Restoration Hardware 2Q16 Earnings Call Notes

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Restoration Hardware’s (RH) CEO Gary Friedman on Q2 2016 Results

Peak and valley promotional model that evolved after 2008-2009 has been difficult to manage

” The gold membership was to eliminate the peaks and valleys in our business, which really create a havoc in the operational infrastructure. And the vendors trying to supply the goods with these peaks and valleys, ordering the goods correctly, it’s really chaotic running a business on what evolved to post 2008 and 2009, a very promotional retail environment. And yes, probably not as difficult if you are in the apparel business, right, but we are a really logistically difficult business like furniture. It’s very costly and it affects execution. So our goal was really to evolve the business to a more consistent model. And so really, we kind of went from an erratic peak and valley kind of promotional cadence to a consistent promotional cadence called membership, right”

Brands are defined as much by what they don’t sell as what they do

” So to build great brands, you have got to decide who you are and who you are not, right. Brands are defined as much by what they don’t sell, as what they do sell. And so we are going to be very disciplined this year editing and eliminating the things that we believe render the brand less clear and less valuable. ”

In furniture 100% of high end business is done on promotion because people use luxury designers

“Obviously, some consumers get into those showrooms with their interior designers. So that business is done on promotion. Designers get 25% to 40% off the business. That’s why we can’t be like a luxury brand like HERMES that has no promotions, right, because at the highest end of luxury apparel, there is no promotions. At the highest end of luxury furniture, it’s 100% on promotion. So we are now 100% on promotion.”

We are making difficult decisions but they are the ones that need to be made

“We are aligning ourselves with the highest end of the business. We have made it a membership model. We think that was the right way to thread this needle. No one has ever done this before. I appreciate all the concern and trepidations and skepticism. I mean we are – we have the same feeling, right. But we think that the decisions we are making this year for the business, while it’s pressuring short-term earnings and results, if you never make these decisions, you never actualize the potential of the business or a brand. And so we are making some tough decisions that are painful on the short-term”

The furniture business is an ugly baby but it’s our baby

“And I have always said for years, I have said being in the furniture business, it’s an ugly baby, but it’s ours, right. And so you have got to love it. You have got to care for it. But it is a tough business. And I think we now elevated this brand. We have elevated the product. We have an average ticket that is significantly higher than our competitors, right. We should be getting massively more leverage, but we are not. And we are not because we are not executing well.”

We need to fix final mile

“And I think if you look at reviews on our company online, talk to each other, you guys are customers. If I took what’s the number one complaint about RH, it’s that final mile, it’s that final delivery, it’s we screwed up. It wasn’t the same quality that you expected. And I think it’s the last piece of the puzzle to solve here. “