Good day everyone and welcome to today's RH Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Allison Malkin of ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2024 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 filing 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, Allison. Good afternoon, everyone. Thank you for joining our call. I will start with our prepared comments in shareholder letter and then open the call to questions. To our people, partners, and shareholders, we are pleased to report that demand was up 7% in the second quarter and has continued to inflect positive, gaining momentum each month with July finishing up 10%. Demand accelerated into the third quarter with August up 12% and product margins inflecting positive despite operating in the most challenging housing market in three decades. Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America while building the foundation for our long-term global expansion across Europe, Australia and the Middle East over the next decade. While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry. Vectors are measured in magnitude and direction, and can be effective in forecasting strategic separation and future market share gains. It is now clear that our vector is increasing by both measures as we are outperforming the industry by 15 to 25 points. We expect our performance will continue to gain momentum in the second half of 2024, fueled by our multi-year effort to elevate our product, and a multi-decade effort to elevate and expand our platform. We are also pleased that results for the second quarter reflected our guidance with revenues of $830 million, up 3.6% versus a year ago, adjusted operating margin of 11.7%, and adjusted EBITDA margin of 17.2%. While aggressively investing into a downturn has put pressure on short-term results, it has also positioned…

[Operator Instructions] We'll pick our first question from Curt Nagle with Bank of America. Your line is open.

Great. Thanks so much for taking the question. Yeah, so I just know with the inflection demand trends driven by all these new product launches coming through, I'm feeling pretty good about the product margins. I think you called that out in the press release, stable, hopefully up for the rest of the year, putting you, I guess, above the phrase or market that feels a little more promotional. What are your thoughts on that?

I'm sorry. You were kind of -- we couldn't quite hear you.

Yeah, just with the inflection, new products right, good margins, how we're feeling about the product margins for the rest of the year? That's the core of the question.

Well, I think as I mentioned in the third quarter, they've inflected positive. And we feel very good about the business right now. The inflection happened a couple quarters later. When you're making big moves and big innovations like this, as I said, it's not as much about the timing as it is the vector and the increasing magnitude and direction of that vector and what that helps you kind of see down the road and we've now got enough data through the product introductions we've made over the last several seasons and now it's about refining and polishing and continuing to kind of learn and improvise and adapt. And we've got a lot more in the pipeline. So I sit here and I think about, look, the mix will begin to shift today, but, we like where we are. We like the demand vector that's unveiling itself. We like that margins have been collected positive. We like that we've got multiple galleries, new galleries opening in front of us. One of them, I mean, could be, one of them is worth like 3 or 4 galleries in and of itself. When you think about the kind of value RH Newport Beach is going to be, I think it's going to be a dominant and disruptive force throughout Southern California. And we're really excited about what's ahead of us. So, yeah, we're going to continue to do what we're doing. We're going to continue to learn, grow, improvise, adapt, and refine and elevate, continue to elevate our strategy. So I can’t be more happy about where we are. Would have liked it to happen a couple of quarters earlier, but that's not really the point, right? I said to somebody, how many times is, I must spend on time. When…

And then just a quick follow-up. So, you noted that consolidation of the contemporary catalog, totally understand the efficiencies. Do you think that maybe points to maybe the scope of the question being a little bit smaller than anticipated or is it maybe just more of a timing thing or it's selling a very high priced set of products and market is still pretty choppy?

No. The point about, I pointed it last year, and I talked about contemporary at some point and said that we -- we're kind of arrogant in pricing, on the product that was, that's just a partial issue. It's more about as trends develop and evolve in any industry, right? There's an opportunity to kind of segment and focus on different looks, aesthetics, perspectives. And we have been successful to this point at thinking about kind of taking assortments, focusing them and getting them to break through the clutter. Yet all kind of still integrated as one brand with a singular point of view, but delivered to the consumer with more clarity than shopping. I mean, I don't know, like some online thing like Perigold or Wayfair, right? Where you just got to look at a lot of stuff and you can't really find things. So the ability to just focus our business and deliver the business with -- in a really clear and compelling way is what will continue to do. Just in this case, there is a big trend movement and no different than the big movement that was made that led us to isolate versus integrate RH Modern. That was a big discussion here years back. As we developed that assortment, do we integrate it into our RH materials book and evolve that book or do we isolate it and create a more focused message to the consumer? And so you've got to think about what are the size of the trends, how do the trends develop, how long the trends are, and you're constantly thinking about how to present in a clear and compelling way that’s going to break through. So, we've done a lot of things, a lot of different books, RH Beach House, Ski…

Really appreciate that. Understood. Thanks, Gary.

Thank you. Thanks, Curtis.

We'll move next to Steven Zaccone with Citi. Your line is open.

Great. Good afternoon. Thanks for taking my questions. I wanted to talk about the product assortment, because there's been a lot of newness. I think last year you gave this point that 80% to 85% of the assortment would be new. So I'm curious, are we at that point now or do you need more newness in the second half of the year? And just with more product newness coming into the business, do you feel like you're at the right cadence now? Or as we get into ‘25, you'll have incremental newness to present to the consumer? Thank you.

Sure. Thanks, Steven. Good question. So we have a lot of newness coming in the second half and a lot of newness coming throughout next year. I'd say, mid to late next year, we will start to be on a more predictable cadence. So we will hit the 85% in the first half of next year. It's when, there's a lot coming in the second half and there's a lot coming in the first half of next year. I'd say by the second half of next year, we'll be on a new regular cadence, right? The business will be very different. And -- but we'll also, there'll also be other things, right? Other categories we might address, like Waterworks. We've got a really small bath business. I mean we're taking the best bath -- arguably the best bath brand on the planet, most desired and coveted bath brand on the planet. And yeah, if you think about the industry, the general trade industry is generally 80% of their business work a little more. But directionally, think about it, 80% of the business is to architects, designers, builders, so on and so forth, right? It is a business to business kind of platform. And while we have a big trade business, 80% of our business is to the consumer. A lot of trade showrooms and high-end things, they're not even open on weekends. They close at 5 or 6 o’clock, they're not open at night, they're not in places where consumers, there's high traffic or so on and so forth. Yeah, it's a completely different model. So what we've learned over our journey here is we took trade brands and businesses years ago. I mean, one example is Perennials, one of the great brands in the high-end to the trade, high-end…

Great, thanks for all that detail. I'll cede the floor and I look forward to the invite to the Newport opening.

Look forward to seeing you.

We'll move next to Steven Forbes with Guggenheim Securities. Your line is open.

Good afternoon, Gary, Jack, Allison. Gary, last call we briefly discussed the idea of top, middle, bottom tiers of the assortment, the new collections. So, would love to hear you sort of talk through how you think the collections are mixing into those tiers today as we all try to sit here and conceptualize what the potential aggregate demand lift could be from the actions thus far into ‘25 and beyond?

Yeah, well, it's how many of the new collections made it in the top third, those will really move the business. If they made it into the top middle third, they'll move the business up. If they made it into the middle, they're not going to make that big of a difference, except when you get enough in the top third, it pulls the whole thing up and the middle gets tight. So there's a new middle. When you think about this analogy and how I describe it, and your bottom third is a bigger, it's a much more productive bottom third, but you've got to keep getting things into the top third. That's the key, because the top third pulls everything up. It's like great people. It's like great leaders. They pull everybody up. They set a whole new expectation and a whole new bar. And all the people that are capable and have the desire and the capability reach a whole new level and everything moves up. So, the real key here today is like, and I would like if I just look at it and I go, okay, where are we versus the industry? Where are we? Where is our demand versus others? What does the vector look like? What are we learning from the new top third? Because you wouldn't have the inflection we have unless you redefine the top third. Right? And you redefine the top third, it's forever redefined. And then the middle third is forever redefined. And the bottom third is forever redefined. Right? And it's no different. As you think about the product is to think about people, right? Somebody goes out, take the Olympics as a point of reference and breaks a record in the hundred meters or in some swimming…

It's great to hear about the focus. So I'll also pass it on. Thanks, Gary.

All right. Thank you.

We'll move next to Simeon Gutman with Morgan Stanley. Your line is open.

Hey, everyone. It's Simeon. Hi, Gary, Jack, and Allison. I wanted to ask a twist on maybe what Steve was just asking, the confidence that this initial demand that you have here has durability. And I know, Gary, you mentioned the vectors and the market share spread. And I think you have a lot of newness. You have catalogs or source books. So you have reason to be stronger than them at this point. And you had this coming. So how do you look out several quarters? And then related to Steve's question when you talked about the different tiers or tranches, do you have enough product out to see how some of the initial product is trending? How many of those top third categories might you already be sitting on? Thank you.

Yeah, we've learned a ton. Yeah, we've got a lot of data. And so, we're very confident in our outlook and what's ahead of us, despite whether we get interest rate tests or not interest rate tests. It's not as all of you know, we came into this year, everybody expected, I think the markets were betting for five to six interest rate cuts. And so far we haven't had one. And now they're saying, it's time to do an interest rate cut. Well, those are the same people that said, when inflation went from 2% to 4%, it was going back to 2% over the next few quarters, and then it went to 9%. So, that's not a dig at those people, by the way. Leading and trying to look into the future is really hard, right? You guys do models on everybody, you have forecasts on everybody. My sense is almost every plan you have, every forecast you have is some degree of wrong, right? And so the key is, are you more right than wrong? And are you learning, are you gathering more data? Are you sharpening your sword? And can you see around the next corner? So we have a lot of confidence, we have a lot of data, we put a lot of product in the market, we've learned a lot. And we have a lot of news coming in and we're rebuilding everything here. Every model, every part of our organization, everything is kind of under inspection, under attack. We're going to reinvent every way we do things and then as we do, the things we did best, we'll optimize those and we'll focus those and those will be our next round of habits but -- and behaviors. But you got to be careful…

Okay, thank you. Good luck.

We'll move next to Max Rakhlenko with TD Cowen. Your line is open.

Great, thanks a lot. Gary, so you earlier walked through the importance of galleries. Can you provide an update on where you stand in resetting the in-store assortment? I think on the last call you discussed being around 50%. So just curious, where's that now? And when do you think it'll get closer to or fully reset, just given the potential lift that it could have to the business?

Yeah, we're at the very early stages of that. Again, you want to think about, we reset on the early data, then we get better data, and then you've got new newness, and then you've got to, so you're going to constantly read and react and refine. And I mean, we're right now so excited about some stuff going really, okay how do we run to get that in the galleries? What do you do? Like, your life depended on it. How to get the goods in the galleries now because they're going to really massively lift. I think public right are mixed right. Yeah they're going to be -- 70-30 kind of. Not really? Okay. I mean, the game is get the goods in the gallery right now. We get the right goods in the gallery, on the floor, in the right place. That alone is a massive move, a massive move. But we've got to, you got to ramp up the production, you got to get it. You've got to dimensionalize it. You've got to -- that's why we're running with a higher level of inventory right now. We've got so many things, you got to kind of, these transitions are really tricky. You didn't -- you're not going to buy it right. So you've got to kind of invest in kind of some downside protection. You've got to carry heavier inventories for a while, while you're learning and then you've got to kind of edit and refine and go through it. But no, that's what you're identifying is one of the next big moves. I would say where are we on the galleries having all the right goods? I mean, Stefan, what would you say?

We have work to do.

Yeah, would we say, 30%?

I was going to say 35-40.

Yeah, 35%, 40%. Yeah, there's some big turns there. Big moves.

Got it. That's helpful. And then maybe we can keep this one. You said it might be rudimentary, but where do you stand now in the promotion, in your promotions and sort of winding down the old discontinued product demands picking up? So, should we think that you're probably in the latter innings or how should we think about it? And then just the key drivers of the product margin inflecting here more recently.

Yeah, I'd say, look, we're in the middle of kind of these big moves in and out, right? So you're learning, you're transitioning, and you're kind of building the bridge to the next place. So I wouldn't really, I mean, I think everybody's making that a bigger deal. And I read the report, no, no, they got to get rid of the clearance or whatever. You've got to build a bridge to the future. I don't know why everybody's overly focused on that. I just focus on, hey, is our demand growing and is our margin inflecting positive? That's the game, right, Right there. And then, how do we organize, say, the brand and the business, all throughout build the platform and infrastructure, and organize the company for where we are and where we're going next, make it really efficient. So we're in a very inefficient stage right now. Massively inefficient. Because we've been laser focused on just kind of almost one thing. And so a lot of things, we've got to kind of rethink this all up and put things in the right order. And, so yeah, but that's what we do. So we've been doing this a long time. We love doing it. It's what we do. We love big moves like this. We love these times. This is what we live for. Figuring it all out. Doing it better than anybody else in the world. Leaving no doubt. It's like exactly how much we're marking down and what that is. I mean, the question is, what does the vector look like? What does the vector look like in demand? What does it look like in margin? Where eventually will the vector be? As you think about leverage and cost, then what will the model become? What's the timing of the big things here, you've got this big thing, Europe, we're just entering that, we had to make a lot of investments that honestly, not the greatest time, under construction, during COVID, post COVID and the most expensive times to do things or try to make, and stuff like that. But we got to get the big brand building markets and galleries open and the brand will build and then the demand will build there and we'll get a vector going there on what is what is Europe and international look like over X number of years and what's the leverage in the cost structure there? Like, there's so many opportunities, I mean crazy amount of opportunities ahead of us but we got to stay focused. We've got to be laser focused and we got to do first things first. We cannot get distracted right now. That's the hardest thing. Yeah, so.

Got it. Thanks a lot. I appreciate all the color and good luck with all the new galleries.

All right, Max. See you soon.

We'll move next to Andrew Carter with Stifel. Your line is open.

Hey, thanks. Good evening. I wanted to ask a little bit about the -- I think you're going to hit with your guidance here, seven design galleries this year plus the design studio. Are you in a position to hit that cadence every year? I know two international you've reiterated today. And I know you're talking a little more about prioritization. Where do the white space markets kind of fit in within that and are the white space markets still in scope for all design gallery types? Thanks.

I'm just processing the multiple questions right now. So the first one is about, we're opening -- how many we doing this year?

Seven galleries, one design studio.

Okay, eight total. Okay, so yeah, I think we were doing nine. Okay, so are we in a position to hit that cadence feature. I think there'll be years we'll hit that cadence and do more and there'll be years that we do less because our kind of pipeline is, if you try to go force things in and if you screw up big real estate moves like we make, you can't getting to unwinding from that is very expensive. So, can we open eight a year? Yeah. We haven't released what we're doing next year, but I'd say it's kind of in that direction. Might be more, might be less. The pipeline is really big. We've got a lot of things in the pipeline. So I think over the next four or five years, there's going to be a lot more galleries that we open than over the last five years. Think about it that way. But they're very big and complex projects. Andrew, you come see Newport Beach or something like, that's the evident. And it knocked down a whole part of the mall, and opened up, I don't know how many, got rid of like four retailers, something like that, five, and give us the path that we needed and the positioning that we wanted, have views of the Pacific Ocean from three of the four floors and do the most, probably the most incredible kind of rooftop restaurants in all of Southern California with the views we're going to have. That's why we didn't even make it any outdoor furniture up there. The whole thing is a 260 feet beautifully designed indoor-outdoor eating experience. It’s got incredible weather, incredible views. I don't know how many of you tried it. How many restaurants now have the new menu? It's like four? Four or five, yeah. And we're rolling out and upgrading and transforming our menu in our galleries. It's terrific new menu and yes, the menu for that gallery, it's going to be fantastic. I think you'll see some of our innovations happening there, that have been previously working on for a long time. So, yeah, there's going to be a lot. And where does, like, the white space thing, what's that question? Where does the white space fit or something?

I mean it's more of a transformation Andrew, right? There's -- there are white space opportunities for design studios of course as Gary's talked about over the quarters.

We've got probably like 10 markets we can open up mid-size gallery. In a couple we can open a big one in North America. Right?

Yeah, we do.

Yeah, I mean, what we're going to do in Naples is unbelievable. Yeah, we haven't talked about that yet. Not yet. Coming. You got me excited. I'm debating right now, like, myself, do I talk about it? Do I not talk about it? Well, it's going to probably be in the press soon. I mean, it's a whole new, three dimensional RH experience of the compound, the RH compound. And, it's a multi building, kind of integrated experience with gardens and courtyards and connecting buildings and it's like nothing anybody's ever seen. We partnered, came in Naples and we got the former Nordstorm’s pad that sits overlooking this beautiful pond and it's an incredible new idea and again, it's evolution of different ways to have more parts that you play. It's going to take a bigger site, how would you use the site, what would it be? Also, we think it might be massively more efficient to build than some of the galleries we're building today. And yeah, another innovative thing. So, yeah, I think generally, again, as you grow, you see more. As your brand grows and does more dollars per location and all of a sudden different markets look, they a lot better than they looked when you were doing a lot less volume, right? And the cost of the markets looked different and everything looks different. So I remember when I was at Williams-Sonoma, when I first joined and Howard Lester and Chuck Williams telling me, we can only have at the most 75 Williams-Sonoma stores, the most in North, like maybe only 50. And I think when I got there, there was like 35 or something. I don't know. How many Williams Sonoma stores are there? Like 250 or something, 200. I don't know. Some like that. But, you keep building a brand and it becomes more productive, it becomes better, and more market awareness, and you create markets. I mean, market leaders create markets. And so today, in North America, what do we think is right? Like 60 to 70? I don't know. So we'd be sitting here in five years and that's 80 to 100 maybe. I don't know. Yeah. So, but as we learn, you'll learn. So…

Great. Looking forward to Newport Beach. I'll pass it on.

All right. Thanks, Andrew.

We'll move next to Jonathan Matuszewski with Jefferies. Your line is open.

Great. Good evening. Thanks for taking my questions. Gary, first one is just on housing. I think investors are trying to understand how the eventual recovery in housing will impact furniture category spend, maybe across different income cohorts. So just wanted your perspective, how you see luxury housing reacting to the Fed rate cuts maybe relative to, you know, homes at non-luxury price points. Do you see luxury housing reacting more quickly? And if so, why?

I think a lot of it's about, again, the affordability gap and are we getting, do people see three rate cuts of 25% or 25 basis points or 50 basis points. And how far is -- how much are you going to close the affordability gap? I mean, the average US home I think is what, up 50 something percent versus pre-COVID and it's the half, yeah, the prices of housing got too expensive. And then the price of a mortgage got too expensive. And there's just a lot of people locked in at very low interest rates and when does that affordability gap close enough that people that are, I mean there's a lot of pent-up demand. I mean people are waiting, waiting really want a new house really want to move that the family's expanded, they need more room. I mean, it's a big build up here. But, how does that affordability gap kind of, just come together. It's like that's the key. So I don't know exactly how it's going to move or -- there's a lot of pent-up demand. So it may pop quicker or it may take time to ease. And yeah, it's going to depend on kind of what the Fed does. And it's going to depend on the homeowners, are they going to lower their price or are they going to hold out? I put a house on the market in Beverly Hills and I got a lot of low ball prices and I had it on the market for six months and I didn't need to take the lower price and I took it off the market. So, and there's a lot of that right now. There's a lot of like homes are coming on the market and people are testing it…

That makes a lot of sense. And just a quick follow-up, Jack. Just on the international investment this year, it looks like the headwind ticked up a little bit. Just if you could contextualize for that, is there kind of any incremental investments that are being made in international versus what was previously planned?

Yeah, good question, Jonathan. Yeah, part of it was just refining the number of sales came down a little lower. And, we had set approximately 200 and we were in that zip code. So we're just refining, giving you a number as the year plays out, we'll see greater visibility than sales growth. So just sales coming down overall and the impact.

Understood. Best of luck.

Thank you.

We'll move next to Brad Thomas with KeyBanc Capital Markets. Your line is open.

Great, thanks. Gary, you've touched on international a bit and some other comments that you've made and answers, but I was wondering if you could just give us an update on how you're feeling about the trajectory of that business and how some of the data points are coming in as you lap the one year anniversary of some of these locations?

Yeah, I mean, look, they're all going to get better. The real conversation happens. We open Paris next spring. We open London late next year. Crossed our fingers that, it's a complex job to string together four buildings and hopefully that plays out. And then we have Milan, but it's the fall after that? Spring after that, or spring 2026.

Yeah, fall after that.

Yeah, so I think we've got to get open in the big markets. I mean, people go like, you're kind of in London. No, we're outside of London. We tried to do an inspiring, unforgettable experience because we had a chance to, like here, we were introduced years ago, selling a lot more totally different brand and people still remember that. We still fight that perception a lot. And restoration hardware, that's where I buy my stocking stuffers. Like okay, William sold stocking stuffers in seven years. So like, no, you don't. Don't lie to me. But perception in brands are, it's really key and we were able to open, and kind of as a whole new thing. And that's why we did what we did. And, yeah, because we said, look, let's do something unforgettable and leave an impression. And, as I said many times, that investment was about conversation, not necessarily about commerce. I wouldn't have opened out there to say, hey, let me show you what I can do in the UK in an hour and 50 minutes outside of London, without anybody walking by with keycards. So, we've learned a lot, business is inflecting, it's all heading in the right direction, our design business is growing, our brand recognition is growing. And -- but when we open in London, in Mayfair, stringing together the four buildings we're stringing together, when you see that, the consumer sees that gallery, like, when they see that restaurant, I mean it's unbelievable. It's like the amount of people that will see it not only in London, from all over the world, like, they'll walk around Mayfair and it's a global -- wealthy global audience, and so we're right in the heart of it. I love our position, with kind of…

I appreciate it. Thanks, Gary.

Okay, Brad, thank you.

We'll move next to Michael Lasser with UBS. Your line is open.

Good evening. Thank you so much for taking my question. Gary, if you look at the updated guidance, how much of the reduction was due to the market just not being as strong as you expected, a slower ramp in demand in response to some of the introductions and changes that were introduced, or just everything executing a little slower than what was previously anticipated. And then as part of that, if demand is shaping up to be a little lower than you had expected, shouldn't there be a benefit to the spread between demand and sales?

Yeah. So, Michael, all good questions. So thanks. I say to the first one, which is kind of a lot of questions in one, right, dealing with what really caused the ramp to be slower, I think a little bit of all of it. Right? So, let me say this. The first one, not relevant. The market is not as strong as we expected. I don't think that was relevant. I think it's more, just the time it takes to marinate with the consumer, to see it, the time it takes for the books to get in home and might get in home. Ours are big books. You got to really intentionally throw it out and get to like, boom, it's out. But a lot of people get our book and it sits on the kitchen counter or the coffee table on their desk next to their bed. And now, all of a sudden, they might open it, you know, And then you have a certain amount of people that, like, they're in the home process, they've moved, they did buy a home. The housing market is not at zero, right? It's just down comparatively. I mean, we're doing a lot of volume. But yeah, it's just trying to say what -- when -- the amount we're doing, it's like, take the amount we're doing and say, like how long does that take to digest? How right or wrong are you, what's the quality of our execution, and what can be the quality of the execution is such a massive move, right? So it's hard to be critical, really, the organization when you're doing so much, it's hard to have the points of reference to measure and it's hard to know what the ramp is, how fast will it ramp,…

Maybe I could reframe the second part of the question is when do you expect demand and revenue, the growth rates to converge?

I don't know. Like, you actually made a really good point, right? If demand comes down, like, we lowered demand, that gap will come down and also the backlog, projected backlog. So we kind of modified some of those numbers. We kept the 4 to 8 because it's a quarterly bounce. It could be bouncy, but it could gap narrower, depending on timing of things. But yeah, it'll all converge. When I think it'll be, I don't know, like end of next year, like when we've -- we're kind of, we start to regulate more, right, as far as the case, in books and the newness and then, those gaps will not be as important, like, we won't have many back orders and won't have imbalances in special demand, lead times won't be as long from our partners. You Like, think about our partners, trying to react to what we just did. I mean, everybody, it's a bit chaotic for everybody, But it's a beautiful chaos. And the great thing is when you create order out of that chaos, and it's a beautiful chaos, it becomes a really focused, powerful beam that's just going to break through. But I don't know. Look, your job's really hard right now. You're trying to build this model. I can't build the model very good, right? Like I, we were off on the inflection stuff and, but, we'll give you the data. Like that's why we never guided demand before. We didn't give anybody demand. And but we thought, hey, you know what? Right now, you're not going to be able to analyze our business with what we're going through, we need to give demand. And so, we're trying to be transparent and give you the important data and be completely honest about what's…

Thank you very much. Much appreciated. And good luck.

Thanks so much. Come see us someday.

We will do for sure.

We'll move next to Seth Basham with Wedbush Securities. Your line is open.

Thanks a lot and good afternoon. I have one question, one follow-up. First, you mentioned in your 10-Q that your contract business is growing. I was hoping to provide a little bit more color on the size of that and the momentum there and whether that's going to become more meaningful to the overall company at any point in the near future?

Yeah, well look, everything begins and ends with the core RH brand, right, that business. And if that business gets stronger and more powerful, then the contract business will get stronger and more powerful. All of everything will, the hospitality business is going to be better if more people are coming to our galleries and buying things and so on and so forth. And we've got great teams and contracts. We've been thinking about our outlet business. If demand is up and sales are up, you're going to have more returns. You have more returns, you have more inventory for the outlet business, and the outlet is a joke, like all those businesses generally trail the core business, right? Like, yeah, it's like the lead, lead sled dog or something, that's clearing the path and creating the geese that fly in formation and stuff like that. The core business is at the front and everything else will benefit from the core business. And so, is the core business demand stronger than all the other demands? Sure. Is that right there an opportunity as the other businesses benefit from what's happening in the core? Yes, that's the coming tailwind. And so we're not breaking that all out right now. But maybe I think it's a firm grasp of the obvious, but maybe it's not. The core brand makes it possible to have a contract business, makes it possible to have an outlet business. It makes it possible to have any other kind of business we're in. Our restaurant business is possible from the great galleries and spaces we build and our baby and child business. If there wasn't an RH brand, would there be an RH baby and child? No. But all the lessons and all the things you'll see, you're starting to see, I don't know if you saw the last the book we just mailed recently for baby and child teen looks incredible, and it's emulating kind of aesthetically what's happening in the core, right? So there's so many reasons we're so excited right now because the reflection in the core, everything else, it will create, it will clear the path for everything else to follow and it'll bring everything with it. It's just a matter of timing. So, but the core is going to lead it all, right? So you could expect, I would say almost with certain, but I could be wrong. Something could pop here and there, but the core business demand growth will be higher than everything else, but they'll all catch up and it'll all kind of come back into harmony.

Got you. And then my second question is on inventory, which increased more than 20 percentage points faster than sales this quarter. You talked about some of the reasons why, but can you provide any more color as to how much of this is for gallery floor models and other things that would be helpful? And related to leagues, we expect this outside inventory growth versus sales growth to persist for at least the next few quarters?

Yeah, a lot of it is a kind of insurance, right? Like, how do you make the transition from here to there? How do you not things like drop out and run out of this before you build a bridge to there and all of a sudden you lost business? You just expect we're coming for this and you're learning every time. In a big transition like this, never done this before. So we're doing all our math and saying, how do we get from here to there? And then we had early learnings and like, gosh, we're getting out of that too fast, hold on, like how do you optimize? So, we're learning. But, yes, there's like an insurance policy, call it inventory, to kind of get from where we are to where we're going and exactly where we're going. We know directionally where we're going. We don't know exactly what that -- the makeup or the pieces and the percentages and the -- like what's optimal now, we're going to learn new things. And, so as we learn, you'll learn, I like to say, so we're, I mean, wish I had -- I mean, I don't really wish I had a really precise answer because then I'd be a manager. I'd be arranging and organizing the status quo and I'd be really accurate telling you what's going to happen next quarter and next year, but that's just not what we do. We would never got here if we were managers. We have a leadership culture. We don't have a title of manager anywhere in this company, in this brand. There are no managers here. We don't have meetings here. We have adventures, you know, pursuit of better ways and brighter days. So, we don't -- different -- yeah,…

I appreciate that. Thank you.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn it back to Chairman and CEO, Gary Friedman for any closing remarks.

Great. Thank you everyone. Thanks for your time and your interest and hopefully you've learned just like we've learned and I guess as we do here, just thank our people and partners around the world. It's just a great time to be on Team RH at all levels. I think, we're all learning so much. We're just getting going. We're getting stronger every day. Our culture here is to get all the brains in the game and the egos out of the room. None of us are smarter than all of us and we're learning together and we're growing together and you know we're going to build something incredible together and it takes a lot of energy and it takes a lot of effort, a lot of courage and a lot of commitment. So thank you everyone on the team internally and externally. You've brought this to life and it's going to be a fun ride from here. It's going to be a really fun ride. So, look forward to speaking with everybody soon and carpe diem.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.