Thank you for holding and welcome everyone to the RH Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Allison Malkin with ICR. Ms. Malkin, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 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 opinion only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today’s financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I will turn the call over to Gary.

Thank you and welcome everyone. We will start with the reading of our letter to our people, partners and shareholders and then open up the call for questions to our people, partners and shareholders. Fiscal 2022 was another outstanding year for the RH brand. While revenues of $3.59 billion were below the pandemic peak of 2021, we finished the year with an adjusted operating margin of 22% and adjusted EBITDA margin of 25.9%, the most profitable business model in our industry. It’s clear that the stay-at-home restrictions of the pandemic created an exponential lift for home-related businesses and it’s also clear the lift like the pandemic was a temporal isolated event versus something structural or systemic. We believe the questions are what if anything has permanently changed? What brands and businesses are positioned to win over the next decade? And what data is important to determine who those winners will be. Those are not easy questions to answer in light of the massive backlog release and a return to discounting at most home furnishings retailers, which distort short-term results. Additionally, inflation that was thought to be transitory is now being persistent by the Federal Reserve, resulting in a record rise in interest rates triggering a dramatic decline of the housing market with luxury home sales down 45% in the most recent quarter versus a year ago. Add to that, an underperforming stock market and a banking crisis, no one saw coming and the data points to business in our sector likely getting worse before it gets better. It’s times like these that businesses tend to move and hurt, pursuing broadly adopted short-term plans that lead to mostly similar outcomes. It’s also times like these that present opportunities to pursue long-term strategies that can result in strategic separation and significant value…

Certainly. [Operator Instructions] Steven Forbes with Guggenheim Securities, your line is open.

Good afternoon, Gary and Jack. I wanted to expand on the new product launches. You mentioned the timing of these launches as an inflection point within the business. So curious you can contextualize sort of what’s implied by the guide if you are sort of baking in a reacceleration, right, in demand trends at the back half? And then maybe more importantly, how we should think about in stock versus special order mix and the potential revenue contributions of these new collections in the back half?

Sure. I think based on the times we are in and the uncertainty we are facing, whether it’s the continued rise of interest rates or the next bank or two that gets eased. It’s hard to be anything conservative right now. And I think it would be foolish to be not just from a perspective of disappointing investors, but disappointing ourselves and possibly making decisions in investments before we can see around the next corner. I can tell you it’s someone the unsettling feeling being a person on a Saturday afternoon who is watching the Warriors basketball game of the news cut to align formed around your local bank, while the banks were sending hourly e-mails trying to tell you that they are committed to serving you, it’s a very unsettling feeling, okay. And those of you maybe on the East Coast that didn’t experience it what happened here on the West Coast maybe aren’t as close to it, but I, as a person that was close to it, have never seen anything like it. So I don’t know how long was it between the fall of Bear Stearns and the fall of Lehman Brothers, what’s going to be the next shoe to drop or pin to fall, that’s very unknown right now. So we believe there will be an inflection point in the second half. What we don’t know is what will be the economic environment in the second half, what will be the condition of the banking industry in the second half, where will interest rates be in the second half, where will inflation be in the second half. I think Powell has been very direct and consistent about addressing persistent inflation. All one has to do is Google the history of the federal funds rate and zoom…

Thanks, Gary. I’ll get back into queue.

Simeon Gutman with Morgan Stanley, your line is open.

Hey, everyone. Hey, Gary. Hey, Jack. Gary, has your approach to the, I guess, the next 12 months of promotional posture, is it changing, does it – will it change if the environment gets worse or we know what to expect in terms of pricing and promotion from here?

Yes. Look, we have – as we said, the biggest collection of new products in our history coming through. So we are going to have to – we are going to have to clear existing products, right. So there will be some promotional activity and clearance activity in the business as we always have, that may get bigger. And also in our view because of the uncertainty in the market, we may decide to just move stuff through our outlets and online just faster than we have made normally just to turn inventory – non-strategic long-term inventory into cash, right and position us to have maximum optionality during these times. So we think leading the business with a cash focus is really important. There is going to be opportunities that we probably shouldn’t imagine that might unveil themselves whether it’s from a real estate perspective, business opportunities that might exist, ability to accelerate our business in different ways, whether it’s as we mentioned kind of what I’d call, I’d always call interior design offices where if you stop and think about our business, interior design is really something that elevates and amplifies our product. But we have become really the largest residential interior design business in North America and likely the world. And it’s become more and more important to our business long-term, attracting the very best people in this industry that are aligned with where we are going, creating incredible offices and spaces for them to approach business in versus maybe having to always be in a retail store. So, our design studios are going to kind of thread a new needle, I think in the business. You will see the first one in London for community concepts and we will have some other ones that I think will pop up relatively quickly. But I don’t think it – we are in a really good position to play offense, right. And that’s what you want to be in. Like our – there is no risk here to our balance sheet. There is no risk here to our operating model besides like, hey, we make less money. Got it, we made a whole lot more money during COVID and we cash that away. So we’re just in a great position. So I’m not worried about exactly where our business is today. And I don’t mean that it sounds like, like we’re not focused on it. We’re just focused beyond this next 12 months. We have a lot of things that we’re excited to bring to life in the next 12 months. But it’s not – like think about it this way. Did you see any of us self-stock at $700 a share, have you seen me sell stock when our stock was $700 a share?

No.

The reason I didn’t sell stock at $700 a share. We believe it’s going to be worth significantly more than that, right? So we’re just playing a very long-term game. And if we’re right, we’re going to create extraordinary shareholder value in this company. We’re going to do something nobody else has done. So expect this to play our game if something really crazy happens, I can’t imagine it, something worse than coded that shuts down multiple parts of the economy again. we may have to improvise adapting over time. But based on what we can see and anticipate that might be wrong today, I think we’re good with the game we’re articulating the strategy that we’re articulating.

If I can sneak a quick follow-up, this follows up to Steve Forbes question. The tax that you took the approach to the guidance, are you taking the fourth quarter sales and run rating? Have you made tweaks, I mean, in the last 2 weeks, even given the banking prices? Like how – and then are you building in a back half improvement because of the new launches?

Yes. There is back half improvement that we launch. We’re not going to launch with that we’re doing without some improvement. I would say we’re not baking in what might happen in better times. Look – or worse times.

Because it’s in the same way we did in 2022 when we were baking in a deterioration. I don’t – that’s going to be part of the story as we look out.

Yes. Listen, do we are going to get significantly works? I don’t think so. I’ve never seen the luxury home market down 45% in a quarter ever, not even in 2008 and ‘09. So I think we’re near the bottom. Could it get a little worse, I think it could, was there erosion during the banking crisis, yes. Our business dropped about 8 points, but it’s kind of bounced back a bit. So we didn’t factor that drop through the rest of the year because it’s been kind of return. So I just don’t know if the banks are stable yet. So there could be – maybe there is another 10 point drop if things become to destabilize further, can we withstand that? Yes, we can. Like I think we’ve got our cost structure in a good shape. There is levers we can pull and things we can do from a cost and investment perspective, we could slow things down a little bit. There may be times where it’s more opportunistic to repurchase our stock. They could benefit long-term shareholders, but listen, we are more excited than we’ve ever been. We’re working harder than we’ve ever worked. Not because we have to because we want to guess the work is that exciting right now, so and I think the customers – our existing customers, and I think the new customers that we’re hoping to acquire. I think they are going to hard to not be excited about what I’d call the next chapter of RH. So we feel good.

Thank you for the thoughts.

Max Rakhlenko with TD Cowen, your line is open.

Great. Thanks a lot, guys. So first, on the 15% to 17% EBIT margin outlook, just how should we think about gross margin versus SG&A, and then also, how should we think about the four-wall gallery margins versus a lot of the investments that you’ll be making? So just thinking about the core versus some of the growth initiatives? And then I’ve got a follow-up.

Well, Max, we don’t break out the gross margin SG&A split, obviously, I mean, clearly, with lower volume ‘23 versus ‘22. Again, you guys can do the math on what deleverage would occur on lower volume from fixed occupancy costs just like we had in Q3 and sequentially in Q4. So I’ll just say keep doing that math. Four-wall…

I’m talking about our gallery level versus the investments?

What do you mean by that? I’m not sure what you’re asking.

Just thinking about the four-wall gallery profitability, where you are now versus where you were before? And then also just a lot of the investments you’ve got international, which you pointed out, but then you’ve got a bunch of gallery openings in the U.S. as well as some of the other growth areas that you’re focusing on. So just trying to think about more one-time in nature versus the run rate of business.

The economic model of the U.S. sort of our North American four-wall gallery base hasn’t changed other than in the same way that would have been impacted as our business has evolved, whether margins come down as we talked about. But it’s not – I think you don’t think about it the same way, I guess, on that basis. On the international side, we will have more to say when we open. I don’t think there is – that’s a question of also the size ultimately of the business. And as Gary has talked about we don’t have – it’s quite a wide range of what could happen here as we launched.

Got it. Okay. And then on just the new openings, any color on the cadence, both U.S. as well as Europe, throughout the year? And then just any color on the new real estate prototype that you’re looking to roll out? How should we just think about that annually versus the regular types of galleries that you open and then just anything on margins and profitability there?

I mean, again, Gary referred to the cadence in the letter. So talking about England opening in the summer, the other galleries are sort of H2 timing. We will update you as that unfolds. And then also the design studio, same thing, I think it’s – when we have more to share, we will share it at the moment, that is what we have.

Got it. Okay, thanks a lot, guys. Best regards.

Thank you.

Steven Zaccone with Citi, your line is open.

Thanks. Good afternoon, everyone. Thanks for taking my question. I wanted to follow-up on international because it did look like you listed some new cities, and that included Sydney. So curious how you think about that timetable? And on the international stores in particular, how do you plan to merchandise these stores versus the gallery in the U.S.? Like will you have RH Contemporary in the UK opening?

Yes. No, there is – we’re building a global brand. And unless we’re in markets that have, for some reason, something that should be vastly different, which there are probably markets we’re not going to approach initially. Yes, you can expect that RH experience, it’s very similar. So, your question about Sydney since I outlined the timeline for Sydney with famous Paris, Milan and so on and so forth, so – and so the timetables are all outlined. These are big development projects. Sydney is a brand-new building, they’ll be digging into the ground soon. So we have to get certain approvals and things like that, design approvals for the building we’re hopeful there could be delays. They could decide they don’t like our building and want to make changes. So we’re working with local developer that owns the land and is developing kind of a custom build for RH. So if we span a reasonable timetable, if there is no real issues there that should fall in mind. Everything else is kind of somewhat under construction or demolition or summer more complex, less complex. Some of the bigger, more complex ones are Milan and London and Paris. Those are all under construction moving along nicely. If you’re in Paris in the next few weeks and if you are anywhere near this [indiscernible] Avenue Montaigne look up, we will see – I think it’s almost 100-foot high, something like that, 100-foot-high, 70-foot illustration is the [indiscernible] wrapping RH Paris as a symbol is our design ethos and beliefs. And soon, you’ll see something like that in London. So it will be clear to people something coming that they have never seen a building wrap in a way that’s never been done. So everything is moving along. And Milan is an…

Great. Then the second question I had was, I did want to shift to margins. And I was curious for how to think about the path beyond this year. It’s helpful to think about the business where you are today versus 2019, but we always used to think about a 20% margin floor for the business. So as we look to ‘24, would you expect the mid-teens to high-teens operating margin level to be the right level for the business as maybe you return to growth, but it’s potentially offset by continuing investments for global.

Yes. I think you’ve got to think about a 20% margin floor, not in the worst housing market – worst luxury housing market I’ve ever seen. It’s been one of the worst housing markets anybody has seen, right? So I think in the third quarter, with luxury housing is not a fourth quarter, luxury, if you think about where luxury housing has been, it was down 18% in the first quarter of ‘22, down 28% in the second quarter of ‘22, down 38% in the third quarter of ‘22 and recently reported a couple of weeks ago down 45% in the fourth quarter of ‘22, which means because you’re talking about months and they are kind of going down, it probably means that the last month of the fourth quarter was down close to 50%. It’s not 50%, then you’ve got a refi market that’s down 70%, 80%, some number like that. And housing values, the refinancing market is another way to drive businesses like ours, when people are refinancing, taking money out, investing money into their home, refurnishing their home, things like that. When you’re looking at kind of record inflation, record rising interest rates, a record kind of falloff in the housing market like this. Like is there – I don’t think I was thinking that we had a COVID giveback and this kind of market environment with the banking prices and other things all happening at once. So for our customer, they are smart and savvy investors. There is one that the leasing housing market went up more than regular housing market is about a 10-point swing between the two between the non-luxury homes I think a 10 point swing all year, even more than that in the earlier quarters. And remember, what happens in the housing…

Great. Thanks for all the details. Best of luck this year.

Thank you.

Seth Sigman with Barclays, your line is open.

Great. Thanks a lot. I’d love to follow-up on that last point, actually. Just thinking about your ability to maintain and continue to grow mind share in this environment? And I guess, whatever a normal environment ultimately looks like, I mean, to your point, there is so much newness, but it is getting more promotional, and it feels like a lot of competitors may go back to pre-pandemic promotional levels, right? So you’re taking a firm view on that. How do you cut through that noise, right? And I guess if you continue to restrain from discounting, does that just mean that marketing structurally is higher going forward and just offsets that? How do we think about that?

No different than you would have thought about it in 2019. Yes, just don’t – just ignore the pandemic. People who have altered their strategies based on the pandemic, I think they are going to find out that those are going to be things that are hard to hang on to as the pandemic is – is there some things that are modified, there are going to be more people that work from home. Yes, there are probably people that should have been working from home. Most of the people are going to go back to the office, yes, they are going to go back to the office. Are we going to – I mean, I don’t know how many people you see wearing masks out there right now. It’s kind of weird, right. It’s almost like the beginning of the pandemic. You saw the people with masks and I remember my significant others tell us, you have to put this mask on to go into the grocery store. So I am not going to put that thing on, looks weird. It’s like I didn’t want to put on a mask. And then you couldn’t think of your life without a mask, right. Just like I had people that came in here pitching the ideas during the pandemic and Erie is laughing here, she is smiling right now, because it’s like I had so many people like with small business ideas or things that they were doing wanted to just rather invest or partner and whatnot and telling me it’s the decade of home. It changes – it is going to change everything, the decade of home. I mean, it’s a pandemic. How could you say that, something the world has never seen like in our lifetime, right? I’ve ever…

Okay. Thank you for that. I just want to follow-up on one point around the margin outlook. You discussed your philosophy about, I guess, maintaining or, I guess, not maintaining the 20% margin and why that makes sense for you right now. I’m just more curious if you could help bridge us to what is actually different from 20% to your actual guidance. I get the 150 basis points of investments and the deleverage in the model, but what else would be different to drive that delta. Thank you.

Well, I mean, we set to inflect the revenue growth back, right? So the housing market has to stabilize. I mean, the luxury housing market was down 45% in the fourth quarter. I mean, I don’t know, do you have any records on have you seen a housing market works on this? When our business is tied to the housing market, it’s tied to the refinance market. Refinance market is down 70%, 80%, like 78%, it’s not rocket science to know this is a really bad time. I think what’s different here than past maybe it’s usually when you have a recession, it all gets thrown into the same pot. The fact is we’ve been in a massive housing recession for the past year. And on top of that, you have kind of the COVID come down. And so – but your businesses, right, that were kind of shut down during COVID that have opened up. So travel and leisure, other things. People are traveling, so they are buying more clothes. That shouldn’t surprise anyone. You’re going to more weddings people are going to right now because there is no weddings for 2 or 3 years. How many events are happening if people are buying new clothes for a new jewelry for. We’ve perfumed where, like yes, people like, well, Lululemon was really up during the pandemic and they are really up now. Well, yes, there was nothing to do, but work out during the pandemic, but you did it mostly at home. Now you get to go back to your yoga class and your SoulCycle, who’s like super happy, really happy that if they weren’t so happy during the pandemic when Telecon took all the business that they feel pretty good right now. I think about all these things…

Great. Thank you for that, Gary. Appreciate it.

Anthony Chukumba with Loop Markets, your line is open.

Hey, it’s sort of a related question. But I mean, obviously, as you were talking about the fact that sales could be down 20% this year, but you could hang up to that 20% operating margin. And now you’re actually not expecting sales to be down quite as much, but the operating margin is going to come in significantly below 20%. So it was just – I mean is it the macro? Like I guess I’m just trying to understand, obviously, look, we see all the same headlines you do, but I’m just trying to understand that sort of disconnect between what you said last quarter and what you’re saying now? Thank you.

What I said last quarter was our core business, right, in isolation can maintain 20% not with all the investments. So that’s what I said last quarter.

In Q3 2021 is when we made – initially made that comment. And so if you think about just relative to the sales we generated in that year, I mean, you could think about it at a $3 billion roughly level. So I think we’ve been trying – I’ve been trying to clarify them as well. So not just 20% in isolation, it is relative to certain business size. And as Gary, for all the reasons talked – Gary just talked about could we generate 20% margins at a $3 billion revenue? Yes. Is that the right thing, the thing that we’re choosing to do, no. I’ll just reiterate what Gary said.

Got it. Thanks for the clarification.

Okay, Anthony, thank you.

Michael Lasser with UBS, your line is open.

Good evening. Thanks a lot for taking my question. So you mentioned that the Contemporary business is on pace to exceed the modern business at a similar time frame and you’re guiding to – at the midpoint of mid-20s sales decline in the first quarter. So how incremental is the contemporary business? And how does that inform how you think about the incrementality of the launches that you’re going to be doing later this summer. Thanks a lot.

And it’s all baked into our guidance right now, right? It’s not a normal time. So, when you think about incrementality in a time like this obviously, it’s different, but it’s all baked into our guidance.

And the down 20% in Q1, again, is relative, again, on a comparable basis – on a compare basis versus up 11% in Q1 last year. The year unfolded with a flat revenue growth in Q2, down 14% – down 14% in Q3 and Q4. So I think you just have to take that into account as well, but the down 20% is relative to just higher level the business was before the trend started to deteriorate early last year.

And you are pushing ahead with a lot of the investment you are going to be trying to manage the cash flow of the business carefully. How are you going to be approaching share repurchases? You stock as you pointed out earlier, well below where it was a few years ago, would this be an opportunity to be even more aggressive with buying back the stock? Thanks a lot.

Sure. I mean nothing different than what we said last time. I mean we would like to get some visibility and certainty is about where things are heady how much capital we deploy in share repurchases. And also, I think everybody should know, like I read sometimes analysts notes that say, yes, we expect that they bought more shares this quarter. And I don’t know if everybody knows the blackout rules of buying shares, but we can only repurchase shares for a certain number of weeks in a quarter. And so we are not buying shares some of the people putting in notes, oh, RH, let’s be in the market buying shares right now. And like you really not know you can’t buy shares the whole quarter. And we can only buy shares at certain times, how many weeks do we have opened.

Well, I mean after this quarter, only two weeks, but typically, it would be five weeks or six weeks depending on when we release.

So, this week, we have two weeks to buy shares this quarter, five weeks or six weeks in other quarters. And so I mean share repurchases is possibly one of the opportunities, and there is other opportunities that are going to unveil themselves. So, I mean we will see you make those decisions somewhat in a fluid manner as you see how the market unfolds and the opportunities unfolds. But clearly, we have repurchased $1 billion of our stock at an average of what was it, $269 thus far. So yes, I mean nothing different than what we have communicated in the past. Okay. Thank you.

Peter Benedict with Baird, your line is open.

Thanks for taking the question. Curious the CapEx and free cash flow view that you have for this year, you talked about bringing inventory down. Just that’s kind of my first question.

So Peter, just what our range is?

Yes. What you are thinking in terms of CapEx for this year and free cash flow, that’s my first question?

Thank you.

How concurrently with the release, so $275 million to $325 million is the range in the 10-K. We are not guiding free cash flow. So, we will keep posted on that. As far as inventory, you see it sequentially coming down. Obviously, we peaked in Q2 of last year and in Q4 came down. So, we are clearly, as Gary talked about, we are rightsizing that inventory and making moves to especially discontinued product and other things. So at a high level, I would say inventory will continue to sequentially decrease over the year as we get to a right-sized level and more appropriate for the size of the business.

Got it. That makes sense. Thank you. And then just on the comments around strengthening the balance sheet being one of the focus areas for ‘23, can you talk about leverage, how you are thinking about it as you look out over the next 12 months? Are there any levels you don’t want the business to get above? Just any color on that, Jack, would be helpful? Thank you.

Yes. I think we think longer term, I think that temporal swings in leverage, they are not – again, it’s not something that we are sitting here thinking that, “Oh, my God, that’s a trigger and we are going to now do something, repay debt or raise equity.” Again, I am just throwing out pendulum swing type ideas. Again, that’s not how we spend our time. We spend our time focusing on the future. So, we have raised the level of capital that we are comfortable with and with the free cash flow profile that we have, the size of the business we are growing to the size of the price, the way we spend our time and free cash flow we will generate over the next 5 years, 10 years, whatever the timeframe is, I think obviously, we have 5 years – 5.5 years up on the term loans. There is nothing earning in that sense from our perspective, the short-term stuff is temporary. So, I am not sure that there is anything to talk about that on that topic.

Got it. Okay. Thanks very much. Good luck.

Jonathan Matuszewski with Jefferies, your line is open.

Hey. Good evening. Thanks for taking my question. First one was on the membership base. It looks like in the 10-K around 350,000 members at year-end, so down around 24%. Are you guys seeing accelerating rates of membership cancellations year-to-date? And maybe if you could just shed some light on this attrition, I would think the annual membership fee is a small change to your average customer. So, just any thoughts there, whether this is just churn of some of your more aspirational customers, that would be my first question? Thanks.

I mean membership reflects our underlying business, and it’s a lag behind sort of sales and demand and then if you have increasing AODs, increasing AURs as we have had that factors into having fewer members for the same level of sales. So, it’s just memberships are going to be again reflective of the size. And as far as renewals go, I mean you are going to see some noise in that number here and there, but I would say it’s been plus or minus at a level that’s been consistent over the years. We haven’t disclosed that number. But to your specific question, I don’t think there is an uptick in sort of cancellations or any changes in that sort of behavior because of the economic backdrop. And if it is, again, it’s just minor. It’s not something that’s worth highlighting.

Got it. That’s helpful. And then just a quick follow-up on the organizational redesign, can you expand on the workforce reduction? It looks like 440 roles were deemed no longer essential, what kind of initiatives are being de-prioritized or delayed in connection with these roles? Thanks so much.

Yes. I think it’s just a level of detail is that terribly important to discuss on this call. So, we – like in any reorganization and redesign, you are going to redesign the organization around what the top priorities are. I think we are pretty clear with we have articulated our top priorities and then things that we believe are less essential and whether it’s just now or we worked pretty disciplined every few years of kind of going through an organization we rely for. So, anything that I would say is worth mentioning. That’s seems what we are focused on, right.

Great. Thanks so much. Best of luck.

Thank you.

Steve McManus with BNP, your line is open.

Great. Thanks. So, I had a question on backlog relief, what’s the contribution in Q4 that largely normalized, or is there still some remainder to work through?

There is still a remainder. I remember at the beginning of last year, we had talked about $200 million of sort of over and above normal backlog. As we look out to where we stand today, we have probably got through about $100 million of that. So, relative to a normalized number pre-pandemic, again another $100 million to go. I think that roughly split out evenly throughout, as we looked at the numbers last year, call it, roughly $25 million a quarter, plus or minus, but just giving you directional number. And then as far as how it unfolds this year, it’s going to be tied to just getting transit times back to normal, which you are on their way production lead times down back to normal, which they are on their way. So, I think it’s possible that we get through it by the end of the year. But there is also – we are also looking at 2019 as some snapshot of perfection and might not be, there could be some different ways that consumers are behaving – and yes, the size of the business is different, the backlog is going to be different. I would also say that based on the historic amount of newness, it’s going to be introduced. I would – we are never going to buy anything exactly right. So, my sense is, whenever you have big newness introductions, you are going to drive higher backlog, higher back orders, things like that, special orders.

Okay. And then on advertising, it looks like that almost doubled this year. How should we be thinking about that and the cadence of Source Book circulation moving through this year?

Yes. Like probably any business, we are always trying to find what is the right cadence of investments to optimize the model. This is a business that, at one point, spent 10% a year on advertising, 10.6% and 10.4% [ph]. And then things changed, the pandemic, I think we have historically been around 4%, right, in the recent history. But we used to run it at 8%. And so I think about it from a strategic perspective. We are opening galleries that are very dominant since the presence in markets, right. And what we have been able to do over time is realize that where we have made those physical – have the physical expressions of our brand, in dominant ways to bring a great deal of brand awareness and require and maybe less advertising the markets that have a small store and don’t show as much of the assortment and don’t have such a physical presence. Like you are more in here, if you entered anywhere near the parking lot, there is no way you miss us, right. So, you don’t need to be reminded about RH as much. We don’t know where we are, we kind of can perceive how much bigger we are than other people, assortment we may have, maybe eat in our restaurants and walk around and just getting to and from the restaurants going up and down the stairs, you are going to see and perceive a lot about our business where other businesses it could be a walk on buy, right. Like there is just another 50-foot storefront in a mall. So, there is a lot to think about when you think about this the physical expression of our brand that we are building and the value that, that brings to the marketing and awareness of the RH brand is how it’s perceived because of not only the size of it, but the quality and the architecture and the design of it all. All communicate so many things that you can’t communicate in a pop-up that or even in the magazine. So, my sense is we could build advertising back up to a higher level than that. Historically, you would say advertising could easily be $120 million today, if you are looking at what it looked like historically in 2019. So, we will see, the pandemic kind of threw it all off, nobody in the home business needed to advertise at all a period of time. And so we didn’t – we kind of bank that money during that period. And now how do we build it up, what’s the right level – what’s the right level and what market. I think I would say that the marketing or advertising jobs and companies to the hardest point to figure out in today’s world with all the choices you have.

It’s helpful. Thanks. Appreciate it. Best of luck.

Seth Basham with Wedbush, your line is open.

Thanks a lot and good evening. My question is just in regards to the statement you made in the shareholders’ letter about this being the most difficult part of the climate luxury amount. And has it been anything that had you heard over the last year or so that made it more difficult than previously thought, obviously, putting the macro aside, and I know there are many crosscurrents?

That’s from the strategic perspective, the climb of the mountain. I mean just if you throw inflationary period and the rising interest rates and difficult to market and so on and so forth, that just makes everything harder, right. But the climate of the mountain, particularly we have always articulated why I keep that last section there. Climbing like you are not building a brand with no peer. The higher you go, the more difficult and treasures decline, decline no one has ever made before, right. So, it’s famously quoted in our company, it’s where the air gets spent and the odds become slim just because it’s never been done. It’s like tracking the highest mountains in the world. So, we know it’s difficult. It hasn’t been done. So, we know that our work has to be more extraordinary and more remarkable and it has to create a forced reconsideration on who we are and what we are capable of. And it has to force the people at the top of the mountain to tip their hat and respect and accept us and admire us. That’s not easy to point to somebody else that has spent it. So, we – it gets more difficult, but we also are significantly better than we were when people climbing at the buying amount. But you are learning as you go, you are becoming stronger and more experience and more knowledge, give more tools and more support. So and as much – look, I addressed my letter to our people, partners and shareholders, it’s not an accident that it’s in that order, right. I am communicating to the thousands of people and team RH where we are going and what we are doing, right. And it is going to get more difficult and it is not for the faint of heart. And it is not a climb that anybody has made before. But if we make the kind, the rewards are also extraordinary and probably never seen before. So, yes, has anything become more difficult, no. It’s just, is business more difficult than it was during the pandemic, of course. Is it more difficult than it was in 2018 and ‘19, of course. Were businesses tied to the housing market and to interest rates and the refinance market, and so, it will be more difficult. But that’s just temporal. That is temporal. Pandemic was temporal. So hopefully, we are sitting here in 12 months, 18 months, the Fed is lowering interest rates, the housing markets up 20%, things are great, you just can’t plan for them to be great all the time and you can’t plan for them to be bad all the time. So, we try to just take the right long-term view and navigate through the noise and distractions that could take you off your path and have you wind up in the ditch.

That’s helpful and just to be clear, there is nothing that you have seen over the course of the past year that you need to believe that you are shedding customers that are not just low value but sort of mid value that you would prefer not to shed and that you need to course correct for that?

That mid value, I – look, we are not going to – I think what you are seeing maybe the delta and our business and others business who have turned promotions back on that’s the only delta they we have right now. Because they would be taking market share from a mid-value customer that maybe if I pushed the promotional button here, maybe we would get some of those customers, yes. But we would probably lose them over the long-term anyway, so at times like this kind of accelerate things. So, I like we are at, it’s not a complete surprise, when you said, hey, if these things happen all at once like if these things happen all at once here is what it could look like, yes. What do we have scenarios internally say, look, if COVID is that a big give-back, if the housing market – if we have a recession in the housing market as dramatic fall, what do things look like. And what we thought, yes, too different. And but I think they will look different. I mean as you see, kind of this next big evolution of our brand, right, like, that’s the thing, I think about climbing a mountain right, and you get to base camp and then you kind of go up a little, you are kind of return to the base camp, and you are out there for a while, then you make the next trip up, right, and you are now at a whole other level. We are about to make one of those next big moves. So, if you think about our brand, if you think about where we went from kind of 2001 to kind of 2008 and ‘09, and we hit that difficult period. And then you think…

Understood. Thank you, Gary.

Cristina Fernandez with Telsey Advisory Group, your line is open.

Thank you. Good afternoon. I have two questions. The first one is on the strategic investments you are making on the global expansion. How should we think about that ramp over the next couple of years in relation to the 150 basis points, or $45 million this year? I guess should we think about it sort of linear with store openings, or are there a lot of upfront investments you are making now or last year?

Yes. I think if you think about it in relation to pace and how fast we go, and how many markets we are going to open this time and then I think about it just based on where revenues are, right. Because the spend is going to be the spend, right. So, we happen to be making the spend when our revenues are kind of what I believe top revenue trends and things like that. So, as a percent to that revenue, it’s 150 basis points, percent of another number, it’s 75 basis points. So, you can kind of assume and do that math, that spend isn’t going to be different, right. Based on the basis points we gave you, you can back into what the dollars are. And then you can say, okay, their business and flex, whether it’s the second half of this year, or next year when the housing market changes, and I mean, will inflect to some degree, no matter what the housing market is there. What we are doing from a product point of view and redesign of our source books and the change out, the re-presentation of our galleries and so on and so forth that’s not going to be zero, okay. Like unless it is the only that’s zero is if the economy gets really bad, right. If the whole banking crisis falls apart, and we have another kind of meltdown that takes housing farther down, right. But at some point here, we are going to cycle the bottom, and things are going to change. And so – but we have an inflection point, that’s going to be some number. You can just take the investment and probably take a look at like what are they spending directionally based on all the things are working on, and number galleries are opening. And then you will be able to extrapolate that and we will give you some kind of guidance long-term. But like you are looking at it, I would say, kind of through that, maybe the worst lens, things don’t get worse, in the economy. Maybe the worst lines are going to look through it. Other times, it’s going to look like a much smaller number.

Brad Thomas with KeyBanc, your line is open.

Hi. Thanks so much. Just a couple of housekeeping questions for me. Just one more on the first quarter guidance. Gary, you mentioned that trends had decelerated I think about 8 points, since some of the banking news was coming out? Is the guidance reflective of kind of the run rate of trends, or is this how things are playing out quarter-to-date, just trying to get a better sense of where demand is tracking, and how you all factoring that into guidance?

Yes. Again, just to be clear, I said it kind of changed about 8 points and then it’s kind of come back, right. So, right now, I think that there was a shock, and there was a pullback. Things look to be stabilized, right. In the banking world right now, at least for now, for at least what we know. A little odd, it’s has never seen the government kind of direct the top banks to lend money to the other banks for 120 days. It’s a little weird. What’s the implications of that, what does that really look like, is that a permanent loan, is the other banks going to be able to survive without that loan for how long, will anybody put their money back in those other banks that the banks that lend them $30 billion, so they are going to own those banks. There is a lot of really questions that are unanswered, right. If you just stop and think about that, so the banking crisis unfold to be something worse, I think it can. That’s why, I think that when I talk to the smartest people I know, but most degrees, and yelling out of just calm everybody down, and just tell everyone, that the government that your money is safe for at least a year, or something, but not let it be kind of unknown. Because that’s just going to get people to keep money – moving money around, and it’s going to create instability in the banking sector, and create more issues. So, what’s going to be determined and what really unfolds here, but it looks like the shock was also temporal. It looks like that people have returned to their habits. And usually need something meaningful that change consumers habits, so they…

Understood. One item that we didn’t talk about a lot on this call, is the guest house, any update you could share on learnings that you have had since it’s been open?

Yes. It’s open, we are happy about it. We have had great. It’s created the right kind of conversation around the brand. And that’s what we are trying to do. And second one is under construction and Aspen. And this is first, the only two we have got the pipeline and so, nothing really new were open functioning running. All good except we had it firstly, so we had to shut down some rooms for a little while. But stuff there are new business, you think different things go wrong, and you learn about. But I think we are tremendously proud of it, that we have been everybody who stayed there, I believe is that a great experience, that is tremendous experience, friends feedback, I think we are in the right conversation is happening about the guest house today. And by the way, we haven’t marketed it at all, we have sent an initial email. So, we are about ready to talk about it a little bit more, we get out of the winter month, where New York is kind of quiet. Springtime, the trees will start having leaves on the rooftop again, and yes, it will bring a little bit more attention to it, maybe send out an email, video and things like that. But it’s not something we are massively focused on. It’s open, it’s so far, it’s done what we intended it to do. But we believe it’s elevated the RH brand, it’s brought the RH brand into a conversation that levels of luxury, that we weren’t in that conversation before. So, I think that people would come, it comes and many global CEOs of luxury brands have brought their teams for tour the guest house. And I am invited just knocking on our door and stuff reaching out. So and I think it’s created the right conversation with the right people, yes. I think people are more aware of us now and maybe have more of a level of respect of what we are capable of. It’s about the quality of the work we can do. And it’s just another step, another stepping stone as we go and kind of climb this mountain.

Understood. Thanks Gary.

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

Thank you everybody for your time and interest and we will look forward to speaking with you soon.

This concludes today’s call. We thank you for your participation. You may now disconnect.