Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2023 RH 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. [Operator Instructions] Thank you. I will now turn the conference over to Allison Malkin of ICR. You may begin your conference.

Thank you. Good afternoon, everyone. Thank you for joining us for our second 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 our 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. Let me begin with our letter to our people, partners, and shareholders. Revenues of $800 million and adjusted operating margin of 20.2% exceeded our guidance for the second quarter due to a $25 million revenue benefit from faster-than-expected deliveries and a shift of approximately $40 million of advertising costs from Q2 to Q3, reflecting the later mailing of our RH Interiors Sourcebooks. We are raising the low end of our revenue guidance for the year and now expect revenue in the range of $3.04 billion to $3.1 billion versus our prior outlook of $3 billion to $3.1 billion and are maintaining our outlook for adjusted operating margins of 14.5% to 15.5%. We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20-year highs and the current outlook for rates to remain unchanged until the second quarter of 2024. The company repurchased 3.7 million shares in the second quarter at an average price of $325.65, representing approximately 17% of the total shares outstanding at the beginning of the second quarter. Product Elevation. We recently mailed our new 604-page RH Interiors Sourcebook, and while it's too early to read the response with only 40% of the mailing in-home this week, the early indications do look promising. We continue to expect our business trends to inflect in the second half of this year with the mailing of our RH Contemporary Sourcebook in late October and our RH Modern Sourcebook in early January, as well as the refresh of our Galleries over the next several quarters. We believe our inflection point will peak in the first half of 2024 as our new collections fully ramp and we begin another cycle of Sourcebook mailings, completely…

[Operator Instructions] Your first question comes from the line of Steven Forbes from Guggenheim Securities. Please go ahead.

Good afternoon, Gary, Jack. Gary, I was hoping you could maybe just expand on what's driving your confidence in seeing an inflection in the business during the back half and what the early indications from the RH Interiors books, and I guess RH England as well? Inform me about what the potential re-acceleration in demand could look like as we think out to '24 and beyond?

Sure. I think there's a couple of dynamics happening. I think you've got a kind of a cycling of the backside of COVID and you've got a cycling of the dramatic rise in interest rates and the fall-off of the highs of what I’d call a COVID and a zero federal funds rate driven home market. So from our view, I think that cycling happens at the end of this year. And the question is, is there a longer downdraft in the home cycle? I think that the answered questions really deal with, if you say what's the problem with the housing market today? You've got this real delta in interest rates between people who bought a home over the last several years at dramatically lower interest rates that are sitting there with 2.7% call it 3.4% interest rates, 90% of the market is fixed, so you've got 90% of market owning homes with really low-interest rates and you've got a interest rate gap, like current 30-year mortgages are going for 7%, somewhere between 6.8% to 7.4%. It's kind of the range depending on credit. So you've got a huge spread there and what's compounding that huge spread is you haven't had home prices drop enough yet, right, to offset that margin spread. If home rates dropped -- home prices went up 42% in the two years post the COVID. And during the COVID boom, once COVID hit and there was everybody who stuck at home and focused on exiting cities, yeah, the biggest migration from cities to suburbs in history and the biggest migration to second homes in history. So you've got a lot of people that moved at a record rate, you've got a lot of people locked into really low interest rates. Now you've got really high-interest…

Thank you, Gary.

Your next question comes from the line of Simeon Guttman from Morgan Stanley. Please go ahead.

Hey, Gary. Hey, Jack. My question -- one question maybe two parts is, you mentioned product transformation and margin dilution. Is that all contained to '23 or did some of it move into '24? And then, Gary, to your point, if this market wallows a little and we do have another downdraft, given that you have leverage or the business has leveraged now, or little more than that it's normally used to, do you operate anything differently if the macro just takes longer to come out and then maybe the curve is steeper in later years but it's flatter in the medium term?

Yeah. I think by the first half of next year the inflection is going to be much more significant than the macro. So I don't think it changes anything for us.

On the margin dilution, Simeon, look I think about it also just -- where the margin or the discounting activity and clearance of that inventory will be in Q1 of '24 versus Q1 of '23. So, yeah, there's going to be still some of that in the first part of the year.

But there's going to be -- I think about it there's two things, right? You've got margin dilution from a product margin point of view as we're transitioning the assortments and -- but you're going to have leverage and margin accretion throughout the model based on what we believe will happen with our top line. So, yeah, I think '24 is going to be a very good year. Unless there is some kind of crazy crisis that we don't believe is on the horizon. I think that the history would tell us, if things really got worse at the Fed is going to ease. If I look back at the last 20 years, I mean, the Fed’s been very consistent. We've lived in a very long period of really low on interest rates with just a few slight blips that are high and I think the Fed will act in a way that will stimulate the economy again. So -- and then housing will at some point the housing will take off, right? You've got a lot of pent-up demand. It's just that the demand can be super pent-up but if the gap doesn't change, right? If either pricing doesn't come down or interest rate gap doesn't change, interest rates have come down. One of the two things happens. If they both happen, the prices come down and the Fed eases, you can get a -- I think we can get a really good bounce in the housing market. But we just can't control that. We have a point of view on it, share our point of view looking at a lot of things and we got a lot of data that we study. The key for us is like if you're -- if we think about the balance sheet,…

Your next question comes from the line of Steven Zaccone from Citi. Please go ahead.

Good afternoon. Thanks for taking my question. So I wanted to shift to the RH England opening. It sounds like it's a good successful opening event, but it will take some time to maturity. Do you expect the rest of your international openings to resemble this maturity curve or is this the longest one since it's kind of your first? And then similarly the letter confirmed nine international openings by 2025. Can you talk a bit more about the pace of annual openings for international going forward? Is three kind of the right number? Thanks.

Yeah. Let's start with first one. One, RH England is unlike anything we've ever opened, not just because of an international perspective, but really the kind of location and our view of how we wanted to introduce the brand and when we wanted to introduce the brand. When we wanted to introduce the brand in a very unique and unforgettable fashion. Just because the US isn't really seen from a European perspective when you think about design taste and style luxury market so on and so forth. That's not really the game we play really well. I think I made the comment before. The only true luxury brand we've had I think in the United States is Tiffany, and now the French own it, right? And all the luxury brands are from Europe. So how are we going to go into that world and introduce ourselves? We thought that was really important. And so -- and we also thought the timing, like how do we kind of get their name known and establish ourselves in a unique way. And we could have waited and opened Paris first store, we could have waited and opened London first. We would have had to wait longer and we came across this opportunity at this property and we thought this could be something remarkable. It could be a really great introduction for the brand. And I've always said that we've made the decision on RH England because of its location. It's an hour and 45 minutes outside of London. It's in the Cotswolds, it's around wealthy and affluent people, but it's not around density. You don't have anybody kind of walking by this Gallery. Like it's not. It is a true destination and it's you kind of got to go out of your way.…

Second part?

The international opening cadence. Yeah, I think this is a start from the opening cadence. I like our start -- I think, it is moderately aggressive I think that we've got planting the lot of flags in important places and really dominant fantastic real estate and we're super excited about it. So -- and I think we're going to learn a lot in the next three years.

Thank you very much.

Sure.

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Hi, good afternoon.

Hi, Brian.

So, my question with regard to the buyback. So you clearly stepped up buyback significantly here in the quarter. So the question I have is, how should we be thinking about this? Was this more or less a kind of a one-time adjustment or is it should we expect the buyback stay aggressive here going into future quarters?

We communicate our intentions with every kind of buyback. We still have open to buy on the buyback, I think a few hundred million, [several hundred million] (ph). And so, yeah, I think we made a relatively aggressive move here and it's -- we think we bought the 17% of the business at a really attractive price. And I think our shareholders are going to benefit from that and if we're right with our view of the next couple of years, it's going to look like a really great investment. How aggressive will be in future quarters, I think if you've looked at us historically, we're kind of optimist -- opportunistic. We're not like a big corporation that sets up a regular buyback every quarter and stuff like that. I mean, if that was smart to do, Warren Buffett would do it, right? Warren Buffett is a very opportunistic repurchaser of their stocks. And we're trying to be opportunistic investors. Whether it's in our stocks, whether in anything that we do. So we think this was a great time to deploy capital and buy back a meaningful position in our company. And it depends what the market does. Depends on what we see and how we feel, what we'll do in the future.

Appreciate, it. Thanks, Gary.

Sure. Thank you, Brian.

Your next question comes from the line of Curtis Nagle from Bank of America. Please go ahead.

Hey, Gary. How are you doing? Thanks for taking the question. So I just wanted to go back on the point, you mentioned in the shareholder letter, just about some of these early signals that we're reading pretty positive from Sourcebook launch, right? You said, it's still early, but curious if you could just elaborate a little bit in terms of what you meant? Are we seeing more people come back into the brand? Are we seeing conversion rates go up? The larger order size. I would just love to hear a little bit more about some of the findings in detail if you could?

Yeah. Well, we -- look the new collections that we think are the meaningful collections are acting like they're going to be meaningful collections and the markets that the books are getting into look good, the responses look good. And so you just got to see it over a period of time in our businesses and our business is a -- it's driven mostly by advances. It's driven by people buying a new home, remodeling a home, or deciding to redecorate a home, all of which don't happen very often, right? So it's a very high transaction value kind of business. So if you look at our customers over a period of several years and take their peak day, they spend roughly 80% to 85% of what they spend with us in a kind of a 90-day period, right? And then they spend very little if you look out the next couple of years on the end. So you've got to kind of get them when they're buying and that's why the business will get us impacted more than others during a cyclical down-market like this and look, we know when we exited the holiday businesses and all the -- whether it's Halloween business and the Christmas business and the accessories business, we're not very dominant in those businesses as we used to be. And in a down cycle, we wouldn't take as big of a hit because people are still buying the small things. We don't sell really much in small things and we don't sell any kind of seasonal holiday stuff, right? So we'll take bigger hits than other people in these down-cycles, but we will have bigger ups in the up cycles and -- because of the mix and stuff like that. So -- but you're not…

Got it. If I may, just a follow-up? International, so you've got Munich and new stores coming up, right? I think secondly, within the four months, just looking at the newsletter, how are you feeling about things openings? And I guess just curious why lead with those two cities?

Yeah, those are just smaller ones. Yeah, smaller ones who don't have a lot of capital like they --

Nor hospitality.

Nor hospitality or anything, right? So these are some locations that we thought the locations were decent. It will give us some without putting a lot of capital in, just give us some feedback at the brand out there. I mean, look, I mean Abercrombie didn't have any bad locations. These were just -- we think we're going to get -- we're in a learning -- get information, right? And then we'll decide how long might we stay in these locations because we've acquired some leases and are there bigger or better places to go. And what do we do? But I think one of the key things is just kind of get the brand out there in a good way. But the real key was what did we do first. When people met us or heard about us, what did they hear, what did they get pointed to, how do they think. So now, we've done that. I don't think people will think Munich and Dusseldorf aren't beautiful galleries, they're just not going to be at the level of London and Paris and Milan and some of the other ones we're doing. So -- but like they're locations that where we were prior to take to get some of the really key locations that we really wanted and that was Central London and the Paris locations. So we think these are fine. Okay. Let's get going. Let's learn, let's see how the business builds. Let's quickly learn how to operate in these different countries at a relatively low investment and a much lower effort than doing the really big ones with a lot of work that take multiple years that -- and that have hospitality and other levels of complexity. So --

Got it. Thanks. I appreciate the thoughts.

Sure.

Your next question comes from the line of Seth Basham from Wedbush Securities. Please go ahead.

Thanks a lot and good afternoon. My question is around margins. How should we think about the product margins on the new product lines that you plan to be much sharper on pricing? So if you are thinking about consolidated gross margins in the mid-40% on a run rate basis going forward?

I think we'll have more to say. I think we believe long-term emergence can be at our historical highs. I think we've got to kind of win some share here, and we've got to play a little offense and just be sharper. And so there's some -- there's a few points of investment we're making there, but we also have places where we're playing aggressively, but our margins are at historical highs. So it all tends like what we're targeting, how we're targeting certain categories. [indiscernible] more to say, yeah -- let's see how these books do when they get in. Let's see what's performing, let's see what we're responding to. There's going to probably be places where we've taken pricing that's really sharp. There are many places we're going to take pricing up, right? We've already got one collection that's kind of through the roof. It looks like our best collection ever. Then we're going to probably take prices up this week. So just as we've got so much demand, and we think we can -- the product is still going to be positioned at a disruptive value. We probably just swung the pendulum a little too far on some -- this is -- the business we're in, it's day-to-day, week-to-week, you're learning, you're getting data, you're rethinking things, you're -- everything you do when you buy a new product is speculative based on backward-looking data. So you're never -- everything we buy is 100% wrong. We've never bought anything and we go, that thing is exactly how it's selling. That's exactly right. So you're only suggesting, right? You're getting real data, real information. And then you're learning from that, and you're extrapolating that and you're making next best decisions. So I wouldn't jump to any conclusions just because…

Right. But just to be clear, Gary, so the margin -- the product margins on the new product that you guys are launching over the next, say, six to nine months is going to be lower by a few points, and what you are earning on products during the pandemic. And then the real benefit that gross margins could be from volume, improved volumes?

That's not necessarily. So we weren't that specific. We don't guide gross margin, as you know. We don't disclose product margins. So we're trying to tell you just a directional flavor. And I think just to recap a little what Gary said, some products are going to be higher, some products are going to be lower. We're not making a general statement that I'll just -- you can roll back the tape on what Gary said as far as the investment we're going to make. That's right. But as far as like what the future is going to look like, let's just let that play out, and we're going to make margin commentary, especially gross margin commentary after each quarter's results because, again, we don't guide that particular line.

Understood. Thank you, guys.

Thank you, Seth.

Your next question comes from the line of Max Rakhlenko from TD Cowen. Please go ahead.

Great. Thanks a lot. So if we were to bucket your initiatives over the next 12 months into US gallery openings, European openings, and then new product introductions, how would you rank-order their magnitude? And then just for clarification, how much of a refresh inside the gallery should we expect both over the next one to two quarters and then a year from now, both in terms of new products as well as the number of galleries that the new products will hit? Thanks a lot.

Sure. I -- take the product, and the product is by far the most important thing we're doing, right? And the new openings and building out the platform, those are -- it's the platform for the product. So what we're doing with the product is going to make the most meaningful impact over the next several years. So when you think about the investment in gallery floor sets, we just began setting RH Marin next to our headquarters and we will all see it over the next -- it gets fine-tuned over the next couple of weeks. It's kind of a Phase 1 move of it. We have kind of right now, Phase 1 and Phase 2, and then we'll have a Phase 3. I think you'll see the majority of the galleries reset by Q1 next year and as we --

All the galleries.

Yeah. Yeah, all the galleries, yeah, reset. And then you'll have some winners and some losers in kind of the product mix. And as we mail the modern books going in in January, I mean, you're going to find out there are some things in modern that are probably really good and better than some things we might have just rolled out into the galleries, and you'll make some adjustments. But I'd say we'll be -- by Q2 of next year, we'll be really educated. Especially by the late Q2, we'll have had two cycles of drops. We will have a lot of newness; we'll have kind of the first phase, the major phase, second phase, still not as major as the first phase, but still more meaningful than normal. And we'll have had a good period of time to measure and have seen Phase 1 of the product transformation and first drops. And then we'll have some data on this second cycle and we'll be fully ready for the second half of next year, but to kind of keep optimizing it, right, because we're going to just get a lot of data, a lot of information, be making a lot of adjustments. And we'll keep doing things that kind of, what I'd say, build the trend. When you go through a big move like this, it's you're going to get some of it really right and you're going to get some of it wrong. As long as you're throwing more things above the line and below the line, then you're going to learn and then you're going to make adjustments. And those adjustments will move the business higher right? So I'd say we'll hit max inflection in Q2 doesn't mean we'll pick max run rate. When I talk about the inflection, I talked about the early inflection, then we'll build on that. right? So I would assume that the first half of next year will be very good and the second half of next year will be better than the first half.

Got it.

Your next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Hi, good afternoon. I was hoping to follow up on the topic of operating margins. And I'm just hoping we could maybe frame up some of the puts and takes. Obviously, the full year implies kind of the mid-teens level for the operating margin. Can you help us think about maybe your latest thoughts on structurally what the operating margins look like in this world where you're opening up stores internationally in this world where you have a new product coming out, there's more Sourcebooks. What do you think sort of normalized margins start looking like as you get back to revenue growth again. Thanks.

I don't think -- Brad, we're ready to talk about that. I think we're talking about some short-term changes, near-term impacts to the margin and especially moves related to -- and making some investments due to competitive reasons, as Gary had talked about. So what the other side of that looks like? We have our discussion with you about each year's guidance in March, so we'll do that and give you a better look then. But as far as we sit here at the end of Q2 and the many sort of changes in levers we're plowing forward with, we just don't have that visibility or that ability to tell you what the steady state looks like other than as revenue grows and we get leverage in the business, we expect margin to increase from here. Where that baseline level is -- I'll let Gary chime in here.

No, I think that's correct. I mean, I think we're -- for the most part, we're giving you color today maybe slightly more different or a different angle on the color than what's written in the letter. But we don't want to kind of talk about things that we don't -- that we haven't really released, right? And we're not really releasing kind of that far out. But yeah, all of us on this call are going to know a lot more next quarter and the next quarter. And we're either going to be more right or more wrong. We think we're going to be more right than wrong. And everything that we said we believe in. And it's -- there's some level of speculation, of course, but there's a lot of data that we have based on doing what we're doing, introducing newness, mailing Sourcebooks, resetting floors. We know all the lift factors and what will happen if we do this, that. And we're directionally usually right on those things. And so we've been rusty. We've been somewhat out of the game, and we're going to come back into the game in a very impactful way. So yeah, we're looking forward to kind of get into data. But look, the good news is the early data shouldn't look at that. It looks good. So, so far, so good. That's as much as we know right now.

Gary, maybe if I could ask you another way, when you did some significant share repurchase back, and I think it was in 2017. You later described that time as a period where you've kind of taken the racetrack of -- car off the racetrack and done a lot of surgery on it. Does it feel like it's that significant of a time for you as you think about how you're positioned in the company?

Yeah, bigger than that. We've redesigned the whole fleet of cars. It's really the biggest repositioning of the business we've ever went through. And, yeah, I think the best work we've ever done. So it's much bigger. I think it's going to be much more significant than that. And look, we just bought back a lot of stock. We played -- we put our money where our mouth is, right? We took a really big position in the stock, and we've allocated a couple of billion dollars that's twice as big, I think, it's the buyback back then. So we wouldn't have done that if we weren't confident and our Board wouldn't have let us do that unless they -- unless they were confident, right? So this is a fully informed kind of position we're taking from an investment perspective on inventory, on share repurchases, but we're not a new team. Experienced team and experience Board. Like you said, we've done this at just a smaller magnitude. We were a smaller company, too. So we're a bigger company [indiscernible]. So I kind of like where things are. I think, look, there's -- everybody is speculating, right? Like if you just like -- just look at what happened in this quarter, our stock started this quarter the day after earnings, $274 a share.

$247.

Yeah, $247 a share. At the end of Q2, it ended today at $369. It peaked at $402. It went up 49%, and it peaked at 63% up. Within a quarter, with the only information and disclosures was we bought back 17% of the shares. So everybody could do the math about how many shares we bought back. And because there's new disclosure that have to be made every time my ownership goes up by 1 point, there's a lot of disclosures. It's a lot of filings. And so you thought, "Hey, you don't now. they're buying back the stock up 17%, this go up 20%, it's about 14%." I mean it went all the way up to 63%. And at the end of today, it was up 49%. After hours, it's still up 36%, even though it's down, I don't know, 28 -- what’s it now 28 points down. So like that, they just flashed it over here a second ago. So -- and people like, wow, like, well, is it a bad day now. Looking a bad day. I don't know we've had 1 million good days, 1 million bad days within a quarter -- not a million, but like so many -- so much volatility in the market because so many people are guessing like what's next, what's this, when is the Fed going to ease? What are they buying back stock? What does this mean? And I would just say, stay focused on what we write. You want to know what we mean, re-read the letter. That's why we write these letters. So it's on there. It's not random comments from a conference call that can sometimes be less focused and just everything I spent a lot of time right in those letters. And the team…

Your next question comes from the line of Jonathan Matuszewski from Jefferies. Please go ahead.

Great. Good evening, Gary, Jack, and thanks for taking my question. It's on the contemporary business. In the past, you referenced $1 billion milestone over three years. Just hoping to see if we could get an update on how that business is looking today as more product has been rolled out across the galleries, and how we should maybe think about the run rate of that business, maybe by the time of early next year, which would be a couple of months after the October Sourcebook mailing. Thanks so much.

Yeah. I think about the totality of what we're doing here. I wouldn't just isolate contemporary, right? Contemporary -- it's a new book. Do we think it's going to be $1 billion? Yes, we do, but you've really got a -- you've just got to look at this whole thing in concert, right? The biggest book is our interiors book. It'll continue to be contemporary -- modern being number two, contemporary, number three. Contemporary might ramp bigger than modern. We may make decisions, a lot of times, what exactly goes in contemporary versus what goes in modern versus what goes in interiors can be somewhat subjective. Like there's sometimes some blurred lines that are going to be there. I'd say -- I wouldn't go kind of micro like that right now. I think you'll miss the bigger idea. The bigger idea is the totality of the product transformation we're making. And I think about it as we're going to mail about 1,200 to 1,300 pages of product, and across that, 70% to 80% newness. I think the next biggest book that competes with us is 228 pages. We haven't mailed anywhere near those number of pages in a long time, and we've never had this much new product hit a market like this, at the design quality, the quality of the make, and the -- what we believe the value equation. And any time we've done anything like this, we've moved the business meaningfully. And so this is the biggest thing we've done. I think it will be the biggest -- the most meaningful thing that we've ever done strategically. It will reset the company for the next five years.

Appreciate the color and best of luck.

Thank you.

Your next question comes from the line of Steve McManus from BNP Paribas. Please go ahead.

Hey, afternoon. Thanks for taking the question. So I had the same question on suppliers. We're seeing more and more suppliers go out of business here, pretty big one on the high-end side last week. So just curious what you're seeing with respect to the financial health of some of your key suppliers. Any challenges that you're facing right now that's worth calling out?

Yeah. I think you're probably referencing one of our suppliers that filed for bankruptcy, Mitchell Gold and Bob Williams, they are really terrific people. It's just an unfortunate thing. I think they went through some private equity hands and there's some -- they stepped back in the business and got some wrong leadership, made some bad decisions and it kind of goofed up the company. And there is, I don't know, probably $30 million, $40 million of demand with them. We can resource it all pretty easily. We don't see any meaningful interruptions or anything. They're not one of our big suppliers, so -- and I think it just goes to show how hard it is to do every part of the business right. They're -- typically, they were a furniture manufacturing company, really great aesthetic, great marketing, great style. They got into the retail business too, and that added a lot of complications. It's hard when you try to do both. You try to be a wholesale business, a retail business, manufacturing business. You're kind of in three kind of complex businesses right there. So I think there is always going to be some people that kind of don't make it through different down cycles like this. Could there be more? There could. There could be more on the retail side, there probably will be, but we don't see any real fundamental risk to our business that is going to be meaningful. Otherwise, we would have talked about it in the disclosure.

Got it. Appreciate the color. Thanks, Gary. Best of luck.

Sure. Thank you.

Your next question comes from the line of Michael Lasser from UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. Gary, is it right to interpret your statement that you expect the business to inflect in the first half of next year to mean that it's going to flatten out in the first half of next year before resuming a growth trajectory in the second half of next year? And my follow-up question is, would you expect, based on everything that you know today, that your totality of investment spend independent of it's going to be in the gross margin or in the SG&A, is going to be greater than, equal to, or less than what you're spending this year? Thank you so much.

Sure, sure. So yeah. Let me just try to be real clear and direct that we expect the business to inflect in the second half of this year, right? Meaning -- and when I talk about inflection, what does that mean? That means a meaningful move in trend, and this means to the upside, right? So we think our business will inflect and our trend will change to the upside vis-a-vis where we've been trending, where -- how the rest of the market is performing. We think we'll have an inflection that will make a meaningful move against all those metrics, right? We'll inflect up against our trends. We'll inflect up against the market trends. We'll inflect up against the competitive trends. We think we will reach kind of a peak of that inflection of this first phase from these books, we think we will hit that in the first half of next year. So I'd say, think about an inflection happening here over the rest of this year, we'll inflect up. And then in the first half of next year, there'll be another kind of inflection above whatever that run rate is, right? And that's against our trends, against the industry's trends, against our competitors' trends. And then as we cycle and get into the second half of next year, I think we will build on that trend, but it may not be as big of an inflection, but it will be a building of momentum. Again, kind of disregarding any kind of meaningful thing that happens in the economy and whatever the -- whatever happens in the economy, I would be surprised if it's more dramatic than our positive inflection, right? So if the market goes down, some step-down, our inflection point will be bigger than that step-down. Does that make sense? Is that more clear?

I think I catch your drift. If you've been trending down high teens, low 20% range, the inflection is, look, we're not going to be trending down at this range. The counterargument would be, well, you're going to be facing easier comparisons. It's harder for us to dissect how much is due to just the market getting better.

Yeah, yeah. No, you've just got to think about -- think about all those things I just said. What's the industry doing? What are the key competitors doing? What are we doing? We're going to inflect against all of that, right? So it's not just our trend. Our trend will be one of those elements, but we're going to inflect against the industry. We're going to inflect against the key competitors. That's how to think about it.

Understood. Okay. And then on the…

Just let me -- let me just -- which means we'll be taking market share, right? So I think we've been giving market share. We will go from giving market share to taking market share.

That's clear. And then as you think about 2024, will the magnitude of the investment that you're making be larger than, more than, or equal to this year?

We haven't guided to that yet. So yeah, we're not prepared to kind of talk about that.

Okay. Thank you very much and good luck.

Great. Thank you, Michael.

Your next question comes from the line of Cristina Fernandez from Telsey Advisory Group. Please go ahead.

Yeah. Hi, good afternoon, everyone. I wanted to go back to the advertising spend and the shift you are making to the twice a year cycle. Like, does this mean you go back to 4% of sales spent on advertising? I know the last couple of years, it was very low or with the product introductions you're making and the new store openings in Europe, does it make sense for that spend to be at a higher level? Just want to get a sense of directionally where that spending goes.

Don't know yet. We'll know a lot more when we see the inflection in the business.

And we have no further questions in the queue at this time. Gary Friedman, I'll turn the call back over to you for closing remarks.

Great. Thank you, operator. Thank you, everyone, for your time and interest. Thank you to team RH for your leadership and efforts. Your hard work is going to pay off, and thank you to all our partners around the world who are part of this team. Your support and efforts mean the world to us. And I can tell you, all three constituencies that are all probably listening into this call, I think, share the sentiment that we shared with you today. I don't think we've ever been more excited about the future. And I believe we'll demonstrate that to the other constituencies, and that's the shareholders that are on this call. So thank you, everyone, for your time and attention today. We look forward to the next few quarters. Thank you.

And this concludes today's conference call. Thank you for your participation and you may now disconnect.