Good day and thank you for standing by. Welcome to the RH Second Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Ms. Allison Malkin. Ma’am, please go ahead.

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

Great. Thank you, Allison and thank you everyone for joining us today. I am going to start with our shareholder letter and then we will open the call to questions. To our people, partners and shareholders, we are pleased to report another quarter of record results with adjusted net revenues increasing 39% to $989 million versus $710 million a year ago, up 40% compared to the second quarter of 2019. RH continues to set a new standard for financial performance in the home furnishings industry and our results now reflect those of the luxury sector as adjusted operating margin increased to 26.6% versus 21.8% last year. We generated $263 million of adjusted operating income in the quarter, up 70% compared to $155 million a year ago. Adjusted net income increased 105% to $252 million and adjusted diluted earnings per share reached $8.48 versus $4.90 in the second quarter of last year. This year’s adjusted net income benefited from an unusually low tax rate of 1.3% versus 16.1% a year ago due to an increase of stock options exercised in the quarter and the nearly 3x increase in our average stock price. If our tax rate in the second quarter was comparable to last year, adjusted diluted earnings per share would have been $7.21, an increase of 47% versus $4.90 in the second quarter of 2020. We generated $290 million of adjusted EBITDA in the quarter and $95 million of free cash flow. The second quarter ended with total net debt of $296 million and trailing 12 months adjusted EBITDA of $1 billion, a new milestone for RH. While inventory on the balance sheet increased 32% to $646 million, inventory on hand was $400 million, up 12% to last year as in-transit inventory of $163 million increased 85% to a year…

Thank you. [Operator Instructions] Your first question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Good afternoon, Gary, Jack, Allison. Gary, given the combination of supply chain challenges, rising cost pressures, which I believe is driving rising retail. Curious if you could just discuss at a high level whether you are seeing any changes in customer engagement or customer conversion trends as well as cancellation rates. And the idea is just trying to gain a level of comfort here on what’s driving your conviction to raise guidance yet again this year as we look towards the back half without having, right, this new product launch, potentially stimulating more demand?

Yes. Well, Steve, I’d start with the fact that we have insights into the quarter. We are relatively well into the third quarter today and we have accelerating demand in the quarter kind of month over month already. So – and we can see – just stand back and think about newness is going to add to a very large business we have here. It’s not going to replace the very large business that we have. So, the underlying business is very healthy. We went through a period of our highest out of stocks and highest back orders that we ever experienced. Our inventory levels are starting to get better. And even though we are delaying the launch of Contemporary, we are delaying once again all the newness that would go into RH Interiors, RH Modern, RH Rugs, RH, everything else, beach house, ski house, everything else we would normally mail. The guidance is our best view of what we see. And I think if you just, I don’t know look at the last 4 or 5 years of history since we kind of reconceptualized the supply chain and moved to membership in 2016, I don’t think we have missed a quarter in 5 years. So, I don’t know how much more conviction or pattern recognition you would need.

No, that’s helpful. And then just a quick follow-up, as I think back to the first quarter letter, there was commentary about the broader international pipeline. I think it was 5 leases were signed, 5 in final negotiations. Any update on how that pipeline has come together? Any update you can provide would be helpful? Thank you.

Yes, nothing really new or we would have talked about it in the letter. It’s a little difficult to kind of travel and negotiate an international business right now, so – and coordinate the kind of meetings and conversations. But nothing has changed. I think we still – we have kind of 5 deals that we are moving forward with. We have multiple deals, 5. We are looking at more. The pipeline as far as opportunities that we are looking at is going to continue to grow. As you know, our galleries are very, very unique and not somewhere you could just walk to a street and find a building that we need. So – but we are confident that we are going to be able to scale the brand. We are one of the only people in Europe with any kind of a specialty business that can sell up multiple levels and multiple floors that can use gardens and rooftops and so on and so forth. So – but our focus to launch the brand is the number one priority in the company right now that and the expansion of our product. And our hands are a bit tied on the product and less tied on the international expansion, but unless something else drastically changes in the world or with new strains of the virus, we feel very confident that we are going to deliver everything that we have just put out in this letter. So, this is our best thinking today and we are really confident about this. If something new changes, I don’t think when we talked last, there was much of a Delta variant or anything that was happening yet. So, I went on vacation in July and – but like masks are off. And while…

Thank you.

Thank you. Our next question comes from the line of Michael Lasser from UBS. Your line is open.

Good evening. Thanks a lot for taking my question, Gary. Are you planning for your path over the next few years from a sales and a margin perspective to be linear? You have all these initiatives in place, some of them are being delayed from this year to next year, that’s going to mean some costs shift from this year to next year. So, should we be modeling your business that sales and margin over the next few years continuing to build year after year?

Yes. Michael, we are not giving kind of detailed guidance over the next couple of years. I would say – it’s like someone will ask me, well, gosh, you are saving money. So, your earnings are up because you are not mailing your catalog. Well, we don’t mail our catalog and get to zero and we don’t mail our catalog to lose money. So we are not mailing our catalog, so we are not getting revenues. Yes. So we invest in things that drive revenues and drive profit. Where we have got new business investments, where we have got to make some infrastructure investments as we launch Europe and things like that, of course, you are going to have some initial period to ramp. What does that look like when we open in a new country, let me see, let me look at past data. Oh, I am sorry, I don’t have any. I don’t mean to make a joke about that. But I just like – there are some things – if you can waste a lot of time thinking about, I think what we have got to do is open great consumer experiences in Europe, we have got to launch with a great website. We have got to launch with real intelligent marketing. We have got to be prepared to execute whether the first year is $50 million or $250 million. You tell me like, hey, let’s stand back and think about this for a second. There is 39 million people in California. If I had new exciting design galleries in California, California would be, I don’t know, an $800 million business for us, maybe a little bit more. There is 68 million people in the UK. There is relatively similar demographic, slightly wealthier in California, but more…

Understood. That’s helpful. My follow-up question is you are articulating a lot of enthusiasm and confidence for the back half of the year in part because of the quarter-to-date trends, the demand comp the 2-year accelerating based on what you experienced in the second quarter. Can you give us what the second quarter demand comp was so we can have a calibration for our models on how that metric unfolded?

Yes. It’s just too crazy right now. Look, I don’t want to make it a habit. We gave demand comps during the most kind of crazy time of the pandemic in the first year. And I don’t want to give demand comps for the rest of our lives, right. It’s – I think – again, I would – just like I answered Steve’s question, I think we have a pretty good track record of doing what we say we are going to do. I don’t think we have a track record of guiding aggressively. So, the numbers may look aggressive to you. I am sure Q1 looked really aggressive to everyone, right. We took the numbers up pretty big when we reported Q1 earnings and our stock went up $100 in one day. And yes, I have got a lot of questions like how do you really picked the numbers up? Do you think you’re going to make them? Yes, yes. So I don’t know – so, it’s not like someone hands me a sheet and says, here is the recommended guidance, Gary. I sit here with 20 people for hours and hours and hours going through categories and trends and every detail on our business. We turned over every rock. We gain alignment and clarity. We gain clarity and then we gain alignment on where we believe the numbers are going to be. And we have been doing it long enough that we have gotten pretty good with it even in a time like this. So, I think we were one of the first ones to start giving an outlook. Now, lot of people didn’t even give any kind of directional guidance for [indiscernible] we did. So – and we did because we are confident that we know our business. If something massively changes in the world, got it, all bets are off, but based on what we know today, based on the data you are looking at and we are looking at yes, this is our guidance. It’s generally not too aggressive.

Thank you very much and good luck.

Yes, yes. Perfect.

Thank you. Your next question comes from the line of Max Rakhlenko from Cowen & Company. Your line is open.

Great. Thanks a lot. So a couple of bigger picture questions here. So, the first one is, Gary, what do you think is your share of the luxury segment of the market today. You had a comment in one of your recent letters that your competitors are closing or downsizing their stores. And with RH continuing to transition the galleries, longer term, where do you think your market share could go over time?

Yes, I say we have a clear line of sight to $5 billion to $6 billion in North America. And that maybe bigger depending on the product innovation and elevation and all the concepts that I have articulated, which are really not all of them are even in that number, right. So I’d say to not hit the $5 billion to $6 billion, something would have to go really wrong here. If we just continue to transform existing galleries to design galleries and launch contemporary and it does directionally what we think it’s going to do, continue to expand and upgrade our product assortments and interiors and modern, expand our rug business, build and dimensionalize our textiles business, continue to build and expand our lighting business and add the new categories and if we are directionally right, does that number get bigger than $6 million, more likely than not. But today, we are very confident about $5 billion to $6 billion in North America. So, I think to do that we have to take market share, right, like take Marin County here. We had a gallery that’s doing about $18 million. And we have a new gallery that we opened – I mean, I might even be able to throw a football and hit our old gallery from our new gallery standing on the roof, maybe, but it’s not very far. It’s like a 20 yard pass. And I don’t know how many people have done this before, but we are – we opened a new gallery and it’s trending, what guys did about $50 million, somewhere in that range. And I think it’s a combination of us creating a new market, because people are seeing products that they have never seen before presented in a way they have never…

Great. That’s very helpful. And can you discuss your cash deployment priorities. You’re now sitting with almost $300 million of cash on the balance sheet. And with free cash flow set to accelerate over the coming years, you’ll have a lot of opportunities. So how are you thinking about reinvesting back in the business versus M&A or ramping up share repurchases? Thank you.

Thinking about all of the above, Jack, I don’t know what.

Yes. I was going to say the same thing.

And even more things, yes, but I mean...

This is every quarter, and I think we answered it so...

Yes. We have a cash chessboard sitting here. So we – there is all kinds of moves and just waiting for the right time to make the right moves. But we’re looking at a lot of things whether it’s investments into the business and innovation in the business, whether it’s investments into M&A and acquisitions that will strengthen our positioning or elevate our business and brand. We’re thinking about share repurchases and everything you think that we’re probably thinking about we’re thinking about. So – but we tend to be opportunistic. And so – and patient. So we will – at the right time, I think we will make a good move on our chessboard. Right now, all the pieces are still there. We haven’t moved anything yet but we contemplated a lot.

Understood. Best regards.

Thank you. Thanks, Matt.

Thank you. Your next question comes from the line of Adrienne Yih from Barclays. Your line is open. Excuse me, Adrienne. Can you please unmute your line? Your line is open now.

Hi, Adrienne. You might be unmute.

Hello. Can you hear me?

Yes, we can hear you. Hi, Adrienne.

Hi, sorry about that. I just – I don’t know that happened. Congrats on the consistency of the success and the progress. Just awesome to see this. Gary, I wanted to continue to focus on the European opportunity. The $15 billion to $20 billion outside of North America, can you talk about specifically the TAM in Europe. And I guess really what I want to know is it really feels like RH Contemporary is going to come online. It sounds like there is more investment, more design, elevating the product overall. And as you shift into the international market, do you feel that the target household income or the demographic is materially different than sort of where RH has been, maybe, say, over the past 5 to 10 years. Just seems like there is a greater appetite and appreciation for luxury brands and goods when we kind of cross the pond. Thanks so much.

I don’t know what I could add to that. That’s how we see it. No. But we have – I mean, let’s start with the global opportunity. Again, it’s directional math. It’s based on looking at the pie in many ways, wealth, consumers, housing markets, the high net worth, ultra high net worth ratios. It’s based on looking at luxury brands and penetration in volume. And in – so we’ve looked at the math in multiple ways, and I think we’re directionally right. If you were here, you’d see a big giant room where about 40 people get together, generally on Thursdays, big cross-functional team. And we’ve got all of Europe. First, we had the whole world and it’s just too much to look at. So we said like, yes, right now just get the rest of the world in the next room. Got it at top line, but let’s really break down Europe and understand it, understand each country. Go deeper. Look at other people’s approaches and real estate strategies, whether it’s – not everybody that has an app phone shops at RH. But most people at the high end of the market, spend a lot of money at Apple, I’d say. So we look at where the Apple stores, where are the iconic Apple stores, where are the big suburb Apple stores. Where are other businesses that we’re familiar with. Where are the luxury – players in the suburbs. The hardest thing in, I think, in Europe is going to be – we don’t know their suburbs like we know our suburbs. We don’t know their market like we know their market. Now we’ve expanded our team. I think we’ve got a great leader. He knows Europe very well. But there is no one like us, right? There…

Gary, I love it. It’s great. Fantastic. Appreciate it.

Thanks, Adrienne.

Thank you. Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Good afternoon. Nice quarter. Gary, just curious on the long-term opportunity as you see it for RH Guesthouse. And then in your prepared remarks, you spoke to the migration of consumers to larger homes and the demand that’s driving. I was just wondering if there is a way to contextualize the size of that demand. Thanks.

Yes, I don’t think anybody has got the real data on it. But the key is there is been an exodus from cities. COVID was the stimulus for that. And I’m not the one that made this up. Actually, one of our big shareholders identified this early on. And they said they did math – their math on this and it was going to exponentially they thought, play in our favor. And then we did some kind of smaller research you indicated, but that’s what’s happened, right. You’ve had people migrating to suburbs, migrating to second-home markets, places like Napa, Aspen, the Hamptons, Palm Desert, kind of second-home markets like that, that are drivable for people that they are at some distance where they could work part time in the cities but live out of the cities. Those markets have exploded. You can’t buy homes in the nice suburbs. I mean it’s just multiple offers and rising prices. So – And so the simple math is this, like take a – someone lives in a 2,500 or – foot apartment in New York or very nice 3,000 square foot apartment and they have moved to a house in Greenwich, what’s the comparable house in Greenwich 6,000 to 10,000 square feet, could be 2 to 3x a square footage. Those rooms aren’t going to be empty, not if they can afford to furnish them. So that’s kind of a good thing for us. And that’s why I think that even without any newness for almost 2 years, our 2-year comp is growing. So – and what’s the main thing that changed is we’re in a much better stock position like back orders are down 10 points or more. It’s like with the latest word. I mean they don’t tell everybody just…

Thanks, Gary. That’s helpful. My follow-up is just you talked about Pulte. And I’m just a little bit curious on RH residences. How that’s going to be implemented. I guess, what’s the time line on that? Just any more color on that would be interesting to hear. Thanks.

Yes, just really long-term. We’re going to test some things in Aspen. That’s where we will have a controlled month of an ecosystem. And a lot of this is going to benefit the brand. It’s just as far as awareness and kind of place making and becoming a tastemaker and a place maker, and a space maker and so on and so forth. So what we learned from these things. I think that’s the other thing that people underestimate when you do new things, it’s not just about the new thing. It’s about building new muscles and getting smarter and solving new kinds of problems, and as human beings growing exponentially, right? And having individuals and an organization in an upward fire of learning and growing. That’s what invigorating for humans. And that’s what makes great companies invigorating. So when you stop inventing and you stop learning, and educating and it’s even like – it’s so funny to think when it grew up with the Gap, we had all these formulas training programs and all this stuff, and I like it’s a training program for everything, like as big manual. And I think like, you got to have all step. And realize like many of those years early in the Gap before Mickey Drexler got there. It’s all about management, right? And it wasn’t very exciting, growing up there back then until Mickey Drexler got there, and then things changed. And I think when you’re inventing and innovating, it’s just really stimulating for smart-driven people because they are learning by doing. They are learning by being involved. They are not learning by studying an operational manual. They are not in some theoretical training class talking about theoretically how you might do this and being taught by someone who has never…

Thanks you, Gary. Perfect.

Yes.

Thank you. Your next question comes from the line of Curtis Nagle from Bank of America. Your line is open.

Good evening. Thanks very much. Just I guess, Gary, a product question on RH Antiques. At least to me, that’s a new one. Would you be able to give just – I don’t know, maybe sneak peak in terms of what you envision for this collection and how you might integrate it with the entire offering.

Sure. Yes, I’d say go into our – one of our new galleries and go, just walk through and count how many antiques and artifacts are in our galleries. A lot. People want to buy them. And we have to say no all the time. Every once in a while, they make us such a silly offer, we say yes, and then we replace them. Well, we have to say no to some of the silly offers. We had some really cool stuff in our galleries and it all renders our product more valuable. And it’s no different than people’s homes where they want to be really unique, and they want some things in their homes that makes it theirs. So while RH Antiques & Artifacts will be limited to a degree because you can’t go manufacture them. What makes them unique and special is there is not that many. And so – and I think we’re good curators of it. I mean we have warehouses of antiques and artifacts. We’re probably – as a buyer of antiques and artifacts, we might be the biggest buyer in the world. If I told you what we spend on a new store in antiques and artifacts, Eri’s shaking her head, I’m not going to tell them, you’d be shocked at the number. But walk a gallery and you could probably take a little pad out or you guys take the phone and do the calculator and you probably walk you probably get close enough if you guessed. But if you really look at it, like, yes, they really help us look unique. And our customers want their homes to be unique. So we have some of our team in here a leader galleries that are all shaking their heads, yes. So that’s…

That’s very interesting. Appreciate it. Thanks.

Yes.

Thank you. Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open.

Hi, Gary, Jack and everyone. I hope you are doing well and thanks so much for taking my questions. I have a couple of quick ones, actually. So first, I saw some of the convertible notes you have were moved to the current liability section of the balance sheet. So are these redeemable in the next 12 months?

Well, so the convertible notes became convertible once we exceeded the certain percentage of a convertible price. So they have been convertible for a while, and they are coming in. As you see on the balance sheet, we have remaining converts $652 million, but with redemption requests that have come in, that will be settled momentarily. We’re actually left with $411 million essentially as of today.

Got it. Got it. That’s helpful. And then the second question, can you talk a little bit about the design services market in Europe. And what kind of opportunity do you see there for RH given this has been a great success for you in the U.S. market. So do you plan to have complementary design into your design service in Europe as well when you launch there?

I think our model is going to be almost identical, but it will be just kind of on the edges, it will be modified for the market. So in a lot of ways, some of the things we’re doing, again, you get to things like a beginner, right? Like you’re going to a new market, like you’re not saddled with legacy stores. You’re not saddled with old ways of doing things. You’re not saddled with, well, this is the way we’ve always done it. Like we get to kind of be a beginner again. And so you get to ask a whole lot of questions about what about this and what about that. What if we did this way or that way. Again, it tends to just stimulate a lot of innovation, new thinking and opportunity. So yes, I think for the most part, it will – the brand will be very recognizable. But in many parts and ways, it will be better. I think there is some of the big – when I think about RH England, RH London and RH Paris, they might be the three most interesting stores we’ve ever opened and exciting stores we’ve ever opened, galleries we’ve ever opened. I mean they are so different, it’s so unique. And when I say that in comparison to the competition it’s an even greater strategic separation, so – like I go back and forth, which ones I like the most. Like right now, it’s tough to say England and Paris, and London are just incredible and all very, very different, but spectacular. I don’t think we could have found anything better for Paris. I mean I really don’t. I think it’s perfectly placed. It’s – the world of luxury surrounding us were within two blocks the top…

Great. That’s awesome to hear. Thank you so much and best of luck for the quarter.

Thank you.

Thank you. Your next question comes from the line of Steven Zaccone from Citigroup. Your line is open.

Great. Good afternoon Garry and Jack. Thanks for taking my question. I had a question on the RH Guesthouse. How do you think about the opportunity there relative to the competitive landscape in the hotel industry. And maybe how do you see the TAM opportunity for guesthouses over time?

Yes. Good question. I think what we are trying to do is to create a new market, right, for travelers seeking privacy and luxury. And I tell people that we believe privacy is going to become a very important thing, and it’s going to become a real market that people are going to – yes. I think privacy is the one thing everybody has given away with social media, and it’s one thing that the Internet has taken away because you can Google anything about everybody, right. So, there is a whole level of privacy that the world has lost. And I think that there is just going to be a desire to find your place, right, to be in that place that’s special to you that gives you that level of privacy and exclusivity and level of luxury that you just can’t find anywhere else because someone is trying to do 200 rooms or 300 rooms or even 50 rooms or 100 rooms. Like our first guesthouses have 9 rooms and 10 rooms. We are going to open in New York with nine rooms and a residence, like with six rooms, three suites and a residence. And residence mean it’s just the top floor and the idea is Mr. Friedman’s residence and he will let people stay there when he is not there and he will approve anybody who is going to stay there. So – of course, I would approve all of you who are on the phone.

That’s good to know. Thank you very much. Good to know. Thank you.

It’s not going to be cheap. But anyway, it’s – we are going to open this smallest hotel, I would say, in the biggest city in the – one of the biggest cities in the world. And it’s going to be like nothing you have ever seen. There are things that no one has ever done in hospitality that you are going to see in our guesthouse. And we think it all makes sense. There is just – when we launch it, you will hear about it, you will know what it is. And I think a lot of people will go, like, why hasn’t anybody ever done that before. I think a lot of it really makes sense. So, we are not trying to be different to be different. We are trying to be better. We are trying to create a new product. And like at this point, I was so excited about, I think, the – the idea of the guesthouse is, again, first and foremost, to elevate the brand and position RH as a kind of thought leader, taste and place maker in the industry. So, it’s not really what anybody thinks it’s going to be. It’s just not going to be that. People ask me, you are opening a hotel. I say, no. What are you doing, I say guesthouse. They go, what’s a guesthouse, I say we are trying to create a new market for guest travelers seeking privacy and luxury. And then they go, oh, I get it. It’s going to be a showroom for your furniture. And I say, no, why would we do that. We have 90,000 square foot showroom 20 steps away. Then I say the thing that kind of like this glazed look, I would say in fact it’s not…

Yes. I appreciate all that detail. Thank you so much and look forward to seeing you in person.

Thank you. Your next question comes from the line of Brad Thomas.

Hi. Thanks for taking my question. Gary, I think you alluded earlier to being interested in potential acquisitions. I believe the last one you did was Waterworks in 2016. And I was hoping you could just talk a little bit about what you learned from that most recent acquisition and how you think about what might fit as an incremental piece of the puzzle here for you?

We have learned a lot from Waterworks. I think that one of the most difficult things challenges, like we work in a very integrated way here. We are very visually oriented. And we made an acquisition of a business that was in Connecticut. So, that’s made it a little, I think, more difficult. You have to kind of – you have been an idea, you can’t just see somebody in the hallway or walk over to where they sit or walk into a room. You can’t walk by the product all the time and see things and talk with people about ideas and talk about what they are excited about. So, I think that’s made it different. I think over time, we have all got to know each other better. Look, we said initially, rule #1 don’t screw it up. It’s the best brand in the space. It wasn’t exactly – we weren’t really ready to buy it when we bought it, but it’s like the things that come along once in a lifetime when it’s for sale, if you don’t buy it, you may never see it again. So, we always admired it, it was actually one of two things on our list, the only two things on our list for the first 15 years of our existence here. And the other one got screwed up with Dean and Deluca. It got screwed up and stuff, but we thought we could do something really great with the Dean and Deluca. And who knows, maybe we still will. We will bring it back to life. Actually put that on the list guys. No. But Waterworks, I think, is going to fit perfectly into where we are going because Waterworks has always been kind of the admired, desired brand. And so…

Great. Thank you, guys.

Thanks Brad.

Thank you. Your next question comes from the line of Seth Basham from Wedbush. Your line is open.

Thanks a lot. Good evening. It’s Seth Basham. I appreciate taking my question. My question is a little bit more about Europe and just the roadmap in terms of the operations and infrastructure to support as much as $250 million in sales in the first year. Can you give us a little bit more color on how that’s coming along and what the building blocks are there?

Yes. I mean the key building blocks for us are – start with demand creation and how are you going to create demand. So, we believe we have got the right initial real estate building blocks and the ability to launch a website and we are learning going through optionality and thinking about how to market the brand outside of the physical – most of our marketing in the U.S. is kind of physical marketing, and then print and tiny bit digital. I think we are going to be doing more things. We have got some really good ideas and especially as we evolve in the world of RH, and that exercises and open our eyes at some really, really, really good ideas where we can shoot with the rifle and not with the shotgun. So – and those things will be the pieces. First, you got to think about how do I create demand. And that’s a big part of the focus. And then we say now how do we fill demand. And if we are – if we say, hey, if it could be between $50 million and $250 million, what risk do you have to take. Well, how do you structure the distribution platform, home delivery platform, small package platform, how do you handle returns and damages, so you have the reverse logistics and outlet platform. And that’s the major pieces really. Did I forget anything, I mean those are the pieces of the puzzle that we have got to put together. And so yes, so the question is how do you – you hate to kind of say like, oh, you launched this thing, and it’s like people come driving in from Spain and France and the Netherlands and every – they don’t drive. They come…

Thanks. And just a follow-up modeling question for Jack. In terms of the operating margin outlook for the balance of the year, could you give us some color on how to think about gross margin versus SG&A?

We are not guiding at that level. I think at the moment, we are just – we will leave it at the operating income margin. I think you have seen what we have delivered in terms of gross margin and SG&A variances versus last year versus the last 2 years we have talked about. And clearly, there has been – as you look at the SG&A difference, there has been timing and differences of advertising that’s been one of the biggest drivers. So I mean, I think we made comments about that last quarter and then you noticed what our plans are with the change in the books this year. So, just keep that in mind.

Okay. Thank you very much.

Thank you. Your last question comes from the line of Cristina Fernandez from Telsey Advisory Group. Your line is open.

Good afternoon. Thank you for taking my questions. I want to ask on supply chain. On Vietnam, particularly, can you comment on how much of your product is sourced from the country? And do you expect any sort of product categories to be impacted by the manufacturing delays, the shutdowns going on right now. Thank you.

How much product is sourced from Vietnam, you said?

Yes.

Is that what you are asking?

Correct, yes. How much product is sourced and then total…?

Yes. I think we have disclosed in the past the amount in Asia, right. I don’t know if we do it specifically by country.

We have broken out China...

Yes. We have broken out China. Yes. I mean we have a meaningful part of our business in Vietnam and more business is migrated to Vietnam with the tariff situation in China. Vietnam makes really high – had some small boutique, high-quality factories that we got involved with in 2008, ‘09, ‘10, ‘08, ‘09, ‘10. We got people that we have grown with that were maybe $3 million to $5 million. And now we are $50 million to $120 million of volume with them, first cost. So, we have got great relationships in Vietnam. It’s a meaningful production. Especially when you think about – you can’t really buy wood furniture in China for a bedroom, right. You would pay crazy tariffs is exponential, right. So, they make it impossible to buy bedrooms. There is antidumping and so on and so forth. And so there is no bedroom coming out of China. So, that’s always been heavier in Vietnam, Indonesia and other countries. But yes, it’s meaningful. And it’s caused us to push the launch of contemporary and hold on the books because it’s a meaningful part of the newness.

Understood. Is it also a meaningful part of the core business?

Yes. Well, anything that’s meaningful is meaningful to the core towards the – all the sort of business here.

Yes. Okay. And then my follow-up question, would you be able to kind of quantify or comment how much of the delay in RH Contemporary and I assume I guess how can the digital are smaller, but how much of the revenue shifted out of 2021 into 2022?

Alright. It’s all in our guidance, right, for this year. We are not guiding ‘22 yet. But it was supposed to first launch in spring. Then it’s going to launch in fall. Now it’s launching next spring. So, it wasn’t zero.

Alright. Thank you.

Thank you. There are no other questions in queue. I will now turn the call over back to Gary for any closing remarks.

Great. Well, thank you, everyone, for your interest, and thank you for our team who is kind of leading the charge and bringing our vision and values to life. We could not be more proud of the work that everybody is doing and the effort that everybody has put through. And again, we feel super blessed and fortunate to be in the position we are in and our hearts go out to not only the people that are suffering in Vietnam. But it’s just suffering all of the world – it’s COVID and the variants that are continuing to wreak havoc. And even right here in America, and even a much smaller scale, people who suffered just recently here through the hurricanes and the devastation. So, it’s been – it’s hard to feel so good about your business when so many people are suffering. And so – but we have never been more excited, and we have said this is the time to have a lot of edge and a lot of empathy. And so I just want to just really thank everyone and also just send out our very best wishes to the people that are struggling through these times. And to our people, just thank you for making this company more exciting, more innovative, more magical than at any other time that – in our history. And I think we are going to rewrite history as we go forward. So great job, everyone. Thank you. Okay. That’s it, operator. Operator, thank you.

You’re welcome. This concludes today’s conference call. Thank you all for participating. You may now disconnect. Goodbye.