business look like? So we can get a – just have a better understanding of the liquidity of the business, especially as these stores are closed and it is facing some pressure? Thank you very much.

Yes. Again, I – we’re not going to comment beyond what we commented in the letter. We feel confident in – just based on what we know today and what we see. And we – we’re taking the appropriate actions and deferring capital and reducing costs. And we – we’re in a position where we’re confident to say that we can pay down the $300 million of convertible notes in cash, just as we plan to before. So nothing different there.

Okay. Thank you very much and good luck.

Thank you.

Your next question comes from Steven Forbes of Guggenheim Securities. Please go ahead. Your line is open.

Good afternoon. I want to focus…

Hey, Steve.

…hey, is that your thinking about times now, right? So I sort of wanted to focus on the efforts of the design team broadly right now that these stores are closed. So, Gary, if you could – I don’t know if you could expand on how they’re interacting with your customer base today? What successes you’ve seen on the back of those efforts? And whether you think those efforts have helped to alleviate some of the stress on the business more recently?

Sure, sure. First, I’d say that the amount of innovation that’s being generated by our people across every, every part of our company has been extraordinary over these past couple of weeks. And we’re doing daily conference calls, including the weekends. I don’t know, Jack, would we have a eight or nine-hour conference call with leaders across the country yesterday and Saturday. And the – this is such an important time to kind of listen, learn and then lead, because we like to say in this company that the smartest people are those that are closest to the customer and those of us who’ve gotten farther away from the customer and generally get dumber and dumber and that makes me the dumbest guy in the company. So the only way to lead people through anytime is to first listen, then learn and then lead. And I’m just so impressed by the amount of innovation that’s happening across our country. We’re reimagining RH live in the moment. And particularly from a gallery point of view, not having a physical location and trying to imagine, how do you work with people, and how do you continue, not only continue, how do – just reimagine, how you interact with customers, how you do interior design and and so on and so forth. How do we market to our customers? What should we be marketing now? What are the – what is the most valuable? Because everybody is bombarded with communication, just start right there that the amount of news people are consuming today, the amount of information just trying to stay up and stay up-to-date and just stay safe is basically overwhelming. And so, communicating in a typical way is, we believe fruitless. And so we’ve tried to imagine – reimagine how we’re…

And then – and, Gary, just a quick follow-up on that, right, sort of thinking about getting ahead. I guess, do you envision any potential future supply chain disruption, right, given the global reach of the virus? Or what are you sort of doing to get ahead of whether it’s more back orders or just disruption in the global supply chain?

Sure, sure. So the biggest piece of the disruption has already happened on our end of the business, and that really dealt with China and Asia, the broader business that we source out of Asia. And that is pretty much back to normal.

It’s actually 100% back to normal.

Yes, 100% back. And so, the challenge we’ve got and then if you look at it more globally, we’ve got a pretty big business coming out of Italy. We’re the biggest importer of Italian bedding in the world. We’ve got some furniture and upholstery coming out of Italy. We’ve got – and so we’ll have some disruption there, that’s not a big percentage of our business. The bedding side of the business, where we’ve got relatively good back stock situations. And so we don’t think that will be massively material as long as the curve flattens in Italy and things come back in the next several months. But most of our – and then really what’s going to happen in the U.S., we still have a relatively good portion of our business, especially if it deals with upholstery and special order business happening in the U.S., some coming out of Mexico. But I think the biggest challenge is behind us. The Asia challenge that the virus has been relatively well controlled at Vietnam. We’re – all of our Asia factories are back to 100%. So the key becomes, how do you think about our manufacturing platform? Is it true strategic advantage for our company, right? I’ve always said that furniture, this quality has never been made in these quantities before. So we’ve built in partnership with all of our key partners built a manufacturing platform. And the key is how do you not let the virus create any permanent damage? And I think it – again, it’s working in partnership. It’s no different than in the real estate world, right? Like there’s some people sending letters out there that are saying, “Announcing they’re paying no rent.” Well, how’d you like to be a landlord on the other side of that…

Thank you, Gary.

Your next question comes from Curtis Nagle of Bank of America. Please go ahead. Your line is open. Curtis Nagle, your line is open.

Hi, Curtis, you…

Hey, Gary. Yes, sorry about that in a small apartment on mute. So…

No worries. We’ve all busy there.

...trying to keep the noise out. But anyway, thanks for taking the question. First, just a quick one for Jack. What the current revolver availability is? I think it’s around 600, but that may not be the case. And then, for you, Gary. I may be getting a little ahead of myself here. But kind of thinking about when the dust clears and things normalize and the macro environment hopefully gets better. Thinking about, I guess, kind of competitively, you guys are in a pretty decent capital position. How would you say it, I guess, your most direct competitors are positioned in terms of liquidity and capital structure and that kind of thing? And when things do get better, do you think there could be an opportunity for, maybe more market share gains, or is it just maybe that’s not the appropriate thing to think about right now?

Sure. Well, let me take that question. I’ll – then I’ll give it back to Jack – give it over to Jack to answer the question about the credit facility and availability. Look, I’m – I’ve been through significant downturns. We went through the Great Depression. And I think our operating margin going into The Great Depression was 7% or something like that, 5% to 7%. And I know how difficult that was to survive. We’re – we just reported operating margins of 14.3%. We had talked about on the last call in the last press release of having at least 200 basis points of operating margin expansion opportunity in 2020, right, prior to this virus. So if you just do the simple math, if we guided – if – we just reported 14.3% and we said, we had at least 200 basis points of margin expansion. You get to 16.3% if you get the least. If you say, “Hey, there was more than that.” You could take a more optimistic view and say, “Hey, this company before this happened probably had a operating margin in the kind of higher teens, if you will, somewhere above 16.3%? Because we obviously wouldn’t have given you kind of 200 basis points, at least, unless we had more than that. So I look at it this way. I say, I’m going into a difficult time like this. This team has navigated really difficult times with operating margins of 7%. What does it look like with operating margins of 17%? It looks like a heck of a lot better. And it – what it does is, it clearly opens up the aperture of potential opportunities. The key is, again, how do you navigate the short-term? So you can set up the right strategic view…

Hey, Curtis. So as far as the revolver availability, so the $600 million is the full line size. But as a reminder, it is an asset-based loan. So it depends how much inventory and other collateral we have. And in the 10-K that will be filed momentarily, you will see that we ended the year with $322 million available. And then as we sit today, it’s $308 million available.

Got it. All right. Thanks very much, guys. I appreciate it.

Your next question comes from Chuck Grom of Gordon Haskett. Please go ahead. Your line is open.

Thanks. Good afternoon, everybody. We’ve done a really good job streamlining your cost structure, which I’m sure you’re really happy about now. I’m just wondering if you guys could dive a little bit deeper into the components of of your cost structure, both cost of goods sold, SG&A, I guess, a little bit, maybe a little bit of color on how much of those costs are fixed versus variable? What you think you can flex down? Would you pay your – continue to pay your employees if the stores are going to be closed for beyond the April 30 deadline? Just any color on that front would be helpful?

There’s not too much detail outside of what – what’s communicated in our financial filings. I – if you think about us being shutdown – while our stores are shutdown, we have a relatively high percentage of our people that are engaged in working because of our interior design business and because of the direct nature of a lot of our transaction. So we’re connected. We’re reaching out where we’re operating. Will we have to – if things remain closed and stay as is a current environment and we have to kind of redesign our cost structure? Of course, we do. Is it as significant as other industries and other businesses? I don’t believe so. I just saw the news about Macy’s today and businesses that really rely on traffic much more than we do. Remember, we have a lot of galleries that are – they’re very unusual places. Start with Chicago, it’s six blocks from any other retail store. It’s in a residential neighborhood. It’s in the Gold Coast. We had to get the city to rezone the entire neighborhood for one day and approve us and zone it back. So there wouldn’t be another retailer in it, because we said we don’t build retail stores. We build inspiring spaces. And so our business is much more destination. I think that plays in our favor. It’s not that walk in traffic is not important. Of course, it is, like people have – want to interact with the goods. They want to feel the environment and be inspired by the space. And then there’s people that are just visiting that are coming in for buying a tea and coming into our restaurant. And all of a sudden, they’re in this inspiring space that makes them reimagine their home and connects…

Okay, thanks. And then I guess, my thought would be there has been some bad points out there signaling weakness on the coast, but relative stability in the inner part of the country. Just curious on what you’re seeing across the U.S.? And then as a follow-up to that, year one New York City now in the books, I guess, could you speak to any big picture learnings that you have good or bad? What you think you could apply to future openings? Thanks.

Yes. I don’t think that there’s vastly different business dynamics on the coast than there is in the Midwest today. That’s not what we’re seeing. We’re seeing relatively similar impact across the country, because the biggest impact to the business is the closure of our physical location. So that has been a relatively democratic decision and a consistent impact across the country. So, look, is – do we expect things to get worse in New York for to get better? Of course. And then if we go back and look at New York in a bigger picture, what are the learnings after year one? One of the learnings are, we probably have the opportunity to do more business in markets than less business. And as we think about designing physical experiences, New York was the first store we embedded in a visible interior design team – interior design business into the physical gallery. You’re going to see that happening in all of our new galleries. The hospitality experience on the rooftop, which started, I think, our first ones Palm Beach, right? Started with Palm Beach, it was the only place we stopped construction for nine months. It’s the only place we could figure out where to put a restaurant. We were scared to do it, because it was on fourth floor. And we thought, what if nobody goes up there? New York, again, reinforced that a hospitality experience on the rooftop is economically viable. It’s more economical to build it that way. And that’s why you’re going to see – because of Palm Beach in New York and few of the others we recently opened, you’re going to see restaurants on rooftops. We think it’s a great experience for consumers to get some beautiful views and beautiful environments to eat…

Thanks for the color, Gary. Good luck.

Yep.

Your next question is from John Baugh of Stifel. Please go ahead. Your line is open.

Hey, Gary. Really, quickly, the RH being down 40% since closing. Is that a shipment number or an order number? Can you give clarity on that, please?

Yes, that’s demand. Yes, that’s demand. Demand leads ship. So I’m giving you the 11 days since we’ve been closed, Jack, 12 days?

Today is day 13, so…

…day 13, okay.

So orders essentially, orders placed [Multiple Speakers].

Yes. Thank you. And then quickly, my follow-up. The commentary around exploring debt is sort of an opportunity offensive maneuver, and is that really the case or might be something that just shore up the cash position, given we just don’t know what the future is?

What was the question Jack?

Well, I think the letter speaks to it. It’s about the liquidity. Is it offensive or defensive? I mean…

Oh, it says offensive. yes.

Yes. So you view it as an opportunity to maybe make a real estate deal or do something it’s not an effort to shore up a liquidity position?

No. Our liquidity is fine. It – if you’ve seen us in the past, we’re relatively opportunistic.

Great. Thank you for the answers. I appreciate it.

Your next question is from Oliver Chen of Cowen and Company. Please go ahead. Your line is open.

Hey, guys, it’s Matt on for Oliver. Thanks for taking our questions. So first, can you maybe update us on the size of your direct business at this point? And what have those trends been over the past few weeks? And then can you remind us where your DCs are located in the U.S.? And then we have follow-up.

Yes. We really don’t report our channel separately. We run the business in an integrated way. We’re not too concerned where the customer transacts. Clearly, there’s only one one place for them to transact today. So that’s where it all goes. But if you just – if you sit back and just did the simple math and said, what were we last quarter? 60%, 40% somewhere around there?

That’s right.

Yes. It’s our business with 60%, 40%. Our – and that…

60% retail, 40%.

Yes, yes, yes, and used to be 50-50. So it’s all happening through the direct channel today kind of, but really being facilitated by our retail teams – a big part of it by our retail team. So it’s kind of irrelevant exactly what’s happening. Like – and so we look at the data that we think is really important that we can impact and affect. So where it lands? Where the customer places the order? We place the order for the customer somewhat irrelevant to us right now and has been for quite a while.

And then as far as the where our DC is located, we have our furniture DCs: one in Paterson, California; and another one on the East Coast in Baltimore, Maryland; and then we have a small parcel facility in Ohio.

Yes. And I’d say just, look, if you stand back and just, again, take out a high level view of this and say, there’s so many people over the last 10, 15 years that have spoken about their retail business versus their direct business. And their direct business is more profitable than the retail business or the retail business is more profitable than direct business. And people get lost in all that noise and they get lost in how they’re allocating costs and they build silos inside their company. And a lot of people had thought, like, why are you guys so ambivalent about this? Why? Don’t you care more other people seem to care so much more about you? It’s just because we see it differently and we care about the integrated outcome. And I think that’s why we have operating margins that are basically two times our next closest competitor today and growing. So, if I tell you, it’s not important to us, there’s probably a reason no. And it’s because there’s a more important way to look at your business.

Got it. And then just zooming out a little bit. Can you just update us, how was our RH ski house and RH beach trending before the slowdown? And at this point, do you expect RH color to likely be pushed back into 2021? Thank you.

Yes. So we just said, we’re going to defer all new business launches. It’s not a time to – you never, in the direct business, mail a book into the wind. It’s just not a good thing. It’s been my history. It’s the worst time to invest, because you have no flexibility. You mail a book into the wind right now. It’s all reverse leverage, because the data would tell you, you can’t make that significant of a difference and change the consumer behavior when there has been a kind of a – some kind of action of epic proportions that’s changed consumer behavior. It’s just too expensive to change that behavior right now. So, yes, we’re pushing that back. We’re also reevaluating all of our ad costs, evaluating what, if any books we should be mailing right now. How should we be allocating capital right now? How should we be allocating advertising right now? I – and by the way, I would tell you this that the data would say that our source books are significantly better allocation of capital than digital advertising. What I’d be worried about is, if I was just a massively disproportional online business today, and I had to rely on digital advertising. And I didn’t have direct catalogs like that’s a disaster. Here we are primarily a retail-based business with a very strong direct business that operates in an integrated way. And our just – our main channel just stop. But I can tell you this that even with the channel stopped, right, where we closed, we still are interfacing from a retail way. And that’s what I feel very good about. We haven’t done anything from a price point of view. We haven’t added one promotion. We haven’t done one promotional e-mail since…

Your next question is from Seth Basham of Wedbush Securities. Please go ahead. Your line is open.

Thanks, and good evening. I know the big picture is really what we’re focused on. But we’re also thinking about some of the near-term options that you have and you talked about potentially cutting catbacks? Could you give us a sense of how your CapEx budget is formulated for this year? What types of things that you could consider cutting for starters?

Look, it’s – in the last downturn, we cut CapEx to $2 million. We didn’t cut CapEx to whatever we want to cut it to. Right now, we’re stopping everything, okay? Does that mean everything will be stopped when things start to be back to normal? Oh, but have we stopped everything right now? We’ve stopped everything outside of – we’re finishing Charlotte, right, because we’re – what Dave about a month away from finishing Charlotte? So, we’re a month away from finishing Charlotte. Our partner in the development has guaranteed that they’re going to continue to find the tenant allowance and so we’re going to keep going. But we’re managing the business with a bias for cash right now, managing this for cash as we should be. We’re deferring all capital right now, basically, all capital. I’m trying to think of anything besides Charlotte, we’re spending money on. We stopped everything in the company. We – will we keep everything stopped for the whole year? I doubt it. I doubt, it’s like, the stores are going to be closed for the rest of the year. We – I think our – we have capital plan with somewhere around $150 million net, Jack, somewhere around that?

Regional.

Yes, regional plan. We’ve spent some in the first quarter, but we can save the vast majority. If we wanted to, we could probably save 89% – 80% to 90% of that?

Yep.

Yes, to pay 90% of that somewhere around there directionally. So that gives us a lot of flexibility. The ad cost we are planning to spend in the first-half, we’re going to really spend a fraction of the ad costs. So we – once we have the all clear and physical stores reopen again, and we’re back running and we see what those trends are like, it – that’s – that changes everything, right? That changes everything as we think about capital allocation be in a position to to realize opportunities. So it’s balancing playing short-term defense, while you’re developing offensive plans, right? So – but yes, so we get lots of control. Like right now, everything stopped except for one store.

Got it. All right. I’ll leave it there. Thank you very much. Stay safe.

Your next question is from Peter Benedict of Baird. Please go ahead. Your line is open.

Yes. Thanks, guys, I’ll be quick, but most of my questions have been answered here. But so just following-up on that. So if you can obviously take your marketing data, you can take the CapEx way down. Just curious, how do we think about SG&A? If you take out marketing, that remaining bucket, how much of that is truly variable? And then we can kind of think about how we might be able to manage that other bucket. But just what percentage, I guess of SG&A after marketing is truly variable?

Yes. We don’t disclose that. But we’ve – yes, we – a lot of things are variable in times like these. So go ahead.

These are more variable in the short-term versus the long-term. But in this times like this, it’s unprecedented and we clearly are prioritizing cash?

Yes. And everything is – yes, everything is negotiable right now, right? Everybody’s got to think about partnerships and priorities and how to get through this time, so.

Yes, okay. Listen, that’s fair enough. Thanks so much and good luck.

Great. Thank you.

Thanks, Peter.

The next question is from Adrienne Yih of Barclays. Please go ahead. Your line is open.

Good afternoon. Gary, I wanted to step back a little bit and talk about your R&D network, kind of pre the transformation. So before you’d invested sort of, kind of fixed salary, R&D, innovation and design talent, and now that’s a global network. I want to say it’s a little bit more variable. But it’s sort of globally going around and creating a group of talent that you can pick from and sort of kind of ebb and flow, depending on how you need that skill set and when you need that skill set. Can you talk about that and help us understand exactly what the changes are there? Thank you very much.

Sure, sure. Well, we think about us is – it’s like the Apple App Store, right? Apple has the best developers in the world developing applications, or in this case, even music, right, developing music the main platform for music, the main platform for apps today is the Apple platform, right? They’re the best platforms, right? And so when you think about our industry and you think about goods that are targeted to the high-end luxury market, we’re the best platform in the world. And so, even more so now, I think, there’s going to be – it’s going to tilt our way. There’s going to be even more people that want to develop for our platform, because we’re going to be even more viable. We’re going to be even more disruptive. We’re going to take even more market share. But when you think about the cost structure and how that works, it’s all amortized into the goods, right? And so if people are designing and developing ideas for us that we don’t like and we don’t pick, there’s no cost. So it’s a true advantage. We don’t really have a big design team here. We’ve got only one or two technical designers inside the company that work with our partners on some specifications and quality and engineering. But for the most part, 95% of the development cost sits outside our company is amortized in the product. It’s either built into the cost of goods from the perspective of at a artist and manufacturing level, design level or it’s someone we’re paying a certain royalty, design fee on the goods, and so it’s all built into the cost of goods. So the flexibility there when you think about it versus other people doing what we do is massively more effective and truly more powerful, right, because I used to say that – I’d say, in my career, I was most influenced in my time at the gap, where I saw, Mickey Drexler transformed the gap from a $300 million business to a $15 billion, the leading global apparel company in the world, right? And that was Mickey Drexler and Les Wexner really were the pioneers and the inventors of vertically integrated retailing as we know it today. And that model was super powerful and there was a lot to like about that model, what I learned not to like about the model and what gave us the idea was when we saw Apple and there was someone asked me to go to the CES is that what they call it? Yes. CES.

Yes.

Yes, CES show at a friend that within technology, you should come with me, you’ll learn a lot about technology. And I live here in the Bay Area, right? So I’ve got a lot of friends that are in technology, I used to be in YPO. And a lot of the key leaders in, in that space during the last last 10, 20 years. I got to know relatively well. And if you come to Las Vegas, come see this, and I was an Apple fan from – for a long time. And I’d say, well, it’s – oh, great, it’s apple going to be there. I’m going to get see all the new Apple stuff or listen to Steve Jobs, and he said, no, no, it couldn’t be said everybody comes and said, Oh great, the Apple doesn’t comment, certainly a company that doesn’t comment. Oh, really? Well, what did they do? They said, well, they do their own conference. And I started attended looking at Apple through a different lens and noticed that when they launched the App Store, how all the best developers were developing for Apple. And then whoever gets the dregs was like Blackberry and all the restaurant, right, like, the Android platform and stuff like that. So, the light bulb went off for us here. And we said, look, Apple is built the best platform, right? They built the best platform. And they – their platform creates the most leverage for all the best developers and designers, right? And maybe we’re doing this wrong. And maybe we had to turn this model that served me very well, right, that I learned from the very best in the industry and turn this upside down. And because realistically, we’d have these big design teams and they…

That’s very helpful. Thank you very much, Gary, and best of luck.

Sure. Thank you.

Your next question is from Brad Thomas of KeyBanc Capital Markets. Please go ahead. Your line is open.

Hey, thanks, everybody, for running long and for all the color as usual. Just a couple of housekeeping questions here from me. I guess, when we think about a new world where revenues are likely down here, can you give us a sense of maybe where you could bring inventory level down to? Can you bring that down much lower from here, particularly with the made to order nature of a lot of the product? And then how should we think about working capital in general, in a world where sales are declining? Thank you.

Yes. It’s is a really good question. It’s something that we’re kind of talking about and kind of studying. So we believe we pushed the inventories down to about as tight as we could be. And we saw – in the fourth quarter, we saw back orders kick up and not only higher back orders, we had missed demand in the company. And so we thought, okay, we obviously we – I think we pulled out on a apples-to-apples basis, about $500 million out of our inventory. If you looked at our kind of four-year – five-year plan, that’s about three, four years ago. We invest $500 million less inventory than we plan to have prior to us redesigning the operating platform and the supply chain. So – and we’re trying to find, okay, where’s equilibrium? Where’s the most optimal ways that we can run inventory? So we think, we pushed it a bit too far in Q4. We gave up some demand in sales. It probably cost us, I’d say, somewhere in the neighborhood of $20 million or so. And that’s fine. There’s cost to learning and cost optimizing. And so now it’s – when you think about this period, you’ve got some – you’ve got to kind of deal with the immediate problem that’s happening. And the immediate problem is, we have a lot less demand and we’ve already bought into that demand. And you can’t cripple your partners by just saying, “Oh, I’m just cutting all those orders and you deal with it.” I mean, that’s no way to have great partners for the long-term and going forward. So, yes, we’re right now in live discussions with everybody around the world. Like, we don’t say like, “Hey, I have a problem at our age. And you have…

That’s helpful. Thank you, Gary. Good luck.

Yes.

Your next question is from Tami Zakaria of JPMorgan. Please go ahead. Your line is open.

Hi, thanks for squeezing me, and I know it’s getting late in the East Coast. So I’ll ask a very quick question. So you’ve mentioned prior to the dislocation in the business in March demand and core RH business was up 8% in February. So how much of that was driven by backorder fulfillment versus core growth? And did that include a 4% drag from lower outlet sales like you’re planning?

No, they didn’t include the core – that’s just the core RH business, right? So that’s not inclusive of the outlet business. So that’s why we characterize the outlet business separately. And so how much of that was from backorders? Zero. That was demand, right? So that was order generation that was demand. And the reason we put that and just give you a point of reference of how our core business had kind of recovered post the elimination of holiday, right? So the fourth quarter businesses were – business was influenced a lot of taking the holiday business out, taking other promotions out that we had characterized in previous press releases and discussions with everyone. What we had is, we had greater than anticipated collateral damage that related to the elimination of holiday. So if you think about it, where we kind of missed our forecast here was, there was more kind of attached to business through the traffic and active in the peak weeks of holiday and the peak weeks of January. When all of that kind of Christmas stuff is – goes on sale, all the ornaments, all the decor, all the gifting stuff, all goes on sale, you have incrementally more traffic going to the web and incrementally more traffic going to the stores. And what we were able to analyze post elimination holiday was that, there was more attached pride means, someone coming to the website or coming into a gallery and they were buying sale Christmas ornaments or sale other tchotchkes and stuff like that, that they might have seen some sale dining chairs and might have seen some sale bedding, they might have seen some sale and other things. So the elimination of that traffic and the the connected possible other transactions, which referred to as a collateral damage, was greater than we thought. So that cost is a portion of the business. And then the other biggest piece of the miss was just, we just ran the inventories too tight. We took out a lot of inventories, I think, going into the fourth quarter with an inventory down 24…

24 at the end of Q3, we ended up the year down 18.

Yes. So down 24, going into Q4 and we ended up down 18. We did – and that was on top of down last year and so on and so forth, and I say, a prior third-year down. And so we just ran it too tight and nothing strategic and easy things to correct. We don’t have to transition out of holiday, again. So the important point about the F8 [ph] is, hey, post holiday in February, the core business rebounded to plus eight. The outlet is a completely different story. And let me make sure everybody has got this in the right context. You’ll remember last year, we had higher than normal outlet sales, because we closed the distribution center in Q4 of 2018 and we decided to accelerate the liquidation of that inventory through our outlets. That’s what we did. So we ran very high outlet sales in Q1, Q2, Q3, Q4 and not as high in Q4 year-over-year, but in the first three quarters, it’s very high. And that obviously was a lift to total business and it was a drag to margins, right? And so, the way to think about it this year is, we burned down outlet inventories the lowest levels in the history of the company. We started the year without a lot of outlet inventory. Obviously, we’ll be creating some outlet inventory right now, because returns and exchanges right now have that usually go straight to the outlets and get liquidated or backing up, because the outlets are closed. So we’ll have a position where you got a little bit more inventory. But really, this year it’s about now, yes, if now you’ve cycled those high sales, you’re not going to have the sales, but you’re not going to have the inventory drag.…

Got it. That’s all I had. Thanks and best of luck and hope you all stay safe.

Great. I hope you do, too. Thank you.

Thank you.

Next question comes from Anthony Chukumba of Loop Capital Markets. Please go ahead. Your line is open.

Thanks for taking my question. Gary, in light of everything that’s going on, I know, one of the things you’re very excited about or very excited about is your own expansion into Europe, which I think will be a real homerun for you. Is it safe to assume that, that everything that’s going on right now is going to push that back, or is it too early to tell at this point?

Too early to tell. I think, we’ll all be a lot smarter in about two or three months. So as far as we’re concerned right now, we’re not really spending capital there yet. We’re finalizing leases and doing some architectural work and development work and so on and so forth. So there’s work that’s all going on. But we’ve got flexibility as it relates to that, if for some reason, there’s later cycle developments in the UK or other things that force us to push things back a lot of flexibility. I think that the little bit of data that everybody has mostly related to China, I would say that the world is going to be on the other side of this issue at the latest by the end of the summer. And so the question is does – when we reentered the coal mines business, it’s like a flu does it reappear? And is there another infection cycle to go through? We don’t know that, right? Nobody knows that. But I have a lot of faith and hope based on what I hear from people that are in the biotech field here, obviously, San Francisco in the Bay Area is the epicenter for a lot of that industry. And what I hear from people that I respect is that the ability to develop – but develop drugs and vaccines and things are going to happen very fast. And so, my sense is, this could get dragged on all year. We could have a long slog of a year that turns into a recession. And it could be that 2020 is – becomes and it’s interesting from one sentence to say, 2020 should – is perfect eyesight. It becomes probably the least clearly year that we’ve seen in a long…

Thank you so, Gary. And…

Yes.

…demonstrating empathy, I commend you and the rest of your leadership team are foregoing your salaries during this very difficult time. Keep up the good work.

Okay. Thank you.

There are no further questions at this time. I will turn the call over to Gary Friedman, CEO, for closing remarks.

Great. Well, I thank you, everybody, for your time. I do want to make sure I just thank our teams and our people and partners, customers and shareholders all around the world, but specifically our team that is – just had an extraordinary year and fought hard to get to where we are, not just this past year, but over this past decade, and for some people that have been with me here through the past 20 years to get to where we are today. And this is the most difficult and challenging time I’ve ever led a team through. And it’s a time for all of us to kind of come together and to band together and to get all the brains in the game and the egos out of the room and do what’s right, not just from a business and financial point of view, but do what’s right from a human point of view. And we all have a lot of decisions to make. We all face the same challenges right now, and it’s a time for purpose and it’s a time for partnerships. And we’d like to say that profits follow purpose. And the key thing for us long-term is to live and breathe our values and let profits follow purpose. If we do the right thing, we will all get through this together on so many levels. So thank you for your time, thank you for your patience, and thank you for your understanding today, and we’ll talk to you soon. Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.