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Edited Transcript of RH earnings conference call or presentation 28-Mar-17 9:30pm GMT

Q4 2016 RH Q&A Call

CORTE MADERA Mar 29, 2017 (Thomson StreetEvents) -- Edited Transcript of RH earnings conference call or presentation Tuesday, March 28, 2017 at 9:30:00pm GMT

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Corporate Participants

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* Gary G. Friedman

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Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Justin E. Kleber

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Oliver Chen

* Steven Forbes

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Operator [1]

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Good afternoon. My name is Chantel, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter and Fiscal 2016 Q&A Conference Call. (Operator Instructions) Cammeron McLaughlin, you may begin your conference.

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Thank you. Good afternoon, everyone. Thank you for joining us for RH's Fourth Quarter and Fiscal 2016 Q&A Conference Call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Karen Boone, Co-President, Chief Financial and Administrative Officer. Prior to this call, we posted a video presentation to our Investor Relations website, ir.rh.com, highlighting the company's continued evolution, recent performance and future outlook.

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 for our business and other matters referenced in our press release and video presentation 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 opinions 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 our call today, 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 it over to the operator to take our first question.

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Operator [1]

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(Operator Instructions) Your first question comes from Oliver Chen with Cowen and Company.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD and Senior Equity Research Analyst [2]

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Regarding the inventory for the year ahead, what quarter will that be a source of cash? And are there any parameters about the magnitude in terms of the opportunity there to drive cash? And as we do model net working capital, are there any puts and takes we should think about on the net working capital in terms of use of cash? And our second question was the details on back-end optimization where you feel like you have the biggest opportunities and how that will factor into either top line in terms of traffic or comps and margin opportunities.

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Karen Boone, RH - Co-President and Chief Financial & Administrative Officer [3]

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Sure, Oliver. I'll take the inventory question, and then Gary and I will tag team on the network optimization. On the inventory, we've said that inventory is going to be a source of cash this year, which implies it's going to go down actually versus last year. We're not giving a lot of color on timing and cadence, with the exception of the fact that we've said that a lot of our SKU rationalization efforts are going to be in Q1 and into the first half, so you should see some good progress there, but part of that's also versus where the inventory levels were last year. So it's one of our key initiatives this year. It's something we're very focused on. And we'll continue to provide progress updates, but we're not really giving details by quarter at this point. And then with respect to working capital, we've talked about the fact that we're trying to make progress in the past on vendor terms, and that's something that -- it's something that we'll work in concert with our inventory. When the inventory goes down, AP is not necessarily going to go up in that way, so that could be an offset. No other items really of note to point out there though. Then on the network optimization...

Gary G. Friedman, RH - Chairman and CEO [4]

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Yes, can you repeat -- you had quite a few questions in that 1 or 2 questions, like I heard about 6 or 7 of them, so maybe if you could repeat the question again.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD and Senior Equity Research Analyst [5]

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Yes, I was just -- I was curious about the back-end optimization in terms of the opportunities you see there and how that will interplay with just the sales and margins and what kind of strategic improvements and how that links to what kind of opportunities you have on the income statement. And Gary, hospitality seems like a game changer. It would be great to have your thoughts on how that will also evolve to impact the core, too.

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Gary G. Friedman, RH - Chairman and CEO [6]

Sure, sure. I think we've communicated all year this past year, that we believe that there was an opportunity to redesign our supply chain network and simplify the business which we believe will have a meaningful impact on the ability to get lower inventories and reduce working capital in the company while also increasing in-stocks and optimizing our inventories and our customer experience. Secondly, the other big opportunity we've articulated is really around the home delivery experience. And the belief is we believe by taking more control of that experience than less control and using our own customer-facing people, in many cases, it can greatly enhance that experience. I would characterize our business today, if I stand back, I'd say we really -- we're in the process of transforming the brand from call it a mid-upper tier brand to a kind of a luxury brand experience. And we've made significant progress on the product side, on the customer experience front-end side in our galleries with our Source Books and online. But our home delivery experience is really still architected the way it was 10 years ago. And while we're making some small steps of progress, I think you'll see us take some big steps. And we have a -- we have a pilot that's just beginning here in the Bay Area where we're taking full control of the delivery experience from the people to the trucks to the entire in-home experience which I believe we should be taking more control than less control. So we think those both can be significant -- significantly impact the business in multiple ways, both from a top line point of view by improving the experience, from an asset turnover point of view and working capital point of view and a return point of view and then the ability to simplify the supply chain network and operate the business out of fewer facilities versus more facilities. We told you we were able to forgo building a planned distribution center that was going to open in 2017. That's saving the company a meaningful capital investment in '16 and '17 as well as significant operating cost. And you'll see us -- I think we've got still a long way to go, but big opportunities here to really move the needle financially for the company and enhance the experience in a significant way for the customers.

Oliver Chen, Cowen and Company, LLC, Research Division - MD and Senior Equity Research Analyst [7]

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And just lastly on hospitality, it seems like a game changer. And how do you see that like impacting the core business? And are your -- do you have thinking along the lines of hotels? And how do you brainstorm about how do you continue to evolve the luxury brands across a paradigm of touch points for the consumer?

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Gary G. Friedman, RH - Chairman and CEO [8]

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Yes. You've seen our first effort from a hospitality experience in Chicago. And what we worked long and hard at there was trying to seamlessly integrate a hospitality experience into a retail environment and not just as -- there's -- we're not the first people to put a restaurant or food and beverage in a retail store, it's -- that's been around for as long as I can remember when my mom would take me to a department store when I was a kid and they'd have a restaurant or a café. I think what we've done differently and where we're kind of leapfrogging that previous experience that might be out there today is, in many cases, the hospitality experience was disconnected from the retail experience. And you might have walked through a shoe department to get to a restaurant or went to the top floor and the business -- the restaurant had nothing to do with the retail experience, it just happened to be convenient. And that was something we weren't really interested in. Just having a porthole that walks into a -- walks from a retail store into a restaurant is I think no different than stepping back out into a street or a shopping center and walking into a restaurant. For us, it was really taking the idea of home, the business we're in, and saying in a home, in your home, you would be hospitable, right? You would have people into your home. Probably one of the first things you do is you offer them something to drink, you might offer them something to eat, you'd make them feel welcomed in that experience and you'd try to connect with them. And that's really what we're trying to do. And I think what we've done really well, and we're the first ones to really do, is integrate the hospitality experience into the retail experience where it's completely seamless. And there's really no barriers, and there's really an interactive play between the consumer, whether they're shopping in the store for home furnishings or they're eating in a café or interacting with us at our coffee bar pantry or having a glass of wine, that you're really immersed in the brand and you're immersed in the ethos of our design esthetic, our lifestyle, our sense of quality, our sense of design in every aspect of that interaction. And look, the response we got in Chicago has been tremendous, way beyond our expectations. And I've had people joke around before -- I think I showed a video in the last -- a little film clip in the last video that showed people lined up around the block a year after we opened and kind of a quick time where they were filing into the store. And people asked me, "Well, did you set that up?" And we didn't set it up. And you go to Chicago any weekend even if it's snowing, and there's a line every Saturday and Sunday. And I think it's not -- do we have great food? Do we -- we absolutely do. And we created a great experience. But there's something magical that's happening there that I think we're on to that gives us so many -- so much more optionality as we think about -- if we think about our business and our brand, where our business can go, what kind of real estate locations we can go to, what kind of destination we can be, the dependence on the brand for mall traffic or shopping center traffic, we've learned so much in Chicago that we believe is the first steps that even -- revolutionizing our physical experience even further in the future. So we're quite excited, and that's why we're making an aggressive investment this year, we ramped up the whole hospitality organization that I talked about on previous calls led by Brendan Sodikoff, who's joined us as President of RH Hospitality. So our focus is going to be on expanding that experience that we launched in Chicago into multiple new galleries, I think -- what is it? 4 of the 5 in '17. And many of the galleries we have planned for '18 and '19 will have integrated hospitality. And I think we'll just get better at it, and we'll learn more as we go. As it relates to the questions around, "Are you doing more in hospitality? Are you opening hotels?" And I've had a lot of people ask me and say, "I've heard you're opening a hotel." And I've told them no. And then they ask, "Well, I hear you're opening a boutique hotel." And I've said no. And I guess I'll just leave it there. So if something does come to fruition, it won't be a hotel and it won't be a boutique hotel, but it will be something that will be equally revolutionary if we decide to step into a new category.

Operator [9]

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Your next question comes from Matt Fassler with Goldman Sachs.

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Matthew Jermey Fassler, Goldman Sachs Group Inc., Research Division - MD [10]

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I've got 2 quick questions, I'll ask them at once. First of all, can you talk to us about your plans for merchandising holiday at retail next year given some of your learnings from this past fourth quarter? And then secondly, if you could kindly run through the cadence of mailings here in 2017 relative to last year, and how we should think about that as we model out the cadence of the year from a sales and expense perspective?

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Gary G. Friedman, RH - Chairman and CEO [11]

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Sure. As it relates to holiday, we're still in the planning stages and aren't ready to unveil our plans there yet, Matt. We did get back more business than we thought last year, and we think there's an opportunity this year. And as our plans come together, we will share them with everyone, so not too many comments on holiday at this time.

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Matthew Jermey Fassler, Goldman Sachs Group Inc., Research Division - MD [12]

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Okay. And on the mailings for '17?

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Gary G. Friedman, RH - Chairman and CEO [13]

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Yes. Mailings for '17, we just communicated that we -- our outdoor book is in the mail -- was in the mail the last 2 weeks, and now it's substantially in home. And Modern will mail late in the spring, and that will be the second mailing to Modern. And at this time, we do plan to mail an interiors book in the fall. But I would also just say that one of the things that we've learned here is that we should put our work out in the marketplace when we -- when our work is ready to be put out into the marketplace. And I don't think -- because of our business, and our business is not necessarily a fashion business like apparel and that we're trying to hit seasons with -- the only seasonal part of our business is really outdoor and the holiday part of the business. The rest of the business is pretty much seasonless. And our focus is to introduce our books and put our work into the marketplace when we feel great about it. And if it takes an extra month or 2 or -- I'm not really too concerned about that, and I'm not really -- I don't want to focus on, "Well, was the book late a month? Or is it early a month?" Look, I think Apple puts out the iPhone, the new iPhone, when the new iPhone is ready. And we're going to put our collections out there when our collections are ready, when we feel our work is truly great and is going to move the brand forward. And if it takes us a little longer to refine the collection, to make the book great, to fine-tune our plans, then it does. And I don't think that does anything but make the brand better as opposed to kind of rushing to hit a time line and maybe sacrificing quality along the way. So I think we've learned a lot in the past year. We've made some moves, gave ourselves more time, invested in the Interior Source Book. And I think I even made an incorrect comment on one of the last calls, I said if I would have done something better, something differently in 2016, I wouldn't have delayed the spring Source Book because I thought it cost us too much revenues. Now that I even have more data and I look back, I'm really glad I delayed that book because that...


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