Restoration Hardware 2Q17 Earnings Call Notes

Gary Friedman – Chairman & CEO

Teams are buttoning down the hatches in Florida

“as it relates to the Florida market. Our teams are buttoning down the hatches everybody is prepared for the storm and so we don’t have any more information than anybody else does at this point to know, to know the business impact in Florida.”

Membership model?

“Really because we’re the only specialty retailers ever done this, outside of Amazon and Costco and a few others we’re the only one made a move to membership that didn’t start out with membership this way and there is no benefit in us creating a roadmap for anybody else follow-up. So we’re not going to say a lot about membership other than the fact that we made a very brave move, a lot of people thought it wasn’t going to work. We’re in a position to tell you today that it is working and the renewal rates are positive. And the membership growth is positive. So other than that we don’t need to get anybody else a roadmap to simplify their business and gain the benefits that we are going to gain over the next couple of years because of that.”

Department stores have been dying forever

” Amazon is wrongly accused right, the department stores have been dying forever. It’s been a slow deferment from a lack of innovation and from very rigid business models that couldn’t adapt and innovate.”

You have to think of us as 7 years old

“you really have to think about this company like a relative new company we are really like 7 years old. I got here in 2001 and the company $20 million market cap is about ready to go bankrupt. We had to raise money three times to kick the company out of bankruptcy. And for the first — for the first five to seven years we were just on the edge of bankruptcy trying to make it. And we took the company from a $300 million, losing $40 million a year to $700 million making $40 million a year. And we’re taking the company private, and then, the economy collapsed in 2008 and 2009 and that set us back to $500 million company losing money again, right? And then, we came out of that really in 2010 as when we made it the significant pivot to the luxury and to the market and really emerged as the kind of a new company if you will.”

Restoration Hardware 1Q17 Earnings Call Notes

Gary Friedman – Chairman & CEO

We don’t compete with Wayfair or Amazon

“Yes. We don’t really see any kind of meaningful threat from Wayfair or Amazon at this time. Those are very different businesses and presenting their goods in a completely different way and in many ways targeting the different customers. So I think I said that in my letter here if you step back and consider we’re really building a brand here and creating a customer experience that cannot be replicated online and we’ve got total control of our content from concept to customer.”

I think our retail experience is going to leap frog the entire industry

“So I think our retail experience is going to leap frog the entire industry and as it is today, I can’t tell you how many people from all over the world are traveling to Chicago and seeing that gallery and taking pictures and trying to understand what we’re doing there. I really think there’s nothing like the customer experience we’ve created in Chicago and our ability to recreate that experience and that energy and that fully integrated customer experience is going to further differentiate our brand in a such a much more meaningful way then even that design galleries that we opened over the last three four years and these are going to be very hard to replicate. It’s going to be very very hard for anybody to replicate it.

Restoration Hardware 4Q16 Earnings Call Notes

Gary Friedman – Chairman and Chief Executive Officer

We’re making long term decisions

“we believe we are going to be a long-term growth company. We are an investment platform. And we think we keep getting smarter and we are going to be better allocators of capital as we go forward. And so we believe the returns we are going to get – continue to get better, but there may be some times where there is lumpiness because we decide to invest more aggressively into something that we think is going to have a greater long-term impact or opportunity. But I think as I articulated in the past, we are going to invest like we own 100% of the company. We are here for the long run. We are not going to play a quarter-to-quarter game. We are going to play for multiple years and a long-term view, and no different than the decision and the investment we made moving from a promotional to a membership model. These are long-term decisions.”

We’re building a new operating platform

“We believe we are going to build an operating platform that’s unlike anything in the industry. And we are going to do it from the inside out. We are going to design it ourselves. And nobody will be able to copy it, so more to come. We are excited about it. And I am personally leading the effort just so you know, that’s what I am really excited to do.”

You can’t solve complexity with complexity

“what I have learned in my career is when you – if you don’t take the complexity out of the business and simplify the business, if you try to take a complexity and you then try to solve it with a complex system, you have created a double complexity and that usually doesn’t work very well. All the companies I have ever been involved with and studied, most of the time when they are launching a big system or they are opening a new facility, if something drastically goes wrong and that’s because they haven’t first simplified it and our effort here is going to, first and foremost, simplify our business and then support and amplify that simple solution with simple systems.”

Restoration Hardware 2Q16 Earnings Call Notes

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. “

Restoration Hardware 1Q16 Earnings Call Notes

Restoration Hardware’s (RH) CEO Gary Friedman on Q1 2016 Results – Earnings Call Transcript

Consolidating distribution centers is better than managing several

think our bias today after a pretty fulsome review is to really simplify our distribution points and hold inventory in fewer distribution centers as opposed to spreading it out across multiple distribution centers. Our previous plans were to continue to open more distribution centers. Our analysis says that the inefficiencies and extra inventory you had to buy-and-hold to be in stock across multiple DCs was causing us inventory deleverage and bloating our balance sheet and also making it difficult to be in stock in the right DC, driving DC to DC transfers up, transportation costs up, etcetera, etcetera. So, our view is to hold inventory in fewer locations, in DCs, and that will improve our in stocks, reduce our working capital needs and inventory, improve our return on invested inventory and simplify things for both our internal teams, who are leading and managing inventory and our vendors.

macro headwinds are affecting the luxury market

I think we articulated that as one really being the macro factors that are affecting the luxury market that we believe is an accelerating headwind. And I think that’s seen pretty clearly across our industry and anybody who’s serving that luxury market today.

We are still performing

you step back here, we ,look look about retrenching or if you think about the action for taking, this is not a Company that all of a sudden its running negative 10 or 15 comp. We are still performing in the positive sales growth versus very aggressive numbers over the last several years. So we see these moves as short-term in nature.

We don’t have a broken top-line model, just difficulties in the short term

we expect the business to begin to accelerate in Q4 and are very optimistic about the content in the goods, and we’re going to have the most significant refresh of new product at retail in the history of our Company and we’re going to remodel the stores and install design ateliers, expand our design services. So I wouldn’t think about that the fact we got a broken top line model. We’ve have some difficulties in the short-term. We’re taking some actions to fix those.

We can always turn promotions back on

“We can always turn promotions back on. This is not like do or die. This is not like we made a change and if it doesn’t work we’re just going to kind of stay the course and drive the business down. That’s not our goal here. We think this is a right long-term move for the Company. We’re making long-term decisions and investments for the brand and business and we think they’re the right ones, but for some reason we’re wrong. I can tell you being I think I’m still the biggest shareholder in the Company, I’m going to change course and we will make decisions that are the right decision for the business, the brand and the shareholders”

There’s clearly a slowdown but we’re not anticipating another step down

“Sure, Oliver. Let’s try to start at the top of your questions. The demand environment, the evolution and we have — we believe we’re taking what — how we see the consumer responding today, which we think that there’s definitely a slowdown. We’ve incorporated those trends in our go forward guidance and we believe we’ve been appropriately conservative in how we guided. So that’s how we think about it. If there’s a another meaningful step down, we’re not anticipating that today.”

Everyone is becoming an Amazon customer

“almost every consumer is becoming an Amazon consumer, because of the breadth of their assortment and the simplicity that they bring to the consumer for many goods, and especially durable goods and that you need in and repeatable purchases. So, look I’m a big Amazon customer. It is Amazon serve the customer at every level in a way that is relevant, I’d say, no. I don’t think Amazon is going to be the only retailer left on the planet and I highly admire them”

Amazon is advantaged because they’re allowed to operate at 1-2% operating margins

“They’re, I’d say, short-term they’re advantaged, right, because they don’t have the same earnings hurdles that many traditional retailers have today. So you have retailers that are out there, they’ve been making 8% to 15% operating margins and all of a sudden Amazon is coming in with 1% or 2% operating margins and eating their lunch. I mean, it would be an interesting world to see if all the other retailers lower their operating margins to 1% to 2%, what would the fight look like. So it is a little bit of an unfair fight, right, because Amazon is not being held to the same standards from a profitability point of view. But today the market’s allowing that and actually rewarding that.”

We can all learn a lot from Amazon though

” Listen, I think Jeff’s is a very smart guy and he is using that advantage for all it’s worth. And he has been using it and he has been killing them. So god bless. I mean, it’s we can all learn from a lot of that — a lot of things that Amazon has done and what they continue to do. So we are big students of Amazon and big fans of what they do.”

We are reinventing physical retailing

“we’ve got advantages of our own and we like the advantages we have. We also think we’re — just like Amazon is reinventing online retailing and we are learning from them. We believe that we’re reinventing physical retailing and we’re building advantages that nobody else has on the physical side of the world. So, but look today — everything is changing in our industry and if you’re not a complete student of the entire retail business, no matter what channel, you’re going to get behind.”

Restoration Hardware 4Q15 Earnings Call Notes

Gary Friedman

Still feels like a softening at the higher end of the market

“Yes, we definitely saw disruption in our business within January that was related to the significant disruption in the capital markets. Post that period, I’d say that aspect has seemed to have stabilized, although I’d say it’s stabilized at a somewhat lower level. I think that we still feel that there’s a general softening at the higher end of the market.””

Specifically seeing drag from energy and currency

“And then I think more specifically, as I outlined in the video, the continued pressure from the markets relating to energy and currency continue to be a down drag. I think that’s what we’re most concerned about. If you think about last year, and we’ve been tracking this very specifically, we saw a two point drag. The total company revenues coming out of those markets and that two point drag in the first half accelerated to a four point drag in the second half. And now has accelerated to a five point drag in Q1, and that’s on top of the two point drag of Q1 last year. And even more specifically, it’s accelerated to a six point drag in March at the end of the quarter.”

I think our business is more of a leading indicator

“I think our business is more of a leading indicator than a lagging indicator. Someone asked me recently about, gosh, Home Depot’s business looks strong. Lowe’s business looks strong, why are you feeling the headwinds differently than others. And I’d say again, if you think about our business in the context of businesses like those, home improvement businesses are tied more to hard, physical construction at homes. And so, our business is more discretionary based.”

It’s easy to wait to buy new furniture

“you can finish that home or if you have moved into a new home, say cheese, maybe we ought to use the furniture we have, maybe we don’t need to buy that new couch just yet. And I think that’s why you see our business somewhat more volatile than maybe other data points and things that people might compare to us. ”

More development stage projects are taking longer to complete than expected

“What we are learning, however, is due to the significant development nature of these projects, we have less control of the timing aspects of the approvals and construction schedules than we may have previously had experience with.”

We don’t want to flood customer’s inbox with redundant promotional emails

“And additionally, we don’t believe anyone wants their inbox flooded with redundant promotional emails. If we just think about how many President’s Day sales we hear about, private sales, spring sales, fall sales, holiday sales, winter sales, Mother’s Day, Father’s Day, one day only sales, friends and family sales, so on and so forth, how many can a customer process before you lose all credibility and they become numb to your brand.”

Your plans are always going to be wrong in some way

“if for some reason our assumptions are incorrect, and by the way, any plan in my entire career I’ve ever been associated with or developed is some degree of wrong. So we expect to be some degree of wrong and that’s why we have a lot of what if scenarios and kind of backup plans in place.”

We look at things based on emotional value

“One, we look at everything based on emotional value. Do we – is this going to connect with our customer on an emotional level, or is it something that we connect with emotionally, are we going to be passionate about it? Because we think if you try to do work you’re not passionate about, you’re not going to do very good work. So emotional value.”

Restoration Hardware 3Q15 Earnings Call Notes

Areas affected by oil are pulling down top line sales

“So when we look at this the areas that are affected by oil…When you take just those three areas, when you take the Texas markets specifically, Houston, which is being impacted the most, when you take the Miami market, and you take the Canadian market which are all very important markets for us. In the first half of the year, they were pulling down total Company sales a little under 2 points.”

They were pulling down the company 2 points, now they’re pulling it down 4 points. It makes me think we should be calling Yellen to let her know what we’re seeing

“They were pulling the whole Company down a little under 2 points. In Q3, that accelerated to 4 points, and that’s meaningful, right? It’s not just meaningful to us, I’d say it’s meaningful to anybody who’s thinking about what the US economy ought to look like, and how we ought to think about it. It makes me think hey, should we be calling Yellen, and the department, and saying, let us tell you what we are seeing, because those things, from my point of view and I don’t mean to make anybody panic, but it’s important how we look at those.”

We have a bias for action

“we have a bias for action in this Company. We are not good spectators, but we are really good participators.”

It’s the most promotional environment we’ve seen

“But one of the things that’s happening is we track all the competitors’ promotions, and we know what everybody’s doing, just like you do. And we’ve noticed that there’s been an uptick in competitive emails year-over-year…when we look at the data internally, it is the most promotional environment we’ve seen, meaningfully so.”

Taking share is important

“Taking share is important. There’s a reason why Amazon launched Black Friday before everybody else in the world, right? There’s a reason why we launched the promotion we did last weekend. It was to take share. There’s consumers, there’s shoppers, and we’re going to try to take share.”

Every 4th quarter is a war

“From a tactical short-term view, right, is every fourth quarter a war? Absolutely. You have, in this business, can you not pay attention to all those little things, and you have got to be ready to fight the fights, and you have to be into the details, and if you want to win in Q4, you have got to be highly engaged, and you’ve got to be willing to improvise and to adapt.”

I don’t mean to make anyone too worried, but I’m trying to be transparent

“I don’t mean to make anybody too worried about this stuff, right? But sometimes maybe I tend to be overly transparent, because look, we’ve got shareholders and supporters on the phone, and I think it’s important to know how we’re playing the game.”

Building partnerships means having to sometimes tell difficult truths

“We can speak less about stuff and pretend like everything’s just always great. I don’t think – I don’t think that’s the right way to build partnerships. I think, we tell you when things are working, we tell you when things are not working, we tell you when we make changes, we tell you when the changes are working, we tell you when the changes are not working.”

Restoration Hardware 2Q15 Earnings Call Notes

We are built to execute

“I think what people underestimate is how well this company executes. And I think what – compared to other people in our sector, I know it looks like we’re going so much faster, and it’s true and we are. And we’re doing so much more, and it’s true and we are. But we’re a different organization. We have different people. And we have different methodologies and processes. And I think – and I think that like – I mean, to focus on, we’re adding a restaurant and a wine bar in Chicago. It’s so little compared to everything else that we’re doing that is so important.’

We value capital investments financially, then strategically then emotionally

“we go through a very rigorous strategic process here, where every idea is dimensionalized and valued based on its financial value, its strategic value and its emotional value. And so the financial value to the company is that sometimes a more obvious one, what is the revenue value, what is the earnings value, what is the cost reduction value, what is the efficiency value, when we think about the financial value to the company. Then we go into the – we rank everything on strategic value. How does it position us in the market? What competitive – how does it create competitive differentiation? And how does it position us long-term to win? And so we go through many discussions around that. We try to value things strategically, and then we try to value things emotionally. And emotionally, as it relates to two constituencies, one, our consumers had is what we’re doing? How will it connect with consumers? How – why will they care about it? And will they connect to it emotionally?”

What’s the one thing we would do or die trying

“Once we had clarity on how we see the value of each of those choices and then we force rank. If we do one thing or die trying what would we do, we debate a hell out of that and then we pick one, and we align on that as an organization, as a team.”

We worry about market instability like everyone else

“I think the thing we worry about like everybody worries about is, market instability. What happens with interest rates? What happens with the market? The high end of the food chain you’ve got people heavily invested in the markets. And if markets are in stable, I think that that’s something we’ll worry about. And not a lot we can do about it, just be prepared to deal with it and what’s going to be the effect of rising interest rates? Will it effect big ticket? Will it expect the home buying? We don’t know, we’ve never, I don’t think the country has ever been in this long over a period of this low interest rates.”

There are correlations between our business and the market

“We can see correlations between our business and the market. And it’s interesting, as we all saw the market get beat up and then bounce back and go around. You can see our business week-to-move a little bit”

It’s really hard to be a CMO today

“There’s so many ways to address marketing spend today. And I’d say that the hardest job in America today, and in any company is probably going to be the Chief Marketing Officer. It’s probably why we don’t have one.”

Restoration Hardware 1Q15 Earnings Call Notes

You just have to watch this video to understand this company,AAABA9G8odE~,-H0MccZq2BGlPV7eCfx8yKi9Cj7CEEPq&bctid=4290443992001

Benefit to working capital from vendors scaling with us

“As we scale our business, both RH and on our artisan partner, vendor partner side, we both have bigger more profitable businesses and we have much more flexibility as it relates to working capital and so, I think you will see us over the next couple of years be able to be much more efficient with working capital and it’s going to be because our vendor base has also scaled with us and the benefits that you would get with scale you should assume that we will get those kind of benefits.”

We are performing ahead of expectation

“based on our results in Q1 and based on what we know Q2 to-date and I will let Karen build on this. But how we are performing today is ahead of our expectation, which gives us confidence in how we build that bridge into Q2 and that marry that with our expectation for the incremental revenues and profitability that the new businesses will create.”

A fully integrated “modern” concept doesn’t exist out there

“if you think about the marketplace as it is, there really is no fully assorted, fully integrated modern concept that exists, I mean anywhere in the world quite frankly. You have people that, you got to whether it’s B&B Italia or other ones that they have upholstery and then they might have few lights, a couple of items here where you’ve got — you can design within reach. I’d say it’s very item-driven business. You walk into one of their stores and it’s very much not a lifestyle. It’s presented like an item business also. And you’ll see this business presented in a fully integrated lifestyle and a model that’s very similar to the core RH business and the interior business.”

This is the very beginning for modern

” this is just the very beginning of modern. This is our — going to be our first book, our first freestanding store, our first retail presence on floors where it worked. We’re going to get so much better than what you see in interest book. The pipeline of development behind this and the excitement and enthusiasm in the designer world, the artisan world, all the people that contribute to us building this platform, in this collection of product, I mean, the pipeline is every bit as exciting. It’s not more exciting than what you’re going to see when we come out of the gate.”

Not just selling products, selling spaces

“We like to talk internally about not just creating and selling products but how do we move from creating and selling products to conceptualizing and selling spaces. And so when you hear about other new businesses that are coming and we’ve talked about RH Modern not RH Modern, RH Kitchen before and we’ve been working on developing a kitchen concept that we believe will be able to when we launch that business transform your whole kitchen, not just daily pops and pans and knives and forks and things like that but be able to transform your kitchen.”

Retail stores are really, really important still

“I think if you worry about that dynamic, you are going to miss the business opportunity and you are going to make that decision through your business long term. I did my video where a lot of people, 10% of retail sales exist online today. Do I think it’s going to be 20 down the road? Of course, I do, okay. But the fact is it’s only 10 today. If it excess, the retail stores are really, really important.”

People who are trying to shrink to greatness are missing the point

“people want to see things and people want to interact in a three dimensional nature and that’s why we’re ambivalent to where they transact, and that’s why I make my point about, it’s not about the Internet, the Internet is a channel. It’s going to change things. It’s going to shift things. But retailers that are penetrating to shrink to greatness, I think they are missing the whole point.”

The physical experiences in the world are going to be even more important

“I think the physical experiences in the world are going to be even more important than the online experiences because we are social creatures. And I think the retailers that have the very best fiscal experiences in the world tied with the very best virtual and digital experiences in the world are the ones that didn’t win, not one or the others. It’s physical and digital. That’s the world.”

Restoration Hardware 4Q14 Earnings Call Notes

2015 is a bridge year

The way we think about our 2015 revenues and why they should accelerate in 2016 is twofold. One, all of the new real estate opened in the back half of this year. So while 2015 will only receive a partial benefit from those new galleries, 2016 will have a much greater benefit as they roll into the next year. And then two, our development accelerates, our store development pipeline accelerates in 2016 with current plans to open 7 new next-generation galleries in the following year.

So really 2016 gets the benefit from the new stores. And if you think about the stores that opened this year that roll into 2015, we really only had one of these big stores, Atlanta, that opened this year, right, that rolls into 2016 – rolls into 2015. So that’s why we see this as a bridge year.”

Launching two new businesses this year. One is a game changer

But the two new businesses that we are launching, I think I mentioned on the last call, one of them I believe represents our finest work ever, and might represent one of the biggest market potentials that we’ve addressed with a new category, a new business. So – and the second one I think is also significantly incremental. But one I think is a game changer.”

Constructing something durable and lasting value

“The right way to think about our business is are we constructing something that’s durable and is lasting value that will dominate its marketplace and win ”

Put mitigation measures in place on the ports a year ago already

I mean, back in April of 2014, almost a year ago we put mitigation plans in place. So we were not that heavily, of course being slowed down, but we diverted a lot of our goods through the East Coast ports. We took that reliance from over 80% on the West Coast down below or around 50% and increased our weeks supply to kind of manage through that.”

You’ve got to serve the customer wherever they want to shop

I mean, I think the fallacy you hear today and it kind of surprises me as all these companies want to talk about, well their direct business is growing faster and this is happening and their direct channel is their most profitable channel.

Well, it all depends on how you’re allocating cost. I don’t know how you make more money when sales shift from retail to direct, right, because your occupancy cost doesn’t go down. Your overhead doesn’t go down. So I think there is a lot of companies that are out there.

In fact it goes up in some cases, you’re seeing in certain people that are now just getting into the direct business and everybody is all excited because they are growing their direct business and they are missing their earnings, right, because they are finding out that it’s expensive to handle the goods, to ship the goods and so on and so forth and fulfill the goods.

And so, its – honestly, I think there is a lot of old math and old thinking that’s in the industry. At the end of the day, you’ve got to build a platform that can serve the customer wherever they want to shop that presents your brand better than anybody else and it should matter where the customer transacts at the end of the day.”