Thank you for standing by. My name is Riana and I will be your conference operator today. At this time, I would like to welcome everyone to the RH First Quarter 2023 Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Allison Malkin of ICR. You may begin your conference.

Thank you, Riana. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2023 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'll turn the call over to Gary.

Great. Thank you for joining, everyone. I'm going to begin with our prepared comments in our shareholder letter and then open the call to questions. To our people, partners and shareholders: Revenues of $739 million and adjusted operating margin of 14.9% exceeded our financial outlook in the first quarter despite a continued decline of the overall macro environment, especially for home-related businesses. With 30-year mortgage rates trending at 20-year highs, the possibility of continued economic tightening required to tame inflation, and uncertainty regarding the recent regional banking crisis, we expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year. Based on the above and current demand trends, we are now forecasting increased markdowns to clear discontinued inventory required to support our product transformation over the next several quarters. We are raising our revenue outlook for fiscal 2023 to a range of $3 billion to $3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes an approximate 150 basis-point drag due to the ramp up of our global expansion. As previously mentioned, it’s times like these that businesses tend to move in herds, pursuing broadly adopted short-term strategies that lead to mostly similar outcomes. It’s also times like these that present opportunities to pursue long-term strategies that can create strategic separation and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That path for RH is our climb up the luxury mountain and our long-term strategies of Product Elevation, Platform Expansion and Cash Generation. Product Elevation: Our efforts to elevate the design and quality of our product are central to our strategy of positioning RH as the first fully integrated luxury home brand in…

Your first question comes from Steven Zaccone with Citi. Your line is open.

I wanted to start on the need to take the increased markdowns. So, Gary, I was just curious if you could comment what you saw in the business over the past couple of months that this was updated in guidance now versus factoring into your original outlook when you spoke to us at the end of March.

Sure. Well, I think what we've seen is an increasing headwind from a demand point of view. And a slowing of our cycling through our discontinued inventory, as we've increased our markdowns to begin to cycle through this product to be prepared to move the old product out and bring the new product in, and then just projecting what it may cost us to cycle through transforming all of our galleries. Remember, we've got product in all of our galleries that we have to kind of do sell -- floor model sell-off and transition through our outlet business. We now believe it's going to cost us more from a markdown perspective to move through that inventory in this environment.

Okay. Fair enough. Then the follow-up question I had was on the UK market opportunity. I think it was a couple of calls ago, you talked about the potential size of the UK market being as large as California. I guess, on the cusp of opening England now, how do you think about the opportunity now? Maybe how do you think about the competitive environment, how you plan to merchandise this first gallery? Anything you could say would be helpful. Thank you.

Sure. I don't think we see anything that's different from how we've always viewed the opportunity. I think the timing is from a -- the macro environment is somewhat different. So, our initial expectations are more muted as you would expect. And from a competitive environment, I don't think anything has changed. Just as we become more connected to the market, as our people have been there longer, working, training, et cetera, developing early connections and relationships with interior designers, the trade industry and so on and so forth. We believe it's going to be a huge opportunity for us. But there's also a lot of unknowns in a new country. So, we believe we're being cautiously optimistic as we dip our toe in the water and begin. And I'd just remind everyone that RH England, it's really -- it's a unique kind of move in the market, a unique play in the market where our goal is to create the right conversation. And not -- I wouldn't say RH England is our play to maximize commerce originally. That will happen as we continue to open RH London and in other parts of the UK. But how do you think a brand and introduce a brand to the United Kingdom and broader Europe in a way that positions the brand correctly for the long term. And if you stand back and think about the world and think about the world of luxury brands, I mean, basically, all the luxury brands in the world are from Europe and the UK, mostly France and Italy. And if you look at what are the true luxury brands in the U.S., you can argue who really makes that cut. I would argue that the brand that's most clearly identified as a luxury brand from…

Thanks for the detail. Best of luck with the opening.

Thank you.

Your next question comes from Simeon Gutman with Morgan Stanley.

Hey, Gary and Jack. How are you? So, I have -- maybe I'll make a two-part question, one question. Just to confirm, it looks like the domestic business seems to be hitting your forecast or bottoming outside of a potential, let's say, consumer recession. So that the change to the guidance other than the markdowns is mostly the Europe inclusion. And then my second question, this is more theoretical thinking about the EBIT margin of the business with the mix of Europe, U.S. reaccelerating and then hospitality and luxury coming into the mix, getting back to, let's say, 20 plus, is that going to be a much longer time frame? Or how should we think about that? Thank you.

I think it depends on the macro. If we get stability and there's any kind of the headwinds, stop and decide, you're going to have a new baseline. And I think it depends on how well we've executed this next major product transformation. I mean, we’ve -- we went through a transformation like this. We generally do in every 7 or 8 years as we've continued to elevate the brand and expand and just move the assortment upwards. So today, I'd say this is the best work we've ever done. We're launching it into maybe the worst home environment at the high end that I've ever seen in my career. I've never seen luxury housing down at the levels we've seen from recent reports and we're at 20-year high interest rates. So there's some level of caution. I can't -- we can't control the macro. But I'd say, I'm more optimistic than less optimistic about our model long term. I don't see any reason that we can't return to 20% plus mid-20s operating margins long term. We have to prove out the European strategy and expansion. I think we have to be smart how we allocate capital and how we build that infrastructure and how we keep things simple. I think our strategy -- I think it's unique. We're not duplicating corporate roles in Europe. We're not looking at Europe as a separate business with a separate infrastructure besides our supply chain distribution piece, but that too is even an extension of what we do in the U.S. So, we look at the world differently than I think most people before us and historically have looked at a global expansion. I mean, we kind of look at countries in Europe like states in the United States, suppose, except there's --…

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

So, coming along similar lines of Simeon’s question, Gary, I’d just love to hear an update on the contemporary line, fully realizing abnormal year, of course. But just in terms of how many galleries it's been rolled out to and what the reception has been for the ones where it's been in place for I guess, an appropriate amount of time where it could be judged in terms of the reception of the…

Yes. I'd say, we're happy with the response of contemporary, considering the environment. It's only been rolled out to four galleries. And the reason why we didn't push it further is because we have so much more newness and so many more choices to think about moving into the business. So, we've held some of it back because I think contemporary, I’d say, is our worst level of execution from what I'd say the disruptive value equation, right? I think that's where I'd be most critical of us. Some of the price points just hit highs that, again, maybe in a tailwind and a COVID, everybody is buying everything and everybody wants everything tomorrow, and you're in the biggest migration from cities to suburbs and second-home markets in any history we've seen. I think we're just too aggressive with the pricing, too arrogant maybe to some degree. And so, we relooked at that. We looked at the sourcing. We challenged everything. And I think as you see how -- what's coming, whether you're looking at interiors or contemporary or modern, you're just going to see a real meaningful value equation connected to design and quality leadership that will change the trajectory of everything, including contemporary. So contemporary, look, if you looked at it with the context compared to modern, things like that, off to a really good start. But if you look at it compared to the work we're about to unveil, you go, oh, it's just the next level of transformation from a product point of view. I think it's kind of -- it's like having a trump card. And again, it's just going to win, we believe. So yes, I look at contemporary not just in isolation, but integrated with the broader thing, I think everything, every interiors and modern are going to look entirely new and different. Contemporary is going to also look pretty new and unique. There's a lot of new collections contemporary. Collections -- contemporary really only -- what do we have, 5, full collections? Four full furniture collections. And that will -- I think it more than doubles, right? Yes. Yes. So contemporary, you're really seeing this next phase of a much more robust assortment.

Okay. Great to hear and really helpful. One other just quick follow-up. Gary, just curious to hear a little bit more detail on the format for Cleveland and Palo Alto. I know Palo Alto, I think, is a little smaller, 25,000 square feet. But anything else in terms of perhaps out with sorted, layup at the field. Just curious, yes, to hear more about that format that you mentioned.

Yes. In a lot of ways, it represents an aesthetic change and a freshening, you'll see us begin to evolve away from gray and create really the platform for where the goods are going. We've kind of ridden the gray wave for the last, I don't know, 14 years or so. And there's big cycles in product. People ask me a lot, "Hey, what's next? And how do you know what's next? And where do the trends come from?" And I like to say the trends in our business come from the dead, generations pass away their belonging to going into a estate sale to estate sale, be at the high end, be the antique markets, the antique markets really what drives the high end interior design market, then that is -- goes into the high-end reproduction market and then it starts to trickle down from there. And if you look at kind of the major trends, whether it’s what I call the Belgian European look that we kind of exploded at a commercial level throughout the United States in 2009, 2010, 2011, 2012, 2013, the -- we made probably the biggest move in modern. If you look at the mid-century movement that started to roll through, and you can kind of time things back. If you look at when are consumers generally in their peak buying years for furniture, it used to be 40 to 50s because there was a shorter lifespan. Lifespans have gotten longer. If you look at the high end of the demographic that has the greatest access to healthcare and are more focused on longevity and fitness and eating well. I think it's now up to 87 years old, right? And so, what that does is it pushes up as people get older and more…

And Curt, it's Jack. One thing to add on your size question. Palo Alto is basically the same size as Corte Madera. So, it's -- I think you mentioned 25,000. It's not that, about 48,000 and Cleveland is just around the same…

Okay. Very informative. Thanks. And yes, good luck for the rest of the year.

Thank you.

Your next question comes from Steve Forbes with Guggenheim.

I wanted to ask about regional trends during the quarter. Are you seeing any disparity by region, anything that either builds on optimism or caution right around the revised revenue outlook you guys provided?

Steve, there's always regional differences, just echo prior comments. We don't really comment on those unless they're so massive that they stand out like oil markets one year did. So, there's nothing that we would share to read into any trends on that.

Then maybe just a quick follow-up, given your comments around the holistic value equation and improving across the portfolio. Any comment on the potential magnitude of input or supply chain cost relief that you see on the horizon here?

On supply chain costs, look at specifically, you're talking about like ocean freight or…?

Any cost relief right, that would maybe help fund, right, a better value proposition?

Well, we've been getting that. And that's -- I think Gary mentioned that at the last call or the prior call that and someone asked about select price changes. But we've already been seeing some cost relief that we're putting back into product prices. From a supply chain and ocean freight perspective, I mean, we're at a point, given our turn and given the way our team approaches getting the best rates for the sailings. We're in a -- it's accretive -- or on the other side, the ocean freight contracts, we’re past the bad news of May 2022, and we're into sort of a lift now, a slight lift in the margin from that good news.

Your next question comes from Michael Lasser with UBS.

Gary, as you had mentioned before that you might have been too aggressive with increasing some pricing. And in the past, you've talked about pivoting to serve a more affluent consumer and that might eliminate your addressable market. Should we interpret some of your current thinking to be, hey, maybe we have to peel back to serve a broader community of customers at maybe lower price points because that would ultimately drive the sales of the business higher and in turn the profitability of the business higher?

I'd say -- again, I start with the lens of design, quality and value, right? And I think we've been most successful when we won with design. We have the best design in the market. That design is at a quality level that's appreciated and respected. And for that design and quality, the value of equation is disruptive, clearly to the market above us. If you look at any people left and right, massively disruptive and even disruptive to slightly below, just because we really have the biggest platform, right? So, we have the ability to have real scale. And I think as we launched contemporary, been moving the brand up, when demand is easy, like it was through the event of COVID and the migration that happened because of COVID and the focus on the home because people can't travel and the shifts in spending big market segments. When demand is really easy, and you can get higher prices, you tend to take them. And then, all of a sudden, it blips and it makes you reevaluate. So, as we reevaluate just where our pricing was and has been, I just think through -- you got to remember, we went through a big pricing cycle increase because of tariffs, right? And then, we went through a massive supply chain disruption and raw goods, raw material costs going up, labor going up, everything going up, freight going up that massively impacted pricing. And so, I'd say, probably we as probably anybody in our industry, optimize what you could get. And I think that you're going to see some people repricing things and trying to optimize whatever market you're going after. So, ours is a little trickier because we're moving up, right? And we're trying to get a more affluent consumer…

Thank you for all that. Just so we can calibrate our models and forecast properly, if you had to guess collectively, how much do you think you will roll back price? Is it going to be in the double-digit range, so on average, 10% across the assortment? Is that a reasonable guess?

I wouldn't say we’ll roll back price at a broader level, right? It's -- again, we're going through a major product cycle. Like, do you see us lowering price on the Cloud Sofa? Yes, we'd lower price -- we have -- when did we introduce the Cloud Sofa? 2015, right? So, we're in our eighth year, right? So, things in their 8ht or 10-year, like that, they start to wane. And you're going to have more -- there's -- I mean, how many dupes of Cloud Sofa? Who doesn't get an e-mail every day of another Cloud Sofa knockoff on TikTok or on this thing or it's a famous sofa. So -- but it's also -- it's a sofa that carried us the last 10 years. It's not the sofa that will carry us next 10 years. And not that I'm telling people don't buy cloud sofa. It's a great sofa. It'll be there the next 10 years. But I don't expect it to perform the same way. It will just find its new level, so. And we'll be more competitive. But we also -- our manufacturers will be -- sharpen their pencils and everybody sharpen their pencils because they want to keep as much market share as possible. So I wouldn't think -- I wouldn’t call it a big rollback. I'd say -- I think of it really about a spring forward because there's so much newness. You really got to kind of look at where the product is going, not where it's been. And so, -- and then also look at what is the current competitive environment and what does it take to be -- to win. And winning on a large scale generally means being disruptive. And again, you have to kind of really look at it through the lens of design, quality and then value based on that design and quality. And I think based on the design and quality that we have coming, I think we're going to be massively disruptive, so.

Your next question comes from Seth Sigman with Barclays.

It's sort of a follow-up to that last question. But just thinking about last quarter, you announced some cost reductions, the $50 million in annualized savings. I guess, just in light of the markdown pressures and your demand comments and that this could just last longer, which is not unreasonable, how are you thinking about the potential for further cost reductions and maybe other levers or opportunities to maybe address any other inefficiencies? Thank you.

Yes. I think we're always looking at that. So -- but look, we had a meaningful change in demand. And whenever you have a meaningful change in demand, whether it's to the positive or the negative, there's going to be investments or you're going to rationalize costs, right? You're going to constantly -- we look at the organization every year and we try to rearchitect the organization based on where we think the business is and where it's going. And we try to always look for efficiencies and always look for better ways to do things, so. But we had always known, look, if there's a meaningful step-down on the outside of it, we're obviously going to have to optimize the organization at that time. That's what we did. So if look, if demand weakens again and so on and so forth, we'll make the right decisions for the business and try to optimize things and sharpen our pencils just as any good leadership teams would. And I think a lot is going to depend on what happens with the macro, does the housing market begin to recover? And again, when you think about the housing market for us, you've really got to look at the luxury housing market, which has taken like a 10-point greater hit than the overall housing market, right? So, those are the key things. But you really got to -- the key is, I'd say, it's about the goods, right? That's what we sell. And if we're right -- if we're directionally right with the product and where we're going, we'll see some kind of inflection, headwind or no headwind, right? Is -- this product transformation, is it worth 5 points, 10 points, 20 points, I don't know, 30 points. Look at our history, when…

Yes, no doubt. Can I just ask you a follow-up around the guidance? So you did raise the low end of the sales guidance for the year, modestly. Help us with the message there in light of some of the cautious demand comments? Do we just interpret that as confidence and visibility and optimism around new product or the expansion? Just help us frame that a little bit more. Thank you.

Really two things. One, what you just said, our confidence about the new product all samples got finalized, costing, negotiations got finalized, value equations got finalized, presentation, how we're presenting in the books, how we're going to present the stores, how we're going to cycle things, what the productivity per square foot of each area of our galleries are going to be? We get out to the detail level. We're replacing this product with this product. What do we think how did this product perform per week at what margin? What's the new product is going to perform per week at what margin? And so -- and we try to figure out the arbitrage of every decision we make and -- positive or negative, right? And then, what's the aggregate of all those decisions. And we feel more optimistic as we spend more time on -- looking at what's coming and what's new and how -- what we're going to transition. And then look, it's going to cost us more to cycle through the product. So, we're going to have to take deeper markdowns than we thought because of the greater headwinds that have developed. And so, that's going to provide a lift. So, you're going to get some lift from the higher -- the greater markdowns. So, the low end of the guidance we gave, we think it would be hard. We'd have to have another meaningful economic macro event for us to kind of consider the low end based on what we know Today, based on what's happened in the last seven weeks and the quarter. And what's happened in the last -- since the last quarter, we've talked to you, the last three months. I mean -- so that's how we feel about it now based on…

Your next question comes from Jonathan Matuszewski with Jefferies.

Gary, I wanted to follow up on your comments regarding the most discerning households being 10 times more valuable in terms of luxury home furnishing. Is there any color you could share on spending patterns across your income cohorts? Are there certain customer segments that are behaving differently lately versus others in the RH business? Asking just because the reference to giving away low-quality market share. So, curious what percentage of your members you would consider to be maybe low quality and what that could imply for maybe what the membership trial looks like long term? Thanks.

Yes. I think if you just study the wealth data in studying the ultra-high net worth people and you look at homeownership and people as they go up the economic ladder, they collect more homes. So, home becomes the biggest source of investment. You keep buying a better home, you generally keep buying a bigger home unless you're in a downsizing mode. But -- and then people buy multiple homes. They buy a second home, then they buy a third home. Ultra-high net worth people have 3 to 5 homes, so. And not only those -- the data would tell you that at the high end at the wealth, the second home on average has twice as many furniture -- twice as many bedrooms as the primary residents, right? And as people build up the economic cycle, those second homes are furnished beautifully because they're trying to impress their guests and they're trying to create a hotel experience. So, you're not going into second homes that have like a bed frame pushed against the wall with a cheap headboard and some crappy sheets. And look, you can go on Zillow or Redfin and just look at homes, right? Go to second home market and look what's on the market. Your first second home, maybe not spending that much on it, maybe stretch for the second half. But again, when you go up the economic ladder, people spend exponentially more on the home. That is where the money goes. It goes into more real estate, you have more rooms to furnish. You're now furnishing with better and more expensive furniture because that's how people are defining themselves, defining their success and their place in the world. I'd like to say -- and they go beyond that, if you kind of get silly rich, you buy a plane and if you get stupid rich, you buy a yacht. And that's where we have our planes that are also available for charter. And we've done RH1 and RH2 and RH3, because we're trying to communicate to those consumers. And if we can get them -- and we have some of them. I mean, -- one of our big projects, the one I'm talking about, I can't say the names, but it has, how many bedrooms, 30, 28 bedrooms?

In that range.

It's 28 to 30 bedrooms, a second home.

Yes.

We're doing the entire project. I mean, we do -- we have some of those clients. We're earning that respect. Our guest house is being visited by the very top of the economic pyramid. It is being talked about at the very highest end. It's a very, very top of that ladder. People are aware of our guest house and visiting, staying, touring, asking for tour, so on and so forth. And we're demonstrating what we're capable of. And we're beginning to speak to those consumers. What people will see at RH England is another -- entirely another level for our brand. We're going to speak to people in a way that they've never been spoken to. And by the way, RH England -- now every investor and analyst on this call is going to want to come to the opening. RH England is going to have all the newness, almost all of it. It's -- if you want to see the new products for the first time, go to RH England. It's being flown there. It's being framed in through windows. But that will be the first view. So we're introducing the brand in an entirely new way with entire new assortment. Do we have some of the legacy product? We do, yes. Some of the key items, best sellers, best collection, but it's -- like what percent is new? 70% of that gallery is new. So -- and how many rooms do we have -- over 60 rooms -- 60 furnished rooms. Yes. So you want to see the new -- you want to get a head start and everybody else come to the opening party. But, yes, I’d say the lower quality -- you're always -- we've been shedding customers for the 23 years I've been here.…

Really appreciate all that color, Gary. And just a quick follow-up. You had some helpful comments on the domestic competitive landscape before in terms of peers who are below you being more promotional. From our check, we're seeing some more luxury brands and home furnishings out of Italy increasingly eyeing the U.S. after years of chasing growth in China and India and Brazil. Some of these brands are pursuing more sizable showrooms in key U.S. markets. Do you see this as a threat? And any thoughts there would be great. Thanks.

Yes. I mean, look, everything is a threat. So, we don't take anybody for granted. But I'd just say that our value proposition versus those brands is massive. And they also -- most of those Italian brands are two things. One, they're just mostly category focused, right? They either are upholstery brand, selling sofas, sectionals, chairs, they’re lighting brand or they're a category-specific brand. There's not one that's integrated all the categories like we do and have a complete lifestyle point of view and can furnish and design a home. And they don't have the size or scale to have our value creation -- our value proposition. So, our value versus the brands that -- the ones I think you're talking about, I think we're massively disruptive to those brands and especially now that we're sourcing out of Italy ourselves. So, when you've got made in Italy versus made in Italy and you have a significantly better value proposition because of size of your platform. And the one other thing I’d mention is they don't control their distribution, right? Some of the brands you're probably talking about, the most famous one, I think, has 800 points of distribution in the U.S., and they control, I think, four points of those 800 points of distribution. And so, there's a whole kind of convoluted platform and pricing discrepancies. They don't really get to control price. They've got a lot of dealers representing them. And so, it takes them a long time to kind of build what we've built. But nonetheless, look, they're great brands. They've built great products. I like our positioning way better than theirs, way better.

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

Follow-up on England. I was wondering, Gary, if you could just give us a little bit of an update on how you're going to be dealing with the supply chain and logistics. Obviously, the furniture industry is going to be a challenging one from a logistics standpoint. How do you ensure that the customer has a great experience for you, especially these early customers that you get in the months ahead here? And then, I was wondering, Jack, if you can give us any color on how you're thinking about the financial impact from England in the second half, particularly from a top line perspective, what's baked into the guidance? Any color there would be great. Thanks.

Yes. Let me start with the supply chain. We feel really confident. I mean, we've had our team boots on the ground over there for 18 years -- 18 months to 2 years, I mean, working training. But we feel highly confident in the supply chain experience, delivery experience that our consumers are going to receive from RH. And then, one of the keys is just making sure we figure out how to be efficient on the reverse logistics. You're always going to have some level of returns in any business and how we handle that, the ability to not have too many touches and liquidate efficiency -- efficiently through an outlet network and so on and so forth, all those things that we're working on. There'll be some things to learn where the demand going to all come across the UK, some things to work out, but I feel highly confident. We've got a great team. We've got a lot of people that have been with us for years that are over there. I don't know if you want to…

Yes. No. We in our England gallery, we're going to have 8 folks on the gallery side and another 5 for hospitality that are from RH in the U.S.

And then from a supply chain perspective.

And from a supply chain perspective, we have one of our best guys over there.

And so, we feel highly confident that in every level that we will execute well. But there's going to be things for us to learn. Like we don't know exactly where the demand is going to come from. We don't know exactly -- we have to just acclimate everybody to our brand, our services and everything that we offer. And so, we'll see how the ramp is. Yes. I'll tell you one thing. The response to the party invite has been incredible. We thought we were going to have x number of people. And now all of a sudden, just after a few days, we think we might have 2x number of people coming. So if anybody is on this call and you want to come, like let us know quickly. At some point, we got to cap this thing. It's -- we're really worried like, gosh, we’re out here in the countryside and we're doing this opening party, sent an e-mail invite, how many people are going to come. And it looks like everybody is coming. So, as long as they're in town, it looks like everybody's coming, so.

On the second question, we haven't said, Brad. So it's modest. And I think we'll all learn together. At one time, Gary had projected that first year sales -- or demand of England could be 50 to 250. The point is there, we'll learn together, we'll share data when we have it. But it's a modest amount. It's not worth highlighting it in our guidance.

Your next question comes from Brian Nagel with Oppenheimer.

So, I know the call is running long. So I'll keep it to one question. But the question I have, I guess for Gary. We talk obviously a lot going on internally with RH and a lot of the really interesting initiatives you have. But, if you look at the macro environment, and there's been a lot of talk about kind of the macro environment, the headwind. And you know your customers and your new customer. What -- to get out of this malaise -- a lot of backward drivers to become a tailwind versus the headwind currently. What needs to change most? I mean, what are the key factors there?

I don't know if I got that quite great. Your connection wasn't the greatest. Maybe just kind of repeat the question, just make sure we get it right.

Yes, I apologize. So just from a macro standpoint. As you think about your customer and the headwinds, the macro headwinds, to get out of this malaise, what needs to change? What do you think is most important from a macro standpoint to really start to change or to drive for your customer?

Yes. I think we just got to find out where the bottom is, right? Like, things just have to stabilize somewhere. Interest rates stabilize somewhere, mortgage rates stabilize somewhere and just get through a cycle. So, we're -- what's the new baseline. I think that's the key. And then, generally, once you -- you've kind of hit whatever bottom is and there's a new baseline and we've got the macro headwinds get stabilized. And history would tell us you start to grow off that new base, right? And so I think the key is what's the base. Is the base luxury housing down 50, because it hit down 45 last quarter. And -- that means if you look at the sequential kind of from quarter-to-quarter, that would tell you it went from 38% to down 45, probably means the last month of that quarter was down 50 or 54, I don't know, somewhere around there, like I've never seen this kind of stuff. But then again, too, I've never -- like the first time we're navigating the brand through a cycle like this, where we've been positioned so high in the market, right? So -- and also, what I'd say what's different about us today is we've eliminated -- we're not really in the accessory business in a meaningful way. We're not in the tabletop business. We're not -- we're not in the holiday business. We're not selling anything for Easter or Mother's Day or Christmas or anything, right, go in and see all the Christmas decoration stuff stocking stuffers anymore. When we had -- when the Company had a bigger mix of accessories and stuff like that, you're not going to get hit as hard. But today, we're basically all height of it, right? We're really furniture-focused between indoor…

Your next question comes from Max Rakhlenko with Cowen.

I'll just keep it to one. But how are you thinking about pricing products in Europe compared to the states? And just your latest view on how profitable those galleries could be at maturity? I think you previously thought, once galleries made sure they could potentially have higher margins than in the states. So just curious for an update there. And then just any differences in cost structures that we should keep in mind?

Yes. We believe that we're -- it's a lot of debate on pricing. We're going to write up to the wire -- do the math on everything and make sure we understand it. But I believe that long term we could have an accretive strategy because I think we're also building everything kind of on a clean sheet paper. So, it should be the most efficient from a supply chain point of view. There should be efficiencies and things just because it's all going to be new thinking and our best thinking. And we'll learn a lot in the beginning here. So, I'd just say, look, every plan we have generally is some degree of wrong. Are we more right than wrong? That's the key. Are we strategically right? So, we're going to be -- we're going to be wrong on a lot of things at launch, whether it's pricing, like -- and the point is, are we strategically right? Because we'll improvise, adapt over time, modify as we get going. So we're excited to just get going and start learning. So like -- but look, there's debate, like right now, where should we price this or should price that, who are our competitors over there and what does it look like? And so, more to learn. I'd say directionally, I feel exactly the same way. But we're not in the game yet. So, ask us in six months, we'll have a much better view.

Your next question comes from Seth Basham with Wedbush.

My question is around inventories. As you take these markdowns to clear excess inventories, do you expect your inventory to be clean by the end of the fiscal year?

Yes. I think we'll have everything in line by the end of the year.

Great. And then, similarly with the 70 new collections you are planning for this year, do you expect to be in stock in meaningful quantities so that they can be additive -- materially additive to the sales this year?

We do believe that. Yes. I think we’ll be in really good shape mid-second half. There is always with the ramp up of this much newness, different timings, different things as they go into production, and some delays here and there as they are going through final finishing and getting into ramp up moving from sampling to production. But will be -- kind of some things will be in stock, end of second quarter , some beginning of third quarter, some mid-third quarter -- I think mid-third quarter. Yes, late third quarter, will be really good, late third quarter -- as far as shipping, right? And, again, think about our business. Our business will generate demand, even if we're not really in stock as people are working on projects. So, but, I think we'll be able to understand what the inflection point potentially can look like, I think by late third quarter. And we'll be -- we'll have a lot more data and information and see where the consumer is really responding and what that looks like. And, for us, look, we've got to play certain bets and we got to buy goods long-term because if -- uncertain things, that's our job, right, is to know what's going to be great. And, again, we never buy anything 100% right, ever, in my entire career. The point is, are we directionally right on the investments, on the buys. And some of these things are going to be really big, right? So we've got to make big bets, we got to buy inventory, kind of out there, because furniture can't scale. You just can't ramp up furniture production fast, not at these quality levels. So, we'll learn a lot and we’ll cycle through. And -- but that's why we're really, really excited about '24. Because we'll have some really good data by the end of the third quarter, and we'll be making a lot of much better decisions as we look out. And then, we have another layer of newness that is going to come as we cycle into the spring, a lot of newness kind of coming through, either late this year, some of it might come -- or will hold it for next spring, and you know what the responses are. But -- so, yes, fingers crossed.

That's really helpful. My last question is just on your pricing strategy and architecture. As you move up to the very high end, you bump up against pricing from timeless designers. Do you see that being a challenge to convert high net worth customers to shop RH when they could buy the true designer piece?

Yes. I think we're pretty much a really good value against any of that. So, there's always going to be interior designers that will take some of these products and go to their local area upholstery guy and knock it off. But for the most part, we're going to be -- I mean, against the showrooms and against the real luxury brands in the categories and stuff like that, we're going to be a disruptive value. And so, I think our competitors are going to be scrambling.

There are no further questions at this time. I would now like to turn the call back over to Gary Friedman.

Great. Well, thank you, everyone, for your interest. And hopefully, we'll see some of you at the opening of RH England. And other than that, we'll talk to you next quarter. Thank you.

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