Good day and thank you for standing by. Welcome to the RH First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be 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. Please, go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2022 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'll turn the call over to Gary.

Great. Thank you, Allison, and good afternoon, everyone. Thank you for joining us. As we do, we'll start with the shareholder letter. To our people, partners and shareholders, we are pleased to report another quarter of record results, as revenue increased 11% to $957 million versus $861 million a year ago and up 98% versus 2020, representing one of the highest two-year growth rates in our industry. Gross margin expanded 480 basis points in the first quarter, driven by 390 basis points increase in product margins and our resistance to promote the business, as demand trends began to slow. While there has been a widespread return to discounting across our industry, as they have been inspired by the barrage of sale e-mail filling our inboxes, and there may be short-term risk of market share loss by choosing not to promote. We believe there is certain long-term risk of brand erosion and model destruction once you begin down that path. It's that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry, and our results now reflect those of the leading luxury brands as first quarter adjusted operating margin reached 24.7% versus 22.6% a year ago. Our results are inclusive of investments related to the opening of RH San Francisco and the RH Guesthouse, the development of RH International and the rollout of our RH In-Your-Home, which led to approximately 200 of the 270 basis points of base SG&A deleverage in the quarter. We are now forecasting SG&A as a percentage of revenue to peak in the second and third quarters as we return to mailing Source Books after a two-year hiatus. By the fourth quarter, we expect SG&A as a percentage of revenue to be in line with last year.…

Thank you. [Operator Instructions] Our first of line of Simeon Gutman from Morgan Stanley. You may begin.

Hi everyone, it's Simeon Gutman. Gary, my first question is on promotional environment and the discipline that you spoke to. Can you give us -- I guess, on the annuity to this, can you give me maybe a sense of the tolerance you will take in terms of market share loss, is it steadfast, or will you adapt to the market if you have to if it continued along a more promotional path? That was my first question.

I think it depends on how you define if you ask you. I think we are really well-positioned with the best operating model in our industry by far. A really strong balance sheet and lots of optionality to create, capitalize on opportunities in kind of any environment. So, I think the last thing you want to do when you're trying to build a brand like ours and trying to scale, as we say, the luxury mountain is you have to remain disciplined about brand perception, desirability, and you just can't fall into a discounting phase. Now, if for some cataclysmic reason, the world was ending and we needed to stay liquid, would we make decisions to move inventory and turn it into cash? Of course, we would. We're not going to let the company go bankrupt. But the path we're on, the road we're on is a long road, right? It is a very long journey. It's not a short journey. It's not a year-to-year or quarter-to-quarter journey. It's a decade to get decade journey and it’s trying to build a brand with no peer and trying to build something that's truly sustainable in this world. And there's not a lot of brands that have done that. Its way less than 1% of the retail businesses that ever gets introduced. And I joke around some times when I say, a retail mall is like a graveyard for short-lived ideas, because most retail brands don't live out the life of their lease. And if you went back 10 years and walked the mall, you'd be surprised how much is not there. Generally 65% to 70% of a retail shopping center turns over. And there's a handful of businesses that continue on. And that's what we're trying to build here. So we're prepared to make the good finishings for long run. It's served us well thus far, and I believe it will serve us well in the future.

Thanks for that. And the follow-up, the buyback question, you've been pretty exact or exacting in terms of your timing in the past. Is there anything you can share on how we should think about using the cash to your advantage?

Yes. Well, we raised the capital to have optionality. And there's a lot of different choices we can make during uncertain times, and there's going to be a lot of opportunities to see things in a new life. Well, they will look much more valuable than they may have looked in the past. So whether that means returning capital to our shareholders through share repurchases to create value, whether it means there's opportune times to do real estate deals and be -- and capitalize on what is certain to be, I think a difficult real estate market over the next year or two, more acquisitions or other forms of accretive decisions that we can make that will create long-term value for our shareholders. So as Warren Buffett says, when others agree to be fearful and others are careful, be greedy. So we're trying to prepare ourselves to have the optionality to make decisions that will put the company in a place to benefit long term. S0 --

Thank you. And our next question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Good afternoon, Gary and Jack. Hey, Gary, I was curious if you could just provide some color around the assumed contributions of RH Contemporary and RH England during the remainder of the year and any thoughts or updated thoughts on the potential year one sales of RH England, as we approach the opening?

Sure. That's a good question. So when we think about contemporary, while it's clearly the best work we've ever done, and I think the most dramatic evolution of our brand towards where we want to go, whether you're looking at all made in Italy sofas and the highest quality fabrics in the world with the introduction of Holland & Sherry, the travertine collection that you've seen, these are all bespoke collections, bespoke furniture and the designers in our company that have had an early look and the ones that especially got to travel to RH San Francisco to help set up the gallery, I mean, they've never been more excited. And they believe our consumers going to just love this, and we're getting we're going to also open-up an entire main market. And that's really the feedback we've gotten, too, from other really high-end interior designers, people we've had through RH San Francisco and given a tour and shown them even the broader collection. So we couldn't be more excited about contemporary. But remember, our business is – to optimize our business, it's really dependent on the goods being seen at retail. There's only so much business you can do in an online business. And it's interesting, over the last, I don't know, it's probably been 8 or 10 years where everybody thought we were the crazy ones because we are opening retail stores. And people have been shrinking stores and closing stores and we've been building the biggest specialty stores probably in the history of our industry for sure, the history of the world in all industries in retail. And that has proven very beneficial and very accretive to our business growth and to our operating model. As people are finding out, it's probably the lowest cost of customer…

Yes.

Yes, since probably September. We're not only going to rollout contemporary to the company and it will probably become, I'd say, the first-third of every gallery. So whether it's the legacy gallery at 6,000 square feet, the first 2,000 square feet or more will be contemporary. If it's a new design gallery, it's the entire first floor, I'd say, we'll flip to contemporary. That's how confident we are in this product line. And by Q3, you're really going to understand the demand. The other thing we're going to do is, you remember, its in 2010 or 2011, when we modeled all the stores, we've done it several times. But if you remember when our galleries weren’t too great, right? We got rid of all the light fixtures on the wall. We got rid of the silver stage and white paint. We stained the floors and we made everything look new again. Well, you're going to see us evolve in a very dramatic way in even our legacy galleries. I mean, it's going to look like an entirely new company in Q3. And even some of our newest galleries are going to transform pretty dramatically. Even New York right now where one is been repainted and --

In the progress there and we’ll have contemporary there by end of June.

So by end of June, you'll see contemporary on the first floor of New York. Yes, I think, you've already finished the first floor in New York. But we kind of have a little strategy inside the company to kind of get the grade out, but not entirely just a grade out, but you don't see a lot of grades in contemporary, right? So this is kind of like, to me, 2009, 2010, 2011, when we really transformed the entire company and the entire business. It is like one of those massively transformational times. So you're just going to see the brand, not evolve but it will be kind of a huge evolution revolution by the second half of the year. And so, I'd say, Q3, you'll really understand the demand. Q4 contemporary will start to impact our revenues, because as we ramp and when we're shipping, it will be smaller stuff, but it will start to impact Q4. And by next year, contemporary will be a force in our industry, not just in RH, in our industry, a transformational force. And then turning to RH England, and I won't be as long with England, but it is our first. Internally, I might be a little excited about contemporary. But RH England is -- if I think about it, is way bit more than a gallery, right? It's really opening a country and in many ways, the continent. And I think, the way we're opening in this truly inspiring magical way, I mean, no one's ever opened a retail store in 17th century, 73 acre state in the English countryside. And while some people will say, "well, gosh, how do you know it will work? I don't know. We have a pretty good history with these things that have never…

Thank you, Gary.

Our next question will come from the line of Steven Zaccone from Citi. Your line is open.

Great. Thanks for taking my question and I appreciate the shout out for the Italian lineage on the call. So, I wanted to ask about the guidance change for the year. So could you just comment a bit more on maybe the softening of demand you've seen as of late, you gave such great color the last time you reported. So, what are you really seeing in the business to guide 2Q revenue to be flattish and then take the second half of the year down? And I guess I'm curious, how much of it is a reduction in demand versus maybe a delay in some of these new initiatives?

And Yes. I don't know how much more color I have. I mean, the demand slowed at the beginning of the war, softened further as the next couple of months and most of the narrative, I think, is out there. I think we -- we're guiding it as we see it today. How do we -- how does this all unfold? I don't think anybody really knows right now. It's the first time anybody has seen inflation like this in 42 years, right? So I don't know if, how many people on this call were adults 42 years ago. Not a lot, right? Not adults that had a lot of wisdom, at least I like to say. So the people that really had wisdom 42 years ago are 80, 90 or 100 years old. So just not a lot of those people still highly active in decision-making roles. I guess like we have a President that at least you might have been old enough to kind of know what's going on, but it doesn't seem like they know what to do. Janet Yellen finally did come out and say I was wrong. I mean, everybody is giving her all this credit for the Mea culpa like what took so long? Like how clear did it have to be to kind of admit you were wrong, right? Like how long ago did inflation go from 2% to 4%, 4% to 7.4% and then 8.5%. And you have to ask yourself like, where is inflation really today? I've had a chance to interact a dinner down in Woodside with some really interesting small group of people from mostly North America, but also someone who runs one of the biggest companies in the world out of China. And one of the biggest venture…

Great. Thanks for all the detail.

Thank you. Our next question will come from Chuck Grom from Gordon Haskett. Your line is open.

Hey. Thanks very much. One for Jack on the guide. You gave some of the important building block sales, some SG&A color by quarter, which is helpful. But it doesn't seem like you're anticipating much gross margin degradation throughout the year. Obviously, 1Q was great. Curious what gives you that comfort level, given the recent change in demand and current inventory levels.

Yes. Everything I just said, we have incredible new products coming in that I think is going to transform our market. I think we're going to be the most exciting game in town. And I think that, it's a really good time to have a membership model like we have right now. Yeah, so we have a model that allows people to get a really great value, get a discount if they become a member of our edge. And I think that's a competitive advantage right now. And so there's a Jack, if you want to go to in.

I don't know if you're asking, again, we've addressed the promotional point. That clearly is a risk factor for anyone that gets into the promotional game. So I think Gary has addressed that fully. And then it's a question of what else could be happening to gross margin? Whether it's shipping expense or occupancy cost or any other pieces, could there be – just on the guide, could there be some modest occupancy deleverage? Maybe. But it's – you just have what the moves we've made with product margin and we have visibility into those persisting and wrapping those. So I think it's just a function of the model we built.

Okay. Great. I just wanted to clarify. And then just looking back on the first quarter, you exceeded your plan by a pretty wide margin, up 11%. The plan, I think, was 7% to 8%. I'm curious how much of that was fulfilling backlogs and versus current demand trends throughout the quarter? And how do we think about backlog levels currently and over the next couple of quarters? Thanks.

Yeah. I think there's certainly some of the backlog relief that occurred in Q1 – our backlog that helped us – when you think about that $200 million in backlog again, is it 20 to 30 got addressed in Q1, and we still have a big amount of that left, but certainly, I think part of the bid, as Gary just mentioned, the biggest part of the bid is related to the backlog. So, but still more to come on that.

Yeah. But it wasn't demand. It wasn't an increase in demand that helped us.

Got it.

It was things shipped faster.

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

Great. Thanks so much for taking the question. So I guess as much as you kind of parse out, just thinking about the pullback you've seen. We don't need to get any numbers or anything like the path. But just kind of curious, I guess, how broad-based it's been across your customer base by demographics, by income levels? Anything in terms of regional differences. Just kind of curious how that is parsed out or just how broad-based is this in terms of the changes in the demand you've seen?

Well, yeah, I mean, there are some small regional differences. You've got to tell us – and so – but Curtis, this is not a business where we have the winter coats and the weather is awesome. Again, the regional differences that are always occurring, and it's not somehow – again, there might be differences, but it doesn't lead you to necessarily manage or lead your business in a different way.

Yeah. Like the people in Texas and places like that are going to be really happy right now the price of oil is pretty good. You're going to have some tailwinds that they're helping some businesses in Florida, obviously, because of all the migration in Texas, it still have a lot of people settling in. And I think that those markets will be better and they're affected by oil. Oil really affects South America, and South America affects our Florida business massively and also positively affects our business in Texas. Canada will be benefited from higher oil prices. So there's always going to be some movement demographically. I think, well, the high end -- like people are -- we've had people reach out to us say, 'Oh, well, luxury is doing really well.' Like aren't you, luxury? Like don't confuse the apparel industry with the home industry, I mean it's -- they're completely different. They're completely different. I mean, how many people bought new clothes over the last two years when you weren't going anywhere? Anybody go to a wedding in the last couple of years? Anybody go to any events the last couple of years? How about dinner parties? No. Like we had a path on many store opening events, we finally opened an event in San Francisco, [indiscernible] apparel sales should rip. Our stores were closed, everybody is staying at home. I mean, people were buying Lululemon and stuff like that. That was like the national wardrobe at the high end. But now, of course, the luxury brands are going to do well. I mean, yes, they might have issues and shutdowns in China and things like that, but travel is going to risk. Luxury hotels are going to do really well. Luxury apparel is going to do…

Understood. Thanks for the extrapolation on that. Just a really quick one to you. I just want to make sure I got the time on rate. In terms of the -- I know HARC opening, it sounds like that's going to be fall. I wasn't quite sure when you're expecting that. Is that correct?

Yes, our construction team, based on the fact that we just -- last week, we got our final approvals like -- I mean, it's been unbelievable trying to get simple approvals. But then again, it's 16th century Grade 1 heritage building out in the English countryside, not a lot of people didn't want to make a site visit instead of somewhat benefit [ph]. So, I had [indiscernible]. I feel bad, get on them pretty tough, then I'm like, okay, I got it. I understand what they're dealing with. So, it looks like we'll be done with the project late August and we'll need about three weeks to put it all together. So, I'd say early mid-September. We'll probably -- Stefan is here, and he's nodding his head. I don't necessarily trust that either. But no, I think we should -- we'll definitely be open in September -- I think, sometime in September.

Do you have time to be there in England. So, hopefully, the timing works out in terms of weather. Anyway--

Say that again?

September is usually a great time in terms of weather in England. So, hopefully, that lines up to you. And good luck and thanks for answering the question.

Yes, we're going to. Rain or shine, we're opening. It's been too long. Thank you.

Our next question will come from the line of Max Rakhlenko from Cowen. Your line is open.

Great. Thanks a lot guys. So, as you continue to count the luxury mountain, I guess, how do you think about who your core shopper is today, whether it's household income or net worth? Just because it does seem like your shopper may be evolving in real-time here, especially once you get going with Contemporary. So, that's the first one.

We don't think about them any differently than we've been thinking about them as we climb the luxury mountain, I say, I tell everyone -- I'm trying to tell everyone, maybe I haven't said this public in the call, but we are both a share giver right now, and we're a share taker, if you think about our client, right? So, as we climb the mountain, we are kind of giving share to people below us because we're moving this brand up. So, we're constantly raising the level of quality, raising the level of design, and building a more desirable luxury product and experience. So -- and by the way, that's no different than the last 20 years, right? So we've been a share giver. Like, when I get here 22 years ago, the best-selling sofa was the $9.99 Chanel sofa. I forgot what it's called, it was that green ugly Chanel sofa, best-selling one in the company. So we don't have a Chanel sofa. Again, any sofa that’s $9.99 anymore, right? But again, it's -- so we're constantly giving share, leaving share behind. And what we're doing is, we're taking share at the higher end of the market. And the key is the arbitrage, a positive arbitrage, right? A lot of times it is. Sometimes you might be a little wrong. Sometimes you may not take as much share as you gave up. But you have to be committed to the client, right? It's like trying to climb Everest. You might get to a spot where you get stuck, right? The weather is not good. You made a bad decision. You went to a park, you slipped down a bit, you went down your rope and you got to kind of go back up. It's not a stroll in…

Got it. That's very helpful. And then, Gary, I think previously when you were talking about the conversion of, a, legacy gallery to a design gallery, I think you used to say that within like a 12 to 18 month horizon, the store revenues double and then e-comm sees a little bit of a lift as well. So just curious, is that still the framework that we should think about, or I think about it, I don't know, six months or a year ago, you said that the restaurants are going to do better. So just curious how we should think about the long-term growth algorithm as far as the store openings go.

Yeah, I'd say directionally, it's about the same. The base gets bigger, so the double gets harder, right, when you're on a higher volume. If you think about it, when we started this journey, our average –our average store volume in the company, I think, was $2.1 million in our old galleries. And like, for instance, in – let's just take Marin. Some of you have been at here to centers, you've seen Marin, our legacy Marin gallery when I got here was $2.5 million. When we closed it, it was what, $18 million, $20 million, somewhere around there. It was doing about $20 million. So if you think when we started doing these big stores, our average volumes were probably $8 million to $10 million, then they went to $12 million, like maybe $8 million, our average legacy gallery today is probably $15 million. And so the base has gotten bigger, so that the double gets harder. Actually, when we started, our average volume was 7.

That's right.

But we have, in our average legacy galleries we have an average volume of 15. But everywhere, we open a new galleries, especially now that we have the restaurants and the incremental traffic it brings and so on and so forth, we're doubling. So if we have a $15 million gallery, it generally turns into a $30 million gallery. $20 million gallery turns into a $40 million gallery roughly. So – and like Marin, I think, is what we like trailing 12 or trend to $50 million, something like that. So Marin went from $20 million to $50 million.

With the restaurant.

With the restaurant, yeah. I'm talking all inclusive, yeah.

Thank you. Our next question will come from the line of Jonathan Matuszewski from Jefferies. Your line is open.

Great. Thanks for taking my question. First one, Gary, you've mentioned in the past RH Modern price points at launch were significantly above the levels of existing at the time, we can flip through the Source Book page by page, but can you help frame aggregate RH contemporary pricing relative to some of your other assortments today? Thanks so much.

Sure. Sure. Yes. When we launched Modern, it was on average, 50% higher price points than Interiors. And Contemporary is about 30% to 35% higher than the current assortment. Yes, some things might be 50% higher, some things might be 20% higher. But on an average, we're about 35% higher.

That's helpful. And then just a quick follow-up. On the last call, you indicated the Palo Alto gallery make it push to 1Q of next year. Is that looking more likely these days? Is that kind of taken out of the new annual guide for revenue, or just any clarification there?

We haven't. We still believe it will be open in the fourth quarter, but we are using that to kind of evolve the prototype, right? So we're -- it's going to have a new look, a new feel and there's some new things that we're doing there. So, it means it opens a quarter later, it might. But today, we feel pretty good about Q4. So, we'll keep you updated.

Thanks so much. Best of luck.

Thank you.

Our next question will come from the line of Brad Thomas from KeyBanc Capital. Your line is open.

Hi, good afternoon. Thanks for taking my question. I was hoping to just talk a little more about the Source Books and just advertising and promotions in general. And Gary, I know that you all don't do marketing or advertising in a traditional way. But I guess I was just curious if you're thinking as you get the Source Books out, how you're thinking about page count and doing big books like you always do versus maybe supplementing with some smaller books, particularly with the new Contemporary product coming out? And then perhaps if you're considering doing more with digital advertising, again, with the Contemporary line and with the World of RH website overhaul? Thanks.

Yes. We're considering all of the above. So everything you're talking about. So, as we start to ramp back up whether it's the size of the book, the depth of the mailing, I would say, we were so excited about Contemporary, we expanded the mailing more aggressively. When it relates to size of books, generally, just directionally, when you add more pages to a book, your cost leverages a lot. It's a lot less for incremental pages. And generally larger books are more productive than smaller books. You're throwing out a wider net. So, until that math says differently, we'd like to be in the range of 300 to 500 pages. I mean, some of our books we've got to 700 pages. They become a little difficult get into all the mailboxes and stuff. But the numbers still kind of tell us what to do there, right? We've got just a lot of data. But it's clear as the world keeps evolving, and we get better devices and we have more mobility with devices, print will become less and less important over time. And things will evolve to become more digitally intuitive. That's why when you look at the World of RH website, like the first part of the launch is just kind of what I -- the first layer, right, of what you see and how you might explore our brand and what our brand is all about in what is it, mid-July, we launched Part 2 of the World of RH.

Yes, mid to end.

So, mid to end of July, the next transformative part, the whole back-end changes. And so all the product pages, the way you shop, the way you--

Experience the functionality--

All the functionality and customer experience changes massively. I think, together, when you see these two parts of the World of RH all come together, it's transformative, it's like no other website in the world. And so right now, you're just seeing kind of better word marketing layer of the brand. And because before you go to our brand and you might just see a light fixture on the front page, you need things like, well, are they a lighting company or who knows what you see? It's like when you go -- when you go to the web and companies are still promotional, and it says, warehouse sale or bedding sale, you think that's all they sell. Because remember, the web is shrinking, you see, you can't see beyond the screen. It's very different when you have a 3-dimensional store. You can see the size of the store. You can tell this store is bigger, must get more than another store. You can walk in the store, and in seconds and minutes, you can figure out what they do and what they sell. Website is very different. Like it was so important for us to get the first part of the World of RH done before we launch internationally, right? Because we don't want people to just like who are they on our website, and you see some product page on the front, whatever we're showing. A lighting collection, a sofa collection, whatnot. Now, you get a sense for a much bigger idea, a much bigger kind of business, a much bigger kind of brand. And if you look at again, if you click on it, it goes through the dream, design, travel, time and experience the World of RH. And then you see the products, places, services and…

Very helpful. Thanks, Gary

Thank you, Brad.

Thank you. Our next question will come from the line of Seth Basham from Wedbush. Your line is open.

Thanks a lot and good afternoon. Gary, if you're successful in plumbing the luxury amount in your business and your customer profile, will be a lot different in five years than it today. But if the arbitrage between taking share at the highest end and shedding share below you is increasingly negative for the next 12 months, even as you elevate your assortment and continue to raise prices, what's the contingency plan? What's the plan B?

I don't know if that's not going to happen for 12 months. Again, we're not making 12 months decision. Not a 12-month strategy. So I think we've learned a lot. We'll adjust and so and so forth, but there's going to be years we take more and years that maybe we take less. So you look back to the transformations we've made over the course of our history here, sometimes there's some short-term pain for long-term gain. You don't know exactly what that looks like until you get there. But you get there and you work through it. You don't go backwards. You don't start going down the mountain when your goal is to go up the mountain, figure out how to get there. And, otherwise, you never get there. So we discuss in this company. It's not what we say; it's what we do that defines us. So we will get to the top of the mountain. Believe me, we will get there. We know -- we can see what it looks like. We have enough data. There's enough evidence to say that if we get there, we will create enormous value. And this will be a very, very large company. Over the next 12 months, I don't know, like, it cost us 5 points or 10 points. I'm not selling my stock. So there's a plan A.

Plan A. Let’s hope we’re in A plan, it pans out and it’s inclusive here.

The Plan A.

Thank you, Gary.

Operator, we’re ready for the next question.

We probably take one or two.

Our next question will come from the line of Chris Horvers from JPMorgan. Your line is open.

Thanks and good evening. So I had a couple of follow-up questions. First on Chuck's question earlier, on the 1% to 3% revenue down guide for the up a bit? And does that suggest you're on the demand side, you're expecting mid-single-digit decline?

Supply chain is better. I suppose there's an opportunity to have a better revenue outcome. I mean, this is our latest view of what we're seeing with supply chain and the lead times and continued delays, but also the improvement in delays. Good opportunity there, but we'll see.

Got it. And then following up on the advertising question. A couple of years…

Demand.

Say again?

We're not commenting on demand. So I didn’t at that point.

Okay. And then on the – following up on the advertising question. So last year, you had spent $40 million in advertising. A few years ago, you spent $100 million. Can you maybe bracket how you're thinking about that to any extent quantitatively, but just maybe even in terms of like how many books you think you will spend – send out across the different brands?

Chris, look, the $40 million reflected, essentially no mailing, but an outdoor book and some reprints. And so – and at peak, I think two years ago, we spent $108 million, and that reflected an outdoor book, spring and fall books and reprint. So this year is more like that. I don't, again, we're not guiding that advertising. I don't think it's back to that level, frankly, but it's certainly on the higher end of the spectrum just based on our current Source Books distribution platform.

Yeah, it's a meaningful increase. It's – we're more than doubling the $40 million spend.

Yeah. And that's in our guidance actually.

Yeah, that's in our guidance.

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

Good evening. Gary, how big do you think the market that you're going after is in the United States. If we say total home furnishings is $200 billion, the higher end of the market, top 10%, top 20%, that's a $20 billion to $40 billion market. Are you going after the top 1%, top 2%? That's the first part of the question. And the second part is if we assume that you're trading some sales for margin right now, is there a duration or a level of sales if it were to fall to that you would have to reconsider that strategy and start to engage in additional demand creation activities?

Well, first, you're saying the top 10% is $20 billion to $40 billion, because you're just running a straight line there, right? So you're not assuming...

Yeah.

Yeah, well, that's not the way the home market is, right? I just gave an example, you'd have to kind of take that pyramid and flip it upside down. The spending on the home at the high end of the market is exponential, right? It's no different than the distribution of wealth, right? So you don't have 10% of the people. You don't have 10% of the wealth in the world, right.

Yes. I understand

Look at the wealth distribution, think about how that affects the home market. Think about how many homes to people at the top half. Think about how much those homes cost. Think about how big they are, think about how much they'll spend for sofa versus someone down 10%, 20% lower. I guess the numbers are massively different than what you're thinking, massively different. Yes. I start there. The top of the mountain is like, it's like thinking about where is the gold in the mountain. It's -- they're really -- all the gold, it's kind of concentrated at the top. So that's why we're trying to get to the top of the mountain that's just say we had a nice climb. That's where the rewards are. And so, it will be worth whatever kind of short-term pain we've got to take to get there. And it's no different than the past we've been on. We've been doing this for a long time now. It just gets a little harder to get higher. But the decision-making and the criteria is all kind of the same. And in every -- several years, you're going to make a big pivot and big moves. And so COVID created that opportunity for us to kind of look at things again and make different investments. And so, is there a sales decline that would -- you reconsider additional demand creation? Not within a certain period, right? Like if we make some decisions that we think, look, we ran up this part of the mountain and it's slippery up here. There's too much ice. We've got to slow down. We've got to get some different gear. We need more ropes or whatnot. We'll obviously make small modifications as we go, but nothing is going to get…

Thank you very much and good luck.

Thank you.

Thank you. And that's all the time we have for Q&A today. I'll turn the call over to Gary Friedman for any closing remarks.

Great. Well, thank you, everyone, for your time and we want to thank team RH for doing such an extraordinary job, not over these past few years of pandemic, but the work that is now bearing fruit and coming out of this pandemic, I think, is transformational, and I just couldn't be more proud of all the leaders on this leadership team and all the people here at our center of innovation and headquarters across the country throughout our supply chain. The level of kind of invention and innovation in this company is an all-time high. Our culture continues to get stronger. And I just could not be more proud of the work we're doing. And no matter whatever anybody does to our share price short-term, we will reach the top of the mountain, make no mistake about that. So, thank you, everyone.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.