Hello, and welcome to the RH Third Quarter Fiscal 2024 Earnings 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] I would now like to turn the call over to Allison Malkin of ICR. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our third 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 our 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 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, and welcome, everyone. I will start with our shareholder letter that was released in the last hour to our people, partners, and shareholders. The positive inflection of our business continued to gain momentum with third quarter demand increasing 13% despite operating in the worst housing market in 30 years. Our vector is increasing in both magnitude and direction, with November demand up 18% as the most prolific product transformation and platform expansion in the history of our industry continues to unfold. Our industry-leading growth is being driven by the RH brand, where November demand increased 24% with the introduction of our new RH Modern Sourcebook and has continued to accelerate into December with month-to-date demand up 30%, demonstrating the disruptive nature of our product transformation. The performance of the RH brand reflects market share gains of 15 to 25 points in Q3, accelerating to 25 to 45 points in Q4 based on our current trends and the expectations of furniture-based retailers. We believe our collections reflect a level of design and quality inaccessible in our current market and a value proposition that is disruptive across multiple markets, positioning RH to gain significant market share for the foreseeable future. Our Contract, Outlet, Baby & Child, and Teen businesses should benefit from our product transformation in 2025 as, one, the new assortment becomes more widely available to support our Contract Business, two, returns of the new product drive our Outlet Business, and three, the most successful designs are translated into smaller sizes for Baby, Child, and Teen. We are also pleased that our results for the third quarter reflected our guidance with revenues increasing 8.1%, adjusted operating margin of 15% versus 7.3% last year, and adjusted EBITDA margin of 20.8% versus 12.4% a year ago. Based on current…

[Operator Instructions] Your first question comes from the line of Michael Lasser with UBS. Your line is open.

Good morning. Good afternoon. Thank you so much for taking my question. Your outperformance relative to the industry has obviously been very wide. So, how are you thinking about taking advantage of this, such that, would you further accelerate some of the investments that you're making in 2025? And if that were the case, would you be willing to trade some margins, so suppress margins, even if it meant that you were still accelerating your sales? Thank you so much.

So, Michael, I think that's always a question for business leaders, and what does an investment cycle look like? What does the harvesting cycle look like? And how are you thinking about the business long-term versus short-term? And I think it's an interesting time in our industry. There's, like, multiple people pursuing different paths generally. A time like this is a hunkering down or harvesting time, people pull back investments. If you looked at our history, this has always been an investment period, because the other side of a downturn in a housing market usually leads to the potential to gain significant market share on the other side. Yeah. So, as we look forward, I would say, today, the view would be, most of the significant investments are behind us. The early investments into Europe, not that we don't have more, but the initial investments into Europe to just put in a platform to be able to launch a business there is pretty significant. We do have some significant investments with RH Paris and RH London and Range Milan. But most of that cash spend is behind us, right? Even as we think of the investments we've made to transform the product over the last 24 months, because the real effort began a couple of years ago. So, the ramping up and building the muscles that you need to operate at a level that we are operating are at today is really behind us. If you think about the new significant brand extension we're discussing, most of that product is in the pipeline. I mean, we could technically launch it today. We're just kind of polishing it up. So, those investments are mostly behind us. But our company is based on invention and innovation. It's based on investing into the…

Got you. Very helpful. And my follow-up question is, as we look out over the next couple of years, A, should we think -- is your baseline assumption that as the housing market does improve, it will lead to an acceleration in the recent trajectory of the business that you've seen, so we should think about that as we start to model next year and beyond. And B, given the pacing of margin decline that RH has experienced over the last couple of years that sales have been under pressure, is that the right frame of reference to think about how margins will recover at the same degree of sharpness as the pace of sales growth maintains, like, you've seen it recently? Thank you.

Yeah, I think that's directionally marked right. I mean the question is, what is the housing market worth? It's not only worth 5% when it comes back. It's likely worth 30%, right? And that will kind of compound over a couple of years. It might start out and it's worth 10% and it compounds to 15%, and -- but it might just spike and you might see the housing market come back like, you might see 30% growth. You could see 50% growth. If you think about how depressed it's been for how long, you think about that, the built-up potential demand, and how many people have wanted to move for several years, expanding families, people relocating, turning into renters and so on and so forth because of the significant gap in between interest rates, right, and how many people are locked into low interest rates. So, that -- that's just -- that's going to evolve, that's going to change. Exactly when it happens, we're kind of ambivalent about that. Quite frankly, sometimes I talk internally about, hey, I hope the housing market stays flat for another year. We'll have a lot less competitors if it does. We'll gain a lot more market share if it does. So I'm not necessarily enthusiastic about when the housing market comes back, because a bad housing market for a brand like ours positioned the way it is, is actually kind of a good thing if you think about what the future will look like. Because a lot of the ankle-biters that were able to raise capital easily over the last five, 10 years, and especially, yeah, pre-COVID, five years before COVID and the four or five years after COVID, I mean everything in the home business was looking great and you could raise…

Thank you very much, and have a good holiday.

Thank you. You too.

The next question comes from Christopher Horvers with JPMorgan. Your line is open.

Thanks. Good evening, everybody. So, I'll keep my question to a two-parter. The first question is, is you're guiding the fourth quarter below what you're seeing quarter-to-date, is that just caution on your behalf? Is there some sort of seasonality of the business to think about proceeding through the quarter? And then the second part is, you've put a lot of clearance in the past few years to introduce all of this newness, 80% newness this year, is it your expectation that over time that you can get that clearance margin back? Thanks very much.

Good question. The guide is, we think is kind of a correct guide, like, depends on what -- how the rest of December and January plays out. So, 75% roughly of our business, it bounces between 73% and 76%, I think, is our kind of core RH brand, if you think about it. And then we have another quarter of our business that are other things like Contract, Outlet, Baby & Child, Teen, Waterworks, Dmitriy, et cetera, et cetera. And if you just kind of pull back and think about the -- those businesses are not accelerating like the core brand. I kind of outlined in the letter that those should accelerate, many of them. Obviously, Waterworks won't be impacted by our product transformation, but our platform will enable the Waterworks brand to do some things that they might not have been able to do in the past no different than other -- how we scaled other businesses. But the markdown percentage, if you looked at the history of our business in our core business, would say the amount we have on market, like today, if you looked at it, 75% of our -- today, if you look at it, about 80% of our business in the third quarter is at full price with a full price and about 20% has been a markdown. It will fluctuate 20%-22%; 78%-22%, 80%-20%, it -- over the years, like in a really up housing market, that could be as low as 90%-10%, but there's always a percentage of clearance. I would say our competitive set or that just the general industry as a whole would love to have an 80%-20% mix. They love to have an 80%-20% mix. Is the clearance part of the business may be more under pressure than it would…

Thank you so much. Have a great holiday.

Thank you.

The next question comes from the line of Simeon Guttman with Morgan Stanley. Your line is open.

Hi, this is Zach on for Simeon. Thanks for taking our question. Following up on some of the free cash flow commentary earlier, can you speak to when you expect RH to turn free cash flow positive? And as a follow-up, how do you think about the funding needs of the business and whether it can be self-funded? Thank you.

Yeah, we believe next year we'll turn free cash flow positive and we'll be able to self-fund the business. I mean, the significant part of our debt is we don't really think about it as debt, right? We think about it more as a currency swap, right? So, if you look at our debt independently, you can say, they have a lot of debt. We look at it somewhat differently. We think of it as the currency swap. One, we didn't spend the money. We didn't buy anything. We didn't buy any physical assets. We didn't buy any buildings with our debt. We didn't build any distribution centers with our debt. We exchanged one currency debt for what we believe is an exponentially more valuable currency, our stock, which is a highly liquid currency, right? We can turn our stock into cash tomorrow. So, we took on debt. We exchanged that currency for our stock. Today, post the interest costs on the debt, we've turned a $2.25 billion investment into significantly, we've made several hundred million dollars on that investment already based on the closing price of our stock today. I mean, if you look at where our stock's trading after hours, that investment looks significantly bigger, right? So, based on our business trends and an expected return to growth in the housing market, that return we believe will grow exponentially, right? But we don't have debt on our balance sheet because we needed cash. We have meaningful part of debt on our balance sheet because we wanted to do a currency exchange, we wanted to purchase our stock when it was undervalued. I think we bought 7.6 million shares at an average price of $295. I don't know, where's the stock after hours right now? Is it four-something?

Yeah. It is at $450 last I saw it.

$451.

Yeah. $452. So, that's a pretty good return. Yeah, what would that return be? I mean, what's our cost of capital over that period of -- a hundred and something?

$350 million.

Yeah. Just about $350 million return. So, look, we've done this before. This is not the first time we've done this. If you look at our history, we have taken debt, exchanged it for our stock, and created significant value for shareholders. I'm the largest single shareholder in the Company. That's the way I think about it.

Thank you.

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

All right. Good afternoon. Thanks for taking my question. Congrats on the accelerating momentum. I was curious, Gary, if you could just help us understand the drivers of really the acceleration in the business. What's really changed with the product? How do you feel about your competitive positioning? Why do you think you're outperforming the industry by such a wide margin? And then if the industry comes back stronger in '25, do you think you're well positioned to scale and fulfill that higher demand?

Well, I think everything that we believe is in the letter. I don't know if there's a lot more to say than what's in the letter, what I might've commented on thus far, why we think we're outperforming. I mean, it's -- we have a lot of competitive advantages. We have a platform that's significantly, we believe, better than anybody else in the industry. We have product capabilities, savvy taste that's we believe better than anybody in the industry. Yes. I've said before, there are those with taste and no scale and those with scale and no taste. And we believe the idea of scaling taste is large and far-reaching. So, that's what we're doing. We believe our taste level demonstrated not only through the product, but demonstrated through the Galleries we built, the physical aspect of our business, our Sourcebooks, our website, and so on and so forth. We believe we're building a platform for taste that's going to be highly disruptive and lucrative over the long run. And that taste level and the capabilities we have at scaling taste, our ability to curate product, our ability to integrate product, and our ability to present product better than anyone in the world, I think, is demonstrated based on the size and scale and profitability of our business thus far. And we'll continue to create strategic separation as we go forward. So, that's who we are at our core, right? That's what we do. That's what we've spent 24 years building. And you haven't seen our Center of Innovation and Product Leadership. You have anybody on the call, I recommend, yeah, try to schedule a visit because nobody has anything like it. That has been built. It's a huge competitive advantage. Our methodologies, the way we think about the business,…

Understood. The follow-up I had is just on gross margin. When you reported the last quarter, you talked about August seeing a positive inflection in product margin. How did that play out over the balance of the quarter? And maybe how should we think about product margin in the fourth quarter? Thanks very much.

Yeah, product margin at the demand level is still positive. We did have some adjustments below the selling margin. One of them was in market stock. I think we did such big transformations of our Galleries that we had some bigger market stock. When you ship our product outside of the box, it's not generally a good thing. And so, we took a -- when we do a floor set transformation, we take the product off the floor, we have teams that are local home delivery networks that pick up all that product. The product's not new, it's not in the box, not in the protected packaging. They take it back and then it gets fed to the outlets. And we've never made a transformation this large. And I think we probably had more damages and more things that got banged up moving back and forth in trucks and moving around without boxes. And so we had to take some write-offs for product that we thought wasn't really sellable at the outlet level.

Plus elevated cost of moving the product and elevated inventory transfer costs.

Yeah, go ahead, Jack.

Yeah, one-time inventory transfer costs too related to moving that product. We also just rebalanced some product in our DCs just to get it optimally positioned. So…

Yeah, this will also move the product from Europe, from Europe back to America. We didn't start off with picking all the right products when we filled the DC in Europe. And now we see the trends and we realized, oh gosh, so we got too much of this, too much of that. Well, instead of marking down all that product in Europe, it's better for us to just ship it back to Baltimore, feed the core business. So we do that, that's another one-time kind of charge. So -- but at a general selling level, especially in our core business, we liked how our margins are trending. We think there's going to be upward opportunity and margins, not downward pressure and margins looking forward.

And Gary said on demand margin basis, it's also on a ship margin basis, the selling margins on the ship basis in the quarter were inflected positive.

Yeah.

Okay, very helpful. Thanks, guys.

Great. Thank you.

The next question is from Steven Forbes with Guggenheim. Your line is open.

Good evening, Gary, Jack. Gary, maybe just a two-part question on real estate, given sort of the planned -- the sheer number of openings, right, planned over the next couple of years here. So, to start, can you speak to maybe the performance payback periods and store-level ROICs that you're sort of expecting in these classes of galleries, maybe relative to what you've spoken to in the past? And then how have the discussions with landlords and developers evolved over the past couple of years? Maybe have you seen cost pressures normalize in the uniqueness of your model and just the pipeline itself? How has the conversation with landlords and developers evolved?

Sure. So, yeah, let's start with the payback and ROICs. Historically, we've always said payback of, I think, one to three years. We believe that's still the right number. Where it wasn't the right number was anything built during COVID, right? Because things that's being built during COVID, stopped and started three or four times, and you had raw material costs in some places go up two to three times or 4x. So, anything built during COVID was significantly more expensive, up to three times more. I'd say in a general sense, building costs today to build at any level, no matter if you're in retail or any kind of business, are somewhere between 70% and 100% higher. So, it costs us more to build the gallery today than it did. The good news is we have a significant inflection in our demand and our sales, and we have an expectation for returning housing market lift. But in most of the Galleries, I'd say, in the pipeline today that we're opening will be relatively quick paybacks. Maybe the really iconic ones, like London and Paris, might take three or four years, but they might take two years. For example, RH Newport Beach is a good example. We have a developer and a partner there in the Irvine company. I think they cleared about eight retailers for us, right? So, if you think about the investment that a developer partner would make here, they cleared probably eight retailers, took dead rent for several years, because our projects take anywhere from two to three years. It takes a long time to get approvals and build these kind of buildings. So, they cleared rent for several years. They completely cleared the site, ripped down two or three-story buildings to clear the site and…

Thank you, Gary. I appreciate the color. I'll pass it on.

Thanks, Steve.

The next question comes from Max Rakhlenko with TD Cowen. Your line is open.

Great. Thanks a lot, and congrats on all the progress. So, first, just what inning of the product transformation cycle would you say you're in now? And that's both the product itself as well as the Gallery [indiscernible].

What inning. I would have said maybe the sixth inning before my latest trip to Asia and Vietnam and now I'd say we might be in the fourth inning because the dots have continued to connect and so we'll -- there's a lot in the pipeline. There's just a lot in the pipeline. I mean, again, if you read the letter, there's a lot happening, a lot coming. The significant brand extension I'm talking about might be worth as much as everything that we just did. So, I mean, I think it could be massively, massively accretive. And so, yeah, we still call it maybe the fourth or fifth, fourth inning halfway. But again, that always changes, right, as you evolve, because you connect that dot, you see more, so on and so forth. I think it's like, like, I don't mean to sound arrogant and compare ourselves to Apple, right, but at what point, someone would ask Steve Jobs when they introduced the first Apple phone and he said, this is going to change everything, what inning were they in? I mean, what was their market cap then? After the first year of the iPhone or second year of the iPhone, maybe $500 million, something like that, maybe $400 billion, $300 billion. I don't know what Apple's worth today, $2.5 trillion.

Yeah, around that.

$3 trillion, something like that. So the more you do, the more you see. The more you see, the more you can do. And you go into what I refer to internally as an upward spiral. And I'd say today, we are in an upward spiral. We're doing more, we're seeing more, therefore we're doing more and seeing more. And you go through that cycle, you can keep connecting dots and see more. So that's why I say competitors, anybody who's hunkering down or trying to harvest in the harvest mode or they're trying to squeak out every tap point they can out of an operating model, that's the very temporal condition. We're in a real upward spiral here that it just going to lead to more and more. So you'll keep asking me what inning you're in and I might be perpetually in the third to fifth innings.

I'll keep that in mind. And then just thinking about some of your comments previously about harvesting profits down the road on the investments that you're making or you've made in the past, how are you just thinking about the magnitude and where margins can go a couple of years from now?

No different than when we've always thought about it. And we're always going to be at some level of an investment stage. That's what you do if you're a brand that's based in invention and innovation. So -- but I'd say the phase we just went in was a pretty massive investment cycle, not just to scale up and ramp all the product that we have and build the pipeline and so on and so forth and build the organization to do that and the new partnerships to do that, but also launching Europe, right? I mean, that's a big kind of one-time investment you're making. And so some of that is behind us, yes, still up here, some of it's in front of us. But, once we build the platform in Europe, and once we kind of get the brand going. Look, if we were in year two, and, yeah, we were cycling RH England, and we were doing like $8 million, like, I'd be really worried. But when I sit there and I go like, okay, we're -- demand tracking it, $35 million to $40 million, somewhere around, you think net $38 million, something like that, and turn that into revenue, you’re $32 million, something like that, $33 million, and then you say, I don't know, what's lending going to be with 9.7 million people in the heart of Mayfair. If you said it three times that, which I think could be conservative, that's $100 million in revenue. It's four times that or five times that that's $130 million to $160 million in revenue. And that's by the way, this is with the brand relatively unknown. And we went into an unknown place where the only retailer of our kind, for like, I don't know, 100 miles, I guess I'd go like, it's a long way to anything like that. So it's, -- I think margins are where we think the margin model ought to be on a regular basis going forward. I mean, we're also in the depths of a bad housing market. If somebody said, well, homes increased 3%, that's a dead cap bounce. The housing market has not shifted yet, it's not meaningfully growing yet, and when it does, we'll benefit from it and you'll start to also see where the margin model will be. But right now, if you're looking at a margin model, you're looking at a margin model based on a bad housing market and a significant investment cycle. Maybe the biggest investment cycle, it's actually absolutely the biggest investment cycle we've ever been in. So you're probably looking at kind of bottom margins for us.

Great. Thanks a lot. I appreciate it. And enjoy Montecito.

Okay. Sorry you'll miss your first opening, Max.

The next question comes from Curt Nagle with Bank of America. Your line is open.

Great. Thanks very much for taking it. Just a couple of ones. One, in terms of just thinking about demand and the revenue trends, when should these equalize? When should the gap narrow? And maybe more specifically, looking at the first half of '25, should we hold it something similar to what we're seeing in 4Q? Is that roughly the right math? And I'll follow up after that.

That's a good question. I think it's going to, yeah, it's going to start to narrow. Our stocks are getting better. Yeah, we invested in more inventory to kind of close that gap. And so I think it'll be a little bumpy for a while until -- again, until the inflection of new product slows down a little bit. But we'll have a stronger point of view in the next quarter or two. But clearly, we see the gap shrinking. The end stocks are going up. But there's a whole new cycle of newness coming that could -- you could have some real runaways that create really high back stocks and longer lead times and so on and so forth. So, but the initial gap is closing, could be a -- could get a little wider and bounce around a bit. But I mean, directionally, I don't see it going back to as big as it was in the beginning of the transition.

Got it. That would be, I guess, a high-class problem that does happen. The second one, I guess, Gary, for you, just trying to think through very early stages here, but potential demand synergies for the core product in the trade business with this acceleration and expansion of the Waterworks business, which I think, as you said, is -- has a strong core B2B customer base.

Sure. Yeah. I think, well, one, the contract side of our business start there almost can't benefit from the new product yet because we're still getting in stock in the best product. And we still are building inventory to get into, to transform the Galleries. I mean, some of the newest product is coming out and outperforming the Phase 1 products, right? So, we're going to have to transition Galleries again to get the best product, which is, again, part of an upward spiral. So, I'd say the Galleries today are a third right. So, I think there's two more transitions in the Gallery to kind of optimize that, which that means it's going to take a while for the best product to be available to the contract business. I think that's what you mean by the trade business, but maybe I've got it wrong. And then Waterworks just having a just higher exposure and our interior designers being able to spec it across their projects and our customers being able to see it on our website, see it in a Sourcebook, just the brand recognition and awareness of Waterworks is going to grow. And the accessibility is going to grow. So, we think that's going to be a big idea. How big could it be? We think it looks like a billion-dollar idea to us when we kind of track it out. So, the synergies and then just taking the best designs and translating those into smaller sizes for Baby & Child, and Teen is going to be a real synergy. And as much as retailers don't like returns, returns are what drive the outlet business. The outlet business is dragged behind the core business significantly, right? Because there's not enough returns of the new product yet, which will drive that. So, again, it's all part of an upward spiral, right? And one begets the other. And all of the learnings right now, all of the things we're seeing all of the dots we can now connect because there's a whole new set of data that we haven't had. And so the data becomes richer, you become smarter, you start investing wiser. Your next ideas are likely better than your last ideas because you're more informed. You have more knowledge. You're making better decisions, assessing things more correctly. So, I don't know if that answers your question or not.

No, that's very clear. And I appreciate it, Gary. Happy holidays.

Great. Thank you. Thank you, Curtis.

The next question comes from Seth Basham with Wedbush Securities. Your line is open.

Thanks a lot and good afternoon. My question is just regarding the product transformation and what you characterize it for as inflection. You previously talked to a peak inflection point sometime in early 2025. So, this upward spiral that you're seeing right now, would you think that peak inflection is extended outwards?

Massively outwards. Yeah, because when I talk about the peak inflection, like think about what I knew. Almost nothing. Right? We had new products hitting. We saw trends on any product. We're tracking it out. What does it look like? But we didn't have enough data and information to really know any more than we knew. So, it got worse. Peak inflection now based on what we know, I think it's several years out.

And previously you talked about peak inflection being sort of the strongest year-over-year growth. I assume you're not thinking that strongest year-over-year growth is going to be a few years out. But you think that you'll see strong growth for the next few years, in other words.

I think the strongest growth might be a year or two out. Because the significant brand extension I talked about is significant. It's not small. It's meaningful. And the amount of new product that's coming. For example, a year ago, probably a year into this transformation, I kind of reframed everything for our internal team and our external partners. I said, look, we are still in the early stages of what I called a product development super cycle. Something we've never done. Because we haven't enough data to say, like, this can be much bigger. We think about the market completely differently. We think about the size of the market, the consumer. We see more consumers. We see more homes. We see more rooms. We see more aesthetics. We see a significantly bigger opportunity for RH. In some ways, I'd say the classical way to think about us is kind of as a specialty brand, right, with a certain point of view. And that's how I'd probably say I looked at us over the last 20 years. How do we build this specialty brand with a certain aesthetic point of view and grow this brand? I think about us differently today. And I think about us a lot differently just in the last 45 days. I just haven't articulated it completely and clearly based on what we've learned. And it is directionally what we've framed over the last five years, right, with our long-term business vision and ecosystem. We've said there are those with taste and no scale. And those with scale and no taste. And the idea of scaling taste is large and far-reaching. So, and then we've articulated, right, what I call the one-pager, kind of a bigger view of how that can play. I think what the…

Wonderful. And just last follow-up. So, I know you'll provide more information next year, but this significant brand extension that you think could be worth over a billion dollars, is it within furniture, or is it more adjacent beyond furniture?

No, it's just kind of within the same thing we're doing. It's just unique, different, aesthetically different, and probably addresses the biggest part of the market. So -- and we think it's going to be amplified by what we think is a trend that is coming.

Wonderful. Can't wait. Thanks a lot, Gary.

Okay. Thank you, Seth.

The next question comes from Andrew Carter with Stifel. Your line is open.

Hey, thank you. Good evening. I just wanted to ask about the inventory, kind of going up again and again this quarter, the purchase is up 30%. Could you talk through kind of what kind of inefficiencies are in there? Is there some planning around there? I know that you're exiting China. Is there any safety stock in there for that, already contemplating that and you're exiting Mexico. And on those two points, correct me if I'm wrong, China was 22% of your purchase dollars last year. I don't know if you ever disclosed Mexico. Where is that going, in terms of -- thanks.

So, the first part of everything you said, I'd say correct. That would be my answer. The last part, where's that going? I think we've said where we're going in China. It all depends what's happening in Mexico. Look, Donald Trump wrote The Art of the Deal, right? And if you've ever read The Art of the Deal, you -- if you do, you will see the negotiating starting to play out. There -- it is a global negotiation happening right now. Where will Mexico -- what will happen with Mexican tariffs? How -- what moves should we make proactively. We're making some moves proactively, but I think Mexico is making moves. You're already hearing from inside sources that they're moving troops to the border. They're going to try to take more responsibility for immigration. And if I was the President of Mexico, I sure would because I wouldn't want the biggest economy of the world to cut me off from trade. So, Mexico, I think, is a little different than China, right? Mexico is not going to become the next global superpower that has a military that can threaten the United States. China can, right? So, if you think about why our country has never been attacked besides 9/11, which is basically some terrorists boarding our own planes and flying them into our buildings, that's a very unique attack. There hasn't been a military that has attacked the United States internationally on our home ground. Since when?

1812? Yeah.

Yeah, yeah. Exactly. Why? Because we have the strongest military and nuclear arsenal in the world. So, I mean, look, Donald Trump is a great negotiator. I think he's looking at the world's playing field and saying, how do you use leverage? Negotiation without leverage is impersonation. And you better hope that they don't find out you're not who you are. So, he's really good at using leverage. He's done it before. We're seeing him do it now. He hasn't even taken office and the art of the deal is in full play right now. It's actually quite impressive, I would say. And so how is Mexico going to play out? I don't think -- if you're Mexico, you do not want that faucet turned off. You don't want 25% tariffs. I'm not saying it's not going to happen. It may happen, it may happen for a while. I think we have too much leverage there. China is a whole different story. It's a whole different game. But if you even think about what happened to North Korea in Trump's first term, I mean, the guy in North Korea was sending missiles over Japan, what, every week saying he could hit California. Trump met with him once and he never sent another missile. Why? Because he likes Trump? No. For another reason. So, we're going to see a lot of negotiations played out here. I don't think there'll be a lot of decisions that becomes a big negative for us or for the US economy. I think the United States of America has a lot of leverage right now, and I think we have a leader that knows how to use leverage.

Fair enough. And then kind of switching gears a little bit, you talked about going into kind of a massive kind of cash flow mode. How are you thinking about that in terms of kind of the external investments you funded? I know you talked a little bit about prioritization last call. I don't know if those are being deemphasized, those are off the table, but in terms of the guest house, the real estate JV, do you go lean into those more heavily or is it just a straight -- more of a prioritization on the core business?

Well, I think there's -- look, there's always a prioritization in the core business. There are certain opportunities that will unveil themselves at certain times, and like an Aspen joint-venture and the develop -- the opportunity to develop an ecosystem in Aspen, which we think is a one-of-a-kind opportunity and we think there'll be a -- we think a very good, if not outstanding return on that investment as it unfolds. Unfortunately, we hit a housing market downdraft and high interest rates and that's not necessarily good for an investment cycle in real estate. So, those things get deprioritized. But we do have a Gallery opening there. We have a guest house that's coming. We finally got the city to approve our facade and we'll probably do a few residences and other things that we've talked about. Yeah. So, that will happen. And I think it will start to become more of a harvesting cycle from an investment cycle in the Aspen JV. We'll turn real estate assets into cash. We have -- we'll have a Gallery, we'll have a guest house and so on and so forth. And the prioritization, I think, will always be on the core business. Everything we do, whether it is an Aspen JV or any other investments we make are all to amplify and render the core business more valuable, to amplify the core business, amplify the brand, how people think about the brand, how people see about the brand -- see the brand and perceive the brand. And I think we're doing a very good job in building a globally iconic brand. I don't think we're there yet, but we are there, looking through a lot of people's eyes. I mean, this brand, I think, is seen very differently than any other brand…

Thanks. I'll pass it on. Happy holidays.

Happy holidays. Thank you.

The next question is from Brian Nagel with Oppenheimer. Your line is open.

Hi, good afternoon. Congrats on the improving momentum within the business. So, my question and it's probably going to be a bit of a follow-up here. But just looking at the business, and Gary, you talk a lot about -- we have talked a lot about -- the last several quarters about the macro environment, we discussed it here on the call tonight, but you're looking at the business and the improving demand trajectory you're seeing. Are you -- do you think -- clearly the new product is helping -- or driving this, but do you think you're also starting to see maybe the early signs of some, so to say, let up in the US housing market?

I don't see our competitors having -- getting that. So, I -- are we the only ones getting it? I don't know. I mean -- do I think there's a pent-up demand and there are few people having to buy homes? Yes, but the numbers wouldn't say it's a -- the macro is the issue. Otherwise, you'd see a more broad pickup. So, I think people are more optimistic. I think there might be a few more people stepping into the housing market, but that's -- I mean, for the most part, our industry is down 7% or 8%. I mean, there's not too many people that have positive growth right now. And even if you looked at our growth from a comparable basis, there's only a two-point difference between total demand and comparable demand. So, could we be getting a point or two from the macro is a little better? Maybe, but I don't think that's meaningful. I think what's really meaningful is the result of a very targeted and well executed product transformation of a size and kind that the world has never seen.

No, that's helpful. And then just on that, my follow-up question. So, with regard to the product transformation and this, like you just said, very significant product transformation, so going forward, I think someone asked the question before, I think kind of what any we're in, I think someone said six or something, but I guess the question I'm asking is, is this -- was this -- should we -- as we think about RH over the next few years, I mean, is this going to be -- is it going to be a more aggressive -- more consistent product introductions than we had over the last couple of years or was this really one big one step-up?

I think it -- as I tried to articulate earlier, we see a full -- a much bigger market opportunity, and I think you're going to see a much more aggressive approach to expanding the product -- particularly the product offering. And really that's how we got here, right? I mean, in the early days, I think I used to talk about -- I think I talked about it publicly. I came up with a -- we came up with a term here called direct-centric growth. And we said, look, we are going to not -- in the early days, I think we're not going to limit our assortment to the size of the stores. We're going to size our assortment to the potential of the market. So, we're going to merchandise beyond the four walls of the stores and we're going to use our sourcebooks and our website to present that assortment. And that strategy is how we went from $300 million to where we are today. I'd say in the last 10 years post the introduction of Modern that -- we call it nine years, we kind of slowed down through that process. I think we perceived ourselves as more mature, slowed down newness, slowed down expansion of the product, and that's what I tried to articulate earlier is, I think we see the brand differently. I think we see the brand bigger. I think by kind of slowing down our product transformation or our product expansion and brand expansion, I think we allow competitors to enter the market that would not have been able to be successful had we kept doing what we were doing. And I think it's shaped by the fact or decision with an outcome of seeing the world more traditionally, seeing RH as a specialty brand, not a platform for taste. So, this idea of seeing RH not as a specialty brand, but a taste platform helps us see a much bigger market and allows us to see a much more disruptive RH brand that can take share from more people based on our taste, our style and the power of our platform.

Appreciate it. Thank you.

Thank you.

The next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Great. Good evening and thanks for taking my questions. The first one's on pricing. Gary, you shared some helpful color related to clearance activity for discontinued product. I was hoping you could just comment on the pricing strategy for some of the new collections that have been recently launched. So, when you talk about maybe peak year-over-year sales growth one to two years out, is that going to be driven by higher prices from the new collections or greater unit velocity? Thanks.

I don't exactly know. Probably both. But again, we're going to keep learning. I think a lot of it is we just see a much bigger market. We have more leverage, we can use that leverage to have more disruptive value. I think people today -- if you could buy a dining chair at RH versus somewhere else, I think the consumer would feel better about buying from RH because of the positioning and the perception of our brand versus online off a -- some other platform versus Wayfair versus other competitors we might have. I think you'd rather walk into one of our Galleries and you would perceive that the taste and style is validated by us, that the brand halo and value you get when you built brand like us, it makes things more valuable. It renders the product more valuable. And I think that all of us tend to buy things based on our trust in that brand, based on what that brand stands for, based on what their values are, and it's kind of why we buy, why we -- why do we trust certain brands versus other brands and why do we trust them more. I think we -- as consumers, we value tremendous physical experiences. We value incredible design and article presentation of product in a physical nature or a digital nature, whether it's source books or online. We value the quality perception and the design authority of brands. And I think we've built a brand that stands alone in our category today. Do we have competitors? Of course, we do, or is there people going to try to emulate what we do? Yes, they are. But I wouldn't want to be competing with us on that. So, it just allows the brand to have a bigger market because someone would -- I think someone would rather buy that chair from us than someone else, if it's similar. I think they will value it more. It's no different than cars. Why people pick a BMW or a Mercedes versus a Chevrolet or a Tesla versus a whatever, somebody else's electric car, because of the value they placed on that brand, the trust they have in that brand and they -- what they believe that they're getting a better level of design and quality and it renders the consumer more valuable. That's part of the equation people don't understand, saying like, hey, I got everything in my house from Wayfair, doesn't really render you more valuable if you're trying to position yourself higher in the economic societal perception of the world, saying you build your house -- yeah, saying you buy your house from RH, I think, renders you more valuable customers versus other people.

That's really helpful. Thank you. And then just a quick follow-up on product. Can you give us any color in terms of maybe some of the lines that have been outperforming? Not sure if there's any commonalities in terms of maybe aesthetic or price points or any other common denominators, not sure if you're leaning into particular trends relative to other peers. Any more flavor there would be helpful. Thank you.

Why would I tell you that? Think about for a minute, like why would I tell anybody that publicly?

Completely respect that. Just trying to get more color.

Yeah. All of our competitors are on this call. Yeah. Like why would I tell anybody that?

Thanks, Gary.

Okay. Thank you, Jonathan.

Your final question comes from Zach Fadem with Wells Fargo. Your line is open.

Hey, good afternoon and thanks for fitting me in. Gary, following up on the balance sheet, appreciate your currency swap comments, but since earnings are constrained by about $9 in interest expense, any thoughts on the appetite for knocking out some of the debt and interest expense and the priority versus investment or buybacks or something else?

I mean, we think we're making the right investments to create the most significant shareholder returns. So, yeah, is the debt at $9 a share compression right now? Yes, but there's 7.6 million less shares. I don't know. So, you have to do the math on the other side, and you have to think about that 7.6 million less shares two years from now, three years from now, four years, five years from now and think about where the trajectory of the business is and would you have rather taken 7.6 million shares out of the market and have that cash or would you rather have that -- what do you think is going to be more valuable? And our math would tell us what we're doing is going to be exponentially more valuable that buying our stock at $295 when we think it's going to be worth $1,200 to $2,000 down the road is going to prove to be the right move and it's no different than when we bought 60% of the stock back in 2017, and what the price we bought that stock at and where the stock is today. So, listen, I know there's not other CEOs maybe talking about currency swaps, but I am benefited from the fact that I was owned by private equity for several years and I worked for some very smart people, and I learned a lot. And I think about the business differently from an investment point of view maybe than others do, so we -- but again, I'd look at our history. You could have asked the same question in 2016, '17. I mean, we've done kind of two, three major buybacks here, and -- but you don't see us doing like regular automatic buybacks. I think that's not a very smart thing to do. It's not looking at it like an investor, yeah, we're buying back our stock at all-time highs. We're opportunistic thinkers and investors, and so we believe this will prove to be a very wise decision.

Appreciate the thoughts. And then lastly, on the decision not to renew the leases in Germany, any color there on sales or margin impact on those Galleries? And is the intention to close those right away or wait until 2027? And any thoughts on just the margin constraint right now? I think you said 230 bps this year from Europe. How much of that is Germany? Thanks.

Yeah. No, well, look, we don't give this level of detail, but the -- to get the Paris and London locations, we had to take those locations also. And we weren't maybe necessarily ready to go into Germany at that point, but the Paris and London locations we thought were so extraordinary, it could have taken us 10 or 20 years to find locations like that, 10 or 20 years. So, we decided to take those locations. In some cases, we weren't even going to open them when we did, but we were faced with a lawsuit, potential lawsuit from a landlord. We thought we were rendering this property less valuable. So, we said, okay, let's open, let's not spend too much capital, and -- but in both those cases, the landlords wanted us to renew the leases and extend the leases to 10 to 15 years. We didn't know if those were necessarily the right locations. We didn't know if it was the right timing for the market and so on and so forth. And we said, how do we secure this London location and this Paris location? What are we willing to invest to get those two locations? Not that we don't like Germany, but we wouldn't have launched in Germany. That's not how you would have rolled out the brand. But doing this deal enabled us to probably move 10 years faster than we would have moved had we not. And so is there an incremental $20 million investment in that? That's the way I'd look at it? Sure. Do we know if we want to extend those leases and stay where we are? Do we -- or -- maybe there's better locations in Germany with better rent, but that's how we think about it. No different than that. Again, it's -- every investment decision, you have to look at all the aspects of it and you have to kind of say, is it more important to do this now and invest now and maybe it's going to cost something upfront like the hit we're taking on Germany? Yeah. But I'd argue when we look at it 10 years later, we may not have a London Gallery, a Paris Gallery like the ones we have today. We might not have even pulled the trigger. So, generally, those people that move faster and do more wind up with better outcomes, right, because you're going to learn along the way. So, nothing more than that. The non-cash charge, we're still open. If you want to look at our business at an EBIT level and operating margin level next year, it's going to be accretive to operating margin and EBIT next year, neutral on a cash point of view.

Makes sense. Thanks for the time. Happy holidays.

Okay. Thanks, Zach. Happy holidays.

That is all the time we have for questions. I'll turn the call to Gary Friedman for closing remarks.

Great. Thank you, everyone, for your time and followship of RH. We appreciate it. And I want to say to our teams that have worked so hard over the past two years bringing this product transformation to life that we couldn't be more proud of the effort, the drive and the determination it takes to do this level of work and to bring a transformation like this to life. We value you at the most important level in this company. The shareholder letters are addressed to our people, our partners, and our shareholders in that order because that's how we place the value. So, thank you all of you for your efforts. Thank you for bringing this next chapter of our story to life. And we wish you a very happy holiday and we will talk to everyone more in the new year. So, thank you.

This concludes today's conference call. Thank you for joining. You may now disconnect.