Ladies and gentlemen, thank you for standing by and welcome to the RH Third Quarter Fiscal 2022 Earnings Conference Call. I would now like to turn the call over to Allison Malkin of ICR. Allison Malkin, please go ahead. Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary. Great. Thank you, Allison, and thank you everyone for joining us today. I will start with our prepared remarks from our shareholder letter to our people, partners, and shareholders. We're pleased to report better than expected results for the third quarter with net revenues of $869 million versus $1.006 billion a year ago and up 28% versus third quarter 2019 net revenues of $678 million. Gross margin contracted 50 basis points in the third quarter, primarily due to fixed occupancy deleverage, partially offset by an increase in product margin as we continue to resist promoting the business. As previously mentioned, widespread discounting continues across our industry, and while it's been almost two years since we've deployed a promotional email, we've been receiving two sale emails per day from many home furnishings retailers. Although the stark contrast in strategy may lead to a short-term risk of market share loss, we believe there are certain long-term risks of brand erosion and model destruction for those who choose the promotional path. It's that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry. Our results now reflect those of luxury brands as we delivered 20.8% adjusted operating margin in the third quarter, also exceeding our outlook despite the dramatic slowdown in the housing market. Our results are inclusive of investments related to the launch of RH Contemporary, the opening of our first RH Guesthouse, the development of RH International, and the rollout of RH In- Your- Home, which led to approximately 200 of the 640 basis points of adjusted SG&A deleverage in the quarter. Additionally, we experienced adjusted SG&A deleverage due to lower revenues versus a year ago. Our business generated $102 million of adjusted free cash flow in Q3, ending the quarter with $12.5 billion in cash on our balance sheet, total net debt of $375 million, and trailing 12 months adjusted EBITDA of $1 billion. Fiscal 2022 outlook. As noted in our previous shareholder letter, we expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated monetary policy and the cycling of record COVID-driven sales and backlog reductions. Based on our current trends, we now expect fiscal 2022 revenue growth of -3.5% to -4.5% versus our prior outlook of -3.5% to -5.5%, and adjusted operating margin in the range of 21.5%-22% versus our prior outlook of 21%-21.5%. While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift and shed less valuable market share, we believe our long-term investments will enable us to continue driving industry-leading results. RH business vision and ecosystem, the long view. We believe there are those with taste and no scale and those with scale and no taste. The idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion-$6 billion in North America and $20 billion-$25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and placemaker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art, and design in the Napa Valley. RH ONE and RH TWO are private jets, and RH THREE, our luxury yacht that is available for charter in the Caribbean and Mediterranean for the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning time-starved consumers. The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion-$10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion-$100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do other brands want you to. We are not from their neighborhood, nor invited to their parties. We do have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate this climb is not for the faint of heart. As we continue our ascent, the air gets thin and the odds become slim. We believe the level of work we have introduced this year, inclusive of RH Contemporary, the World of RH, RH San Francisco, RH ONE, TWO, and THREE, as well as the opening of our first RH Guesthouse in New York, begins to demonstrate the imagination, determination, creativity, and courage of this team and reflects and our relentless pursuit of our dream. I mentioned at the start of this year that in over two decades leading RH, I've never been more excited about our future, and I've never been more uncertain about the present. Although my uncertainty regarding the short term has expanded due to the complete collapse of the luxury housing market, my excitement for our long-term opportunity has grown exponentially as I believe the investments we are making to elevate and expand our product and platform will once again be transformative. As we look forward to 2023, we will introduce the largest collection of new product in our history across RH Interiors, RH Modern, RH Contemporary, RH Outdoor, RH Beach and Ski House, Baby & Child, and Teen. To amplify this historic launch, we will once again unveil a revolutionary new gallery design as well as redesign and remodel all of our current galleries. We'll be introducing RH to the U.K. and the rest of Europe this spring, summer in the most inspiring and unforgettable fashion with the introduction of RH England, The Gallery at the historic Aynho Park, a 16th century 73 acre estate that will feature three restaurants, The Orangery, The Conservatory, and The Terrace. Plus the Aynho Architecture & Design Library and the Deer Park, inclusive of the largest herd of white deer in Europe with a viewing from the grand lawn. We're also under construction on RH Paris. The gallery on the Champs-Élysées, scheduled to open in 2024, and RH London, the gallery in Mayfair, scheduled to open in 2024, 2025. We've also secured locations in Milan, Madrid, Munich, Düsseldorf, and Brussels, some which will also open in 2024 and 2025. RH also announced today the following acquisitions and hires to accelerate the brand's transformation and climb up the luxury mountain. The acquisition of Dmitriy & Co, a to-the-trade custom upholstery atelier, and the hiring of Dmitriy founders Donna and David Feldman to create RH Couture Upholstery. The acquisition of the business of Jeup, Inc., a to-the-trade custom bespoke furniture workroom, and the hiring of Joseph Jeup to create RH Bespoke Furniture. The hiring of Margaret Russell, former editor-in-chief of Architectural Digest and Elle Decor, to create RH Media, an editorial content platform that will celebrate the most innovative and influential people and ideas that are shaping the world of architecture and design. Today's announcement, plus our previous acquisition of Waterworks, firmly plants four RH flags at the very top of the luxury mountain and clearly states our intention of establishing RH as an arbiter of taste and design. These brands and businesses, thoughtfully integrated and amplified on what we would believe will be the world's most innovative and dynamic global design platform, will begin to fundamentally change the landscape of the luxury home furnishings market and the to-the-trade design industry. As we approach the holidays and new year, I would like to express our gratitude to all of our people and partners around the world for your contributions and commitment to our cause and for bringing our vision and values to life. It's not easy striving to become the most inspiring brand in the world, and it's surely not for the faint of heart. It takes courage to lead rather than follow. It takes collaboration to build a brand that can break through the clutter in this world. It takes teamwork to reach the top of a mountain no one else has attempted to climb. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations. Lessons that can't be learned in a classroom or by managing a business. Lessons that must be learned by building one or by reaching the top of the mountain. Happy holidays, team, Team RH. Carpe diem. Ready for questions. The floor is now open for your questions. To ask a question at this time, please press star one on your telephone keypad. If at any point you would like to withdraw from the queue, please press star one again. You will be provided the opportunity to ask one question and one further follow-up question. We will take a moment to render our roster. Our first question comes from the line of Simeon Gutman from Morgan Stanley. Please proceed. Good afternoon, everyone. I wanted to ask a question about written orders in the third quarter. I don't know if you'll comment, but if you use that run rate as a proxy for the business, does that get worse? My question is that we now since you've beat in the third quarter, we have a slightly steeper slope to the fourth quarter. Is that less backlog? Is it more macro risk? What's changing from third down to fourth? Maybe starting with the second part, Simeon. look, in the, you know, the beat in Q3, I think, you know, most of that I would characterize as just timing of sales from Q4 to Q3. Not necessarily. You You know, some of that is obviously relieving backlog faster than expected, but we had expected to relieve that backlog, and continue to do so throughout the year. look, I think on the year, we're still talking about a $3.6 billion in sales. I don't think our sort of, you know, numbers change materially in terms of that outlook. Slightly steeper, sure, but it's not, you know, this is kind of a rounding error in a sense, you know, with all due respect. You know, I think it's pretty consistent, you know, with what we had talked about before, and simply that just Q3 said some pull forward of sales from Q4 and a little bit of faster backlog build. Okay. As a follow-up, maybe more for Gary, knowing that you're gonna continue to invest for the future and still be somewhat responsible here for the near term, question is, you know, are you looking at prioritizing things differently? Does anything get sacrificed? Love to hear how you think about this, especially as the year keeps involving with, you know, the Fed still tightening. Yeah. How do you define responsible? Yeah. I don't know if. I'm serious. I'm just trying to interject your question. Um. Yeah. Yeah. I'm just trying to interject your question. I think. Cut back on everything, yeah. Yeah, we're communicating what we're doing. We believe everything we do is responsible. I, you know, I don't quite know how to answer that. Well, maybe it's the second part, which is, you know, is anything getting sacrificed, meaning are some of your longer term investments putting on pause or no? Maybe that's just the right way to, you know, look at it. We're not putting any longer term investments on pause. I mean, we're playing for the long term. We're, you know, we're not doing irresponsible things that other people are doing, like promoting their business and selling, you know, sending, I don't know, 30 emails to a customer a week with, you know, sale signs. That I think might be irresponsible. You know, but I guess it depends on your strategy. If your strategy is, you know, to stand for price, then maybe that's an okay strategy. Our strategy is to stand for design and quality and innovation. It's positioned the company around product, not price. I think we've been really consistent with our strategy. As you think about priorities, we reprioritize all the time here. You know, we like to say, you know, you've kinda gotta get going. You have to know, are we strategically right? Are we directionally right? We believe we're strategically and directionally right. We believe if we make the right long-term investments, you know, and build this business for the long term, we'll become, you know, one of the few brands in the world that exists over a long-term period of time. That's unusual in our industry. You know, most people build a concept, then they roll out 300 or 500 stores. you know, at the end of 10 years, it's an old concept. We, we like not to get old, and we like to continue to reinvent the business and, you know, whatever the cycles are. If you look at, if you look at it for us, if you look back at history, you know, since I joined in 2001, you know, there was a recession at that time and, you know, we elevated the product and kind of transformed the brand. We did the same thing in 2008 and 2009, you know, with the financial crisis. We went through another cycle again in 2015, 2016, 2017, when we made the move to membership and rearchitected the back end. We also introduced Modern and, you know, continue to evolve and make the brand relevant and make sure we're leading the industry. We think the work that, you know, has begun with the introduction of RH Contemporary, which will triple in size next year from an assortment point of view. You know, the introductions we're gonna make across the entire portfolio, plus the new gallery design that we're gonna unveil, and we'll go through and remodel and redesign all of our current galleries and refresh all of those, as well as the platform we're building, you know, globally for the brand, is gonna once again, you know, transform RH. Man, put us in a position where we create massive strategic separation. We, you know, we're kinda comfortable being the others and going the other way. You know, a lot of people are hunkering down right now, you know, and slowing down. We're kinda speeding up. You know, we're more excited, less fearful. I think we saw this coming. This is not a game that's the first time we've seen it. It's just different. You know, our moves over the last 22 years have been very consistent. You know, I think we're pretty disciplined in the things we do. They're unusual. You know, when we were opening 50,000-60,000 sq ft stores, the rest of the industry was closing stores and shrinking footprints and, you know, trying to move all their business online. Now everybody's opening stores. I don't know, maybe we're just a little bit ahead of everybody else. Okay, thank you very much. Happy holidays. Thank you. Happy holidays to you. Our next question comes from the line of Steven Zaccone from Citi. Please proceed. Great. Good afternoon. Thanks for taking my question. I wanted to focus on RH Guesthouse. The last time you were on the call, you talked about some of the initial interest. How has that performed the first three months that it's been open? What are some of the early learnings for the hotel, and do you see opportunity to open more of these concepts going forward? Yeah. I mean, we just opened. We think it's extraordinary. The feedback we're getting from our guests is incredible. The feedback we're getting from the restaurant has been incredible. You know, we're just in early learning period. You know, we're not... You know, I mean, it's the first time we've ever done this. So far, we're really excited. You know, we're gonna be opening our Champagne & Caviar Bar soon. We've got our feet under the ground, you know, underneath us on our new live fire restaurant. You know, we couldn't be more excited about it. You know, I mean, the feedback from our guests is, you know, a lot of people are saying, "Gosh, how am I gonna be able to get in long term?" You know, 'cause it's just not that many rooms. We're excited. We're, you know, there's gonna be learnings here that will help us evolve and make Aspen better and, you know, so on and so forth. This is just very early big test. You know, it's a kind of a small thing in a very big organization that if it becomes a big thing long term, great. Right now, you know, it's really positioned to Be something that helps redefine the brand and have people look at us differently. You know, I think it demonstrates, you know, the kind of creativity and passion and attention to detail to do something extraordinary. You know, people from the hospitality industry have come and seen it, and toured it. You know, luxury CEOs that have come and toured it, you know, have said they haven't seen anything like it anywhere in the world. We just let it kind of unfold here. Okay, great. Very helpful. The other question I had was on gross margin. It's the first quarter the business has seen a decline, you know, obviously on occupancy deleverage. As we look forward, is that the likelihood that you probably see gross margin decline again in the fourth quarter? How should we think about the trajectory from here? Yeah, I think, look, when you look at the sequential just change in our absolute sales. When we went from revenue in Q2 of $992 million and gross margin of 52.8% and going to $869 million in Q3 and 49.7%, you know, as Gary mentioned, a lot of that is occupancy deleverage. If you think about Q4, there's a further sequential decline, right? Q4 is a smaller quarter for us. At the midpoint of the guide, we're at $789 million. You know, if you just, we're not guiding gross margin, but if you do sort of like similar sort of math and, you know, transposition of numbers going from, you know, Q3 to Q4, as you did from Q2 to Q3, you'd naturally, you know, see a gross margin decline built into that because, again, the absolute sales are lower than Q3. It's just math. I mean, directionally, probably 100 basis point-ish, but again, we're not officially guiding gross margin. It's just a directional number. You know, I would just say, look, if you, if you look at the housing industry and if, you know, track the housing industry, and if you track the performance of home furnishings retailers against, you know, past, you know, housing downturns, you know, that would tell you things are gonna get worse before they get better here. You know, the housing industry is in a free fall. Like, the National Association of Realtors, you know, just reported in that housing demand was down 37% in October. You know, we've never, at least in my lifetime, I've never seen, you know, interest rates rise so quickly. I don't think anybody on the phone has either. You know, the impact on the housing market, especially when you look at it versus a housing market that was overinflated and run up by COVID, you know, you're gonna have some wild swings here. It's, you know, it's happening first to the luxury market. If you look at the numbers and if you track the last, yeah, nine months or the reporting on Redfin, I think the luxury housing market started going down in Q4 of last year. The luxury housing market went up faster and higher, and the luxury housing market is gonna go down faster and lower. You know, that's just an outcome. You know. You know, the question is, you know, there's gonna be people that rode it up, and they're gonna try to stay up, and they're gonna promote their business, and I think they're gonna break their models. You know, next thing you know, you got to send out 1,000 emails next year too, and you're just in a, you know, what I call the downward spiral. You know, we're, you know, we're in the ditch. You know, we kind of expected from the beginning that this COVID lift wasn't anything that we manufactured. Generally when that happens, those kind of things go up, and then they go down. You know, and you try to stay focused on the long term. You know, we're not gonna try to break our model to try to, you know, and promote the business in a period. I mean, we have people that are in our industry right now that have some pretty good sales. Their whole website is 30%-40% off. If I put our whole website 30%-40% off, we'd change the sales trend by 50 points. The problem is you're just gonna have a much less productive business because doing more volume and lower margins and all that volume also creates, you know, costs that are inefficient through a, through a model. I've already run companies like that. yeah, we have a, we have a different model. You know, someone asked me the other day, "Hey, you know, what if you're wrong on your long-term view? What if the market's not $25 billion?" I go, "Okay, what if it's not? What if it's half that? What if it's $12.5 billion?" We, you know, and we have 30% EBITDA. I don't know. That directionally looks like some other people, like Hermès and people like that. You know, like, I mean, their EBITDA is higher than that. You know, we'd be in a ZIP code where this company would be worth a lot of money. You know, whether we become $12 billion or $25 billion is, you know, not really what's most relevant. It's do we get there? Do we become really the first, you know, integrated luxury home brand in the world? You know, and that's just gonna be a different path than anybody's taken 'cause no one's ever done it. You know, you know, there's gonna be some ups and downs here, but, you know, the housing market's in a free fall, you know. It's gonna get worse before it gets better. You know, and, you know, so far we've been more right than wrong about that, you know, 'cause, you know, we don't really try to lead our business based on hope. We, you know, we try to run our business the best we can based on facts and math and logic and patterns. I may not sound really optimistic right now short term. I'm not. I'm super optimistic long term. If you wanna play a short term stock, don't play ours. If you wanna invest for the long term, this is a good place to put your money. Duly noted. Thank you. Happy holidays. Happy holidays. Our next question comes from the line of Max Rakhlenko from Cowen. Please proceed. Great. Thanks a lot. The way that you're seeing your margins play out over the past couple quarters, with upside both 2Q and 3Q, does that give you more confidence in keeping at least 20% EBIT margins next year if the environment remains challenging? Then just more broadly, how are you thinking about the durability and margin power of the business today given some of the moves that you've made recently? It depends on our. You know, that always, it's gonna depend on your investment and your investment timing. You know, our underlying, you know, core business, if we wanted to, yeah, we can crank it all back and stay at 20%. You know, I'm not sure that's the long-term priority. You know, I don't know how, you know, how bad this market's gonna get. You know, we don't wanna promote the business over the short term, you know, to try to create some short-term outcome that's gonna be irrelevant, you know, two quarters after that. You know, there's gonna be a lot of decisions to make. It's a really difficult environment for those of us in the home industry. Especially if you're at the higher end, you know, it's more challenging and for some people it's not intuitive. You've got to think about it. We had the greatest migration of people moving from cities to suburbs in the history of America, you know, during COVID into second home markets. The people that did that could afford to do that. The people that moved the most and bought the most homes were the luxury customers that had the capability to do that. That's why, you know, the luxury market went up so high, and the housing market, you know, the luxury housing market benefited most, and we're gonna have a flip side here. You know, look, we didn't... All that extra money we made during COVID, we didn't waste it, you know. On the flip side, you know, if we have a bigger give back, that's okay. If you look at every home furnishings retailer and look at where their operating margins were in 2019, you know, when they entered COVID, and where they exited in 2021. We had the highest operating margins going into COVID amongst all home furnishings retailers, and we exited with even higher margins than anybody else. We picked up, you know, more margin than others. We had more strategic separation. I believe as we should, our consumer moved more, our consumer had more urgency. You know, and, you know, and in some cases where other people promoted, maybe they got a little bit more top line than us, but we just didn't promote. You know, it's like trying to act like, "Oh, this is a surprise." You know, like, I mean, the Fed pumped so much money into the economy, they created inflation. They held interest rates at such low levels, they made it easy for people to buy homes. Now we're on the other side of that. Quantitative easing, interest rates are up. We've got inflation. Who's seen this game before? Anybody on this phone? Not unless you were in the market in 1975 to, you know, 1982. This is a whole new ball game that no one's even seen. We're trying to just look at the patterns and look ahead and say, "What's the best way to play this where we come out and we really are positioned for the next five to 10 years?" Not the next two to three quarters, you know, or even the next five or six quarters. That's not relevant long term. Relevant long term is what's the next five to 10 years gonna look like, and what are the decisions we're making today that are gonna impact that vector, right? That tilts us slightly more up, you know, and over the long term makes a big, big difference. That's how we're focused. You know, we're not managing this business, we're leading this business somewhere bigger and brighter. You know, our journey is gonna be a little longer, it's gonna take a little longer. You know, there's gonna be people that have patience, and there's gonna be people that don't have patience. We have patience. You need patience if you really wanna be extraordinary in this world. Got it. That's very helpful. Can you just separately speak to the customer reception to contemporary? How is that going compared to your expectations? Just any update- Yeah. on the timeline of the rollout to other galleries. We're, you know, we're very happy with the initial response. You know, we wish we could, you know, get more product faster. It's, you know, two things: A lot of it got impacted by the supply chain backups, which are now just kinda all coming unlocked. Also, almost all of the new product is really new product that has never been made at scale before. One of the things that, you know, is gonna happen to us during cycles. This happened to us in 2008, 2009 when we kind of transformed the assortment in the business. It happened to us in 2015, 2016 when we moved to modern, and it's happened to us now. When we make these big moves, and they're generally every seven or eight years, because those are kind of the big cycles in our business. I mean, trends can last 10-15, but there's generally. You know, I think every brand needs a major refresh every seven or eight years. Ours just happened to be timed to economic downturns. You know, a lot of that's coincidental, quite frankly. In 2015, 2016, it wasn't really an economic downturn. We created somewhat of a downturn when we moved to membership, 'cause that, you know, was a kind of a year transition to do that. You know, when you bring in this much new product that the world hasn't seen before, that no one's ever scaled, you know, travertine furniture, you know, or burl wood at, you know, at scale. You can see pieces out there at antique stores or, you know, some retailers have a piece or two, a couple pieces. You know, they don't have collections with 130 SKUs. And, you know, no one's out there making that stuff at scale. We are gonna constantly, for the rest of time, have to continue to build the supply chain capability that, you know, that enables us to invent. I mean, If you're gonna invent something new and scale something new, it means it hasn't been done before. You know, it's gonna take longer, it's gonna be bumpier, you know. You know, it's the difference between, you know, leading a business, managing a business, invention and innovation versus duplication. You know, so I think we're gonna go through the same thing with contemporary. It's just taking longer to scale this stuff. I mean, we just got back from the quarries in Italy, you know, meeting some of the best families and quarry owners and building partnerships for stone, so we can, you know, make stone furniture at scale, and we can have better economics and a better supply chain. I mean, I don't know, two weeks ago, we went around the world. We were in 10, you know, for 10 days, I think we were in seven countries or something like that. You know, in the factories and, you know, meeting with the factory owners and talking about scaling, not only, you know, what they're scaling up now, but what's coming next, which is... I mean, you've just seen the first little introduction of Contemporary. When you see what happens next year, it's extraordinary and revolutionary. I mean, I think it's gonna be, you know, we're just gonna own this entire kind of aesthetic and look and, you know, be no different than, you know, how we approached 2008, 2009, you know, when we took kind of the European, Belgian kind of aesthetic and, you know, we went out there and owned it and did it at scale, and it became kind of the RH look in the industry. You know, we didn't just dabble in Modern. You know, we launched with a 450-page book or something like that. 545-page book. Yeah, 545-page book. Yeah, bumpiness on getting the supply chain up, you know, on both of those, by the way. We wind up, you know, building a $1 billion business out of Modern. I think Contemporary is gonna be the most extraordinary thing we do. You've seen like the first kind of, the first course of the meal. You know? Call it a four-course meal. Next year there'll be two more big courses and, you know, there'll be another big course in 2024. By 2024, I think we'll have it rounded out. It's gonna be. I think it's gonna be the most extraordinary thing we've ever done. We're really excited about it. Wish we had more goods right now. Wish we could roll it out to more galleries right now. So far, every gallery we, you know, we've put it in, there's been really good response and, you know, we're really excited about getting it into more galleries. Awesome. Thanks a lot, Gary. Jack, Allison, happy holidays, everyone. Speak soon. Happy holidays, Max. Our next question comes from the line of Curtis Nagle from Bank of America. Please proceed. Great. Thanks very much for taking it. Maybe kind of one longer-term question then a quick model one. First, Gary, I'd love to talk about the acquisitions and kinda, you know, how much they step up your high-end trade and into your design business for us, kind of a little less in the know and, you know, how big an opportunity from a revenue perspective you could see. Just as a follow-up, I just wanted to clarify the comment you kinda loosely made about 20% margin next year if you pull back on investments. Maybe I misheard, just if you could clarify what you were talking about there. Yeah, I think, like, as you think about, you know, the high-end design and trade, you know, how big is the revenue opportunity? The people at the very top of the mountain, you know, own the most homes. Not only do they own the most homes, the homes are more expensive. On average, someone spends about 10% of the home cost on furnishings, decor and art, right? When they buy nicer homes, they buy nicer furniture. They furnish the whole house. They have multiple houses. You know, that's the most lucrative part of the business. It'll be the most profitable part of the business. It has the most leverage. You make the most money there. So we think it's really important strategically, and we went out and, you know, met who we believed, you know, had the best reputation and quality and design in upholstery and the same in kind of case goods and furniture. You know, they're big believers of trying to scale this level of quality and design. You know, we're really excited about it. You know, it's gonna take a while. We've gotta, you know, get it up and going and test it and see how it goes. We've gotta figure out exactly how it's integrated, the long term, you wanna... Yeah, I would just say probably today, right now, there's, you know, a bunch of people in the high-end trade industry that just kind of said, you know, "WTF?" You know, then, and like, now what, you know, is gonna happen? You know, so this is, this is a big move for us strategically, but we've got to build capability. You know, there could be other acquisitions, you know, to build capability here. You know, you think about, you know, the investments we're making building a media platform and a content editorial platform that will, you know, position the brand as an authority in the industry. You know, not speaking about ourselves, speaking about the people who, you know, who are really, you know, shaping the world of architecture and design. You know, we wanna become an authority and a voice in that. You don't really do that by talking about yourself. You do that by talking about other people. We're just gonna... You know, we're taking a different path and gonna build a different market, and we're gonna continue to evolve and change. You know, I mean, not too different. If you think about Apple, right? I mean, Apple, I mean, they started pretty high up with a $400 phone or something, we started at. What's the latest Apple phone? Like $1,100 or something like that? $1,200. Yeah. I mean, they kinda created a high-end market for phones. When I think the average phone back then was, like, $69, a Motorola Razr or something. I think, you know, we're not just going after a market and how big is the revenue opportunity there. We're also gonna create a market because that product at that level of the market, it's not accessible. You can't go into those showrooms. The goods aren't priced. You know, you're kind of blind. You know, you have to go through, you know, go through a middle person to have access to quality of, you know, that quality and that design. You know, we think there's gonna be a big unlock just starting to make that level of quality and design available. We think we will grow the market. We think it will be a big plus to our brand, you know, to get us into those customers' main rooms. I think today we mostly play in, you know, the family room, the second bedrooms. I don't know, we get that customer's living room, master bedroom, main house. You know, it's just gonna open up a lot of opportunity. You know, lot to test, lot to learn, lot to figure out. We've thought about it for a long time. We worked on this for a long time. You know, and today we decided to tell you officially that we're doing it. Great. Before everybody else knows. We announced it, yeah. We're super excited about it. The talent, it's also what I'd say is it's a talent acquisition too. I mean, these people are just incredible. Incredible. Incredible culturally, creatively, you know, entrepreneurially, you know, just incredible talent. We've all, you know, in the short time we've been together, we've learned, you know, from each other and, you know, they've rendered us more valuable. I think we've rendered them more valuable. It's kind of an upward spiral. You know, for sure. Some really impressive resumes there. Just going to the follow-up question, Gary, just the comment you made about, you know, could have 20% margins if you pull back or something like that. I may have misheard, but just wanted to clarify that. Yeah. The underlying model, you know, like the underlying model, I think we've always said it can withstand a 20% down, you know, and probably hold, you know, the margins around 20%. That doesn't necessarily mean that's what we're gonna do, you know, that we're gonna pull back investments when we should be investing. Right now, I, again, I don't think it's strategic to go, "Hey, let's have 20% operating margins in 2023." You know, I don't think a lot of people get up in the morning and go, you know, go to work and fight for 20% operating margins. They get up and they go fight to do incredible, inspiring work that they think is gonna create great long-term opportunity. You know, if we didn't have a whole lot of things to do, if we didn't have a lot of great ideas that we're pursuing right now, yeah, I, you know, I might say, "Hey, you know what? We don't have anything that's really that big worth investing in, so, like, Let's hit 20% operating margin. Let's make that the, you know, the goal." You know, we have some incredible stuff we're working on, the most exciting stuff we've ever worked on by far. You know, the kind of stuff that you're so excited you don't even... You can't sleep. You know, you can't even go home. You're just so excited. You know, we have groups of people that here have been all through all kinds of hours, like figuring stuff out because the work is really that special. You know, so we're investing in that work 'cause we think that work will, you know, change the vector and will change everything and will create massive strategic separation. We're not really looking at... I wouldn't say, you know, if you said, "Hey, Gary, is your focus on financial outcome in 2023?" Not really. Our focus is on creating a leapfrog in 2023 and 2024 that when we come out of this cycle, that people look around and go, "Where did they go?" That we've just made such a leapfrog that we're so much farther ahead of everybody else on every level. That, you know, that will create big returns. We know how to create big returns. We've built the best model in the industry. We're gonna do things that make the model better. You can't do that by not investing and go, "Okay, we're at 20%. Let's hang on. Let's do less." That's the downward spiral. That's the long-term death spiral, and that's not the game we play. Understood. Thanks very much and Happy Holidays. Our next question comes from the line of Jonathan Matuszewski from Jefferies. Please proceed. Great. Good afternoon and thanks for taking my questions. Gary, you mentioned 2023 will mark the largest introduction of new products in company history. How should we be thinking about your source book strategy next year? How are you thinking about mailings relative to maybe, you know, this past year, given all the new product launching? Should we be planning for elevated source book costs? That's my first question. Thanks. Yes, you should. Probably a big advertising campaign, 'cause I think it's the best work we've ever done. We're gonna shout from the rooftops. Gotcha. You know, my follow-up question on supply chain. Can you help us understand the cadence of how supply chain cost tailwinds may flow into gross margin next year? The reason I ask is I think 70% of your cost of goods sold is sourced from Asia. How should we be thinking about the timing once we're on the other side of elevated inbound container rates next year? Any color there would be helpful. Thanks. Hey, Jon. We're kind of getting some of that already. If you think about the ocean freight contracts, they reset roughly June 1, so that's where we saw the initial burden of those much higher rates as we've talked about on various calls. I would say every month since then we have actualized the number lower than it's contracted. The way you achieve that, obviously, you're not always going on contract if the spot rate's lower. You're going out in the spot market and those rates have been coming down. There's excess availability, especially along certain, you know, Asia to Pacific routes. While we initially saw margin pressure from the higher rates in I would say, you know, the first four or five months, we're at a point now where we. Like this last month we were lower than we were for the sort of contracted rates for the prior year. If you think about our turn, you know, call it 2x, 3 x, you know, depending on the product category, and a lot of our business is special order, so there's an immediate impact on that. But the part that stocked, I mean, we felt the pressure, and we're kind of now getting into some of the initial tail, you know, tail ends. We're kinda. That's reflected in our guidance, obviously. We expect, honestly, as we look at it and we think about what's happening with supply chain, I think there's probably more to come there, more opportunities. Those are starting, and we'll continue to see this in the next year, we believe. That's helpful. Best of luck for the rest of the year. Thank you. Thank you. Our final question comes from the line of Michael Lasser from UBS. Please proceed. Good evening. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our questions. Gary, your stock buybacks has slowed quite a bit this quarter. The question is, why did you go slow on buybacks so much? Was it because of the M&A, or has anything fundamentally changed about how you view buybacks in the current landscape, given you still have over $2 billion of cash in the balance sheet? Yeah. Look, I think that the housing market has collapsed and, you know, and it's went down pretty viciously as interest rates have went up. I think Simeon's first question was about being responsible. You know, we're not gonna necessarily change the world through a buyback strategy, you know? When, you know, you're going into kind of a storm that you haven't seen before, you don't wanna sail, you know. Or they say, Let's say, you're not in a sailboat, but you're in a boat. You don't wanna spend all your fuel, you know, before you can see the shore, and, you know, and run out, you know, and be floating around out there. You know, there's lots of examples of people who went out and spent a lot of money on buybacks and went bankrupt, you know. Bed Bath & Beyond will probably be the next one that does, you know. You know, they're pretty famous for how much stock they bought back, you know? I, you know, I don't, I don't know exactly how, you know, this housing market's gonna play out. Like, the housing market is in a recession. I mean, if somebody doesn't think that, I'd love to just do a Zoom and put our numbers up for you. You know, the luxury housing market has trailed down since last September, right? It was down 8%, down 16%, down 17%, down 16%, down 12% in January, down 13% in February, down 15% in March, down 18% in April, down 18% again in May, down 21% in June, down 24% in July, down 28% in August. You know, the new numbers will come out for the next quarter, and we'll know how far it goes down. The odds are it could be down 35%, it could be down 40%. When we start seeing trends like that, you know, I don't know how it comes all apart. Did anyone see 2008 coming? 'Cause the way the market reacted, it didn't seem like it, right? Nobody sees the big implosions. You know, we're not greedy. Again, we're not gonna accomplish our goals here based on a buyback. We're spending our... You know, we'd rather just go look. You know, like, where is the world going right now? We've never pumped this many trillions of dollars into the economy. You know, interest rates have never raised, accelerated this fast. Inflation, you know, hit numbers that we haven't seen in 40 years. It seems like Powell kinda, you know, sounds relatively confident when he's up there, but he's the guy that raised interest rates way too slow. You know? He's the guy that didn't start easing. I mean, he should have raised interest rates and not let the housing bubble happen. You know, housing prices went up from 2020 to 2022 by 45%. You know, that's never happened except in the 70s. The two-year period, housing going up 45%. Like, I, you know, it's like, I don't wanna sit here and have all kinds of debt and not have any clarity of, you know, what it looks like out there. Let's, you know, let's let the storm become clear. Let's make sure we can see the shore. You know, does that mean, maybe the stock runs a little bit and we buy a little less? That's not, you know, we're not here spending all our time trying to figure out how to optimize a buyback. We think our stock's undervalued today. Could it get worse? I think business will get worse before it gets better. Will our stock get worse before it gets better? I don't know. I haven't been here for 22 years, but, you know, spent all my time thinking about that. We got much more exciting things to focus on. When we have a better view of the shore, then we'll make the right decisions. Got it. That's, that's fair, Gary. Thank you for that. As a related follow-up, at this point, how much visibility do you have on some of the planned gallery openings in Europe and even the U.S. over the next 12- 18 months? If the macro does turn for the worse, would you look to maybe delay some of the openings until when the macro stabilizes so as to get the most customer attention to some of the great work that you and your team have been doing? Yeah. It's a little tough to do that, you know, 'cause when you're in construction, you know, if you stop, you're just gonna make a gallery cost twice as much, you know. You're still paying rent and, you know, you still have costs. I mean... I don't think we've ever opened a gallery that doesn't make money, so. You know, our new galleries I anticipate will do well. I mean, you know, if business goes down 30%, 70% of the people still buy. All our galleries are really productive, you know, in the company today. You know, again, so we open a little lower, and then it just means when we come out of this, those galleries have big comps. You know? I... We don't try to time things like that. I mean, we're not... If we were a company that had like, you know, 5%-8% operating margin or, you know, even 10% or 12% operating margin and you hit a downturn like this, you know, that could be sustainable and it pulls, you know, pulls you down and, you know, you might have cash flow problems. Yeah. You're gonna make decisions like that. We're not gonna have a cash flow problem. You know? Why would we stop building stores that we know are strategic and are gonna make a lot of money? You know, that doesn't make sense to me. Maybe other people have to do it because they have a cash flow problem. We're not gonna let ourselves have a cash flow problem. That's why we haven't deployed $2 billion buying our stock back yet, 'cause I don't know. You know, does Powell and his team know what to do? Are they just tinkering around? They haven't seen this before? Is, you know, someone gonna make some calls here and we go into a ditch. You know, it's not gonna be a subprime thing, but it could be something else nobody saw. Nobody's seen any of these big things coming except for one or two people. You know, the guy in the big short. You know, he got it. Maybe a few others. Most people don't get it right. Right now I've never seen more confusion. You read the headlines of the, you know, top papers in the world and, I mean, who's saying what? Who thinks? Like, I mean, you know, the KPMG Consulting Group, they think housing prices are gonna drop 20% next year. Goldman Sachs thinks housing prices are gonna drop 7.5% next year. The National Association of Realtors think housing's gonna go up 1.2%. Prices are gonna go up 1.2% next year. Generally, people speak from a place of kind of self-consideration. Like if you're a realtor, you need to sell houses to make money, so you're gonna have the rosiest outlook. If you're a banker, you don't want transactions to stop. You don't want, you know, the banking industry to slow down, right? If you're a consultant, you don't mind telling everybody the bad news because people hire you when they're all screwed up and panicking. You know? Maybe they're, you know, they're the ones that are gonna tell you the worst case. I don't know. That's a big spread, don't you think? Housing prices are gonna go up 20% go down 20% or they're gonna go up 1%. Well, that sounds like everybody's on the same page. You know? You know, so it's just a lot of uncertainty right now. One thing I'm certain of, the housing market is collapsing at a level I haven't seen since 2008. I haven't seen this kind of drop since 2008. Go look at, you know, how far housing dropped in 2008 and 2009, because these numbers look just like that. That sounds ominous. Thanks for that, Gary. Happy holidays. Thank you. Thank you. We do have one final question from Seth Basham from Wedbush Securities. Please proceed. Thanks for taking my question. First, Gary, I'm sorry I jumped on late, but if you already addressed this, but we noticed in our work that you're partially rolling back some price increases on select products. We've also seen a higher level of clearance on your website. Can you characterize that relative to your pricing and brand strategy? Sure, sure. Well, you know, the... as Jack mentioned, you know, freight costs are coming down, raw material costs are coming down, pricing is coming down, and, you know, we're not gonna want to have a good value in the marketplace. Of course, we'll adjust pricing as our pricing comes down. Sales are down. Did we plan for sales to be down this far? No. Did we think the housing market was going to collapse this fast? No. Did we think interest rates were going to go up this fast? No. Do we have more inventory than we'd like? Yes. Should we be accelerating the things that we don't want to have in our assortment long term that we're clearing out because we have new product coming in? Of course. Will we have more than normal? Of course, we will. That shouldn't surprise anyone. It's the retail business. You have new product coming in, you've got to get rid of old product. You mark it down. Your sales are down, you've got more old product. You're gonna mark it down a little faster. Otherwise, your DC can't, you know, can't process it. Yeah, that's all that's happening. And if, you know, prices go up, raw materials go up, shipping goes up, like everything that happened in COVID, you're going to take your pricing up. The consumer is going to understand it. It's, you know, it's well known, but they're also going to understand when things come down. You know, our whole business, we look at everything through a lens of design, quality, and value in that order. If the design is not beautiful and inspiring, nobody buys it. If the design is great, then they get closer to the product, and they assess the quality. If they love the design and they believe it's really good quality, it's great quality, then they look at the price. The consumer makes the decision. For that design and that quality, is this a good value, and do I buy it? We try to guess where that best point is. Sometimes we're right, sometimes we're wrong. We adjust pricing all the time. Like, we're never gonna price anything exactly right. We're never gonna, you know, buy it exactly right. As it relates to your clearance strategy, Gary, is the primary channel of clearance through your full-price stores and website as opposed to your outlets? Yeah, yeah. You, like, we've got way more galleries with way more people coming into them, right? We have a website, you know, our full-price website is where we have the most traffic. You don't wanna move product out of that channel right away. You know. Yeah, we, you know, you'd just back up inventory really fast. I mean, this isn't the luxury apparel business where they just throw it in a dumpster and burn it. You know, so, you know, it's this is furniture. You know, we're never gonna run it exactly like the luxury apparel people or the luxury jewelry people and stuff like that. I mean, you know, our business, we can't throw away the product and, you know, it's just got a different thing. We're gonna have a different kind of outlet clearance model all the time. Something comes back as a return, you can't take it back at the store. You can't put it back on the shelf. You know, I mean, once it goes on a truck and it's out of the box, you gotta take it somewhere. You have outlets. You know, 'cause the customer doesn't like it or it's got a tiny scratch or, you know, that you can't fix or something's wrong, you've got to figure out what to do with it. You know, when you plan to say, "Okay, you know, here's the collection, here's the things that are gonna be going out, that you're gonna be marking down," and your demand falls pretty, you know, pretty rapidly, you know, that, you know, that's gonna change your pricing strategy. It has to, 'cause you've got inventory that's on order that's coming in. Got it. That's really helpful. Yeah, bulky goods like ours, you know, you better keep that inventory moving because, you know, Fernando's sitting here, you know, if we don't move the inventory, he'll have to figure out where to put it, and we might not like what he does with it. Okay. Lastly, if I may, a point of clarification. Did you say earlier that you could do 20% operating margins next year if you pulled back on a lot of investments? With this tough macro investment environment, should we think of 20% as the high-water mark for next year? Well, I think it all depends where demand goes, what happens to the housing market. You know, what's gonna happen with interest rates, inflation in the housing market, and, you know, how, you know, how long of a downturn are we in? Does the downturn get worse? If housing falls off at a greater rate, just demand's gonna go down. You know, our business is tied to the housing market because, you know, if you look at our business, it's tied to events. Someone bought a new home, they're remodeling a home, or they are redecorating their home. The core of our business is not like the person that goes, "Yeah, I need, you know, I need some new bedding." You know, that's. Our business is tied to those three things. If people are not buying homes, if people are not remodeling a home, and by the way, when people remodel a home, they're generally buying a home to live in, our customers, while they're remodeling. That's actually kind of good for our business. If the real estate activity stops, it hurts our business, you know. If you have a 20% downfall in the housing market, two out of 10 people didn't buy a home. You know, if it's 30%, three out of 10 people didn't buy a home. You know, or didn't move and, you know, are not, you know, remodeling. If the activity is down. I mean, look, what is it? Mortgage applications were down 47% in October. That's just the number. I'm not the doomsday guy. That's just the number. You know, we look at these numbers. Mortgage applications down 47% isn't good for the outlook of our industry. It's the highest print yet. Next year is, like, a month and a half away. That slowdown or, you know, like that, you know. You don't buy a house, and they buy the furniture the next day, you know. There's, there's a, there's a whole tail to all this stuff and, you know, so how it cycles through, you know, I don't, I just don't know where it's going yet. I don't think anybody does. I think anybody tells you they think they know where the housing market's going. You know, I don't know who's been right yet. This is not by the way, for the housing market point of view, there is no soft landing. We're way beyond a soft landing. This is a really hard landing or a crash landing, and it's looking more like a crash landing in the housing market. It's looking like 2008, 2009. If that sounds like whatever Atul said, like I'm gonna... Pessimist or whatever. O-ominous. Yeah, you know, ominous or whatever, you know. Okay. Okay, maybe I'm a truth teller, and I'm not a BS-er. Sometimes the truth isn't what everybody wants to hear. It's just the truth. Well. It's the facts. You guys can read. Yeah. Yeah. Understood. Thank you for your candor. Happy Holidays. Happy Holidays. That does conclude today's questions. I would now like to turn the call over to Gary Friedman for closing remarks. Great. Thank you, everyone. As we said in our letter, you know, we really wanna, you know, thank all the people and partners, all the world that, you know, contribute to our cause, our shareholders for believing in us. We just wish everybody a happy holiday. We look forward to speaking with you in the new year. Thank you. Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.