Hello. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Restoration Hardware Second Quarter 2022 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Ms. Allison Malkin of ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second 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 reliable disclaimer that we will make certain statements 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. Hi, everyone. We are live from RH New York, the RH Guesthouse in New York. And for those of you in town, hopefully, you'll come by over the next few days and come to say hi. We'll be -- I'll be here through next week, and it is a place you should come by and see. And we have the best breakfast by the way in New York City. So anybody looking for a good place for breakfast, lunch or dinner. But particularly, you usually can't find good breakfast in this town. At least that's what I believe. I'm going to start with our letter, as I always do. To our people, partners and shareholders, we are pleased to report better-than-expected results as revenue increased to $992 million versus $989 million a year ago, up 40% on a 2-year basis from revenues of $709 million. Results exceeded our revised guidance due to faster backlog relief despite a deteriorating macro environment. Gross margin expanded 350 basis points in the second quarter, primarily due to increase in product margins as we continue to resist promoting the business as demand trends continue to slow. As we've mentioned, there continues to be widespread discounting across our industry. And while there may be short-term risk of market share loss as a result of our choice not to promote, we believe there are certain long-term risks 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 continue to reflect those of the leading luxury brands as we delivered 24.7% adjusted operating margin in the second quarter, also exceeding our outlook. Our results are inclusive of investments related to…

[Operator Instructions]. Your first question comes from the line of Steve Forbes with Guggenheim.

Gary, just wanted to start really with your high-level thoughts around the value, as you perceive it, of the real estate pipeline given the delays today. So really, can you talk through the anticipated 2023, 2024 opening cadence? I mean can you speak about any of the projects in a little more detail? And any sort of time frame on when we should expect you to get back to a more normalized opening cadence?

Yes. I don't know what's going to be exactly normal based on the kind of projects and experiences that we're building. I mean we're -- I mean I know it's -- you want more normal, but we don't build normal, right? So we don't really roll out a 10,000 or 20,000 square foot store that you can open in a mall. We don't know open kind of windowless stores that have maybe a glass store front in a shopping center that you can stamp out. Every one of our projects -- it's a development project. And it's complex, and it's hard to do. And it's hard to get approved, and they take longer and takes more human capital and more financial capital and more imagination and more determination. And that's why they're so much more valuable than other things and that others might build and they might be able to be more consistent. But we rarely build many stores that are exactly alike. And it's funny we've used the word prototype here on and off for a little while in the last few years. And I finally said like just take that out of our vocabulary because honestly, every retailer I know that develops a prototype and starts to roll it out wakes up about 5 years later with a bunch of old stores. And in today's world, where things are evolving so much faster, information is slowing so much faster, the world is so much more visual based on social media platforms and just the immediate movement of images and photography across the world instantaneously. I just think that having a prototype and trying to be more predictable is a dangerous strategy because we're in a world that innovation is going to only speed up. And I think duplication…

Just a quick follow-up. It's been 18 months since the JV investment. So just curious if you could give some high-level thoughts on how the partnership with is going. And if it's evolved at all, whether in line or just how it's helping the process, right, through the whole real estate process.

Yes. It's really been completely additive, and again, a whole another level of innovation because I think our partner is incredibly creative and intelligent and resourceful. And the ability to source real estate that we probably would have never found has been massively incremental. We just got one of the last like palaces in Madrid. That's going to be if -- and when you see what we're doing in Indianapolis, I mean, it's nuts. We have a 178-acre estate in Indianapolis next to Butler University with this incredible home on a lake behind this wall. Like you think like what is back there in the wall. And it goes from miles, right? Like you drive one. And it's -- I mean I think we're just seeing so many more creative things. We just closed on -- I guess we haven't even announced that yet now. I guess I could talk about that, right? Yes. Yes, we own it. We own it. We closed on 856 acres in the Napa Valley, probably the most beautiful piece of property in all of Napa. It was the site of the historic Soda Springs Resort from the 1800s, still has the ruins, where we'll build a guesthouse and residences and a winery. We have some of the best in all of the Napa Valley, organic farms. We're building experience that the world has never seen. Yes, we're close to closing -- are we -- I don't know if we can talk about it. I'm wishing. I can't talk about that yet. No. Okay. There's like an incredible property somewhere in Europe that you'll hear about, and I can't talk about that one yet. But a lot of these things that we're doing with the JV, we're just seeing things that we've never seen before,…

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

So first, can you provide just any more color on Contemporary demand in New York and San Francisco? Any early reads or anything to call out? And then with the supply chain pressure easing, is there an opportunity to get it into maybe some more of your galleries faster? Because I think the time line has actually been pushed out a little bit from what you noted last quarter. And then I guess given all this, is 1Q '23 or maybe even 2Q of '23 the first few quarters where Contemporary is going to have a meaningful impact to your top line?

Yes. Sure. Well, one, we're really happy with how Contemporary is performing, I mean, both in San Francisco and in New York. And I mean it's -- San Francisco, we've been really, really pleased. In New York, it actually meaningfully has changed the direction of the business. And so that one was a little bit easier to measure, right, because San Francisco went from this little, tiny store to a big store with a restaurant. New York, you've got kind of an apples-to-apples comparison. And New York is not completely done, set up, one would be all done, right, probably another month or so, a few weeks. We're redoing every floor of New York. And by the way, probably at the end of the year in January, we might redo the restaurant to just freshen it up and tie it into kind of the whole new aesthetic and color pallet to keep that restaurant really relevant and exciting. And then as it relates to supply chain ramping, because these are all new goods, you just can't ramp too fast. But the big headline, as you know, when our goods in our -- when our product is in our retail stores, it sells significantly higher than it does when it's only online or in a Source Book. So that's the big opportunity. I mean the great thing is right now, we're getting some early reads, what are the best sellers, what things are -- what categories, what aesthetics and finishes and things like that is our clients responding to. What are our design teams excited about? What are they expecting? What are external interior designers excited about and expecting? And then how are we adjusting on orders to present those things in our galleries and expand and dimensionalize those ideas further…

Got it. That's very helpful. And then just going back to 2Q quickly, how much of that top line was supported by working through the backlog? And then just where does it stand today? And how long do you think it will take you to get back to a more normalized level?

Max, it's Jack. Obviously, when we relieve a backlog, we're generally also building it at the same time. But I'd say if you think about even just the revenue beat versus our expectations, as Gary noted, that was backlog relief. I think through the first half of the year, we'll call it probably $50 million to $75 million through it. So relative to that $200 million we originally noted at the beginning of the year, we still have that work left ahead of us. And while supply chain constraints and other things are easing, they're still not back to -- if there's a level of normal, if we all believe 2019 pre-pandemic is normal, they're still not there, and there's still a number of factors that are continuing to have that backlog persist. So we'll see. I think there's a chance to get through it by the end of the year. But if not, we'll just continue to chip at it. At some point, it will normalize, especially with the macroeconomic environment and the shape that it's in.

Your next question comes from the line of Adrienne Yih with Barclays.

Gary, I kind of want to stay on the topic of how the brand is shifting. It seems like the DNA of the brand is actually -- the piece of it is shifting. I'm just wondering if that's the right way to think about it. Is the company still rooted and founded, the foundation being home furnishings? It seems like future CapEx are hotels and real estate property and the physical assets. And while, yes, you're still opening the stores, they're more experiential. So I'm just wondering how you think about sort of the root DNA of the company. And then, Jack, just really quickly, next year as we think about 1H '23 SG&A dollar growth because a couple of the Palo Alto and England are opening then, how should we think about that dollar growth?

Sure. Well, let me take the first part, Adrienne. So I'd just tell you, if you have our shareholder letter in front of you and if you just go to the RH business vision and ecosystem, the long view, and if you read it carefully, what you will communicate is that everything that we're doing is designed to elevate and render the core business more valuable, everything, right? Everything we're doing. And if you just read it really carefully, you'll pick up everything here. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience, right? Our hospitality efforts will continue to elevate the RH brand as we extend beyond the 4 walls of our Galleries at RH Guesthouses. We're going to a new market. It's all designed to elevate and render the core business more valuable. If you go to architecture, interior design and landscape architecture, all designed to elevate and render the RH brand more valuable, right? Doing homes that are fully furnished, all designed to elevate and render the core brand more valuable. So it's just a different way to communicate and build the brand than anybody else has done. That's okay. I mean Elon Musk has taken a completely different approach. He uses Twitter. Never does an ad. Yes, we just believe what we're doing is going to position our brand correctly, elevate it and render it more valuable and that it all -- that's why we call it an ecosystem. Yes. So there's nothing here that is dilutive to the brand, right? It's just a different way to communicate than a free shipping or Labor Day sale or financing sale or paying now -- buy now pay later, all the different ways that people are communicating with their customers. We're just communicating differently.

Yes, that's helpful.

And then, Adrienne, on the SG&A dollar growth, look, there's variable components in there, there's 6 components. I think maybe you're asking sort of like what's the fixed investment that we're making because clearly, it will flex on the variable side as it has as our business has grown. But we're making investments in international. We're talking about that. Some of those are in the base this year. We've got preopening of something that we called out, San Francisco and Guesthouse this year. Those will repeat. Obviously, there will be other elements of preopening next year. It's different every year, whether it's a new level or higher or lower. So we don't -- we haven't really guided but just kind of given you some perspective into some moving pieces there. And again, there's going to be pieces that are variable, pieces that are fixed. But from an investment cycle, you kind of know what we're doing. And Gary called out in his letter the pieces that we're investing into this year. And some of those, again, that are in the base, we'll cycle those. And if there's more investments we made, we'll be talking about that.

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

So I guess the first one I wanted to go to was just going back to Contemporary. Great to hear after a really promising start. But yes, just kind of thinking about this brand kind of further outlook, I think, Gary, you said this is potentially the next billion-dollar brand, right, presuming that still stands. What do you think the time line is in terms of like how that ramps, what that does to other brands? Is it additive? Is it cannibalistic? And what level do you think you get which, I guess, gets to a mature level? Does it take 2, 3 years? Yes, how do we think about the ramp of that brand?

Yes. I mean it'll take about 3 years to ramp or so. And we'll keep expanding it and dimensionalizing the brand, that part of the business. And everything you do is somewhat cannibalistic. Hard to tell at this early stage what that looks like but -- because some customers will just trade up. But for the most part, I think it's going to be more incremental than not. And it will open up more of a new market, especially at the high end of the -- at the high end where people have bigger homes, more homes, spend more on the home. It will open up the market to high-end interior designers, as will even more so RH Bespoke Furniture and RH Couture Upholstery. So yes, I mean, I think -- I mean we -- look, the way we kind of encapsulate ideas allows those ideas to break through the market, right, and penetrate and would be seen and known for things. I mean in a lot of ways, it's just an expansion and evolution of the brand. It's just we choose to do it our own way and tend to -- and let us -- instead of like letting things kind of dribble out there and get a lot of impact or get noticed, we tend to kind of pull back, build an idea, build a big idea and then try to break through the clutter. And then it can really move the needle, like RH Modern did. The biggest debate inside our company in 2014, '15 was do we integrate RH Modern. Is it just integrate into the RH brand, the core book? Or do we isolate it and we try to break through? And we went back and forth, back and forth, back and forth. Last minute,…

I think that's Adrienne -- Curtis, I'm sorry, that's...

Anyway, yes, that answers your question, hopefully.

It does holistic, for sure, and all that makes total sense. And I just got to ask a question on the buyback. I think it was the first time you've been in the market, I think, in like 12 quarters, right? Kind of why now? You've had cash on the books -- a lot of cash in the books for a while. So yes, I guess what triggered that? I mean what do you see in the business? Is it the valuation and the certainty in the long-term growth? Should we expect it to remain in the market? Yes, just very curious about that.

Yes, yes. Well, first, we only have very small windows when we can be in the market, right? And I think sometimes not everybody is aware of that. We have generally how many weeks in the market?

It would be -- it's the second week of the final month of the quarter. So by the time we announce, 5 or 6 weeks.

Yes. We generally -- once we announce, we have a 5- or 6-week open window. And so most of the quarter, we can't buy our stock, right? So I think there's a lot of people who read different reports, and people think like we're out there buying. Well, we can't buy. But just generally -- but we're looking at multiple things. We're looking at valuation. We're looking at what the environment looks like, where we think things are going to be. I mean it's not -- like we have a lot of capital on our balance sheet right now that we've raised. And there's a lot of optionality we have. There's -- in a market like we're going into, there may be businesses we want to acquire. There's real estate we may want to acquire. There's other things we may want to do. Our stock, we may want to buy. I don't know, maybe we want to buy stock of someone that we want to buy, like Bernard Arnault does. So there's a lot of things you can do when you're in the position we're in and you've got optionality and 've got a really good business model that you can capitalize in any kind of a market, especially if we're heading into a recession. So we're just constantly looking at all of our options and saying, okay, based on what we know right now, what is our best use of capital. Sometimes it's just -- yes, we want more data. So we don't just mindlessly buy. I mean look what happened at Bed, Bath & Beyond for God's sake, spent $12 billion buying their own stock back. And look where they are at today. I'm sure some of the people here thought it was a good time. Probably we had $12 billion. But...

That's my next question. Because you guys have been so thoughtful and just disciplined, right? So it's just first time in a while, so I just -- I thought that was worth highlighting because you are -- restrained disciplines, right, have the balance sheet, so just how did you come to the decision point.

Yes. I mean like especially right now, I don't know exactly how this is going to play out. Just like all the investors you interact with, right, how are they deploying capital, who are they buying based on what information is in the market and what's the right time to buy what. And look, this is kind of like the optionality capital in times like this. We're not -- it's not the most important thing we do, right? It's -- the most important thing we do is really all the big efforts here to build one -- build the most admired brand in the world. So that's where most of our time is. And then we spend some time thinking about -- we're looking at data. If we have capital, is it a good time to buy our stock based on the data and where we think things are going? Or is it better to hold off and be -- get more clarity on what the market is going to look like and how our -- what our business is going to look like in that market? And is there other opportunities? Is there businesses that look like things that we want to strategically do that we may be able to acquire at a fraction of the price and maybe get a 5-year head start on something that -- if we were to try to do it internally, might go faster. I mean nothing -- I'll just say this. I want to talk about things like that. Some press will say, "Oh, Gary Friedman talked about like buying businesses," and that becomes like our big strategy. That's not our big strategy. But there are things that we're working on and doing and then things that we've articulated that we want…

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

A little bit of a near-term question, so pardon these. First, when you lowered the guidance, it was June, and it sounds like that might have been the low point for a lot of retail. I realized you're catering to different clientele and customers in a different end market, but curious if anything picked up. And then the more -- the bigger question is, I guess, how much are you willing to sacrifice in terms of market share? The down 15 to 18, I don't know if that's a representative run rate beyond. But I guess when do you step in with price? And is that a '23 decision or it could be an end of '22 decision?

Yes. Like I think I said last time, there's not really a plan B as it relates to that. I don't think we're going to need to do that. And it doesn't mean that we're not -- we're always going to be cycling through inventory, right? There's always going to be, I think, a level of inventory that we're cycling through. If the market gets really bad, we might cycle through the bottom part of our inventory more quickly. And so we may burn a couple of hundred basis points of margin to not lose market share, but we're not going to promote across the brand. I don't see that as needing to take place. And I don't think that other people are going to take that market share because they don't have our product, and they don't have our positioning and our experience and our brand, right? So like a lot of people say, "Oh, this is your competitor. That's your competitor." I go, really? Go to their store. You really think it's our competitor? Like we do 3x per square foot than they do. They're not really our competitor. And we're doing 3x per square foot like versus some of the next best players. So I don't mean to sound arrogant at all or dismissive, but like the world would just have to really fall apart for us to deviate at all. So could that happen? Maybe. But there's -- I can't see anything in the future that would say, oh, my God, this happened and that's going to force us to screw up the model. I just really don't. We don't sell any seasonal goods. We don't even sell Christmas stuff. We have no seasonal inventory. We have no summer inventory. We find no winter goods. Nothing…

Yes. As a quick follow-up for international, I forget, was there anything embedded in sales guidance for contribution? And how much, I guess, gets pushed if there was?

In fiscal '22? Yes, yes. You'll notice we took a bit out of revenue, about 1 point. So you can view that as a combination of international and Palo Alto coming out of the forecast essentially.

And we took the high end of the operating margin by 50 basis points, right.

That's right.

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

Thanks for all the helpful information. I guess my question was on RH Guesthouse, which, I mean, just sounds spectacular. I mean how do you think about the potential financial implications? Just like how do you -- how does that kind of work through the model? I mean I know it's mainly about advertising for the RH brand, which makes perfect sense to me, but I was just wondering if -- how we should be thinking through the financial implications, particularly given those room rates.

Yes. Check with us next quarter. Let's see what the demand is like, what the restaurant does. I mean the San Francisco restaurant is just -- it's feeling incredible. And this is the same -- I think we decided to put it in San Francisco at the last minute and perhaps we fine-tuned it. But I think our restaurant -- I mean the restaurant of the Guesthouse, if you combine it with the Champagne and Caviar Bar, which is 32 seats, kind of in a cellar underground, I mean, between those 2 things, I think it's going to definitely be by far the highest volume, just food and beverage kind of restaurant experience we've ever done. We think it's going to be significantly higher volume. And that's a different model, right? Most of the hotels, they're really good at rooms, and they stuck at F&B. And so their whole model is just a room model. Our model is a slightly different model. We're a street front F&B business. We have 100 -- I think we have 115 feet street front here for a restaurant. And we have a very discrete entrance, private entrance for the Guesthouse. And so it's like a restaurant with sleeping rooms on top, right? So if you're a good restaurant operator and you've got a good model, you're already starting way ahead. And then you've got the rooms, which everybody told me for so long, you can't make money in a hotel without under 100 rooms. So yes, we always say, "Well, I'm not opening a hotel." And they say, "What are you doing?" It's guesthouse. And they say, "What's that?" And we're trying to get a new market for privacy and luxury. And then they say, "Oh, I get it. It's going to be a…

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

This is Avanti Cheruvallath on for Steve. How do we think about pricing in the back half and into 2023? And do you still see opportunity to take price increases even though demand has weakened?

What was the first question? Sorry, you cut out there for a second. Apologies.

Sorry about that. How do we think about pricing in the back half and into 2023?

I think we're always thinking about prices, what are the inputs and outputs. And yes, I mean, you've got freight rates kind of coming down. And raw materials are stabilizing, although everything is still high, right? So freight rates are down, but they're still higher than they were historically. Inputs are still high. I mean they started coming down, but most things are higher than they were historically. So we're constantly thinking about it. And as we make decisions, we'll let you know, or we won't say anything, and you might notice it in the pricing. I think we've got way more flexibility than other people just because we have a higher average price point. And people don't shop for home furnishings and furniture every day. So it's not like you're constantly looking at it, and you noticed like, oh, they went up 3% or 5%. So I think we've been able to demonstrate that we could continue to do what we need to do to have the kind of model that we have. So yes, there will be more. I don't know, Jack, anything else to add or...

Like we continue to have pricing power given the brand, and so we'll continue to approach our thoughts that way. And then we're going to watch the supply chain costs, like Gary said. I mean good news is they're coming down. But if they stay elevated or if they go back up or there's other cost pressures, then clearly, we'll -- we have price as a lever to maintain our margin or enhance it, yes.

Absolutely. I also wanted to ask on operating margin. In the past, you've cited a 20% as the floor for the business. Do you still see that as the floor if the macro picture continues on the current path? And are there certain macro factors you're monitoring that put that at risk?

Yes. Look, I think what we talked about is if revenues were down 20%, we believe that margin -- operating margin will be above 20%. That -- yes, at or above. That's the gist of it. In the way a year plays out, how we get to 20% -- like if you think about it, you make that decision at the point you know the revenue would be down 20%. But you're going to have things like we have preopening costs. You have other things that could impact that. But the earnings power of the business, let's say, revenues are down 20%, are absolutely at 20% or above. I think that's the take-away. Again, is it plus or minus a little bit because of some onetime?

You're doing different things.

Yes. That's not critical. That's not the critical message.

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

Given the third quarter guidance, should we think about demand comps trending down in the 20% range? And you ended last year with around 450,000 members. That should provide a good leading indicator on the trajectory of the business and the movement to higher price points, which may give up a little bit -- result in a little bit of market share loss but being able to capture more share per customer. So what is the recent trend of membership?

I think I'd start with there's -- you've got a couple of things going on. I think you have to really separate people that are in the home business or selling furniture from what else is happening. Sometimes people say, "Oh, a luxury people or Hermes or Chanel are doing this to that." COVID hit different businesses very differently. Our business went way up in COVID. A lot of other people's business went down in COVID. And now then some people are looking at but coming up against lower numbers, and they're catching back up. And there's businesses like ours that are going to give business back because COVID was really a big pull forward. And so like trending down 20% -- what exactly could -- go back with we're up against -- I mean if we look at the Redfin data from -- I think it came out, right?

June or July, June.

Yes. The entire housing market, I think, was down 5% and the luxury home market was down 18%. Why was the luxury home market down 18%? And I'd argue we're really the only one in the luxury home market. Some people, again, are trying to put other people in there because they're not selling really low-end goods, but they're not at our level. And the luxury home market was down 18%. And why was it down 18%? Why was it down so much more? Because it was up against up 80%, up 80%, right? And why was the luxury home market up 80%? Because all the people that had their money to move during COVID moved. And a lot of the other people didn't have the money to move. So just take New York. People moved to the Hamptons. They moved to Miami. They moved to Palm Beach. They moved to Aspen. They moved to Naples. They moved almost everywhere but New York. At one point, New York was the hot bed for COVID, and all the people with the money and wherewithal and the ability to move to second homes or buy second homes moved. And it drove second home prices in the Hamptons and Aspen, all these other places, through the roof. Well, a lot of those markets are coming down, right? And when something goes up 80%, it doesn't grow from there, and it doesn't stabilize there. It goes down. And so our customer is the one that moved. That was where all the activity was, right? And so -- and it drove a significant amount of business. And so the high end is going to come down. So say like -- when did the Redfin data come out again? I think weeks or sometime behind the…

January 29.

January 29. It doesn't look good. When I circled the last the last 20 years, the average Federal Funds rate was 2%. And if you look at it over the last 30 years, I think it's 3%, average 3%. And if you look at the last time we had real inflation, most of the people that are managing a lot of money on Wall Street or foreign positions were kids. And I thought like nobody's seen what's happening right now. Nobody's seen inflation like this in their lifetimes. The only people that did, if you did the math, you'll see like if you were in 1980, if you were 40 or 50 years old -- and I'd say, usually 50 years old, you start to gain wisdom. If you're 50 years old in 1980, you're 90 years old in 2020. So we're in 2022 and Warren Buffet is, what, 92, 93. Something like that or close to that. You got like a Warren Buffet who had wisdom in 1980, and you've got a handful of other people, George Soros, a few people that are still active. So most of the people managing big funds right now, they might have been 5 years old in 1980 or anywhere around the '80s. Never seen anything like this. Never seen interest rates -- never seen the inflation like this. Never seen interest rates like this. That's why Powell was so wrong in the beginning. That's why Janet Yellen was like massively blind and wrong. I mean -- and Fed moved too slow, quite frankly. And now because they move too slow, we're going to see higher interest rates than we would have if they would have moved faster. And I'd say we're going to have -- the interest rate is going to go…

Understood.

Michael, just to clarify. Michael, just to clarify. Obviously, we're not -- we don't guide demand. We didn't -- the 20% comment was yours. The guidance is that we're down 12% to 16% at the midpoint, but just to clarify.

Yes. I mean understood. You go.

Go ahead.

My quick follow-up question is, was the gross margin expansion in this past quarter and what presumably you expect for the next few driven by you exercising your pricing power? And is there a point at which you might have to start to restrict supply of your products in order to further exercise pricing power much in the way that luxury goods are able to command the margins that they're able to command by the scarcity associated with the value of their products?

I'd say it's more implied scarcity. Yes. Somehow they figure out how to grow. So you say, well, how scarce is it? I mean there's a level of scarcity, meaning you just can't be everywhere. And you've got to -- having fewer, more extraordinary galleries or stores, like really positioning yourself well, being where you should be and not where you shouldn't be, all those things, making more scarce and just being smart about it, right, like not -- I mean there's also a level of scarcity because a lot of them threw away or burned their product instead of selling markdowns, right? And so it's just all kinds of things that drive that. So we'll figure out all that stuff as we go. But I just -- I mean good question. I just don't know. We know all the answers because we're going somewhere we've never gone before. But we've been more right than wrong. We've been directionally right on our path and our strategy. And we keep getting smarter, and we keep learning more. And we keep doing better and better work. And all that should lead to more trust in our brand, more admiration of our brand and a higher premium people will pay for our product and be part of this brand. And it's just a different model. And a lot of times -- as you said like -- I mean there's really no one has done to do what we're doing in home, right? There's like leave little -- there's a whole bunch of little guys selling either sofas or lighting or this thing or that thing. And there's a bunch of custom people. But no one kind of like become the luxury brand of home. Like there is Chanel, Hermes and Louis Vuitton and Ferrari or , all these other kind of categories. And so it's going to be hard for people to figure us out for a while. And like most new things, like think how long, I mean, like all of a sudden -- remember that guy. Who was the guy that was always...

Bob Lutz?

Yes, the guy who was on CNBC all the time saying like Tesla will never make money. They're just terrible.

They'll go bankrupt.

Yes, go bankrupt. Incredible guy. I mean he was on CNBC like every 2 weeks, like taking Tesla down. And all of a sudden, boom, Tesla hit the inflection point and people realized, oh, my God, they've just changed the industry. And I think ours could be a little different because it's not as broad reaching. We're not going to have a Model 3 and stuff like that. But I think people are starting to get where we're going. I think in 3 to 5 years, it's going to be undeniable. And then people are going to go, whoa, this is a whole different -- I never thought this could happen. This is -- I mean where they've gone to, what their model looks like, where the brand is, I couldn't even see it. And that's okay. You shouldn't be able to see it. If you could see it, it means our imagination isn't good enough. Our creativity isn't good enough. Just like people didn't see Apple. All of a sudden, yes, completely turning the cell phone industry upside down. I mean who didn't have a Motorola or Nokia? What happened to Motorola and Nokia? They're gone. What happened -- like all of a sudden, Tesla became the most valuable car company in the world. So when you are on a different path, it always makes you harder to be understood because nobody has seen it before. And I think we're on one of those paths, and I think people are going to wake up 3 to 5 years from now. And they're going to see what we've done in Europe, and they're going to see where we're going next, and they're going to see the path ahead. And they're going to see the strength of the model. And they're going to go, oh, my God. Like, I mean, how many people actually thought on this 5 years ago, RH would have a 20% operating margin. I don't think anybody ever thought that. But here we are. And we think that's kind of the baseline. Like even if we have a recession, could it be 18, 1 year because we're investing in that, yes, like that's not the relevant point unless -- I got it. A lot of you guys, like your customer or hedge funds that are like renters, not buyers, they're traders, not investors. And so you've got to kind of make your customer happy and look at kind of the small moves, in the quarter-to-quarter, year-to-year moves. Like that's just not how we are. We just have a long-term view. And if you have customers that are long-term oriented, talk to them about us. But if you have short-term oriented people, tell them not to bug us. We're just -- we're probably not going to make them happy, and they're not going to make us happy.

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

Follow-up on the Guesthouse. Gary, can you just remind us, at this point in time, how many locations you think might be candidates in the United States and globally for Guesthouses? I know you're going to know a lot more in another quarter, but just wondering initially what your thoughts might be and then maybe what metrics you're looking at most closely to figure out what could be maybe more bullish end of the range. And then just a quick one for Jack. Wondering if you could give us a little more flavor for 2023 and with some of these openings shifting and you're seeing how this year's Source Books are performing. Any insights that we should think about in terms of what margins may look like for next year? Is that an investment year? Or do you start to get some back next year?

I think you've got to really give us until the next quarter or so. And the data is going to tell us what happens. I'm just so happy though that we had the courage to do the first one in New York because guys -- some people tell me, "Oh, you have to do the first one in Nashville or Birmingham, Alabama or somewhere where there's not going to be all the critics and you can learn it." Yes, like we liked it. We like to go in the main stage because we believe it brings out our best work, not our average work. And I'm just so happy that we came to New York and we've done something so extraordinary because this -- every time we do, we've figured out how to monetize the idea. Look, we already have a second one teed up in Aspen. And I mean the first one is -- it's always like creating the first iPhone, right? It's like the R&D that it takes and the investment it takes to create something like this, both human capital and financial capital. It's always greater than the next one because we've learned so much here, and we can dimensionalize and use those learnings to go much faster and be really efficient as we go forward. But if it works -- one, like people go, "Is it can only be 9 rooms?" This one is only -- yes, 6 rooms, 3 suites and a residence. And I think we've got -- we call those rooms. Like those are pretty big rooms, which is like 1,200 square feet with 2 full fireplaces and all that stuff. And one from Aspen are pretty nuts. I mean these are nuts, too, but the size and scale of the Aspen one…

Brad, we don't guide 2023, at least not at this time. I think if you're building a model, I mean, just don't forget everything we've been talking about in terms of not promoting in terms of climbing the luxury mountain. So if you're looking at components of margin and product margin in that model, that's something that -- as we look at it, it's not something that we have plans to break. Other components, we'll see where revenue shakes out, and we'll guide revenue that's appropriate. But clearly, you have other fixed components in COGS and also in SG&A. So look, I think the outlook is uncertain as you've heard us talk about. And so we'll provide more guidance later. But I think just don't forget that as far as you build up the product margin piece of our gross margin that you know how we're looking at that.

Your next question comes from the line of Jonathan Matuszewski with Jefferies.

I'll leave it to one in the interest of time. Gary, a lot of investor questions on this concept of shedding lower-value customers. Is there a way to help us understand the spending pattern of maybe the top 10% or 20% of your member base versus the bottom 10% or 20%? Presumably something like that could help us better understand the opportunity ahead in terms of serving more households in that top 10 of 1% of the population versus, say, the top 3%, 4%, 5%. Any perspective would be helpful.

I think it's going to be like other luxury brands. You're going to have fewer number of customers spending a lot of money, and then you're going to have very aspirational customers. They're reaching up to your brand now and then. I mean Eri tells a story. Eri Chaya, our President and Chief Creative and Merchandising Officer, tells a story of when she saved up her money when she's younger in her career to buy a B&B Italia sofa because it's such an iconic thing, saving up to buy her first Hermes bag, a Birkin bag, right? And it was such kind of milestone in her life. And now she is one of the customers. She's got a home. She's redoing the home. She's going to do an incredible house, and she's going to be one of those customers. Hopefully, she buys from us. She has a very high-end interior designer working on her whole redo perhaps, the interior architecture and everything she's doing. And I would say the best thing about it, she's learning a lot, and she's going to go through that process. She's going to be even better at what she does here because she's actually going through an exercise that our best customers go through, building an incredible home. It could be incredibly designed, furnished. And she can be a lot smarter and have an even better perspective than she has today.

Jonathan, I might just add on your question. Look, you're familiar with the 80-20 rule, Pareto principle that applies in many, many things in life. And again, we're not -- just directionally, if you think about the top 20% of our customers driving 80% of our volume, that kind of relationship intends to hold in business. So again, you do it with one, right? Like if you're cutting the bottom, they're not spending as much. It's just -- by definition, that's just whether it's SKUs, whether it's merchandise or it's customers that...

Yes, yes. The most important thing for everyone to realize is we've been doing this for 22 years. This is nothing new. We've shed way more customers than lower-value customers than we're willing to shed in the future. Way more. So we're going to shed less, but it's still going to have to do that if we're going to get to the top of the mountain. Yes, we're really going to become one of the -- yes, one of the great luxury brands. So we'll see. I mean the good news is if we don't make it, nobody is going to lose a lot of money for it. And like this is -- if I look here and think about this as an investor, oh, God, they didn't make it. You're not falling to the bottom. A really good model. We're in a really good place to take a shot at making the next 1/3 of the plan, the final 1/3, I kind of call it. So kind of go, okay, what's the downside? So we're kind of where we are today, and we become global. And it's still a very big company with a really good model, and everybody is going to make a lot of money, yes, if I just look at it financially.

At this time, there are no further questions. I would like to turn the call back over to Gary Friedman for closing remarks.

Great. Well, thank you, everyone. Thanks for your time and your interest, and especially in these kind of uncertain times, I just want to thank our team who continues to drive us up this mountain, make the climb. And to everyone out there, our team internally, external partners and shareholders, if you get a chance to be in New York, come take a peek. Ping us, and we'll get your seat in the restaurant. Come quickly because the place is filling up. So I might not be able to give you a tour of the property because it is about privacy. And so we have clients here. We're not going to be walking people through the hallways or through the building right now for kind of this week and maybe part of next week -- I mean, next week, we may have. I guess we've inquiries as soon as next week. Maybe a few guests here. But if you are in New York, we're here through next week. At least I'm here through next week. Not everybody is here through next week. And you want to try to get a quick look, see. We'll kind of take you through and show you a room, show you a suite and show you the rooftop. You can't take any photos here. If you do, we'll have to take your phone. And so -- but it is -- it's safe for our team and our partners and our shareholders. I think this is really an example of the kind of work that we're capable of and the kind of work that will demonstrate and prove that we can make it to the top of the mountain and build one of the most admired brands in the world. So thank you for your time and thank you, everyone, and our team for your hard work and support and your persistence and determination. Thank you.

This concludes today's conference. You may now disconnect.