Yahoo Finance RH (NYSE:RH) Q4 2023 Earnings Call Transcript
RH (NYSE:RH) Q4 2023 Earnings Call Transcript March 28, 2024
RH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter 2023 Q&A Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.
Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter fiscal year 2023 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.
Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revive 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 the 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 industry relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.
Gary Friedman: Thank you, Allison, and good afternoon, everyone. I'm going to start with our prepared comments, which are included in our press release and shareholder letter. To our people, partners, and shareholders, fiscal 2023 was a year of diversity, innovation, and investment for Team RH as we faced the most challenging housing market in three decades while investing in the most compelling product transformation and platform expansion in our history. We have positioned the RH brand to gain significant market share in 2024 and beyond while building the foundation for a global expansion across the United Kingdom, Europe, Australia, and the Middle East over the next several years. While aggressively investing in the downturn has put pressure on short-term results, it also positioned us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation.
We've demonstrated our confidence in our strategy by repurchasing 7.6 million shares of our stock during fiscal 2022 and 2023, representing approximately 35% of the shares outstanding, and believe that investment will create meaningful long-term value for our shareholders. Turning to our fourth quarter and full year results, revenue was negatively impacted by $40 million in the fourth quarter due to the severe January weather and shipping delays related to the ongoing conflict in the Red Sea. We do expect the majority of the deferred revenue will be realized in 2024 when transit times normalize. Adjusted operating margin was 9.1% and 13%, and adjusted EBITDA margin was 15.3% and 18.2% for the fourth quarter and the full year, respectively, reflecting deleverage from lower revenues, increased markdowns to support our product transformation, and investments in international expansion.
Every act of creation is first an act of destruction, Pablo Picasso. We have spent the past 18 months destroying the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry. Our product transformation plans for 2024 include the launch of our new RH Outdoor Sourcebook, the most dominant and disruptive collection of luxury outdoor furniture in the market arrived in homes late February through mid-March with 14 new collections. The initial response has been exceptional and we expect to gain significant market share in this important category in fiscal 2024.
The unveiling of our new RH Modern Sourcebook is scheduled to be in home late April through early May with 30 new collections across living, dining, bedroom, and bathroom, including original designs from the Harvey Probber Estate, one of the most influential modern designers of the past century. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of 2024. The second mailing of our new RH Interiors Sourcebook is planned to be in home late May through early June with new collections and improved in stocks, which should also provide an additional lift to demand in the second quarter and continue to build through the second half of 2024. We will be mailing an updated RH Contemporary Sourcebook in late July through early August with new collections and a compelling value proposition, which we believe will also accelerate demand trends.
A second mailing of the RH Modern Sourcebook and third mailing of the RH Interiors Source Book are expected in the second half of 2024 with additional new collections, refreshed galleries, and improved in stocks. These mailings will result in a doubling of our sourcebook circulation and customer contacts in 2024 versus 2023. Our data would suggest the increased number of contacts alone should provide another lift factor for our business. We are also increasing print and digital advertising across major home design publications in 2024. You will see our ads in Architectural Digest, Elle Decor, Veranda, Gallerie, World of Interiors, Luxe Interiors and Design, Business of Home, the Financial Times, plus the Wall Street Journal and T Magazine design issues.
As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past seven years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of their revenues from the trade market, selling to architects, designers, developers, and builders. While RH is a significant trade business, the vast majority of our revenues are generated by consumers. We believe there is a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we've expanded other mostly trade-focused businesses and brands over the years.
Our plan is to launch with a 3,500 square foot Waterworks showroom in our newest and largest design gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid- to high-teens EBITDA that we believe has the potential to become a billion dollars-level brand on our platform. Let me shift your attention to the expansion of our platform. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform expansion plans for 2024 include the opening of five North American design galleries, including Cleveland, which opened last week, Palo Alto, Raleigh, Newport Beach, and Montecito, all with integrated RH interior design offices, restaurants, and wine bars.
The opening of our first RH interior design studio in Palm Desert, California. We believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation, as well as augmenting some of our design galleries in larger markets with additional design services in standalone design studios. We will also be opening two international galleries, one in Brussels, which opened last week, and Madrid, opening this summer. Both galleries are located in beautiful historical buildings that elevate our product and render our brand more valuable. Unfortunately, RH Paris has been delayed until Spring of '25 due to construction restrictions relating to preparations for the Olympic Games this summer.
We are also pleased to announce RH Sydney, the Gallery in Double Bay, a five-story development with a rooftop restaurant and wine bar, received council approval last month with plans to open in fall of 2026 in what we believe is the most vibrant and desirable location in Australia. Now let me turn you to our outlet. While we expect business conditions to remain challenging until interest rates ease and the housing markets begin to rebound. We expect our demand trends to accelerate throughout 2024, due to the extensive transformation of our assortment, we do expect revenue to lack demand during the year by approximately four to eight points until we read and react to new collections, reduce back orders, and shorten special order lead times. Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze the business.
We believe it's also important to note that we are forecasting to end the year with an increased backlog of approximately 110 million to 130 million due to revenue lagging demand throughout 2024, which will negatively impact operating margin adjusted EBITDA margin by approximately 140 basis points for the year. Additionally, investments and startup costs to support our international expansion are estimated to be at approximately 200 basis point drag for 2024. For fiscal 2024, we are forecasting demand growth of 12% to 14% and revenue growth of 8% to 10% on a 52 versus 52-week basis. We are forecasting adjusted operating margin in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%. For the first quarter of fiscal 2024, we are forecasting demand growth of positive mid to single digit and revenues of negative low single digits.
We are forecasting adjusted operating margin in the range of 6% to 7% and adjusted EBITDA margin in the range of 12% to 13%. Now let me turn you to the 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, and 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 & 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 to 6 billion in North America and 20 billion to 25 billion globally. Our strategy is to move the brand beyond curating and selling products 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 place maker. 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 Yonceville, an integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean where 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 on 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 to 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 to $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. Never underestimate the power of a few good people who don't know what can't be done.
For the past 23 years, we've heard others tell us what can't be done and for the past 23 years, we failed to listen. We avoided bankruptcy by being accused of lunacy. While others have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world. When Wall Street didn't think our stock was worth buying, we bought 60% of it ourselves. When everyone told us we should be working from home, we were in the center of innovation working on rebuilding our new home and it's almost ready for prime time. From the largest product transformation in our history to the most inspiring retail experiences in the world, from couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels, Guesthouses, from Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich, and San Francisco to Sydney, soon the world will be within our reach.
Never underestimate the power of a few good people who don't know what can't be done, especially these people. Onward Team RH. Carpe diem. And now we'll open the call to questions.
Operator: Thank you. The floor is now open for your questions. [Operator Instructions] We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Simeon Guttman with Morgan Stanley. Your line is open.
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