Ladies and gentlemen, thank you for standing by, and welcome to the RH First Quarter Fiscal 2021 Earnings 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 being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Allison Malkin of ICR. Thank you. Please go ahead ma’am.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2021 conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, as well as our press release issued today, for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our 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 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 Gary.

Great. Thank you, everyone. We’re going to start with an overview of our shareholder letter, which highlights our results and outlook. And then, we’ll open the call to questions. To our People, Partners and Shareholders: Fiscal 2021 is off to a strong start, with revenues up 78% in the first quarter versus down 19% a year ago. Total Company demand increased 101% in Q1 and RH Core demand increased 109%, the strongest demand trends in our industry. We continue to set a new standard for financial performance among home furnishings retailers with adjusted operating margin increasing 1,260 basis points in the first quarter to 22.6% versus 10% a year ago. Adjusted net income increased 375% and adjusted diluted earnings per share increased 285% to $4.89 per share versus $1.27 last year. We generated $228 million of adjusted EBITDA in the quarter and $136 million of free cash flow. Q1 ended with total net debt of $382 million and trailing 12 months adjusted EBITDA of $896 million. Our expectation is to be net debt free by the end of this fiscal year. Increase in Fiscal 2021 Outlook: Based on current business trends, we are raising our outlook for revenue growth in fiscal 2021 to a range of 25% to 30% versus our prior outlook of 15% to 20%. We now expect adjusted operating margin in the range of 23.5% to 24.3%, an increase of 170 to 250 basis points versus our prior outlook of 100 to 200 basis points, with ROIC in excess of 60%. As it relates to the second quarter, we expect revenue growth in the range of 35% to 37% and adjusted operating margin in the range of 25.9% to 26.1%. While fiscal 2021 will surely be a tale of two halves, there are many data points that…

[Operator Instructions] Your first question comes from the line of Chuck Grom with Gordon Haskett.

Hey. Thank you. Good evening. Incredible results to the team. Gary, is there any way to size up the degree to which categories such as outdoor is supporting total sales growth, maybe the penetration of the category in 2018 versus where 2021 can end up? And are there any other categories that you believe you’re seeing outsized growth today, just exceptional results?

Yes. I think if you look at our demand trends, everything’s way up, right? So, but outdoor is one of our best performing categories. I mean, we’re the most dominant outdoor brand at the high-end in the world today and have the biggest business in the world at the high-end for outdoor by multiple. So, you would expect that we dominate that category. Even though there’s really long lead times, and we’ve been sold out for a good part of the past year.

Great. And is there any other categories you would highlight besides outdoor?

Again, if you take the core business at 109% demand growth in Q1, they’re all way up. So, business is strong across all categories.

Great. And then, in your shareholder letter last week, you wrote, we have to be willing to endure short-term pain to provide long-term gain. And you referred back to a lot of other growing pains in the business over the past few years. But, I was just curious, if there’s something down the road that you were referring to in terms of the future outlook?

It’s the mindset of investing with a long-term view to build one of the most admired brands in the world. And it’s not a path that most people take. I think you’ve got -- most of the world is focused on duplication and moving a lot of small rocks, and we tend to focus on big rocks that create big value, and those sometimes take multiple years to move and to bring to life. And so, look, I think if you look at our guidance, it would indicate, we don’t see anything in the near future that could be disruptive to our results. And today, as we think about the investment horizon over the next several years, whether it’s international or digital reimagination or product elevation or any of the big moves we’re making. They’re all implied in our outlook and our guidance. But, from time to time, there may be a significant investment we have to make that’s going to leapfrog the business further into the future, right? I mean, that’s the way we have an operating margin. It’s almost twice the next best person in our category.

We ask that everyone limit themselves to one question and one follow-up question. Next up, we have Adrienne Yih, Barclays.

Good afternoon. Let me add my congratulations. Eloquent, as always, Gary. Gary, I guess, my question is about the TAM opportunity -- or actually, the $5 billion to $6 billion sales target in North America and the $20 billion to $25 billion. You talked about it being in the Company’s current format. Can you talk about the number of galleries that supports in North America, but more importantly, the number of galleries that supports globally? And is it just focusing on the home furnishings industry with no hospitality, no B2B et cetera? So, just want to get more color there. And my follow-up will actually be when you’re opening the stores internationally, all the different cities, different countries, is there anything that you’re doing from a product market research or customization for each marketplace? And should we assume that each of those stores delivers the same sales dollar, or is every one of that is distinct? Thank you.

Hi Adrienne. That was a lot of questions in one question. I am going to -- where do you want me to start? Let’s see. The opportunity, as it relates to the $6 billion in North America, and $20 billion to $25 billion in the current format, how many galleries in North America and how many galleries internationally? It’s an interesting question. Because in North America, I think we’ve always said about 60 to 70 galleries in North America to kind of penetrate North America. And you’ve got to think about the fact that we built America -- we built North America while we’ve transformed the brand and transformed the business. So, we had a pretty logical footprint that was in all the major markets and all the major suburbs, so on and so forth. And we basically consolidated and transformed in our opening large design galleries and replacing the former footprints. And the question is, do you need as many galleries internationally as the world continues to evolve and change, right, as consumers continue to be comfortable shopping online, not seeing products. That’s somewhat unknown I think to us. If there’s no indications today that we should have less galleries in North America, we wouldn’t penetrate the markets the way we penetrate the markets today with less galleries as we do the math. So, even though there’s kind of a migration online, you really got to be careful in today’s world not to look at the channels independently. I really would caution any retailer who’s doing that. I think it’s a foolish way to look at a business. Because we live in a -- we’re physical games, living in a physical world, and being able to see brands and no brands in a physical manner, being able to understand…

Yes you did. Thank you so much.

The next question comes from the line of Steven Forbes with Guggenheim Securities.

Good evening. Hey Gary. Given your comments in the letter about maintaining a 20% EBIT margin in any scenario you can envision here, because I think we’re all living in the scenario land. I’m curious if you can provide some color on how you’re thinking about the potential paths of demand growth as we head into the back half? And if you can contextualize sort of the downside scenario, right, that you tested in the model, so we better understand the flexibility that you see or that sort of inherent right to the model that you have.

Sure, sure. So, look, I think, anybody that’s not -- if it’s things that go up generally that you have no control or don’t necessarily stay up. The question is how long do they stay up? What does it look like when things evolve and return to some kind of normal? But, this isn’t a new normal. And I think it’s naïve to not really look at all the models. And look, if you were talking to me a month ago, it’s a lot more pessimistic than I am today. I’m a lot more optimistic a month later because I have more data and the organization we have -- we can see more trends and we can see what’s happening, and not just data internally and how our demand trends look and as we look ahead and what’s happened and what we think will happen. But just what’s happening in the housing market, what’s happening in the stock market, what’s happening in the remodel world, the pent up demand that exists. And if you think about people that are building homes, the homes are taking longer to build. You can’t get the trades. People can’t get people to remodel their homes. All of that means that they haven’t bought their furniture yet, right? We’re kind of the last stop on the journey. So, there is this kind of pent up demand, back up. A lot of things that indicate to us when we think about our pipeline and look at our pipeline that look very good as we look out into the rest of the year, and possibly into next year. And when we get into next year, we’ve got some step-ups, right? We’re going to introduce a record amount of kind of new products beginning in the later part of the second half this year. That will mostly accelerate revenues in 2022, right? We’ll ship some of it this year, but not a lot of it. So, as we look at it, we kind of look at the current trends, we’ll get something in the second half for new stores that we just opened, new stores we are opening. We’ll get some for new product, but really, those will set up ‘22. So we have all of that momentum going into 2022, and then we start opening internationally. And internationally is very different than opening a new gallery in North America because most of our galleries in North America are replacement galleries. There’s just a couple that are -- like Jacksonville, you can argue if that’s new market or expanding the Florida market. We’ve only got a couple ahead of us where we’re not -- we’re not in Hawaii and we’re not Montreal. I can’t even member if there’s anything else. We’re not...

Naples maybe.

Naples. Yes, you can argue Naples probably could be incremental, but they’re not probably 100% incremental, since we’re somewhere in those countries already. But we’re not in the United Kingdom, right? We’re not in France. We’re not in Germany. We’re not in the Netherlands. We’re not in Spain. I mean, on and on and on. And so, we’re going to be opening countries, which is a very different dynamic, right? And we’re not only opening countries with a handful of galleries. We’re opening countries with a multidimensional digital portal that people are going to have -- and the entire country is going to have access to the brand. And then, we’ll probably figure out like how do we think about selling cross-borders until we establish our presence there and delivery and stuff like that. We may be able to -- we may able to reach more of the continent. I’m sure there’s going to be customers, they are going to want to ship to Russia and the Middle East and so on and so forth. And we’ll figure out how to do those things. We won’t officially open up the continent of Europe when we open the first handful of galleries is just a bit complex from an operational point of view and would create too much upfront cost. So, we’ll kind of learn as we go there. But that gives us a step-up. So, when you think about that -- the downside model, which is important to look at, right? And like we’ve had it ever since we’ve been -- since we saw this uptick, we said, look, it’s -- how is this going to play out? And so, today, my view is, the rest of this year looks pretty good based on everything I can see and know…

That was super helpful, Gary, really appreciate that. And then just as a quick follow-up, it’s sort of hard not to get excited here about RH International. So, just curious, as we’re -- what are we, less than a year away, right? What else needs to be done to ensure a smooth and seamless launch as you sort of prepare for this grand opening here?

Sure. All the things that you would expect. I mean, we’ve got to build the operational platform from a distribution and logistics and home delivery perspective, which we’re working on and building. We’ve got to make the inventory investments and be able to get the inventory, which we’re working on. And we couldn’t have launched this year, would have had no inventory, right? So, we had to delay everything by a year. Thank God, we did, because we wouldn’t have any goods to sell. So, we have to have the inventory to build the inventory. And you’ll start to see that being reflected in our balance sheet as we build the inventory for international. And then, we’ve got to continue building the team. And the good news is -- what’s the latest pull, how many people from our organization want to work for us internationally?

A couple of hundreds...

Yes. We have several hundred people that have already volunteered from America to go work in Europe. So, we’ve got -- and some of them are from Europe. So we’ve got a lot of enthusiasm about people who want to go help us open internationally. But plus, we’ve got a team that’s -- and we’ve got a leader on international. And we’re building that team. And if you came here and you’re in our center of innovation, we have giant RH International room with maps and dots and cities and numbers and volumes and populations and things we have to do and where we have to go and where do we open home delivery, where do we open this and that? So yes, we’re working on all the things you have to do. I mean, the good news is they are all the things that we do here. So, it’s not like there’s anything really new. It’s just in some cases -- for the most part, everybody speak in English. It’s not like 50 years ago. And there’s slightly different currency, things like that. And then, the question is, how do you price the goods. And I think that the good news is, is we study it and we look at how other brands have priced their goods. There’s probably a bigger margin opportunity than we thought. So, we feel more positive than less positive that RH International, as we begin to scale it, will actually be margin accretive, not margin dilutive.

The next question comes from the line of Tami Zakaria with JP Morgan.

Hi. This is Tami. Thanks for taking my questions. So, my first question is around international openings. I think in your shareholder letter, you mentioned you’re going to open 10 locations in total over the next two to three years. So, probably the cadence, I’m guessing, is international opens per -- two to three international opens per year over the next two, three years. So does that mean you plan on opening an equal number of U.S. and international locations over the next couple of years? So basically, what I’m trying to understand is what is your gallery opening cadence, over the next two years, and how is the split between international and domestic.

Sure. Thanks for the question, Tami. And by the way, you’re kind of -- you had a crystal ball, I saw your note right before we announced and your projections are pretty close to our projection. So, good job on your models. But, the gallery opening cadence in North America will remain somewhere around, I’d say, three to five or so, maybe four to six, depending on how these deals come together. And then, international, I would look at it and say we’ve got two in the first year as long, as France opens and we can get work done there. So, Paris will either open in the fall of next year. And if for some reason, we continue to have COVID delays and we can’t get in and do the work we need to do, it could go into the spring of the following year. But beyond that, we have the other locations, some of them are much easier to open than others. They’re less complex. These first few are relatively complex, and then London is relatively complex. Some of them are less complex where some are not quite as big a footprint, and where we have an ability to kind of test, if you will, and have some flexibility. We don’t want to be locked in everywhere in a bunch of countries where if we made a mistake, we have a permanent mistake. We don’t -- net-net on Aynhoe in England, that will be a relatively low net capital deal as we bought the property, investing some money. We’ll do a sale leaseback. We’ll have more capital in Paris, that’s a long-term lease, and then we’ll have more capital. And we’re more pregnant, if you will, in London in Mayfair where we’re kind of stringing together four buildings…

Your next question comes from the line of Michael Lasser with UBS.

Gary, it seems like what you're suggesting is RH has spent the last 20 years or so building this unique luxury brand that hasn't existed in home furnishing. It now has pricing power and should command luxury margins, which we've seen you realize in the last several years. And COVID has allowed you to accelerate that process by raising prices and getting to the margin level that's appropriate for the fitting a luxury brand in this market. Is there a case where you haven't gotten a great sense of elasticity in your core customer segment because of -- or the size of your core customer segment because of these unique conditions? And that could change on the other side of this? So that's the first part of my question. And then the second part is who is in the demographic that you've seen come in buying? What have they been coming to buy in the last couple of months to drive this level of growth?

So I'll start with the second question. It's really that -- it's kind of a core RH customer, nothing different in the demographic that's buying from us. Just more activity, more movement, more people moving, more people moving for cities to suburbs, second homes, things like that. And then more people just refurnishing their current homes just because they've been spending so much time in their home and they couldn't really travel. So people doing their outdoor spaces and stuff like that. And that's all continued to be strong. As it relates to COVID speeding anything up, it really hasn't speeded anything up. Not for us. I mean, this year, it's going to give us a lift. But again, if you just go back to last year and say on 8% revenue growth, 7.7% revenue growth, we had 21.8% adjusted operating margins, right? So that's -- that was lower than we thought we be. We thought we were going to 10% to 11% growth. And so our model is pretty clean if you look at it through 2020. And then this year, you've got -- you have some lift. Obviously, we're going to be up 25 to 30. And so the way I'd look at it is model us out over 3 -- if you model this at kind of 10, 10 and 13, you'd kind of be directionally right, plus or minus 1 point or so here or there. And then the question is what is 2022? Is 2022 a giveback year or a flat year because the COVID cycle and the focus on the home goes back? I mean could be. We've got things that should make it a better year than that because of the fact that we haven't introduced new products, how long it’s been now? 18 months at most?

It will be 2 years in the fall.

Okay. It will be 2 years, okay, in the fall where we have introduced new products. Think about that. 2 years. No new product at RH. So we've got quite a backup that will be introduced this fall, next spring. Just the product pipeline for the next 18 to 24 months is a really dynamic pipeline and of new products in everything, right? In RH Interiors, RH Modern, not just RH Contemporary but interiors, modern, baby, child, teen, beach house, ski house, there's a lot of new product coming in as well as RH Couture Upholstery, RH Bespoke Furniture, RH Color, lots of things we've been working on. So that's a big plus to us. And then we're opening up internationally, and that's a big plus, right? That's a 100% incremental, right? It's not like just transforming a gallery where it's a market that is already doing $15 million, and it's going to go to $30 million or $25 million market is going to go $50 million. So this is not incremental markets, incremental countries and then thinking about it more as an incremental continent. Because at some point, we'll open enough galleries in Europe, and we'll have our infrastructure and home delivery figured out, and then we'll just open up the whole continent, whether we have galleries everywhere or not, we'll be able to figure that out. The big thing is why you can't rush to just open up the continent is you have to figure out the reverse logistics, right? You have to figure out, what am I going to do with the returns? Because what you don't want to do is all of a sudden like open up the country too soon, and you've got a bunch of returns in Russia or Copenhagen or places where you've…

Your next question comes from the line of Steven Zaccone with Citi Research.

Maybe shifting to the margin side, given such strong performance here in the first quarter, is there any real change in thinking about the drivers of gross margin versus SG&A on a full year basis versus the initial guidance you provided back in March. And then I guess specific to the second half of the year, given the momentum in gross margin, is there opportunity for gross margin to continue to expand?

I don't know, Jack, do you want to take that?

Steven, I don't think anything has changed with respect to what we said in the last quarter. If you look at historically what's driven our operating income margin increases, I kind of view it as sort of 3/4 of it roughly coming up in gross margin quarter up in SG&A. And of the gross margin, the bulk of that, call it, 3/4 coming from product margin and the moves we talked about elevating design quality taking the margin of the goods up. So that's been pretty consistent as we look at the model back 4 or 5 years, as Gary was talking about the evolution. This year, we'll have a little bit odd comparisons because of the way 2020 played out. So obviously, with Q1 down 20% -- 19% last year, Q2 being flat and so -- and the growth rates we have now, you're going to see a little bit swings in sort of the, I guess, the margin deltas versus last year. One thing we were just looking at -- or that I like to look at is in the same way that people look at 2-year growth rates, I would look at margin changes on a 2-year basis as well versus '19. And that sort of formula that I alluded to earlier holds ongoing, and I would expect that going forward. And then I think the opportunity for the gross margin to expand just to address that. I mean there's always that opportunity I think you know our position on how we communicate our guidance and our outlook numbers to you and how our internal models are positioned. But it's something that we -- where we do well, we continue to elevate the design, the quality, and the luxury mountain, and I think you've seen the benefits of that, and I think that will continue to accrue to us.

Your next question comes from the line of Anthony Chukumba with Loop Capital Markets.

So Gary, I mean, you guys are doing a lot of different things right now. A lot of very exciting initiatives, particularly the international expansion, but all the product newness and some of these new concepts. And I guess my question is, how are you personally allocating your time? Because I know -- or I'd have to imagine that you're very, very intimately involved in a lot of this, particularly the international expansion. And so I would just love to get a better sense for that.

It's a good question. That's -- we say inside our company, we do -- we really do 2 things. We allocate human capital and financial capital. And then the most important one is human capital and how we allocate our time. So we don't work on any things in this company that the cross-functional leadership team can't work collaboratively on. So whether if you look at the kind of the big product initiatives, and thinking about the product initiatives, this happened over years, right, so that by the time you're seeing contemporary coming, we have been working on contemporary for a long time. We've been looking -- working on color for years. We just -- it's just been other things more important than we've launched, so color keeps getting kicked to the back of the bus because we don't think it's as incremental as some of the other things that we're doing sooner or maybe not as important to elevate the product brand. But all the big initiatives we take kind of the cross-functional collaboration of the entire leadership team to move the big rocks because they're all big rocks. I mean, whether it's product elevation, whether it’s gallery transformation, brand elevation and the things that we're doing there to elevate the product and elevate the brand. The things we're doing to digitally reimagine the business, not just the website, but digitally reimagine the way we move information and data and how that amplifies -- can amplify the productivity of the teams and the decision-making of the teams and then global expansion. They're all things that we -- as a leadership team, we allocate our time. We ranked everything in this company through a lens of what's the emotional value, what's the strategic value and what's the financial value in…

Your next question comes from the line of Curtis Nagle with Bank of America.

Maybe just turning back to international. Maybe a little too early to ask or assess this. But just, I don't know, Gary, how do you think about kind of like what -- I guess, the baselines or the comps would be for some of these early markets you're doing, London and Paris, where you've got these magnificent spaces, recognition of the brand, but certainly a decent number of people in those cities, but they are new markets. I mean the benchmarks -- I don't know, perhaps New York, maybe that's aggressive, is it L.A., San Fran? How do you think about that? And then just as a quick kind of model question. Could you comment on kind of what demand trends are doing now? Are they sort of proportionately similar to what you saw in 1Q in terms of how they are balanced relative to sell-through?

Sure. Yes. As far as international, we think about London like New York. If you look at the population demographic profile of this broader New York market, broader London market, they're profiled pretty close. If you look -- think about the UK, we think about the UK a little bit like we think California. There's 68 million people in the UK, and there's 39 million people in California, so it should be bigger. If you look at the profile of kind of high net worth and ultra-high net worth people, California skews a little higher per capita. So we look at California and say, California is probably long-term $800 million to $1 billion market. So London should be somewhere around $1 billion market. We've got to have the penetration of galleries and the brand recognition to get there. But the upside is we're opening some pretty spectacular places. We're opening with a brand that's got kind of worldwide recognition with our core customer. It's not like people don't know the brand at all unless they don't travel to America or they don't have any friends in America, right? If they travel to America and they have wealthy friends in America, we're on their radar. And so the question is just like how is it -- how quickly does it scale? We don't know. We'll know more when we open them. We're going to do a great job. I think we're passionate about it. We're -- the work we're doing is going to be extraordinary, and it's going to be remarkable. And I'd like to say that when you do extraordinary, remarkable work, you can usually figure out how to monetize it. But it's very hard to monetize ordinary or unremarkable. So we feel better than worse. We feel excited about…

Your next question comes from the line of Max Rakhlenko with Cowen & Company.

So just staying on Europe, just curious on the margin side. What do you think profitability could look like versus the U.S.? And I think earlier on the call, you said that margins might actually be accretive. So just curious how you're thinking about GM versus SG&A. And then just leverage on the overall business?

I don't think we're ready to talk about that level of detail. I think when I think about it directionally and strategically, we believe that we think it can be accretive to margins long-term and pull our model up as opposed to be dilutive to our model. We're going to have to get some scale. We're obviously going to open distribution facilities and capabilities and make investments in inventory and other infrastructure that we've got to be able to open the business to. So -- and depending on how quickly we ramp and how quickly the business ramps, we will determine how the model evolves. And so when we're talking about it, I'm talking about more long-term. Like I look at -- we studied now a lot of people's businesses, a lot of models, what people are charging, what they're charging there for similar goods. And we look like a tremendous value. And our view is it can be a higher-margin business than the U.S. And also, the reason it can be somewhat higher margin as you just don't. You're not -- we're not -- like traditionally, a lot of people -- American retailers that would open in Europe, they duplicate all kinds of jobs. They duplicate buying teams and duplicate corporate overhead and infrastructure and things like that. You had a lot of levels of duplication, and we don't believe we need to do that. We're going to run it more as a like -- look at the world is kind of one place and we'll have very few duplicative infrastructures. I mean we obviously have to have some human resources and people, leaders and people running stores and oversight and stuff like that. But we're not going to duplicate many of the things that other businesses or brands…

Got it. That's very helpful. And then just as a quick follow-up. On RH Contemporary with the continued supply chain disruptions, just how are you guys thinking about fulfilling what will probably be really strong demand. Are you guys able to bring anything in ahead of time? Or is that not really feasible given that the business is really custom driven? Just curious how the team is approaching these challenges as your sites have a lot of newness over the coming quarters?

Yes, good question. It's not that it's all special order. There's -- it will probably have a slightly higher special order mix to start. But we will stock a good portion of the product. And the real key is the supply chain catching up, and what the demand trends are and what's the level of kind of in-stock rates can we be at? And that will determine, we'll probably go all the way to the wire to figure out how many books we may, how big we get behind this just so we don't drive another giant level of backorders and long lead time. So we've got a few months here to see how the supply chain is happening, how people are catching up, what the current demand trends are going to be. And we'll figure that out as we go. But there is a bit of a supply chain constraint. And that's why we haven't launched anything in a long time. So -- but right now, we feel pretty good that kind of middle to late, I'd say late September, early October, we look like we can launch Contemporary. And we'll launch the business. But it's like our business, people get a book, they don't start ordering that much in the first few days. It's about a month to digest it and the designs, does that work in my house and so on and so forth. So by the time people really start ordering contemporary, we should have pretty good in-stock rates, but it will keep getting better and better and better as we move through the end of the year. But we think we'll be in a good enough shape. But for some reason, the demand trends are bigger than we think as we move in -- through the quarters, we may have to just launch contemporary in a smaller way. And so -- but look, it's all a good problem to have, right? It's not like nothing's selling here. It's just that, okay, you don't really want the demand trends to go down so you can launch contemporary on time, right? Like that would be bad to wish for. I'd like the demand trends to stay up. And a good outcome would be, hey, guys, we’ve pushed contemporary to 2022 because our demands are damn strong, right? Now some people would say that's really bad. I think that's really good. That means our business has continued stronger than we thought. So it's not really exactly when we launched contemporary. It's -- just it's going to happen as depending on demand trends and the ability to ramp production.

Your next question comes from the line of David Bellinger with Wolfe Research.

So just looking at all the success over the past few quarters through the membership model, how much have you seen your customer base grow over the past call it, 12 to 18 months. And more importantly, where can that number go over time as you build towards the $5 billion to $6 billion sales target for North America and a much larger opportunity on the international side?

Yes. We don't really give that data.

David, I might say, I mean our membership count is disclosed. You can look at it in our 10-K. So last year, on -- as Gary talked about 8% revenue growth on membership went up by 4. 6%. So we went from 415,000 members to 434,000. And that's one proxy. Clearly, sales in general tend to outpace with increased average order values, other things we've talked about that tend to outpace the growth in members or customers.

Got it. Okay. And then just as you think about the trends here, it's incredibly strong throughout Q1, are there any regions of the country that you're seeing within that strength that are either outperforming or being held back in some way? And did you see any moderation trend in some of the areas of the country move closer to normal? Or is this more of just a broad-based strengthening throughout the entire business?

It's pretty broad-based. Yes. I mean you have the -- you had through this pandemic, obviously, the core dense cities where you had more of an exodus of people. Those were softer. The second home markets were explosive. The suburbs were explosive. And now you've got the cities that people are coming back and we're getting close to the unmasking of America that the cities are -- the energy's coming back, the business is coming back, and they'll probably have a stronger kind of later surge is how we think about it.

Next up is Cristina Fernández with Telsey Advisory. Cristina Fernández: I wanted to ask a follow-up question on Contemporary. Can you -- do you think that line will bring a new customer to your -- to the business like Modern did a few years ago? And how are you thinking about presenting it in stores the price points. Maybe can you compare that to the launch of Modern, like how this one is going to be similar or different? That would be helpful.

Yes. We think it's going to be a lot like Modern. We think it will bring a new customer into the business. It's higher price points like Modern was versus the Interiors business. So it's a higher level of quality. All the new product kind of reflects the elevation of the product and the brand, right? So you'll see higher-quality, higher-priced product kind of flowing in over the next several years as we take the brand up the luxury mountain. You'll see the quality get better everywhere. You'll see the design get better everywhere. You'll see the designers and people we work with -- more -- people will be more aware of them, designers that -- a lot of people said would probably never design for RH are now coming onto the platform. And so you'll see the product continue to elevate, and that should have a positive impact on average order, average ticket and a lot of good things that help the model of the business. I think that's the thing that you got to think about long-term with our business as you're kind of taking -- going up the luxury mountain, you're taking quality up, you're taking design and quality up, you're also taking price points up. You have more pricing power there. All the leverage flows through, right? I tell people all the time, imagine if you're selling a $2, 000 sofa or a $10,000 sofa, I mentioned a $10,000 because that's our best-selling sofa. So it cost you roughly $200 to deliver a $10,000 sofa, it's a fraction from a shipping cost point of view as it is to deliver a $2,000 sofa, right? You're 2% versus 10%. So it cost you 1/5, and that's why you can get such better margins here. So when you…

Yes. Sure. We used to do 11 or 12 a year, right? And then we went from 11 or 12 and we went to, I think, 3, then we went to 2, then we went to 1, then we went back to 2. Now we're at zero. So we'll go back to at least 1. And then we'll keep -- the world is changing, right, all the time. When we open these big -- one of the things to study, to think about, when you take RH -- again, I mean it's great because we had this point of reference here right next to us. And I encourage anybody who hasn't -- if you haven't been to our center of innovation, product leadership, you ought to come out here and kind of see not only what we're doing, but how we do it, and you'll understand how unique and different we are. And then we'll take you to lunch at RH Marin and we'll walk you through. But if you just like walk them all and look at, oh, there was our in-line store in the mall. And then you see us as a third anchor in the center that you can't miss when you come driving up to this place. You got to think about the fact like, hey, how many source books do we have to mail in Marin when everybody in Marin who is a potential customer of ours is going to at least come have lunch or dinner with us once a month, maybe a little less frequently, but most likely. And every time they go to the mall, they go to Nordstrom, they go to Apple, they get a drive by our magnificent gallery with how many 100-year-old Dollar Trees surround it? Like it doesn't…

And your next question comes from the line of Brad Thomas with KeyBanc Capital.

Gary, you mentioned an interesting point in the letter about the RH Dallas restaurant being booked through August. I was hoping you could just give us an update on where the overall restaurant business stands and its reopening and recovery. And how that flow through is translating over to the extent you can tell at the restaurants that have opened sooner than others?

I think it broke up a little bit. What was the question?

So around F&B -- the overall F&B business...

Yes, the F&B business is coming roaring back. And look, one of the things we did, we took the opportunity while we were -- everybody was sheltering in place, we reimagined our hospitality business. We redesigned our menus, our pricing structure, our turn times, our service standards. We've got a tremendous leadership team. And we believe we're going to make a huge impact once we can go back to kind of full service, a huge impact in our F&B business, both from a revenue and a margin perspective. So many of the restaurants that like maybe it would have been $5 million or $6 million, we think they'll now be $8 million or $9 million, maybe up $10 million just by the enhancements we've made. We used to have -- our pantries used to be more of a coffee bar. Now it's really a wine bar. And we have 40 wines by the glass. We found out that, hey, you have 82 points of margin on average when you’ve wine by the glass. So that's a really good business to be in, it's way better than coffee. And look, coffee is not a bad business, right? You wouldn't mind being Howard Schultz Starbucks. But we like the wine business. It's a really good business. When you're paying somebody to kind of go carry something to a table, if they're carrying a $4.50 glass -- cup of coffee to a table versus a $24 glass of wine to the table, think about what that looks like on their payroll as a percent of sales. Again, just keep -- everything we're doing, keep thinking moving up the luxury mountain, kind of higher price points, more leverage, more volume, serving actually kind of fewer customers and you make a lot more money. So F&B, we've kind of done the same thing. We've elevated the menu, elevated a lot of things. In fact, yes, most of the menu elevation we're doing right here right now in Marin, and we'll be rolling that out. I think that will be a significant impact. But I think we're in a -- I think we have one of the great hospitality businesses in the world right now. Like our volumes are incredible. Our model looks incredible. Most of our restaurants are packed all the time. And we can't wait until we can get to 100% seating. And I mean, just out of the gate, Dallas looks like it's going to be a $10 million-plus restaurant and with the new wine margin structure, which is really good -- and they're drinking a lot of wine in Dallas. So we feel good about it. Like it's going to be a good part of the model. And when you think about how much traffic it drives to our galleries and what that does and then what that traffic does to offset advertising costs and other things, it's -- it all looks incremental to us.

And your next question comes from the line of Seth Basham with Wedbush.

My question, if you can hear me, is around the design services business, and you mentioned it being the largest in North America. Wondering by what metric you're measuring it? And then secondly, could you give us an idea of what you've learned from that business over the last 2 years and how you might translate it to Europe?

Sure. Yes. If you just look at the volume our interior design business generates and the volume our trade business, which is really part of our design services generates, support the external interior designers. I mean we're really if you look at design firms, residential design firms, we -- I don't know if anybody that's larger than us or close to larger than us. So it's been a big, big enhancement to our business. It's moved us from kind of just selling products to selling spaces and moved us from products to projects. And so it's a huge, huge strategic strength of ours, and we've created a great strategic separation. And we continue to invest in that business. I mean, it's an important business for us. And as it translates to Europe, we think it's going to be very successful in Europe. People -- if you just stand back and think, how many times in people's lifetimes did they get to kind of furnish an entire home? Very few times. Therefore, why would they be any good at it, right? It's -- you can't be good at something you only do a couple of times in your life. And that's why if you look at -- I would say look at Zillow or look at Redfin or look at anything and just go through the most expensive houses, the least expensive houses, you generally see bad architecture and bat interior design. And so we think we can make a big impact in the way people live and to live with just -- not just more beautiful environments and spaces, but massively more functional and logical. People just -- they don't know how to do it. Why would you be any good at it? And if you'd be like walking on…

Your next question comes from the line of Zach Fadem with Wells Fargo.

Gary, 2 questions on guesthouse. You said a lot of exciting things here. So first, I'm curious if there's anything you can share on the revenue model. And then second, maybe you could walk us through the food and bev or experience offerings versus a typical boutique hotel?

Well, we're not building a hotel. So I don't know how to compare us to one. But -- yes -- the guesthouse revenue model, you'll learn more about it once we open it. Yes, we're going to have fairly expensive rooms. We're building an experience that the world's never seen. So it's not going to be cheap. It's actually -- think about it this way. The guesthouse is the flag gets planted immediately at the top of the luxury mountain. So every other luxury hotel in the world is -- I think is going to be forced to tip their hat. And they're going to say like, wow, we've never done that. Wow, how did figure that out? We're just going to do a lot of things that have never been seen and we're doing it at the very top end of the market. So it's going to be an incredible aspirational, inspiring experience. And it's all designed about privacy and luxury. And I think we're going to command very high rates, and we don't have to sell a lot of rooms because we don't have a lot of rooms. And so -- but most boutique hotels are all about trying to -- they're all trying to be hip and cool and they're trying to have lobbies with a bunch of people sitting in them. And like if you go to -- what's the one I forget now, I'm blanking. But the one you go, you have the Ace Hotels or anything like that, which I think are cool for the market they're going after. But you walk in and...

The original W...

Yes, the original W. I think there's all kinds of people sitting in the lobbies and they have their Apple, they have a bunch of little Apple lit up logos, everybody is working, a bunch of unemployed people working on their laptops in the lobby. That's exactly the opposite of what we're going to have. This is about privacy and luxury. Like private entrances, whiff stuff to your room, you don't have to walk by a bunch of people in the lobby. There's no people in the lobby that can like get up the elevator to your room. This is like a whole different gig. And then the F&B experience is super elevated. I mean it's a beautiful, beautiful restaurant with an incredible live-fire component to it. I mean there's no restaurant like it in the world that I've ever seen. And we're really excited about the restaurant concept. We're really excited -- New York has been open with our first champagne and caviar cellar, that's going to be an incredible -- I think it's going to be the best experience anybody seeing around caviar and champagne. And it's targeted for very wealthy and affluent and discerning clientele. And it's -- the idea is it's going to elevate our brand. It's going to position us as a thought leader, as a tastemaker and a placemaker in the world. And Aspen will do the same. And Aspen will have our first RH Bath House & Spa, and that will have a membership component to it because we only have 9 rooms in Aspen, so you can't rent a bath house and spa with 9 rooms. But Aspen is going to be a really good model for us with having a membership to a bath house and spa. That will be the nicest spa you can go to in all of Aspen. So you'll get it when you see it. It's really hard -- this is the kind of stuff we do, sometimes seeing is believing. No different than RH Modern. We're first launching that, A lot of people were like, what? What's it going to be? And then we launched it. Now it's a huge part of our business. And same thing with contemporary, same thing with guesthouses, same thing with everything we do. They just haven't been done before. So it's basically, we try to anywhere we can't create new markets, right? So we don't say, oh, let's do it like this person, just a little better. We try to kind of conceptualize something that is significantly better and more unique and desirable than anything that's in the market. And we think our guesthouse is going to be that.

This concludes today's portion of the Q&A call. I will now turn the call back over to Gary Friedman for closing remarks.

Great. Well, thank you, everyone, for your interest in our brand. And I want to thank our team for everything they do to bring our brand to life. And we're all excited about the kind of the unmasking of America and moving past this pandemic. We think it's going to be an exciting time, and we have a tremendous amount of innovation in our pipeline. And we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.