RH (RH) Q4 2022 Earnings Call

RH (NYSE:RH) Q4 2022 Earnings Conference Call March 29, 2023 5:00 PM ET

Company Participants

Allison Malkin - Investor Relations

Gary Friedman - Chairman and Chief Executive Officer

Jack Preston - Chief Financial Officer

Conference Call Participants

Steven Forbes - Guggenheim Securities

Simeon Gutman - Morgan Stanley

Max Rakhlenko - TD Cowen

Steven Zaccone - Citi

Seth Sigman - Barclays

Anthony Chukumba - Loop Capital Market

Michael Lasser - UBS

Peter Benedict - Baird

Jonathan Matuszewski - Jefferies

Steve McManus - BNP

Seth Basham - Wedbush

Cristina Fernandez - Telsey Advisory Group

Brad Thomas - KeyBanc

Operator

Thank you for holding and welcome everyone to the RH Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Allison Malkin with ICR. Ms. Malkin, please go ahead.

Allison Malkin

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2022 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 will turn the call over to Gary.

Gary Friedman

Thank you and welcome everyone. We will start with the reading of our letter to our people, partners and shareholders and then open up the call for questions to our people, partners and shareholders.

Fiscal 2022 was another outstanding year for the RH brand. While revenues of $3.59 billion were below the pandemic peak of 2021, we finished the year with an adjusted operating margin of 22% and adjusted EBITDA margin of 25.9%, the most profitable business model in our industry. It’s clear that the stay-at-home restrictions of the pandemic created an exponential lift for home-related businesses and it’s also clear the lift like the pandemic was a temporal isolated event versus something structural or systemic. We believe the questions are what if anything has permanently changed? What brands and businesses are positioned to win over the next decade? And what data is important to determine who those winners will be. Those are not easy questions to answer in light of the massive backlog release and a return to discounting at most home furnishings retailers, which distort short-term results.

Additionally, inflation that was thought to be transitory is now being persistent by the Federal Reserve, resulting in a record rise in interest rates triggering a dramatic decline of the housing market with luxury home sales down 45% in the most recent quarter versus a year ago. Add to that, an underperforming stock market and a banking crisis, no one saw coming and the data points to business in our sector likely getting worse before it gets better. It’s times like these that businesses tend to move and hurt, pursuing broadly adopted short-term plans that lead to mostly similar outcomes. It’s also times like these that present opportunities to pursue long-term strategies that can result in strategic separation and significant value creation for those teams willing to take road less travel and pursue their own unique path. That unique path for RH is our climate for luxury mountain and our long-term strategies of product elevation, platform expansion and cash generation.

Product elevation. Our strategy to elevate the design and quality of our products is central to our strategy of positioning RH as the first fully integrated luxury home brand in the world. It is also the most difficult part of our clients as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs. While it’s a client that becomes more difficult as we reach new heights, it’s also one we have navigated successfully over the past 22 years, but don’t expect this to waiver from our vision anytime soon. This spring/summer we will be unveiling the most prolific selection of new products in our history with over 70 new furniture and upholstery collections across outdoor interiors and temporary, modern, baby and child and team. It represents a massive leapfrog for our brands. These new collections reflect a level of design and quality and accessible in our current markets and a value proposition that will be disruptive across multiple markets. We also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the second half of the year. The new thesis will be gracing the pages of the new Source Book design with the objective of creating a cohesive collection of titles, reinforcing our design and quality leadership. The first of those titles, RH Outdoor, began arriving in homes last week with our trademark belief in spreads across the cover. There are pieces that furnish a home and those that define it.

Platform expansion. Our plan to expand the RH brand globally, address new markets locally and transform our North American galleries, represents a multibillion-dollar opportunity. This summer, we will be introducing RH to the UK in a dramatic and unforgettable fashion with the opening of RH England, the Gallery at the Historic Aynho Park, a 73-acre 17th century estate that will be a celebration of history, design, food and wine. RH England includes 3 full service restaurants, the orangery, conservatory and the loggia, plus 3 secondary hospitality experiences, the wine lounge, the tea salon and the juicery. Guests will appreciate views of Europe’s largest herd of white deer grazing on the vast and scenic property from the 46 windows adorning the south facing main building and can enjoy a glass of wine or afternoon tea service while sitting around monolithic stone fire pit on the Grand Viewing Terrace.

One of the most unique attractions at RH England is The Aynho Architecture & Design Library, featuring rare books from the foundational masters of architecture, Palladio, Scamozzi and Alberti. The centerpiece of the collection is one of the first printings of De architectura, The Ten Books on Architecture by Vitruvius, whose work from the 1st Century BC inspired Leonardo da Vinci’s drawing of the Vitruvian Man 1,500 years after Vitruvius sketched the original. The principles at the core of Vitruvius’s philosophy have also inspired the Design Ethos at RH, which is reflected in our galleries, interiors and gardens. The Gallery will also include the Sir John Soane Exhibit, honoring one of England’s greatest architects, in partnership with the Soane Museum in London. The exhibit will touch on his life story and detail some of his most famous works, including Aynho Park. We believe RH England, The Gallery at the Historic Aynho Park, also represents RH’s greatest work and will act as a symbol of our values and beliefs as we embark on our expansion across Europe.

Our global expansion also includes openings in Brussels, Dusseldorf, Munich and Madrid as well as an interior design studio in London over the next 18 months, followed by Paris, London, Milan and Sydney in 2024 and 2025. Regarding our North American transformation, we will be introducing a new gallery design this year in Palo Alto and Cleveland, plus opening new galleries at the Historic Firehouse in Montecito and The Linden House, a 178-acre estate on a private lake in Indianapolis. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years.

We also believe there is 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. We have several existing locations that validate this strategy in East Hampton, Yountville, Los Gatos, Pasadena and our former San Francisco Gallery in the design district, where we have generated annual revenues in the range of $5 to $20 million in 2,000 to 5,000 square feet. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets.

Cash generation. We have demonstrated that those with capital in difficult markets are the ones who capitalize. That’s why we raised $2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation. Times like these also require us to have the discipline to say no to the things that are nice to do in order to focus our time and resources on what is truly important. That includes making the difficult decision to graciously say goodbye to team members whose roles are no longer essential in our new view of the future, enabling us to work in a more integrated and collaborative fashion, on fewer more important priorities. Please know we have treated everyone with respect and dignity and appreciate the contributions all have made to our cause. Approximately 440 roles were eliminated as part of our organizational redesign and we expect to achieve cost savings of approximately $50 million annually, inclusive of associated benefits and other cost savings. Concurrently, we will be focused on reducing inventories and generating cash, further strengthening our balance sheet to maximize optionality.

Outlook. As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis and the cycling of record COVID-driven sales and backlog reductions. Based on current trends, we expect fiscal 2023 revenues in the range of $2.9 billion to $3.1 billion and adjusted operating margin in the range of 15% to 17%, which includes an approximate 150 basis point drag due to the ramp of our global expansion. We estimate the 53rd week will result in revenues of approximately $60 million. For the first quarter of fiscal 2023, we are forecasting revenues of $720 million to $735 million and adjusted operating margin in the range of 13% to 14%

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 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 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 Yountville, an integration of food, wine, art and design in the Napa Valley, RH1 and RH2, our 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 and 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 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.

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 the other brands want you to. We are not from their neighborhood, nor invited to their parties. We 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 that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim.

We believe the level of work we plan to introduce this year inclusive of our new product collections, new Source Book design, new gallery design and the introduction of RH to the UK in an innovative and immersive fashion, continues to demonstrate the imagination, determination, creativity and courage of this team, and the relentless pursuit of our dream. 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 earned by building one or by reaching the top of the mountain. Onward Team RH. Carpe Diem.

At this point, operator, we will open the call to questions.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] Steven Forbes with Guggenheim Securities, your line is open.

Steven Forbes

Good afternoon, Gary and Jack. I wanted to expand on the new product launches. You mentioned the timing of these launches as an inflection point within the business. So curious you can contextualize sort of what’s implied by the guide if you are sort of baking in a reacceleration, right, in demand trends at the back half? And then maybe more importantly, how we should think about in stock versus special order mix and the potential revenue contributions of these new collections in the back half?

Gary Friedman

Sure. I think based on the times we are in and the uncertainty we are facing, whether it’s the continued rise of interest rates or the next bank or two that gets eased. It’s hard to be anything conservative right now. And I think it would be foolish to be not just from a perspective of disappointing investors, but disappointing ourselves and possibly making decisions in investments before we can see around the next corner. I can tell you it’s someone the unsettling feeling being a person on a Saturday afternoon who is watching the Warriors basketball game of the news cut to align formed around your local bank, while the banks were sending hourly e-mails trying to tell you that they are committed to serving you, it’s a very unsettling feeling, okay. And those of you maybe on the East Coast that didn’t experience it what happened here on the West Coast maybe aren’t as close to it, but I, as a person that was close to it, have never seen anything like it. So I don’t know how long was it between the fall of Bear Stearns and the fall of Lehman Brothers, what’s going to be the next shoe to drop or pin to fall, that’s very unknown right now.

So we believe there will be an inflection point in the second half. What we don’t know is what will be the economic environment in the second half, what will be the condition of the banking industry in the second half, where will interest rates be in the second half, where will inflation be in the second half. I think Powell has been very direct and consistent about addressing persistent inflation. All one has to do is Google the history of the federal funds rate and zoom in on the 1970s to 1980s and look how many times the Federal Reserve thought they had inflation under control, lower the federal funds rate only to have to raise it twice as high all the way to, I think, 21%. If you look at those moves and you look closely, zoom into that chart, you realize that we are in uncharted waters today from an economic environment perspective.

There is not many people on the planet in levels of authority and responsibility that were old enough to experience those times. And I think that having a conservative view and being prepared, having a strong balance sheet and trying to see the whole board and all the moves, we like to say inside our rates don’t move until you see it. And so, our view is just to be conservative, be prepared and try to capitalize in the – capitalizing the opportunities that avail themselves in times like these, times of dislocation, because this is the time of dislocation. Anybody that thinks it’s not a big deal, the three banks went down, where they don’t think it’s a big deal if the government directed 11 banks to lend $30 billion from my bank just to say that bank is living with a euphoric view of the world. I’ve been on the planet for long enough to know this is not normal and this is dangerous. So we want to make sure we navigate this period in the most thoughtful way that we can and position ourselves – to position ourselves to really capitalize long-term. And that’s what we have done in every past time like these, whether you look at 2001 when I joined the company, 2007 and ‘08, the 2015-16 period, where we had a slowing housing market and some issues in the oil industry as well as an internal issue with the launch of RH Modern. But we have made during those half times.

We have a history of making a few very important moves that have positioned the company that really shouldn’t be here today, right. It was really a bankrupt company enthusing to see one of the leading companies in the world is what we do. So that’s how we approach things. It may be different than everybody else. We are not pushing the panic button of promotions. I wouldn’t call it panic button of promotions. It’s really trying to hang on to the illusion of where business was during the pandemic, right. Like the pandemic has come and it’s gone. Some of the after effects are still lingering. We are acting like it’s never happened. And so whatever the giveback is, the situation is, does it really matter? If our business looks more like 2019 coming out of it, but it’s really built on a strong base and foundation with a really exciting long-term strategy and vision. That’s what we think is important, not hitting the sale button is not spending out sale e-mails. I don’t know check your inboxes unless you are getting filtered.

Lot of people are saying, we are not really returning to promotions. I am sorry, if you are sending me promotional e-mails every other day, if not everyday, multiple times a day, calling them different things, you want to call your promotion something different, that’s interesting. Let’s see what happens when all those people have to anniversary those promotions, right. Let’s see how many more promotions they at when they anniversary those promotions. Let’s see what happens over the long-term as their operating margins start to grind down to where they were historically. And that’s what’s going to happen here like we are not doing anything different in our operating margin this year. We guided to a midpoint of 16, yet 150 basis points of drag for international. You have got 17.5. We entered the pandemic with 14.3, right. So without changing anything, we are ahead of where we were. I don’t know if everybody else is going to end up there. I think there are some new businesses that have grown quickly up a smaller base. But based on some of the sales growth that you see, the operating margins aren’t where you think they would be. So, I like where we are. We thought deeply about the decisions we made and this is the game we are going to play right now and we feel good about it.

As it relates to the stock versus full mix for these new collections, what are the in-stock levels? We are going to be in stock. Many of the products we run our upholstery business mostly is a special order business just because the customers want choice and color of fabrics. And then we generally stock our broader furniture collections. We also are planning to transform our galleries and our floor sets beginning in this late second quarter into the third quarter when we can get the enough product and our collections. For us to put a single collection in a gallery is generally what we order, I don’t know, it’s 1,500 to 2,000 pieces of that collection. And so getting factories to ramp up for that kind of a change out is pretty massive. And so you are balancing the decisions between looking to galleries and being in stock.

Our view is we want to flip the galleries sooner than later. We think this product – I mean, one of the reasons we haven’t split some more of the stores into contemporary quite frankly. And we are happy with contemporary. Contemporary in its first year is tracking to do more than modern in its first year. So – and that’s even in this environment. And the product that’s on its way is by far the best work we have ever done. I mean – and the breadth and depth of the assortment, the value proposition that we are going to have in the market that I think will be disruptive, not only at the high end, it’s going to be disruptive to people that are below us in the market just because we have the scale to buy and stock inventory. Many people don’t. The platforms that are out there today, whether it’s Wayfair or others, you got to understand, they don’t take position in inventory. So they can’t really buy in volume. So they – because they can’t buy in volume, they can’t drive efficiencies. So a lot of people say, well, aren’t you worried about platforms? Well, I think platforms ought to be worried about us too. There is not a platform that’s made a dollar yet, I think. I mean Wayfair made money during the peak of the pandemic for God’s sake. And look, may Wayfair be able to hike their prices and make it. I don’t know. All I know is that we’ve got a really great model. We have got, I think, the most compelling vision in our industry. We are trying to do something that’s never been done. So what the stock versus SPO, the spell mix for the business, special order mix for the business will be is kind of a really small rock, quite frankly. So those are just little nuances in the business. The key is really going to become I think – and it’s hard to communicate until you have seen it. I mean, I don’t know how many people on the phone have got the Outdoor book. But the Outdoor book to me, I mean just visually looking at it, looking at the cover, looking at the MAC coverage we have developed for all the other books, feeling the quality of the cover, the page, the map finish, it looks like a new brand and the Outdoor book has probably the smallest percentage of newness. Yet it’s a lot. It’s got 10 new collections, that’s – many of our competitors don’t have 10 collections.

So when you see what’s going to happen, this is a big – it’s the biggest move we have ever made in our history. It’s most exciting time in the history of our company, yet it’s the most uncertain time, I’d say, in this history of leading this business. I think it’s more uncertain than 2008-2009 since you didn’t have the inflation problem that we have today, you didn’t have some of the political unrest that you have today and the inflation issue is going to be an interesting one. If the Fed can navigate to the other side of that with a positive outcome with what I’d call any kind of landing any kind of landing is good, just land the plane on the other side, whether it’s hard, whether it’s bumpy, just don’t completely crash. A complete crash would look like the 70s and the ‘80s. That will take over a decade to recover from. A recession, which people are worried about and afraid of, like we have recessions every 7 to 10 years in this country, it’s like we have had the longest economic expansion in our history. Don’t be afraid of the recession, I’d tell people. Recession is a temporal event. They usually last 12 to 18 months, maybe 24, pull up the history of the Federal Funds rate and zoom in to the ‘70s to ‘80s. That’s what we should be scared of.

Steven Forbes

Thanks, Gary. I’ll get back into queue.

Operator

Simeon Gutman with Morgan Stanley, your line is open.

Simeon Gutman

Hey, everyone. Hey, Gary. Hey, Jack. Gary, has your approach to the, I guess, the next 12 months of promotional posture, is it changing, does it – will it change if the environment gets worse or we know what to expect in terms of pricing and promotion from here?

Gary Friedman

Yes. Look, we have – as we said, the biggest collection of new products in our history coming through. So we are going to have to – we are going to have to clear existing products, right. So there will be some promotional activity and clearance activity in the business as we always have, that may get bigger. And also in our view because of the uncertainty in the market, we may decide to just move stuff through our outlets and online just faster than we have made normally just to turn inventory – non-strategic long-term inventory into cash, right and position us to have maximum optionality during these times. So we think leading the business with a cash focus is really important. There is going to be opportunities that we probably shouldn’t imagine that might unveil themselves whether it’s from a real estate perspective, business opportunities that might exist, ability to accelerate our business in different ways, whether it’s as we mentioned kind of what I’d call, I’d always call interior design offices where if you stop and think about our business, interior design is really something that elevates and amplifies our product. But we have become really the largest residential interior design business in North America and likely the world.

And it’s become more and more important to our business long-term, attracting the very best people in this industry that are aligned with where we are going, creating incredible offices and spaces for them to approach business in versus maybe having to always be in a retail store. So, our design studios are going to kind of thread a new needle, I think in the business. You will see the first one in London for community concepts and we will have some other ones that I think will pop up relatively quickly. But I don’t think it – we are in a really good position to play offense, right. And that’s what you want to be in. Like our – there is no risk here to our balance sheet. There is no risk here to our operating model besides like, hey, we make less money. Got it, we made a whole lot more money during COVID and we cash that away. So we’re just in a great position. So I’m not worried about exactly where our business is today. And I don’t mean that it sounds like, like we’re not focused on it. We’re just focused beyond this next 12 months. We have a lot of things that we’re excited to bring to life in the next 12 months. But it’s not – like think about it this way. Did you see any of us self-stock at $700 a share, have you seen me sell stock when our stock was $700 a share?

Simeon Gutman

No.

Gary Friedman

The reason I didn’t sell stock at $700 a share. We believe it’s going to be worth significantly more than that, right? So we’re just playing a very long-term game. And if we’re right, we’re going to create extraordinary shareholder value in this company. We’re going to do something nobody else has done. So expect this to play our game if something really crazy happens, I can’t imagine it, something worse than coded that shuts down multiple parts of the economy again. we may have to improvise adapting over time. But based on what we can see and anticipate that might be wrong today, I think we’re good with the game we’re articulating the strategy that we’re articulating.

Simeon Gutman

If I can sneak a quick follow-up, this follows up to Steve Forbes question. The tax that you took the approach to the guidance, are you taking the fourth quarter sales and run rating? Have you made tweaks, I mean, in the last 2 weeks, even given the banking prices? Like how – and then are you building in a back half improvement because of the new launches?

Gary Friedman

Yes. There is back half improvement that we launch. We’re not going to launch with that we’re doing without some improvement. I would say we’re not baking in what might happen in better times. Look – or worse times.

Jack Preston

Because it’s in the same way we did in 2022 when we were baking in a deterioration. I don’t – that’s going to be part of the story as we look out.

Gary Friedman

Yes. Listen, do we are going to get significantly works? I don’t think so. I’ve never seen the luxury home market down 45% in a quarter ever, not even in 2008 and ‘09. So I think we’re near the bottom. Could it get a little worse, I think it could, was there erosion during the banking crisis, yes. Our business dropped about 8 points, but it’s kind of bounced back a bit. So we didn’t factor that drop through the rest of the year because it’s been kind of return. So I just don’t know if the banks are stable yet. So there could be – maybe there is another 10 point drop if things become to destabilize further, can we withstand that? Yes, we can. Like I think we’ve got our cost structure in a good shape. There is levers we can pull and things we can do from a cost and investment perspective, we could slow things down a little bit. There may be times where it’s more opportunistic to repurchase our stock. They could benefit long-term shareholders, but listen, we are more excited than we’ve ever been. We’re working harder than we’ve ever worked. Not because we have to because we want to guess the work is that exciting right now, so and I think the customers – our existing customers, and I think the new customers that we’re hoping to acquire. I think they are going to hard to not be excited about what I’d call the next chapter of RH. So we feel good.

Simeon Gutman

Thank you for the thoughts.

Operator

Max Rakhlenko with TD Cowen, your line is open.

Max Rakhlenko

Great. Thanks a lot, guys. So first, on the 15% to 17% EBIT margin outlook, just how should we think about gross margin versus SG&A, and then also, how should we think about the four-wall gallery margins versus a lot of the investments that you’ll be making? So just thinking about the core versus some of the growth initiatives? And then I’ve got a follow-up.

Jack Preston

Well, Max, we don’t break out the gross margin SG&A split, obviously, I mean, clearly, with lower volume ‘23 versus ‘22. Again, you guys can do the math on what deleverage would occur on lower volume from fixed occupancy costs just like we had in Q3 and sequentially in Q4. So I’ll just say keep doing that math. Four-wall…

Max Rakhlenko

I’m talking about our gallery level versus the investments?

Jack Preston

What do you mean by that? I’m not sure what you’re asking.

Max Rakhlenko

Just thinking about the four-wall gallery profitability, where you are now versus where you were before? And then also just a lot of the investments you’ve got international, which you pointed out, but then you’ve got a bunch of gallery openings in the U.S. as well as some of the other growth areas that you’re focusing on. So just trying to think about more one-time in nature versus the run rate of business.

Jack Preston

The economic model of the U.S. sort of our North American four-wall gallery base hasn’t changed other than in the same way that would have been impacted as our business has evolved, whether margins come down as we talked about. But it’s not – I think you don’t think about it the same way, I guess, on that basis. On the international side, we will have more to say when we open. I don’t think there is – that’s a question of also the size ultimately of the business. And as Gary has talked about we don’t have – it’s quite a wide range of what could happen here as we launched.

Max Rakhlenko

Got it. Okay. And then on just the new openings, any color on the cadence, both U.S. as well as Europe, throughout the year? And then just any color on the new real estate prototype that you’re looking to roll out? How should we just think about that annually versus the regular types of galleries that you open and then just anything on margins and profitability there?

Jack Preston

I mean, again, Gary referred to the cadence in the letter. So talking about England opening in the summer, the other galleries are sort of H2 timing. We will update you as that unfolds. And then also the design studio, same thing, I think it’s – when we have more to share, we will share it at the moment, that is what we have.

Max Rakhlenko

Got it. Okay, thanks a lot, guys. Best regards.

Gary Friedman

Thank you.

Operator

Steven Zaccone with Citi, your line is open.

Steven Zaccone

Thanks. Good afternoon, everyone. Thanks for taking my question. I wanted to follow-up on international because it did look like you listed some new cities, and that included Sydney. So curious how you think about that timetable? And on the international stores in particular, how do you plan to merchandise these stores versus the gallery in the U.S.? Like will you have RH Contemporary in the UK opening?

Gary Friedman

Yes. No, there is – we’re building a global brand. And unless we’re in markets that have, for some reason, something that should be vastly different, which there are probably markets we’re not going to approach initially. Yes, you can expect that RH experience, it’s very similar. So, your question about Sydney since I outlined the timeline for Sydney with famous Paris, Milan and so on and so forth, so – and so the timetables are all outlined. These are big development projects. Sydney is a brand-new building, they’ll be digging into the ground soon. So we have to get certain approvals and things like that, design approvals for the building we’re hopeful there could be delays. They could decide they don’t like our building and want to make changes. So we’re working with local developer that owns the land and is developing kind of a custom build for RH. So if we span a reasonable timetable, if there is no real issues there that should fall in mind. Everything else is kind of somewhat under construction or demolition or summer more complex, less complex. Some of the bigger, more complex ones are Milan and London and Paris. Those are all under construction moving along nicely. If you’re in Paris in the next few weeks and if you are anywhere near this [indiscernible] Avenue Montaigne look up, we will see – I think it’s almost 100-foot high, something like that, 100-foot-high, 70-foot illustration is the [indiscernible] wrapping RH Paris as a symbol is our design ethos and beliefs. And soon, you’ll see something like that in London. So it will be clear to people something coming that they have never seen a building wrap in a way that’s never been done. So everything is moving along. And Milan is an extraordinary project in dug out the site in the ground, they built the infrastructure for what’s going to be an incredible chunking Garden restaurants and – so a lot of exciting things. We’re moving along and make a lot of investments and I think we’re going to be relatively easy to find in Europe. I don’t know how many people actually know about it yet, but they’ll know we’re coming. They know something coming that they haven’t seen before.

So yes, so there is – and that’s the great thing about the buildings we build, right, is there is people watching by them all the time, driving by them all the time. So there is inherent curiosity that gets filled depth. And sure, a lot of people are going to go to our website and say, what’s that and see what we’re doing and see who we are. And so the brand is going to be benefited by not just topping up in a mall store where you throw a little barricade up along 300 other little storefronts and say, whoever’s coming in 2 or 3 months, I mean our buildings are under development for 2 to 3 years. So people get to anticipate our entry into a market for a while. So I think that’s one of our advantages, quite frankly.

Steven Zaccone

Great. Then the second question I had was, I did want to shift to margins. And I was curious for how to think about the path beyond this year. It’s helpful to think about the business where you are today versus 2019, but we always used to think about a 20% margin floor for the business. So as we look to ‘24, would you expect the mid-teens to high-teens operating margin level to be the right level for the business as maybe you return to growth, but it’s potentially offset by continuing investments for global.

Gary Friedman

Yes. I think you’ve got to think about a 20% margin floor, not in the worst housing market – worst luxury housing market I’ve ever seen. It’s been one of the worst housing markets anybody has seen, right? So I think in the third quarter, with luxury housing is not a fourth quarter, luxury, if you think about where luxury housing has been, it was down 18% in the first quarter of ‘22, down 28% in the second quarter of ‘22, down 38% in the third quarter of ‘22 and recently reported a couple of weeks ago down 45% in the fourth quarter of ‘22, which means because you’re talking about months and they are kind of going down, it probably means that the last month of the fourth quarter was down close to 50%. It’s not 50%, then you’ve got a refi market that’s down 70%, 80%, some number like that. And housing values, the refinancing market is another way to drive businesses like ours, when people are refinancing, taking money out, investing money into their home, refurnishing their home, things like that. When you’re looking at kind of record inflation, record rising interest rates, a record kind of falloff in the housing market like this. Like is there – I don’t think I was thinking that we had a COVID giveback and this kind of market environment with the banking prices and other things all happening at once. So for our customer, they are smart and savvy investors. There is one that the leasing housing market went up more than regular housing market is about a 10-point swing between the two between the non-luxury homes I think a 10 point swing all year, even more than that in the earlier quarters. And remember, what happens in the housing market, it kind of trails to our business didn’t happen, it happens fast, but not completely it takes about 3 months to kind of completely hit us and settle in. And so the – all of that happening at once, could we be it 20, if we wanted to be, could we slow down the European expansion. If we wanted to, did we kind of structure the business and make 20 points? Yes. I mean we could.

Is that the right thing to do long-term? No. So in a typical environment, in a slowing market, with one thing hit us at once, but multiple things are hitting us at once. So do we think there is anything different about our long-term view, the business being in the mid-20s operating margin, 30% EBITDA, maybe even higher operating margins than end. Just think about our model and imagine it with real scale imagine with this looks like. Imagine if we really become one of the great admired luxury brands in the world and what kind of product margins you can achieve when you really reach that level of desirability and there is a lot to these business is – yes, the brand that we’re trying to build doesn’t happen quickly. It takes that age in centuries, if you name all the real luxury brands in the world. And that’s why most people don’t even think about building one because it’s too far out of their view. I mean we may not get there in my lifetime. The key will be that I set this company on the trajectory – to get there, and do something that’s never been done because no one’s ever started at the bottom of the mountain like we’ve started. We’ve been further ahead, if I would have taken the $60 million I raised 2001 and just starting from scratching and not invested in RH. Yes, probably, but it’s still is a really long time. Our management side 300 years old, like most of these brands are more than a century old – more than 100 years old. So I got that everybody’s been patient. And we’re in patient too. I think we moved faster than most. But it’s just a different path. It’s not going to be – we got rolled out and we burned out.

There is a lot of things that really hot with investors for a little while. And next thing they are not ever again. We’re trying to build something that’s really interesting and unique that stands to test the time. If it’s not many people trying to do what we are doing today, so it’s a little foreign. And if it’s somebody that’s not really – that doesn’t really cover luxury. I’d say for people, you want to understand it’s more, we will read about Bernardo now, read about how he thinks about luxury brands, what it takes to build them, the discipline you have to have, the radical innovation it takes, the relentless pursuit of a long-term view, people that are doing it. I think people that are more familiar with luxury brands are more familiar with the path that we’re taking than a lot of people that aren’t, right? If you’re just covering the home furnishing sector of hard goods, almost none of it relates to the path we’re taking except that we’re selling furniture and home stuff. It’s a very different strategy.

Steven Zaccone

Great. Thanks for all the details. Best of luck this year.

Gary Friedman

Thank you.

Operator

Seth Sigman with Barclays, your line is open.

Seth Sigman

Great. Thanks a lot. I’d love to follow-up on that last point, actually. Just thinking about your ability to maintain and continue to grow mind share in this environment? And I guess, whatever a normal environment ultimately looks like, I mean, to your point, there is so much newness, but it is getting more promotional, and it feels like a lot of competitors may go back to pre-pandemic promotional levels, right? So you’re taking a firm view on that. How do you cut through that noise, right? And I guess if you continue to restrain from discounting, does that just mean that marketing structurally is higher going forward and just offsets that? How do we think about that?

Gary Friedman

No different than you would have thought about it in 2019. Yes, just don’t – just ignore the pandemic. People who have altered their strategies based on the pandemic, I think they are going to find out that those are going to be things that are hard to hang on to as the pandemic is – is there some things that are modified, there are going to be more people that work from home. Yes, there are probably people that should have been working from home. Most of the people are going to go back to the office, yes, they are going to go back to the office. Are we going to – I mean, I don’t know how many people you see wearing masks out there right now. It’s kind of weird, right. It’s almost like the beginning of the pandemic. You saw the people with masks and I remember my significant others tell us, you have to put this mask on to go into the grocery store. So I am not going to put that thing on, looks weird. It’s like I didn’t want to put on a mask. And then you couldn’t think of your life without a mask, right. Just like I had people that came in here pitching the ideas during the pandemic and Erie is laughing here, she is smiling right now, because it’s like I had so many people like with small business ideas or things that they were doing wanted to just rather invest or partner and whatnot and telling me it’s the decade of home.

It changes – it is going to change everything, the decade of home. I mean, it’s a pandemic. How could you say that, something the world has never seen like in our lifetime, right? I’ve ever seen people walking around the United States with mask before. I’ve never had the government tell us we couldn’t leave our house, that’s go buy groceries, yes. I didn’t have to wear gloves going grocery shopping. I have to wash my groceries in my sink before I even put in my fridge like, I got it. It was a radical change, but it was temporal and not systemic. And it’s just a – we don’t think that there is a lot different than 2009. We’re going to play our game for people’s promotional in 2009, they were, say, what’s different about other people from us right now. They are promotional on top of not being promotional. If I push the promotional button right now in our business and send some promotional e-mails, our business would go up 10% to 20% overnight to put some pressures on margins, and it would be really difficult to anniversary next year. And you start spending your time on pricing your business from week to week, month to month not on building your business.

You are focused on price, not on product. And you’re thinking about products from a promotional lens and your – yes, you’re just playing a completely different game. So how do you cut through the noise, we’ve cut through the noise, read the letter. It’s cutting through the noise. That’s what we’re doing. We’re not panicked. We’re not nervous. We had the best model going into the pandemic. We have the best model coming out of the pandemic. And we will have – and well – I think, we will leapfrog even farther ahead. when we get to ‘24 and ‘25. I think whenever things have – from an economic perspective, get a little normal in the housing market, interest rates and get inflation under control, that’s the big thing. Like I worry most right now about inflation. But if we don’t get that under control and that changes the whole structural economic environment for so many people. That’s the most important thing. If Powell gets this under control, somebody automating President in the United States as the people that were here in the 70s completely true to that.

Yes. So right now, I’m betting on Powell. I wasn’t happy that he thought was temporal, they didn’t move fast enough but I’m happy with the stance we’ve taken. Do I wish he raised interest rates to 0.5 point I do. So I think it really matters to the banking industry that went 0.25 point and 0.5 point, no. Not really, the banks that are going to go sideways to the banks that they are going to go side with. The government is going to have to bail banks out. Do I wish Yellen would just tell everybody that we’re going to backstop everybody’s savings in banks. Just tell everybody that, and it will calm everybody down and we will having people nervously take their money out of banks.

You said, where you’re sitting there and you see the news, you see the TV cut to align around your bank, your me. And I was – you only do my part is like we got to get in the car. We got to go downtown. I can still get in the line with the bank because people managing my money, we’re going to wire the money out of the bank on Monday. I thought, shit, they see the other banks over the weekend. Many might be too late. Like if you have to experience and stuff like that, you just know this is not normal. So I just wish that, look, I think that there is no way the government can’t backstop people savings. And if we continue to have runs on banks and have banks lend other banks money and banks buy the whole thing is kind of a mess, I think, yelling out is just tell everybody to calm down. This is what the government will do. So no more runs on banks, how will let it take the interest rates to where we have to taken to kill inflation, then we get back to normal. Otherwise, zoom in on the 70s and do you think things are crazy now, can’t even imagine what that was like to navigate through.

Seth Sigman

Okay. Thank you for that. I just want to follow-up on one point around the margin outlook. You discussed your philosophy about, I guess, maintaining or, I guess, not maintaining the 20% margin and why that makes sense for you right now. I’m just more curious if you could help bridge us to what is actually different from 20% to your actual guidance. I get the 150 basis points of investments and the deleverage in the model, but what else would be different to drive that delta. Thank you.

Gary Friedman

Well, I mean, we set to inflect the revenue growth back, right? So the housing market has to stabilize. I mean, the luxury housing market was down 45% in the fourth quarter. I mean, I don’t know, do you have any records on have you seen a housing market works on this? When our business is tied to the housing market, it’s tied to the refinance market. Refinance market is down 70%, 80%, like 78%, it’s not rocket science to know this is a really bad time. I think what’s different here than past maybe it’s usually when you have a recession, it all gets thrown into the same pot. The fact is we’ve been in a massive housing recession for the past year. And on top of that, you have kind of the COVID come down. And so – but your businesses, right, that were kind of shut down during COVID that have opened up. So travel and leisure, other things. People are traveling, so they are buying more clothes. That shouldn’t surprise anyone. You’re going to more weddings people are going to right now because there is no weddings for 2 or 3 years. How many events are happening if people are buying new clothes for a new jewelry for. We’ve perfumed where, like yes, people like, well, Lululemon was really up during the pandemic and they are really up now. Well, yes, there was nothing to do, but work out during the pandemic, but you did it mostly at home.

Now you get to go back to your yoga class and your SoulCycle, who’s like super happy, really happy that if they weren’t so happy during the pandemic when Telecon took all the business that they feel pretty good right now. I think about all these things that have changed. I think what happened at Telecon. What was it worth $50 billion and now it’s worth $3 billion or something everybody thought like that was going to last forever or people thought, SoulCycle was never going to open again. Like it’s kind of less of time, the times are more normal. 20% is the floor. This is not normal. So 20% is not before. And it’s not normal because we’re also right of the steps of global expansion, making significant investments in people and travel and training and I mean opening galleries for us is a massive investment. That’s not like store opening for again, a mall store that takes you 16 weeks to build and a few days to open. We have people there for a month, just trying to set and install in our galleries like we’re training people in our restaurants for a month or several months. Some people are several months, we’ve had teams here in San Francisco and New York training for hospitality experiences overseas and for gallery experience. So massive investment. Will that all kind of normalize once we open just kind of first few rounds of countries, yes. Once we get some scale, the deleverage won’t be so great. The investments will be different. So I don’t think anybody ought to be surprised. But I mean it’s – when I said 20% we should be able to stand at 20%. I was kind of thinking about a COVID giveback, not a COVID give back and a collapse of the housing market. I’m sorry if anybody is surprised that math isn’t hard to do.

Seth Sigman

Great. Thank you for that, Gary. Appreciate it.

Operator

Anthony Chukumba with Loop Markets, your line is open.

Anthony Chukumba

Hey, it’s sort of a related question. But I mean, obviously, as you were talking about the fact that sales could be down 20% this year, but you could hang up to that 20% operating margin. And now you’re actually not expecting sales to be down quite as much, but the operating margin is going to come in significantly below 20%. So it was just – I mean is it the macro? Like I guess I’m just trying to understand, obviously, look, we see all the same headlines you do, but I’m just trying to understand that sort of disconnect between what you said last quarter and what you’re saying now? Thank you.

Gary Friedman

What I said last quarter was our core business, right, in isolation can maintain 20% not with all the investments. So that’s what I said last quarter.

Jack Preston

In Q3 2021 is when we made – initially made that comment. And so if you think about just relative to the sales we generated in that year, I mean, you could think about it at a $3 billion roughly level. So I think we’ve been trying – I’ve been trying to clarify them as well. So not just 20% in isolation, it is relative to certain business size. And as Gary, for all the reasons talked – Gary just talked about could we generate 20% margins at a $3 billion revenue? Yes. Is that the right thing, the thing that we’re choosing to do, no. I’ll just reiterate what Gary said.

Anthony Chukumba

Got it. Thanks for the clarification.

Gary Friedman

Okay, Anthony, thank you.

Operator

Michael Lasser with UBS, your line is open.

Michael Lasser

Good evening. Thanks a lot for taking my question. So you mentioned that the Contemporary business is on pace to exceed the modern business at a similar time frame and you’re guiding to – at the midpoint of mid-20s sales decline in the first quarter. So how incremental is the contemporary business? And how does that inform how you think about the incrementality of the launches that you’re going to be doing later this summer. Thanks a lot.

Gary Friedman

And it’s all baked into our guidance right now, right? It’s not a normal time. So, when you think about incrementality in a time like this obviously, it’s different, but it’s all baked into our guidance.

Jack Preston

And the down 20% in Q1, again, is relative, again, on a comparable basis – on a compare basis versus up 11% in Q1 last year. The year unfolded with a flat revenue growth in Q2, down 14% – down 14% in Q3 and Q4. So I think you just have to take that into account as well, but the down 20% is relative to just higher level the business was before the trend started to deteriorate early last year.

Michael Lasser

And you are pushing ahead with a lot of the investment you are going to be trying to manage the cash flow of the business carefully. How are you going to be approaching share repurchases? You stock as you pointed out earlier, well below where it was a few years ago, would this be an opportunity to be even more aggressive with buying back the stock? Thanks a lot.

Gary Friedman

Sure. I mean nothing different than what we said last time. I mean we would like to get some visibility and certainty is about where things are heady how much capital we deploy in share repurchases. And also, I think everybody should know, like I read sometimes analysts notes that say, yes, we expect that they bought more shares this quarter. And I don’t know if everybody knows the blackout rules of buying shares, but we can only repurchase shares for a certain number of weeks in a quarter. And so we are not buying shares some of the people putting in notes, oh, RH, let’s be in the market buying shares right now. And like you really not know you can’t buy shares the whole quarter. And we can only buy shares at certain times, how many weeks do we have opened.

Jack Preston

Well, I mean after this quarter, only two weeks, but typically, it would be five weeks or six weeks depending on when we release.

Gary Friedman

So, this week, we have two weeks to buy shares this quarter, five weeks or six weeks in other quarters. And so I mean share repurchases is possibly one of the opportunities, and there is other opportunities that are going to unveil themselves. So, I mean we will see you make those decisions somewhat in a fluid manner as you see how the market unfolds and the opportunities unfolds. But clearly, we have repurchased $1 billion of our stock at an average of what was it, $269 thus far. So yes, I mean nothing different than what we have communicated in the past. Okay. Thank you.

Operator

Peter Benedict with Baird, your line is open.

Peter Benedict

Thanks for taking the question. Curious the CapEx and free cash flow view that you have for this year, you talked about bringing inventory down. Just that’s kind of my first question.

Gary Friedman

So Peter, just what our range is?

Peter Benedict

Yes. What you are thinking in terms of CapEx for this year and free cash flow, that’s my first question?

Gary Friedman

Thank you.

Jack Preston

How concurrently with the release, so $275 million to $325 million is the range in the 10-K. We are not guiding free cash flow. So, we will keep posted on that. As far as inventory, you see it sequentially coming down. Obviously, we peaked in Q2 of last year and in Q4 came down. So, we are clearly, as Gary talked about, we are rightsizing that inventory and making moves to especially discontinued product and other things. So at a high level, I would say inventory will continue to sequentially decrease over the year as we get to a right-sized level and more appropriate for the size of the business.

Peter Benedict

Got it. That makes sense. Thank you. And then just on the comments around strengthening the balance sheet being one of the focus areas for ‘23, can you talk about leverage, how you are thinking about it as you look out over the next 12 months? Are there any levels you don’t want the business to get above? Just any color on that, Jack, would be helpful? Thank you.

Jack Preston

Yes. I think we think longer term, I think that temporal swings in leverage, they are not – again, it’s not something that we are sitting here thinking that, “Oh, my God, that’s a trigger and we are going to now do something, repay debt or raise equity.” Again, I am just throwing out pendulum swing type ideas. Again, that’s not how we spend our time. We spend our time focusing on the future. So, we have raised the level of capital that we are comfortable with and with the free cash flow profile that we have, the size of the business we are growing to the size of the price, the way we spend our time and free cash flow we will generate over the next 5 years, 10 years, whatever the timeframe is, I think obviously, we have 5 years – 5.5 years up on the term loans. There is nothing earning in that sense from our perspective, the short-term stuff is temporary. So, I am not sure that there is anything to talk about that on that topic.

Peter Benedict

Got it. Okay. Thanks very much. Good luck.

Operator

Jonathan Matuszewski with Jefferies, your line is open.

Jonathan Matuszewski

Hey. Good evening. Thanks for taking my question. First one was on the membership base. It looks like in the 10-K around 350,000 members at year-end, so down around 24%. Are you guys seeing accelerating rates of membership cancellations year-to-date? And maybe if you could just shed some light on this attrition, I would think the annual membership fee is a small change to your average customer. So, just any thoughts there, whether this is just churn of some of your more aspirational customers, that would be my first question? Thanks.

Gary Friedman

I mean membership reflects our underlying business, and it’s a lag behind sort of sales and demand and then if you have increasing AODs, increasing AURs as we have had that factors into having fewer members for the same level of sales. So, it’s just memberships are going to be again reflective of the size. And as far as renewals go, I mean you are going to see some noise in that number here and there, but I would say it’s been plus or minus at a level that’s been consistent over the years. We haven’t disclosed that number. But to your specific question, I don’t think there is an uptick in sort of cancellations or any changes in that sort of behavior because of the economic backdrop. And if it is, again, it’s just minor. It’s not something that’s worth highlighting.

Jonathan Matuszewski

Got it. That’s helpful. And then just a quick follow-up on the organizational redesign, can you expand on the workforce reduction? It looks like 440 roles were deemed no longer essential, what kind of initiatives are being de-prioritized or delayed in connection with these roles? Thanks so much.

Gary Friedman

Yes. I think it’s just a level of detail is that terribly important to discuss on this call. So, we – like in any reorganization and redesign, you are going to redesign the organization around what the top priorities are. I think we are pretty clear with we have articulated our top priorities and then things that we believe are less essential and whether it’s just now or we worked pretty disciplined every few years of kind of going through an organization we rely for. So, anything that I would say is worth mentioning. That’s seems what we are focused on, right.

Jonathan Matuszewski

Great. Thanks so much. Best of luck.

Gary Friedman

Thank you.

Operator

Steve McManus with BNP, your line is open.

Steve McManus

Great. Thanks. So, I had a question on backlog relief, what’s the contribution in Q4 that largely normalized, or is there still some remainder to work through?

Gary Friedman

There is still a remainder. I remember at the beginning of last year, we had talked about $200 million of sort of over and above normal backlog. As we look out to where we stand today, we have probably got through about $100 million of that. So, relative to a normalized number pre-pandemic, again another $100 million to go. I think that roughly split out evenly throughout, as we looked at the numbers last year, call it, roughly $25 million a quarter, plus or minus, but just giving you directional number. And then as far as how it unfolds this year, it’s going to be tied to just getting transit times back to normal, which you are on their way production lead times down back to normal, which they are on their way. So, I think it’s possible that we get through it by the end of the year. But there is also – we are also looking at 2019 as some snapshot of perfection and might not be, there could be some different ways that consumers are behaving – and yes, the size of the business is different, the backlog is going to be different. I would also say that based on the historic amount of newness, it’s going to be introduced. I would – we are never going to buy anything exactly right. So, my sense is, whenever you have big newness introductions, you are going to drive higher backlog, higher back orders, things like that, special orders.

Steve McManus

Okay. And then on advertising, it looks like that almost doubled this year. How should we be thinking about that and the cadence of Source Book circulation moving through this year?

Gary Friedman

Yes. Like probably any business, we are always trying to find what is the right cadence of investments to optimize the model. This is a business that, at one point, spent 10% a year on advertising, 10.6% and 10.4% [ph]. And then things changed, the pandemic, I think we have historically been around 4%, right, in the recent history. But we used to run it at 8%. And so I think about it from a strategic perspective. We are opening galleries that are very dominant since the presence in markets, right. And what we have been able to do over time is realize that where we have made those physical – have the physical expressions of our brand, in dominant ways to bring a great deal of brand awareness and require and maybe less advertising the markets that have a small store and don’t show as much of the assortment and don’t have such a physical presence. Like you are more in here, if you entered anywhere near the parking lot, there is no way you miss us, right. So, you don’t need to be reminded about RH as much. We don’t know where we are, we kind of can perceive how much bigger we are than other people, assortment we may have, maybe eat in our restaurants and walk around and just getting to and from the restaurants going up and down the stairs, you are going to see and perceive a lot about our business where other businesses it could be a walk on buy, right. Like there is just another 50-foot storefront in a mall. So, there is a lot to think about when you think about this the physical expression of our brand that we are building and the value that, that brings to the marketing and awareness of the RH brand is how it’s perceived because of not only the size of it, but the quality and the architecture and the design of it all. All communicate so many things that you can’t communicate in a pop-up that or even in the magazine. So, my sense is we could build advertising back up to a higher level than that. Historically, you would say advertising could easily be $120 million today, if you are looking at what it looked like historically in 2019. So, we will see, the pandemic kind of threw it all off, nobody in the home business needed to advertise at all a period of time. And so we didn’t – we kind of bank that money during that period. And now how do we build it up, what’s the right level – what’s the right level and what market. I think I would say that the marketing or advertising jobs and companies to the hardest point to figure out in today’s world with all the choices you have.

Steve McManus

It’s helpful. Thanks. Appreciate it. Best of luck.

Operator

Seth Basham with Wedbush, your line is open.

Seth Basham

Thanks a lot and good evening. My question is just in regards to the statement you made in the shareholders’ letter about this being the most difficult part of the climate luxury amount. And has it been anything that had you heard over the last year or so that made it more difficult than previously thought, obviously, putting the macro aside, and I know there are many crosscurrents?

Gary Friedman

That’s from the strategic perspective, the climb of the mountain. I mean just if you throw inflationary period and the rising interest rates and difficult to market and so on and so forth, that just makes everything harder, right. But the climate of the mountain, particularly we have always articulated why I keep that last section there. Climbing like you are not building a brand with no peer. The higher you go, the more difficult and treasures decline, decline no one has ever made before, right. So, it’s famously quoted in our company, it’s where the air gets spent and the odds become slim just because it’s never been done. It’s like tracking the highest mountains in the world. So, we know it’s difficult. It hasn’t been done. So, we know that our work has to be more extraordinary and more remarkable and it has to create a forced reconsideration on who we are and what we are capable of. And it has to force the people at the top of the mountain to tip their hat and respect and accept us and admire us. That’s not easy to point to somebody else that has spent it. So, we – it gets more difficult, but we also are significantly better than we were when people climbing at the buying amount. But you are learning as you go, you are becoming stronger and more experience and more knowledge, give more tools and more support. So and as much – look, I addressed my letter to our people, partners and shareholders, it’s not an accident that it’s in that order, right. I am communicating to the thousands of people and team RH where we are going and what we are doing, right. And it is going to get more difficult and it is not for the faint of heart. And it is not a climb that anybody has made before. But if we make the kind, the rewards are also extraordinary and probably never seen before. So, yes, has anything become more difficult, no. It’s just, is business more difficult than it was during the pandemic, of course. Is it more difficult than it was in 2018 and ‘19, of course. Were businesses tied to the housing market and to interest rates and the refinance market, and so, it will be more difficult. But that’s just temporal. That is temporal. Pandemic was temporal. So hopefully, we are sitting here in 12 months, 18 months, the Fed is lowering interest rates, the housing markets up 20%, things are great, you just can’t plan for them to be great all the time and you can’t plan for them to be bad all the time. So, we try to just take the right long-term view and navigate through the noise and distractions that could take you off your path and have you wind up in the ditch.

Seth Basham

That’s helpful and just to be clear, there is nothing that you have seen over the course of the past year that you need to believe that you are shedding customers that are not just low value but sort of mid value that you would prefer not to shed and that you need to course correct for that?

Gary Friedman

That mid value, I – look, we are not going to – I think what you are seeing maybe the delta and our business and others business who have turned promotions back on that’s the only delta they we have right now. Because they would be taking market share from a mid-value customer that maybe if I pushed the promotional button here, maybe we would get some of those customers, yes. But we would probably lose them over the long-term anyway, so at times like this kind of accelerate things. So, I like we are at, it’s not a complete surprise, when you said, hey, if these things happen all at once like if these things happen all at once here is what it could look like, yes. What do we have scenarios internally say, look, if COVID is that a big give-back, if the housing market – if we have a recession in the housing market as dramatic fall, what do things look like. And what we thought, yes, too different. And but I think they will look different. I mean as you see, kind of this next big evolution of our brand, right, like, that’s the thing, I think about climbing a mountain right, and you get to base camp and then you kind of go up a little, you are kind of return to the base camp, and you are out there for a while, then you make the next trip up, right, and you are now at a whole other level. We are about to make one of those next big moves. So, if you think about our brand, if you think about where we went from kind of 2001 to kind of 2008 and ‘09, and we hit that difficult period. And then you think about how we pivoted from there, and what the next part of the climb was, and how we differentiated ourselves in a massive way. And then kind of the reset and kind of ‘16, ‘17, and how we repositioned ourselves for the next part of the climb. So, now it’s just the next chapter, it’s next kind of part of the climb we will develop a new base camp in this next part of the con. In the meantime, between that there was a crazy period like pandemic. So, that’s I don’t know that just doesn’t come along. So, how that affects us, and just watching through the pandemic, and seen to the other side of that correctly and strategically not getting stuck into being tactical like, there is just no way that once people start pushing the promotional buttons that they are pushing, that they are not going to push it more times, now, and there is not going to be more emails, and there is not going to be it’s like look at the emails you get, and look at them and the timing of the quarter, okay. Like, if you think about our business and say, okay, they are driving demand that they have to shift to a customer tone, or they are having sales in an outlet warehouse sales thing. Those are all things that try to hit a number within a quarter. We just don’t play that game. That’s a game of running around in place. And got it, everybody looked great during the pandemic, hats off. Let’s see where everybody is the next couple of years, once we have cycled away from this and we get through this difficult time. I like the game we are playing. I like the strategy we have. And it’s just a completely different game than the one everyone else is playing.

Seth Basham

Understood. Thank you, Gary.

Operator

Cristina Fernandez with Telsey Advisory Group, your line is open.

Cristina Fernandez

Thank you. Good afternoon. I have two questions. The first one is on the strategic investments you are making on the global expansion. How should we think about that ramp over the next couple of years in relation to the 150 basis points, or $45 million this year? I guess should we think about it sort of linear with store openings, or are there a lot of upfront investments you are making now or last year?

Gary Friedman

Yes. I think if you think about it in relation to pace and how fast we go, and how many markets we are going to open this time and then I think about it just based on where revenues are, right. Because the spend is going to be the spend, right. So, we happen to be making the spend when our revenues are kind of what I believe top revenue trends and things like that. So, as a percent to that revenue, it’s 150 basis points, percent of another number, it’s 75 basis points. So, you can kind of assume and do that math, that spend isn’t going to be different, right. Based on the basis points we gave you, you can back into what the dollars are. And then you can say, okay, their business and flex, whether it’s the second half of this year, or next year when the housing market changes, and I mean, will inflect to some degree, no matter what the housing market is there. What we are doing from a product point of view and redesign of our source books and the change out, the re-presentation of our galleries and so on and so forth that’s not going to be zero, okay. Like unless it is the only that’s zero is if the economy gets really bad, right. If the whole banking crisis falls apart, and we have another kind of meltdown that takes housing farther down, right. But at some point here, we are going to cycle the bottom, and things are going to change. And so – but we have an inflection point, that’s going to be some number. You can just take the investment and probably take a look at like what are they spending directionally based on all the things are working on, and number galleries are opening. And then you will be able to extrapolate that and we will give you some kind of guidance long-term. But like you are looking at it, I would say, kind of through that, maybe the worst lens, things don’t get worse, in the economy. Maybe the worst lines are going to look through it. Other times, it’s going to look like a much smaller number.

Operator

Brad Thomas with KeyBanc, your line is open.

Brad Thomas

Hi. Thanks so much. Just a couple of housekeeping questions for me. Just one more on the first quarter guidance. Gary, you mentioned that trends had decelerated I think about 8 points, since some of the banking news was coming out? Is the guidance reflective of kind of the run rate of trends, or is this how things are playing out quarter-to-date, just trying to get a better sense of where demand is tracking, and how you all factoring that into guidance?

Gary Friedman

Yes. Again, just to be clear, I said it kind of changed about 8 points and then it’s kind of come back, right. So, right now, I think that there was a shock, and there was a pullback. Things look to be stabilized, right. In the banking world right now, at least for now, for at least what we know. A little odd, it’s has never seen the government kind of direct the top banks to lend money to the other banks for 120 days. It’s a little weird. What’s the implications of that, what does that really look like, is that a permanent loan, is the other banks going to be able to survive without that loan for how long, will anybody put their money back in those other banks that the banks that lend them $30 billion, so they are going to own those banks. There is a lot of really questions that are unanswered, right. If you just stop and think about that, so the banking crisis unfold to be something worse, I think it can. That’s why, I think that when I talk to the smartest people I know, but most degrees, and yelling out of just calm everybody down, and just tell everyone, that the government that your money is safe for at least a year, or something, but not let it be kind of unknown. Because that’s just going to get people to keep money – moving money around, and it’s going to create instability in the banking sector, and create more issues. So, what’s going to be determined and what really unfolds here, but it looks like the shock was also temporal. It looks like that people have returned to their habits. And usually need something meaningful that change consumers habits, so they change for a short period of time, they are kind of look normal. But then again we are in a period where, I mean you think about the yields and stuff like the change in the forecast on the interest rate hikes and things like that. I mean like, from one day to the next, it was crazy like, how the markets were pricing in, where interest rates were going and all of a sudden it completely flipped just because of the banks shut – banks that got shutdown over the weekend and everybody believes that all people believe me, like, let’s think about this. Like Goldman Sachs that we – they weren’t going to raise rates at all, with that pretty credible big bang. And just the week before everybody thought that we were going to go 50 basis points and another 50 basis points, maybe even higher than that. So, yes, it’s just a lot of unanswered questions from a macro point of view that you have to consider. So, we are kind of guiding based on what we know today, if it gets meaningfully worse, we will let you know, we got some flexibility within our numbers to navigate through this. And it’s just a very uncertain time. So, if you sit around and just obsess about it, you are not going to be obsessed about building your brand and growing your business. So like, I know I am talking a lot about it, because we think about it and just give you my view, but it’s not what we obsess about here. We obsess about the things that are in the letter. And in that order and we have some just some ordinarily exciting stuff about to happen here that I believe leapfrog this brand and business to another level. So, we are really excited about that. In the meantime, we are trying to navigate through the worst luxury housing market I have ever seen. And going all of the stock market and our recent banking crisis and all kinds of other things, so again, just there is not going to be kind of any details here that unlocked any new view. If it’s not in the letter, it’s probably not big news to us.

Brad Thomas

Understood. One item that we didn’t talk about a lot on this call, is the guest house, any update you could share on learnings that you have had since it’s been open?

Gary Friedman

Yes. It’s open, we are happy about it. We have had great. It’s created the right kind of conversation around the brand. And that’s what we are trying to do. And second one is under construction and Aspen. And this is first, the only two we have got the pipeline and so, nothing really new were open functioning running. All good except we had it firstly, so we had to shut down some rooms for a little while. But stuff there are new business, you think different things go wrong, and you learn about. But I think we are tremendously proud of it, that we have been everybody who stayed there, I believe is that a great experience, that is tremendous experience, friends feedback, I think we are in the right conversation is happening about the guest house today. And by the way, we haven’t marketed it at all, we have sent an initial email. So, we are about ready to talk about it a little bit more, we get out of the winter month, where New York is kind of quiet. Springtime, the trees will start having leaves on the rooftop again, and yes, it will bring a little bit more attention to it, maybe send out an email, video and things like that. But it’s not something we are massively focused on. It’s open, it’s so far, it’s done what we intended it to do. But we believe it’s elevated the RH brand, it’s brought the RH brand into a conversation that levels of luxury, that we weren’t in that conversation before. So, I think that people would come, it comes and many global CEOs of luxury brands have brought their teams for tour the guest house. And I am invited just knocking on our door and stuff reaching out. So and I think it’s created the right conversation with the right people, yes. I think people are more aware of us now and maybe have more of a level of respect of what we are capable of. It’s about the quality of the work we can do. And it’s just another step, another stepping stone as we go and kind of climb this mountain.

Brad Thomas

Understood. Thanks Gary.

Operator

There are no further questions at this time. I will now turn the call back over to Gary Friedman for closing remarks.

Gary Friedman

Thank you everybody for your time and interest and we will look forward to speaking with you soon.

Operator

This concludes today’s call. We thank you for your participation. You may now disconnect.