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Restoration Hardware Holdings Inc (NYSE:RH)
Q3 2019 Earnings Call
Dec 4, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the RH Third Quarter 2019 Q&A Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, speaker Allison Malkin. Thank you. Please go ahead.

Allison Malkin -- ICR

Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter fiscal 2019 Q&A 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 for our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainty 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 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'll turn the call over to the operator to begin our Q&A session. Operator, we're ready for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Michael Lasser. Your line is open.

Atul Maheswari -- UBS -- Analyst

Good evening. This is Atul Maheswari filling in for Michael Lasser. Thanks a lot for taking our question. So if you look at the guidance for the fourth quarter, you're calling for 5% to 6% sales growth. Why shouldn't sales be much higher than this given you're cycling the 10 percentage point decline from December last year due to the stock market volatility and now also have Ski House launched in the marketplace?

Jack Preston -- Chief Financial Officer

All right. Well, that's what we guided and we're cycling a 4-point drag from exiting holiday and some other promotions.

Gary Friedman -- Chairman and Chief Executive Officer

You can essentially add 4% to our guidance and in essence think about an adjusted revenue growth rate.

Atul Maheswari -- UBS -- Analyst

Okay. Thank you. That's very helpful. And then as my follow up, RH clearly has got a lot going on right now with all the new gallery openings, you have new concepts being rolled out, hospitality [Indecipherable] global expansion. How do you manage the sequencing of all that's going on so as to ensure that there are no execution-related hiccups going forward? Thank you.

Gary Friedman -- Chairman and Chief Executive Officer

Well, we execute the way we've been executing. So, I just look at our past performance over the last couple of years and I think we've what beat earnings guidance eight, 10 quarters in a row. So, we're not worried about it.

Atul Maheswari -- UBS -- Analyst

Okay. Thank you.

Operator

The next question comes from the line of Steven Forbes. Your line is open.

Steven Forbes -- Guggenheim Securities -- Analyst

Good afternoon. So, Gary I wanted to start with RH International, right? And maybe if you can just comment on your current thinking around the number of international development projects the business can take on right within a single year. I guess, I was sort of assuming as I was modeling out the business that you would do one, but is that right? I mean, would you do more than one in the year? I mean, are there any sort of capacity restraints or people restraints as we start layering in the potential impact of RH International into the model?

Gary Friedman -- Chairman and Chief Executive Officer

Well, we expect to start with one to two a year for the first year or two and believe we can ramp it from there, but from a capacity constraint point of view, we're not too concerned about it. We're opening in Europe first, focused on the UK and Paris and a few other kind of adjoining countries. So we don't see it as too much more complicated than opening new stores quite frankly. We run our business as a showroom business. We don't really stock our stores, we set up our galleries and take orders basically, right? Service customers do design jobs and take orders and the fulfillment side of our business, we've simplified greatly and we don't see much complexity beyond that.

So I don't think this is like 10 years ago opening an international business or 20 years ago opening an international businesses. There is so much smaller world today. Everybody communicates the same way, everybody speaks basically English today especially throughout Europe and all the European countries and everybody knows our brand there. So we don't see a whole lot of complexity. It's just across the water and the biggest thing we're figuring out is how much of our product needs to kind of be housed and distributed from Europe. How much of it can actually travel across the water from our East Coast DC, but there is the people running business is similar than ours -- a similar to ours today. Every one of our vendors ships to Europe today. And a big part of our business is special order and that ships directly into countries from vendors. So there is -- it's not as complex as you might think.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you. And then just a quick follow-up, Jack, maybe for you. In the release, you mentioned 200 basis points of EBIT margin expansion in 2020, but any color you can provide on the revenue growth outlook? I mean, is it just fair to assume to expect sort of to be within the long-term guidance range of 8% to 12%?

Jack Preston -- Chief Financial Officer

Correct.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you.

Operator

Your next question comes from the line of Curtis Nagle from Bank of America. Your line is open.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Thank you for taking the question. First, just a quick model question, just in terms of the 200 bps of margin expansion next year, I just want to make sure that's a net, not a gross number. And then I'll follow up with another quick one.

Jack Preston -- Chief Financial Officer

So, what do you mean by that, Curt?

Gary Friedman -- Chairman and Chief Executive Officer

Yes, it's a net number, Curtis. We -- what we're saying is at least 200 basis points of margin expansion next year. That's right. That's the minimum we would hope to achieve.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Understood. Great. Thanks for clarifying that. And then maybe just a question for you, Gary, maybe a little more I guess qualitative. I'm just kind of looking at the model, I mean, I think one of the more interesting things that you guys have done over the past few years is beefing up your collaboration with known designers and artists and kind of bringing them into your ecosystem. How important has this been to the growth of the brand? Do you have people coming in like specifically to ask for guys like Timothy Oulton and kind of how do you see that continuing to develop over the next few years?

Gary Friedman -- Chairman and Chief Executive Officer

Sure. I think it's one of the things we did when we pivoted the brand in 2009 and '10 and kind of turned the business kind of upside down or inside-out, if you will. Most vertically integrated brands and ours was, what I call, an inside-out model, where we had 50 or so designers designing internally inside the company and then we present that externally. And what we did is we really turned that model inside-out, and we call it outside-in model now, where we realize it and it was really a life off that went off kind of watching Apple when Apple launched the App Store. And if you look at what Apple did, everybody went to the -- what was that? C -- CSC -- CS conference -- Consumer Electronics Conference, yes, and Apple's the only one not going there and Apple did their own conference and seem to have the best attendance. Highest quality designers and developers in technology were all designing for the Apple platform and Apple focused on building the very best platform to amplify the work of the very best people in the world.

And that's when the light bulb went off for us where we changed our model. We don't have any designers internally in the company anymore and we really have what we call a curation platform and now, instead of our product and our innovation being limited to 50 people or in that area inside a company that would have to live in Corte Madera, really the best people in the world can design and collaborate with us and we can amplify their work across the best platform.

So our focus is really building the best platform and building the best relationships with the best people and I would say we're just starting to hit an inflection point where at the highest end of the market, people that I think many would say might have never designed for our platform, you're going to hear about new names, senior people inside our inside our books and on our website that are among the very best people in the world and will help us to take the brand to another level of quality, taste, and style.

So from our point of view, it's one of our real competitive advantages and we've -- I think we've, especially over the last decade, have our efforts and focusing on building the best platform. That's physical platform, the best online platform, the best print platform, the best service platform with interior design and you'll hear about other things that we're doing that kind of enhance our services to really amplify the work at very best people. I think now that we're a lot more visible, now that we have more of our larger physical stores, it's hard not to believe what we're going to do, right. It was different than when we had a lot of small mall stores. You have to be a big believer to say we are going to take the experience and the quality to an entirely different level. Now I think people see it and believe in it. So we, again as I said, we can have a tipping point where you have just more and more people coming onto the platform because we provide the most leverage for anybody in the industry today at the high end of the market.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Okay. That's definitely appreciative. Thanks very much.

Gary Friedman -- Chairman and Chief Executive Officer

Yes. Thank you, Curtis.

Operator

Your next question comes from the line of Oliver Chen from Cowen & Company. Your line is open.

Oliver Chen -- Cowen and Company -- Analyst

Hi, Gary. International is a big opportunity. What are your thoughts when you think about a market like Germany versus France and also as you really think about the supply chain and delivering to the customer, the delivery networks there as well as how you're thinking about the supply chain with these and how those may evolve in the context of your expansion plans? Thank you.

Gary Friedman -- Chairman and Chief Executive Officer

Sure, sure. Well, Germany clearly is one of the biggest markets in Europe and France is I'd say the most fashionable and probably has the most influence on taste and style and maybe a brand cache in all of Europe. So our view and we believe the UK will be our biggest market. And again, I think, just about rivals France, London, France from just kind of a global view and global awareness, two very, very important cities. So we're going to start in the UK. I think we're going to do something completely revolutionary and unique to introduce ourselves into Europe in a way that no retail brand has done before, and we believe it's right to follow that with Paris and with France and make a statement there, especially since its center of the fashion world.

And Germany is also on our list. When I articulated in my letter that we have five to seven locations that we're in negotiations on and pretty close to closing quite a few, Germany is right on that list. We're looking at two locations in Germany right now. One in France, that would be Paris, we've two in the UK and then we're looking at cities -- other cities in Europe, Brussels and Madrid, Barcelona, other key cities where it's really the right place to kind of start our brand and position the brand from a design perspective. Also looking at Milan, because it's a center of taste and style and where really the biggest home show in the world is the Salone Show in Milan.

Oliver Chen -- Cowen and Company -- Analyst

So, Gary, as you do that, you've paid a lot of great attention to your delivery experience here in the US. Do you anticipate that being a big piece of the puzzle just to ensure that it's a luxury experience when you touch the consumer at their home in these markets?

Gary Friedman -- Chairman and Chief Executive Officer

Yes, absolutely. Well, one that, again, the world is getting smaller and smaller every year. And Europe has more complexity as far as trying to sometimes delivering in some of those cities, the infrastructure is a little more challenging. The good news is everybody's home in Europe has furniture and furniture is being delivered and has been being delivered for longer than our country has been on the planet. So it's not like it entirely new practice. What it is it's new to us. And as we've studied it, we think that it's not going to be too much more difficult than kind of opening a new area in America or opening in Canada. The world has just gotten that much smaller.

So the real key is, where do you position the DC, what's the most effective way to kind of cross borders, how do you manage some of the administration complexity but what we feel confident about is the work we've done over the last three years, more than three years now here on really architecting an entirely new operating platform and simplifying the business from a distribution network point of view and kind of rearchitecting the reverse logistics and supply chain part of our business and focusing on elevating and simplifying the home delivery part of our business. We've just learned so much and feel so confident from an operational perspective. And our leaders in the business today are just kind of real forces, I think, in the industry. And I think we're in many ways reconceptualizing the way supply chains are being looked at and executed in at least in our part of the business, the way home delivery is being looked at and executed in our part of the business and we'll bring all that same thinking to Europe. We may be initially a little bit more constrained just because we won't have all the volume and leverage we have, but our business is going to be pretty concentrated in certain markets, just as it is in the US today.

So, pretty quickly we'll get scale and leverage. And the good news is we're really good today and only getting better, right. And I think that's reflected in our operating margins and we've guided to 14.2% this year. We're saying we're going to have at least hundred basis points of operating margin expansion last -- next year. That would tell you will be somewhere above 16.2% or above.

And all of that is inherent in the work we've done over the last three years and what we've learned and really now the culture we built from a kind of an operational service culture that I think is second to none, second to none in the industry today, maybe second to none in the world. We don't know yet. We haven't spent enough time over there, but I'm just really confident in the team we have and our ability to execute and continue to innovate and improve.

Oliver Chen -- Cowen and Company -- Analyst

Okay. And our last question, Gary, Waterworks has continued to be another impressive part of the business. What are your thoughts about that operating margin opportunity in terms of enhancing that and the integration pieces that are most important for the next few years?

Gary Friedman -- Chairman and Chief Executive Officer

Yes. Well, with all the work we've had to do with redesigning and architecting the operating platform and kind of enhancing the gallery experience and launching a really kind of a revolutionary integrated hospitality platform inside our business, we had our hands full and honestly, Waterworks has been operating no differently than Waterworks operated when we bought them. There really hasn't been any integration of the business today in any meaningful way that would create any amplification or leverage in that business.

So, we now believe it's the right time to focus on Waterworks. We believe it's the right time to begin to integrate that business onto our platform and amplify that business onto our platform and we think it's the best brand in the industry and we think it will render the RH brand more valuable and we believe Waterworks on our platform is no different than any of the great artisans in the world on our platform. We amplify their business and render them more valuable based on the platform we're building, which is really kind of second to none in the industry today.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. Best regards.

Gary Friedman -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Seth Basham from Wedbush. Your line is open.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot and good afternoon. My question is around gross margins. You guys posted some strong performance in the third quarter and I was hoping to get a little more color on the drivers behind that performance?

Jack Preston -- Chief Financial Officer

And you're referring relative to our guidance, not necessarily [Speech Overlap]?

Seth Basham -- Wedbush Securities -- Analyst

Correct.

Gary Friedman -- Chairman and Chief Executive Officer

Yes, because, obviously, we beat last year -- not beat, but we increased gross margins by 170 basis points versus last year and versus the midpoint of our guidance, it was up 140 basis points. A few factors there, I guess, relative to expectations. We are seeing continued strongness in sort of product margin piece of our business. We are, as we talked about the operating platform and the savings that we're getting there that the $15 million to 20 million that we've talked about, we continue to learn about the full impact of that and I think we're seeing just again happily surprised that there continues to be leverage in that part of the cost of goods sold.

And then frankly, as we've said before, we give a number and our -- the guidance we gave versus what we have internally, obviously, what we have internally is higher. I think in this case, there was just a bit of conservatism, and we did -- we were proud of the result, we did a great job and it was just partly again our internal forecast is generally higher than what we guide.

Seth Basham -- Wedbush Securities -- Analyst

Got it. That's helpful color. We'll take that to me when the fourth quarter gross margin guidance unchanged. Your internal forecasts are higher and the pricing power will persist, which is good news. And last question, on the topic related to tariffs is that you imply that there is a little to no impact on the business. Could you state whether or not you saw for the full price business units decline or increase for the quarter?

Gary Friedman -- Chairman and Chief Executive Officer

Yes. We don't give that level of data, but I just say, look, you've got to in our business is expanding at a pretty healthy pace. Our gross margins are expanding substantially. I think we're the only ones in our industry that meaningfully growing operating margin. Most are trying to kind of hold on and where they're eroding. And I think what you're seeing is the -- what I say the emergence of the RH brand, it's a luxury brand that has the potential to generate luxury margins. And we just have a completely different business model today. We have a different brand today. The connection we have with the customer, the membership model that we have, the physical environments we're creating that are multi-dimensional with integrated hospitality, the design services that we offer, where we have real interior designers doing your home, not a visual merchant or someone that's right out of school. So we just have a completely unique and differentiated brand and platform and its allowing us to get better margins as -- and we continue to position this as a luxury brand. That's why we said we have clear line of sight of 20% operating margins in the company today.

And when I say clear line, I say we know we can get there. We could probably get there faster than most people believe and it's just a question of how we want to invest along the way and how we want to kind of keep building and it's not that 20% is the target or the endpoint. We looked at our five-year plan, 20% is not the endpoint, not by any means.

So if you think about the operating margins that many people have running at luxury brands, that could be 25% to 30% and I'm not saying that that we'll get to 30% today, but I would say 20% is visible and very doable and 25% is likely. So when you put that together with the long-term growth algorithm and the brand being able to play internationally, there is no one like us internationally. There is no -- I mean we have less competition internationally than we do in in the United States. I think our biggest competitor in the United States at the higher end is probably $300 million or $400 million.

So the impact we have or the impact we will have and the disruption we can cause internationally, I think is exponential comparatively to the US, where you actually have more developed competitor base. So, tariffs to us, I mean, they're not a big headline inside our company today. I mean, it might be a big headline in companies that are kind of trying to squeeze the lemon and hold on and maintain operating margins or not let them slide further and that's just not who we are, it's not what we're building. This is an entirely new business model that has massive potential. Tariffs are kind of a short-term episodic kind of distraction. They're not anything that we look at strategically. We've got lots of flexibility, we can source in many different companies all over the world, I think still believe China is a great partner. I still have faith that trade deal will be worked out, but if it doesn't work out, we have lots of optionality. There is -- so not a big headline when you're thinking about RH.

Seth Basham -- Wedbush Securities -- Analyst

Wonderful. Thanks a lot and good luck.

Gary Friedman -- Chairman and Chief Executive Officer

Okay. Thank you.

Operator

Your next question comes from the line of Oliver Wintermantel from Evercore ISI. Your line is open.

Oliver Wintermantel -- Evercore ISI -- Analyst

Yes. Thanks, guys. Gary, you were talking just now about operating margins in the 20%, 25% range and up from 14% today. Can you maybe help us understand how you -- may be on a path, how to get there? Is that more on the gross margin line or is that really leverage from the SG&A line? Or does the business have to change materially to get there? Just help us maybe understand that a little bit more how you think to get there. Thank you.

Gary Friedman -- Chairman and Chief Executive Officer

Yes. Did you get a chance to read the letter yet?

Oliver Wintermantel -- Evercore ISI -- Analyst

I did, yes.

Gary Friedman -- Chairman and Chief Executive Officer

Okay. Well, that gives you a path to '20 just basically right there and so -- if you just take those pieces and with some enhancement. So -- and then if you kind of just think about the business, the last point I made there, every time we trend, it's going to transform a legacy gallery to a designed gallery. And we expect in the first few years to double the business. That provides leverage across our entire platform. But as I pointed out, meaningful leverage in occupancy, meaningful leverage in advertising and I know advertising is in SG&A, but I wanted to pointed out because it doesn't mean just to take any market where we're -- we might have a $15 million gallery and we open a big gallery over the first few years, it gets to $30 million.

We're not mainly in anymore source books into that market. We're not doing anything differently from an advertising point of view in that market, but we're doubling the volume in the market. So you can do the math on that pretty easily. Your ad cost falls in half. [Technical Issues] cost leverage in our new galleries and especially with our new development model, where we're able to really cap very little depreciation in the next galleries that we're going to be doing going forward.

And so just right there, you think about and then you take that volume and leverage it across the whole corporate SG&A, right, and the entire supply chain. And when you look at our business and you look at the -- they're very healthy percent of our business. Do we talk about what percent of our business is special order?

Jack Preston -- Chief Financial Officer

No, we don't.

Gary Friedman -- Chairman and Chief Executive Officer

We don't. Okay. Well, just -- let's just say we have a big percentage of our business in special order, right. So that inventory spend is very fast and has a very high return on it and you just kind of do that math all the way through the model as you expand the model and get to 60 to 70 design galleries in North America. And then think about the fact that around the world we're starting with the new model, not the old model. You have to remember if you start the fact that this was a very different company with very different earnings, when I took over, it was a negative 5% and we kind of got it to 7% and then we hit the downturn and we had scratch back up from zero and today most of the people that are home furnishings businesses of a scale in North America have operating margins of probably 5% to I don't know 8%, maybe someone has 10% and today we've got 14% going to 16%, 16.2%. And so it's just we're not starting with having to kind of buildup, it's like we're starting with the new model in these countries. And we're starting with, really, really great brand awareness and brand power. So we think we're going to ramp relatively quickly when we go internationally. We're opening internationally with all the leverage in the real estate development model that we're executing here.

So that's what kind of gives us a lot of leverage long-term. And the growth in the kind of the corporate overhead is it can't be relatively minimal over the long term. I mean, we'll make investments and we'll keep expanding businesses and things like that, but in some ways, you could think about us in a way like a technology company from the perspective of we also run our business in a very project based point of view. So just as Apple might shift a lot of resources to developing from an iPod to an iPhone or an iPad.

We shift internal resources to develop RH Beach House, RH Ski House, RH Color and so on and so forth. Those are not kind of new businesses with new infrastructures in new organization, it's just really the leverage of the flywheel we've built that will provide a lot of gross margin expansion and operating margin expansion. And then you put that on this kind of new massively more efficient operating platform we built. I think people probably underestimate the work we've done over the three-and-a-half years. I mean, we basically took the entire leadership team, cross-functional leadership team of the company. It's been 3.5 years reconceptualizing and whiteboarding and entirely new operating platform. I've never been with the company that ever tried to do that. Usually, the methodology is, let's go hire a consultant, let's hire McKenzie or Boston Consulting or Bain or take your pick whoever they are, let's bring in their consultant, let them interview everybody in our company. And then, you know look at our supply chain, look at our business and come back with a 1,000-page report and charge you $2 million or $3 million and say thank you very much, good luck. If you wanted to help you execute this, we can kind of be around and try to assure you long for another few million bucks. And it usually becomes a plan, nobody believes, and it's not the plan the organization conceptualized. Nobody really stopped work long enough, got out of their siloed functions long enough to really look at the business cross functionally to really build something entirely new, and that's what we did. And look, it was painful at first, right.

We pulled the car into the pits after we blew it higher when we launched RH Modern. Everybody is expecting us kind of change the tires and come out back into the race, and we decided to taken -- to stay in the pits and build an entirely new car, start one other way down to $25 a share. People thought we are nuts, but we decided we were going to kind of stop and focus and conceptualize an entirely new business platform, and we built it not one consultant, nobody from the outside, everybody from the inside and everybody that knows this business, but everybody is forced to work an entirely different way. We got all the brains in the game, all the egos out of the room. We broke down every silo, and if it moved, we measured it, if it didn't, we painted it. And we built an entirely new company, and I think we will also see how -- how the results unveil over the next several years.

And look, when our operating margins got to 10%, a lot of the analyst reports said, oh, their operating margins are the highest performer in the industry and that person is slid back. We don't think 10% operating margins sustainable. When we got to 12% same story, oh, we don't think 12% operating margin is sustainable. Now we're at 14%, I'm sure a lot of people don't think 14% sustainable. We just told you we've got at least 200 basis points of operating margin expansion in the models for next year, as Jack just said, that's probably not our internal forecast. And so, correct, it's not sustainable. It's only going to get better. So I think, yeah, this is a new business, a new model, very differentiated brand with entirely new platform and brand proposition, and so it's -- yeah, it's going to be fun.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. Thanks very much and good luck.

Gary Friedman -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Tami Zakaria from JP Morgan. Your line is open.

Tami Zakaria -- JP Morgan -- Analyst

Hi. Congrats on another strong front, and thanks for taking my question. So I have two quick questions. The first one is, do you think the two distribution centers you have in the US are enough in the medium-term to support your sales and the momentum in the business you're seeing, especially if you go into Europe in 2021?

Gary Friedman -- Chairman and Chief Executive Officer

Yeah, we will probably start to expand the footprint in the distribution centers over the next 12 months to 18 months. So we -- but you're really talking about kind of space expansion and not so much new distribution centers in new markets, we think we're kind of well-positioned. So as we go into Europe, we're still sizing that up, what percent of the SKUs should we start with for European expansion, just like any other business, you can use kind of the 80%-20% rule, maybe ours is 70%-30%, but directionally the top 30% of our SKUs drives 75%, 76% of our revenues. You got a good portion of the SKUs that are special order, so they really never hit a DC, they just get cross-docked and go to a customer.

So just like we don't necessarily house 100% of our SKUs in both distribution centers, that would just slow down the turn. I mean, do you think about what's really different in our company, we step for furniture DCs at 100% of the SKUs, all right. That like made no sense. Now we have one DC that has 100% of SKUs and one DC that has a significantly smaller percentage of SKUs. And so, when we -- when we opened in Europe, I think about it that way. We probably open a distribution center that has maybe a third of the SKUs, and then the other two-thirds get shipped from Europe. And so, that's why I say it's not -- it's complex as you might think, right.

And we're not housing the goods in retail stores, we're not replenishing retail stores. We set up our galleries and it's like setting up a beautiful home or hotel lobby, right, like nothing really moves. Once in a while we get a customer that wants to lay on top of the bed. We've got a kind of fluff up, but still inside salary, but our business is not -- look, I think back in my days at the GAAP, and I was restocking shelves in back rooms and having a moved floorsets, because all of a sudden, you know whatever collection blew out, you have empty racks and now you're going to try to move the whole store around and you're trying to stay and stock and all these styles, sizes, colors, so on and so forth. We don't do any of that.

It's a much simpler business on many levels. Hardest part of our businesses is actually delivering the stuff to the customers' homes, which we believe we've leapfrogged from where we weren't probably leapfrogged much of the rest of the industry. But it's not -- it's not as complex. I think people think it is, you know for us, we kind of look at it, OK, we're going across the pond and we're opening in London. Then we'll open in Paris, then we'll will open beautiful galleries, and again, we just kind of got to set them up once right, nothing moves. Nobody steals anything, nobody walks out with a bed, nobody moves a bed or sofa. All the mirrors and light stay in the same place. What we do is we show up and we service the customer and provide an outstanding experience. And then in the back end, we have to execute and get the goods in the customer's home.

And for the bigger part of our business, which is furniture again, you're talking about probably the top third of our SKUs that we have to focus on, not the entire assortment, and then add of that, you've got a meaningful percentage of that, I mean, less than half more than a quarter that special order, right. So it's a different kind of model.

Tami Zakaria -- JP Morgan -- Analyst

Got it. That's helpful. And my second question is, how should we be thinking about the tax rate next year?

Jack Preston -- Chief Financial Officer

So, Tami. We haven't obviously guided to that level yet, you know we've provided out for few this year. The update to the -- to our guidance tax that we did the prior quarter was 21% and we clearly beat that this quarter given the stock option activity. I think no specific guidance, I'll tell you internally, we're using 20%, it could be better than that to be honest, I think -- it's a function of the stock price, right. So we've got a lot of people holding options at relatively low prices and so if stock continues to perform, I'm sure people are going to exercise options and sell stock. I mean, we've pretty widely distributed option plan within the company.

And that's where it really would drives it. So as our -- as our stock has performed, as the stock is -- went from 50 to 100, 100 to 150, 150 to 200 [Phonetic], we have more activity in our stock option plan and that drives a lower tax rate. So it's probably -- if I think about it simply, if our stock stays at this level, continues to go higher, we're going to probably have a high activity of -- in our option plan. If our stock drops to $50, it will probably slowdown, we will pay more tax. It's not too much more complicated than that.

Tami Zakaria -- JP Morgan -- Analyst

Got it. That's super helpful. Thank you

Operator

Your next question comes from the line of Brad Thomas from KeyBanc Capital Market. Your line is open.

Brad Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Great. Thank you. Good afternoon. Hey, Gary, I was hoping you could talk a little bit more about the guest house as we look ahead to its opening in 2020 and if you could tell us a bit more about what you hope that experience to be like for guest and it maybe how it may fit into the long-term business model. Thanks.

Gary Friedman -- Chairman and Chief Executive Officer

Yeah, not a lot to report yet. We wanted to let you know are obviously opened it this year. We'll do a more fulsome explanation, I'd start with the fact that everything we do is intended to render the RH brand more valuable, right, and position us -- position RH as kind of thought leaders, pace makers and place makers inside our industry and that's with the guest house is designed to do we believe we can -- we reconceptualized entirely new market will create entirely new market for traveler seeking privacy and luxury and security in many ways. So you think about privacy today is something everybody's given away with social media and it with the Internet for the most part is taken away and it's -- what people talk about most as being at risk is our privacy. So hard to find privacy today. Hard to -- but nobody's -- not too many people are selling privacy today. So we're creating a concept built around privacy and luxury. A lot of people have asked me because it hit the real estate press right and that's the way we had to start talking about it a little bit because we signed a lease and in that public documents, it talked about RH building a hotel concept. So, people ask me, I hear you open your hotel in New York and I say no. And then they say, I mean, a boutique hotel, and I say, no. And then they say, what are you doing? We're creating a guest house and we're going to try to reconceptualize hospitality and do something no one's ever done and then say, oh, so I got it, it's going to be a showroom for your products. And then I say no. We have a 90,000 square feet showroom 20 steps away. Why would we do that? In fact, it's not going to have any of our products and that usually what twists everybody's head around a bit, because it's too expected, right. And if you do something that people expect and consumers expect, you'll never surprise and delight them. So we're doing something that I think nobody can imagine. I think it's going to elevate our brand. It's going to be among one of the best things we've ever done and one of the most innovative things done in hospitality in years. So, we're very excited about it. The first one is in New York. The second one, I wrote in the letter, it's in Aspen. They are two epicenters for taste, design and wealth and it's where the wealthy and affluent visit in vacation. Aspen is one of those global up centers.

And I think this will again be another thing we do that creates a global conversation that continues to elevate the RH brand as we attempt to climb the luxury mountain. I tell our team internally here that -- and if you think about almost every -- I think every luxury brand in the world today, of the best luxury brands, whether it's Hermes, Louis Vuitton, Chanel, you name it, on and on, Christian Dior, all the others, they were all born at the top of the luxury mountain, right, they started there. And we obviously didn't and we're one of the few that is trying to make the climb to the top of the luxury mountain.

And the people at the top of the luxury mountain, quite frankly, don't really want you to make that climb. They don't really invite you to their party, You're not from the neighborhood. You don't have the background. And to make that claim, which I don't know brand that has from the level we started at, to make that claim of the luxury mountain, you have to do things that create a forced reconsideration, right? You have to do things that force people to respect to you that force people to tip their hat, right? And I believe that's the kind of work we've done throughout our entire journey step-by-step. We've taken another client another run up that luxury mountain. We've only done things that have rendered our brand more valuable, even if they were painful like taking the [Indecipherable] to the pit and going from a promotional model to a membership model and changing how our brand is perceived or opening really inspiring spaces and galleries. When the world was shrinking and closing stores, we're opening the most inspiring architectural environments in the history of retail and -- or integrating hospitality into our galleries the way we have.

And the Guesthouse will be no different. It will be a magnificent statement of our brand. It will -- we believe it will create a global conversation and set a new standard and not only that what happens when you do work like this is it challenges your organization in a way that kind of just executing the same thing every day doesn't, right. It forces you to think differently. It forces you to reach higher and that's why by the way why we started in New York. A lot of people said, like, gosh, why don't you open your first Guesthouse somewhere where everybody is not going to pay that much attention, where you can make mistakes, where the critics won't be so harsh. We more operate from the Frank Sinatra model. You don't [Phonetic] believe that if you can make it there, you can make it anywhere and that's why it's important to start New York, you start in the city like that, it brings out your best work. It brings out your best thinking. And I think what you'll see when we open the Guesthouse this year is something that's entirely new, entirely unexpected, and I just told you entirely too much.

Brad Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Well, I appreciate it, Gary and looking forward to seeing it when it opens. I was hoping I could ask a quick follow-up on color and if you could just give us a sense of how big you think the scope of that new category may be next year and if you think you need to make changes of significance in the store to highlight that product in the store next year?

Gary Friedman -- Chairman and Chief Executive Officer

Yes. Well, I think if you -- our brand is a lot of times picked on for not having much color. People usually say, RH doesn't like color, Gary Friedman doesn't like color. It's not that we don't like color. It just so happens that the vast majority of the market is colorless. Why is it colorless? Because humans are generally colorless, right? We're shades of light to dark, the world is generally colorless, except for some green. The ocean is actually colorless, it's reflection of the sky. And so what do we most comfortable with? Neutrals. Is there a market for color? There is. How big is it? It's not that big. If it was, it's significantly smaller than clothing, right? And I learned that the hard way back in my Pottery Barn days when I think I could chase the fashion color pallets and all I did was create a hell of a lot of markdowns.

And so we think color will be additive to the brand. Today nobody's waking up in the morning saying I want some colorful furnishings and saying, I'm going to RH, like zero, right, we're basically a neutral base brand. Is there a market, is there possibly another 15% to 20% kind of opening up the aperture of our brand? I think so. I think it could be up to 20%. I think it will take several years to get there. And we have to do this in a really smart way. What we don't want to do is confuse the brand and unfocus the brand. So we're doing it in a very RH way. It's very architectural, it's very disciplined, it's very structural in its approach, it's very intentional in its approach, and it's done in a way that maybe one or two interior designers in the history of the world have executed color. That's who we've studied. One primarily who was really influenced by the way I see the world from an interior design point of view more than anybody else and that's Anouska Hempel, who is an interior designer that was really the godmother to the boutique hotel trends, everybody kind of gives Ian Schrager credit, actually Anouska Hempel was before Ian Schrager. She just launched in London with the Blakes Hotels.

And if you look at some of her work and she uses colors in a very architectural, very disciplined way. We've studied hard work, we studied one other person's work. Honestly, I don't think that community people do color very well. So we have to do color as well as we do neutrals, we have to do it within the point of view of our brand and we have to do it in a way that it elevates the RH brand and renders the RH brand more valuable. We can't let it unfocus us, we can't let it kind of distract from the core business. We have to beautifully integrate it and it has to amplify what we do.

So, not easy. We've been working on it for five years. We thought we're going to kind of get it done the last couple of years and it's just -- it hasn't got there yet. We think we're very close and we'll be ready next year, but it's like anything else we do, right. I mean, everything we've done is kind of a test, right, and we learn. You can have all the ideas in your head that you want, but you don't really know anything until you do something, right. And so we tend to learn by doing. We spent a lot of time deeply thinking about anything we do and we try to conceptualize it, we try to kind of move our vision, translate our vision from a vision to a strategy and figure out then how we can bring that strategy to life. But honestly until you do it, you don't really know that much. And so no different than RH Beach House or RH Ski House. They launched as relatively small tests. Source books that are 100 -- I think they're about 120, 140 pages. Very different than how we launched Modern, we launched with 545 pages. That didn't go so well. It is maybe a little bit too much complexity but looking back, look, we're glad we did. It cost us $20 million to keep customers happy. We kind of botched some of the execution, but it's a huge business for us today. But if you look at Beach House and Ski House, we tested them very small, we're learning a lot. We know what's working, what's not working. We will expand the assortments, optimize the mailings, optimize the web presentation, and begin to then test and move some of the best collections into our retail galleries. That will be the same thing with color. That's why -- we try to integrate color into the RH core book into the interiors book back, at least 5 times, and probably 30 days before mailing in the book. We just yanked it, because it was unfocusing in the brand and so we decided to capitalize it in its own book and we'll call it RH color and it will kind of give it some part of the website or its own website integrated to our portal of the world of RH, which you'll hear more about that later. That will be working on and introducing later this year. But we'll presented in a way that people will know we're in the business will be in the business in a very distinctive way, but we'll test it, we'll learn, we'll do some things right, we'll do some things wrong, but we get, we get smart, really quick here, once we get data. Once we get real feedback.

And so, and then, and then our -- then we accelerate the learning curve and we start to accelerate the business. So we're hopeful, we think -- we think we're going to do color better than anybody else in the planet, except for maybe Anouska Hempel and one unnamed interior designer. But we're hopeful, but I don't think it will start real fast. I mean, I think, there is just nobody waking up in the morning, thinking about us for color. So it will take, it will take a couple of years to kind of have be known and have it grown, no differently with modern.

Today, yeah. If anybody is thinking about modern home furnishings furniture. I think everybody is thinking about is us. And so it's color will ramp and will build a bigger impression in people's minds, and we'll be able to integrate it into our galleries in a really beautiful way. We've got a lot of concepts and things we've been thinking about and how we'll do that. So I'm super excited about it, but it's not going to change everything the first year.

Brad Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Very helpful. Thank you so much Gary.

Gary Friedman -- Chairman and Chief Executive Officer

Yeah.

Operator

Your next question comes from the line of Zach Fadem from Wells Fargo. Your line is open.

David Lance -- Wells Fargo -- Analyst

Hi, this is actually David Lance [Phonetic] on for Zach. Thanks for taking our questions. So on the evolution of the real estate strategy, I was curious to see how you think about the opportunity as it stands today, and in particular, whether you see an opportunity in some of the smaller domestic markets like Columbus or Minneapolis in relative to this -- to the sales lifts that you've seen in some of the larger markets that you have?

Gary Friedman -- Chairman and Chief Executive Officer

So, well, I mean, we have obviously opened in Minneapolis, we're opening in Columbus next week. So what's the specific question, David.

David Lance -- Wells Fargo -- Analyst

I guess, just more clarity around kind of some of the lift and like what you've been seeing in some of the smaller domestic markets in comparison to some of the larger markets?

Gary Friedman -- Chairman and Chief Executive Officer

Yeah, the list basically the same. The big -- the biggest difference is, if do we or don't we have hospitality integrated, hospitality integrated into -- into the gallery gives us a greater lift, not just from the hospitality business, but the traffic the hospitality business drives. So we've been really, really consistent plus or minus 10% or so. We haven't really had any surprises per se, whether it's small market or small as I guess -- small we've done is Kansas City and Leawood, I guess, and the biggest is big New York. New York was really two step right. New York was a legacy gallery that we expanded kind of four years before.

If somebody to a, like call kind of a design gallery, we tripled the size of New York in its previous location in the Flatiron, went from one floors to three floors. And then we -- then we more than doubled the size of New York again. And so the math has been very consistent. It's within a band as you might expect, and sometimes it's a little different just on how -- how the business is actually growing that year, right. So if you looked at the gallery that was converting in a year where the business might have been growing at 15%. The gallery lifted bigger. It was a year where the grid [Phonetic] business grew at 5% that gallery -- that number also influence the lift, right.

So it depends on what we're doing with the assortment strategy, with the marketing strategy, so on and so forth around the business. But we've got enough of now. We're very consistent, it's very predictable. And what is very different than other people and why it hasn't worked for other people, most people -- they taken a 5,000 square foot assortment, they put it into a 20,000 square foot flagship in Manhattan or Los Angeles or San Francisco, name any city, and it's still performs like a 5,000 square foot assortment, right. You might get a little bit more sales, but what we have today, it's very different. We have probably 200,000 square foot assortment and less. I think today is less than 5% of the assortment is in our legacy galleries, right. Yeah, you can only go in and probably see 5% to 8% of the assortment today in a typical gallery.

So when we go from showing 5% of the assortment to 30% of the assortment, we know that math and we know what that lift is. And so in each of these markets, we look at, not only how big the gallery is really, but also how are we presenting it at each category, how many collections in each category do we have, how many living room presentations, dining room, bedroom, bathroom. We understand the math and the productivity and studies. These prototypes are designed very scientifically, very mathematically, and we have a lot of data. So -- and because we've now a real proven concept and a high productivity concept that can perform on multiple levels, right, multiple floors, most retailers can't and they can use rooftop space and garden space with our outdoor furniture business.

We're really very desirable to developers. And so, and we're proven and now we're more desirable we have, hospitality, that's really valuable to a developer because it drives traffic into their development. And we don't just have any hospitality. With many markets that we're going into, probably the most beautiful restaurant in the market and one of the most productive restaurants in the market, if you look at our hours. We're not really open some of the peak hours for dinner. We closed relatively early and we don't have a bar. So when you look at our productivity and you take the alcohol component away from it, you look at our hours of operation, we were probably as productive, it's almost anybody out there, and I think it's because we're building beautiful environment, we have amazing hospitality and we have really high quality consistent culinary experience in food.

So that just -- it's only going to make the gallery performance better going forward as we expand the offer with Beach House, Ski House and Color. We're not going to do zero with any of those. So they are all going to be incremental, right, and they don't even have to be in the gallery to be incremental to the galleries, right, because our galleries can sell beyond the four walls of the store. So we feel more confident than ever about the real estate strategy, and it really doesn't matter, again, whether -- with our kind of our lowest volume markets are about $10 million, right. So our lowest point stores are probably about it. Productive is many of our competitors highest-volume stores. So many people would like to have a $10 million or $12 million gallery store. We look at those are kind of our lower volume wins, but when $10 million store will turn into go from like $10 million to $17 million to $18 million in year one, and then to $19 million or $20 million in year two and keep growing, but we tend to, on average by year three double the business if we have hospitality and less than that if we have -- if we don't have hospitality.

David Lance -- Wells Fargo -- Analyst

Great. Thank you so much for the color. And just one follow-up for me. On outlet sales, they continue to expand. Curious if you could talk about any additional drivers beyond the DC liquidation and to the extent [Phonetic] you think the outlet sales could be cannibalizing your full price business?

Jack Preston -- Chief Financial Officer

No, we don't believe it cannibalize the full price business. The outlet business is basically always been a return business, right. So it's mostly a return slightly second quality product, sometimes we get some new some new product if we've -- if we have long inventory, we're discontinuing things, but really what we've done over the last several years is just reduce inventory in the company, right, I think versus our five-year plan from three years ago, where the company has about $500 million less inventory. If we -- if we were turning the business at the same rate we were in 2016, I think today we would have about $500 million of inventory, right.

So you can think about it is, like-for-like company. We took $500 million of inventory at cost out of the system, right. That's how much more efficient we are. So the company has gotten significantly bigger on $500 million less inventory. So we've used the outlets to kind of help us liquidate that inventory, right, and drive down that inventory.

And so as we think about it going forward, we actually think that it's funny, you're asking because we were just in a meeting day before yesterday in here thinking about, OK now, where do we go from here? What is the outlet business look like for RH as we go forward? And not that we want to build a big second quality brand or do anything to kind of render the RH brand less valuable, but we've never really kind of looked at it in a real innovative way. We've made it massively more efficient. Next year it will be massively more profitable just because we're not going to be driving so much revenue at low price through it, but we now have some new kind of thoughts, new visions and ideas for that channel that where we could probably even drive some incremental -- long-term incremental revenues. Next year, it will probably be a revenue drag, but long-term incremental revenues and incremental profitability. It's just -- it's never been used for anything besides liquidating returns and damages.

David Lance -- Wells Fargo -- Analyst

Okay. Great. Thanks again for all the color.

Gary Friedman -- Chairman and Chief Executive Officer

Yes.

Operator

And your next question comes from the line of Bobby Griffin from Raymond James. Your line is open.

Bobby Griffin -- Raymond James -- Analyst

Yes. Good afternoon and thanks for taking my questions. Just one quick clarification first. Is the 20% operating margin target inclusive of the international expansion or is that just for the North American business?

Gary Friedman -- Chairman and Chief Executive Officer

Well, there is some International expansion. Like I said, we'll launch international in '21 or '22. So, as you go forward, I mean, International will be part of that. So, I don't really kind of separate them out as we model it.

Bobby Griffin -- Raymond James -- Analyst

Okay. I guess the other way to ask, Gary, do you expect the international margin profile to be similar to what we're used to seeing here in the US business, I guess, is the other way to ask [Speech Overlap]?

Gary Friedman -- Chairman and Chief Executive Officer

Yes, we do. Yes. As we've modeled it out, there'll be a little bit of start-up cost. We open DC again, but we're not going to open a giant DC. So we'll have some investments, we'll have some minor overhead, some boots on the ground internationally and there'll probably be some slightly higher pre-opening costs because initially we won't be able to leverage the local teams who have sent more people over but again once we get a gallery up and running, it's pretty self-sustaining pretty quickly. So initially, if we're right on the volume, what's interesting here, Bobby, and for the rest of people on the call that we probably haven't talked about, when -- if you think about going into the UK, right, the UK is, what is that, population is 61 million or something like that, California has population of 40 million, yes, 68 million to 40 million, significantly more people in the UK, a very high demographic. You look at California, we have lots of galleries, right, and yet we're going to open in the UK with initially one and then we'll have two, but you're going to have -- it'd be like think about New York. If -- We just opened one gallery in New York and we didn't have anything in New Jersey, which we've got multiple stores, we didn't have Connecticut, we didn't have Westport, we didn't have Philadelphia, we didn't have anything in that geographical region or just take the almost the entire East Coast or the entire West Coast. I mean, that great brand is bigger than 40%, 50% more people in California. In California, we have a lot of stores and so what we're doing at best $450 million in California today. $450 million in California and we only have one market with the big gallery and that's Los Angeles, right. We don't have Orange County, we don't have San Diego, we don't have San Francisco, we don't have Northern California and Marin County, we don't have Silicon Valley, we don't have the East Bay, Walnut Creek area. I mean, California once we transition the galleries will probably be a $700 million market for us, right. So, we'll over time double the retail business and we'll get a lift in direct.

So, if you think about starting in the UK, I look at it and go, what is that potential than a $1 billion market? What if I had a potential billion dollar market and I opened just one big store in LA? It's going to be a giant store and the direct business is going to be huge, right.

And so we think because of the size of the markets and the fact we're opening with these really dramatic retail experiences within assortment that is really disruptive that we're going to ramp very quickly and get really good leverage in the international growth. It's not -- it'd be one thing if we are opening little galleries, right. It's very different that. It's one thing if we're going in opening 7,000 square feet stores opening in London with the 7,000 square foot store in the Greater London area like four or five 7,000 square foot stores and opening in these other markets with these little stores and then having a comeback and redo them, I mean, we're opening in these massive markets and we're opening with incredible brand statements and with an incredible assortment. So I think we're going to do really, really well.

And then all the math on our internal models even at our conservative side, our return on invested capital and our operating margins and earnings look really, really good. So we don't see this as being any kind of real drag to the business side. I know for some businesses, they rollout internationally, they're not really making money or they've got a drag or they've got to wait five years to make money. That's -- I hate to say anything is impossible [Phonetic] but call this as close to impossible, we'd have to have such a swing and a miss like in these markets. And I just don't think that's going to happen, not based on the work we've done and what we know about our brand today, how much we export to those markets today, et cetera.

Bobby Griffin -- Raymond James -- Analyst

Okay. I appreciate the detail, very exciting, look forward to seeing one of those stores once they're up and running. And I guess secondly for me, I just wanted to go back to the comments about product margins. Could you maybe just help me get a better understand, help us get a better understanding of the fundamental drivers driving better product margins and then within those drivers, the sustainability of that? Is there a concern that at some point of its price, the consumer becomes -- you get too pricey for your core customer or is some of the drivers difference your volume becoming a bigger part, working with more -- fewer designers but doing more business with each one of those designers? Just help me frame the product margin discussion better?

Gary Friedman -- Chairman and Chief Executive Officer

Well, our product keeps evolving, right, and we keep kind of climbing the luxury mountain, the quality gets better. With better quality, prices get higher, but while the prices get higher, there is still massively disruptive inside the marketplace. Start with RH Modern, the average price of furniture in RH Modern when we launched was 30% to 50% higher than our core business, right. So -- and it's wildly successful, but it also had a higher quality. We used it as a platform to kind of take another step up from a quality point of view. And so, I don't know, if you look at the value of Hermes globally, what's Hermes, like $80 billion or something like some market value. And there is a lot of people that want really high quality product. And I think if you just study American business over the last whatever period you want to, 10, 20, 30, 40, 50 years, people trade up, people will pay for better quality. They just won't pay more for the same quality, they'll pay for better quality. So what's evolved in our business is the quality has gotten better, the design has gotten better, the taste has gotten better, the scarcity has gotten higher, the desirability has gotten higher -- gotten better. We're just a more desirable brand today. We are more admired brand today. We have higher quality products today. We have better designed products today, we have better -- it's presented in more aspirational spaces today. We've got an aspirational hospitality concept that drives thousands of people into our galleries that are now seen that really high quality, high taste, inspiring -- presented inspiring spaces. So it's -- in many ways, we're creating a new market, right, and when you're creating a new market, you've got a lot of leeway with what should the price be. I mean, I don't know. You hold up a Birkin Bag against every other bag in the world. Is it cost too much? Is it too expensive or is it the most desirable bag in the world? That's the way to think about it.

Bobby Griffin -- Raymond James -- Analyst

I appreciate it. Best of luck in the fourth quarter and happy holidays everybody there at RH.

Gary Friedman -- Chairman and Chief Executive Officer

Okay. Happy holidays, Bob.

Jack Preston -- Chief Financial Officer

Thanks, Bobby.

Operator

Thank you very much. And there are no further questions at this time over the phone. Presenters, you may continue.

Gary Friedman -- Chairman and Chief Executive Officer

Okay. Well, great, thank you everyone for your time. We wish all of you a happy holiday. We look forward to hopefully seeing some of you at our Columbus opening next week, and if not, we'll see you in the New Year. Thank you so much.

Operator

And this concludes today's conference call. Thank you all for participating. You may now disconnect.

Duration: 73 minutes

Call participants:

Allison Malkin -- ICR

Jack Preston -- Chief Financial Officer

Gary Friedman -- Chairman and Chief Executive Officer

Atul Maheswari -- UBS -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Tami Zakaria -- JP Morgan -- Analyst

Brad Thomas -- KeyBanc Capital Markets Inc. -- Analyst

David Lance -- Wells Fargo -- Analyst

Bobby Griffin -- Raymond James -- Analyst

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