Q4 2023 RH Earnings Call

Participants

Gary G. Friedman; Chairman & CEO; RH

Jack M. Preston; CFO; RH

Jarrett Stuhl

Unidentified Company Representative

Bradley Bingham Thomas; MD & Equity Research Analyst; KeyBanc Capital Markets Inc., Research Division

Christopher Michael Horvers; Senior Analyst; JPMorgan Chase & Co, Research Division

Curtis Smyser Nagle; VP; BofA Securities, Research Division

Jonathan Richard Matuszewski; Equity Analyst; Jefferies LLC, Research Division

Maksim Rakhlenko; Director; TD Cowen, Research Division

Michael Lasser; MD and Equity Research Analyst of Consumer Hardlines; UBS Investment Bank, Research Division

Seth Mckain Basham; MD of Equity Research; Wedbush Securities Inc., Research Division

Simeon Ari Gutman; Executive Director; Morgan Stanley, Research Division

Stephen James McManus; Research Analyst; BNP Paribas Exane, Research Division

Steven Paul Forbes; Analyst; Guggenheim Securities, LLC, Research Division

Allison C. Malkin; Senior MD; ICR, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by. My name is and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter 2023 Q&A Call. (Operator Instructions) I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison C. Malkin

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter fiscal year 2023 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'll turn the call over to Gary.

Gary G. Friedman

Thank you, Allison, and good afternoon, everyone. I'm going to start with our prepared comments, which are included in our press release and shareholder letter. To our people, partners and shareholders, fiscal 2023 was a year of diversity, innovation and investment for team RH as we face the most challenging housing market in 3 decades, while investing in the most compelling product transformation and platform expansion in our history.
We have positioned the RH brand to gain significant market share in 2024 and beyond while building the foundation for a global expansion across the United Kingdom, Europe, Australia and the Middle East over the next several years. While aggressively investing in the downturn has put pressure on short-term results, it also positions us to capitalize on the long-term opportunities to present themselves during times of disruption and dislocation.
We've demonstrated our confidence in our strategy by repurchasing 7.6 million shares of our stock during fiscal 2022 and 2023, representing approximately 35% to the shares outstanding and believe that investment will create meaningful long-term value for our shareholders.
Turning to our fourth quarter and full year results. Revenue was negatively impacted by $40 million in the fourth quarter due to the severe January weather and shipping delays related to the ongoing conflict in the Red Sea. We do expect the majority of the deferred revenue will be realized in 2024 when transit times normalize. Adjusted operating margin was 9.1% and 13%, and adjusted EBITDA margin was 15.3% and 18.2% for the fourth quarter and the full year, respectively, reflecting deleverage from lower revenues, increased markdowns to support our product transformation and investments in international expansion.
"Every act of creation is first an act of destruction," Pablo Picasso. We have spent the past 18 months destroying the former version of ourself and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry.
Our product transformation plans for 2024 include: The launch of our new RH Outdoor Sourcebook, the most dominant and disruptive collection of luxury outdoor furniture in the market arrived in homes late February through mid-March with 14 new collections. The initial response has been exceptional, and we expect to gain significant market share in this important category in fiscal 2024.
The unveiling of our new RH Modern Sourcebook is scheduled to be in home late April through early May with 30 new collections across living, dining, bedroom and bathroom, including original designs from the Harvey Probber estate, one of the most influential modern designers of the past century. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of 2024.
The second mailing of our new RH Interiors Sourcebook is planned to be in home late May through early June with new collections and improved in-stocks, which should also provide an additional lift to demand in the second quarter and continue to build through the second half of 2024. We will be mailing an updated RH Contemporary Sourcebook in late July through early August with collections -- with new collections and a compelling value proposition, which we believe will also accelerate demand trends.
A second mailing of the RH Modern Sourcebook and third mailing of our RH Interiors Sourcebook are expected in the second half of 2024 with additional new collections, refreshed galleries and improved in-stocks. These mailings will result in a doubling of our Sourcebook circulation and customer contacts in 2024 versus 2023. Our data would suggest the increased number of contacts alone should provide another lift factor for our business.
We are also increasing print and digital advertising across major home design publications in 2024. You will see our ads in Architectural Digest, Elle Decor, Veranda, Gallerie, World of Interiors, Luxe Interiors and Design, Business of Home, The Financial Times, plus The Wall Street Journal and T Magazine design issues.
As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past 7 years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generate the vast majority of their revenues from the trade market, selling to architects, designers, developers and builders.
While RH has a significant trade business, a vast majority of our revenues are generated by consumers. We believe there is a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we've expanded other mostly trade-focused businesses and brands over the years.
Our plan is to launch with a 3,500 square foot Waterworks Showroom in our newest and largest Design Gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid- to high teens EBITDA that we believe has the potential to become a $1 billion global brand on our platform.
Let me shift your attention to the expansion of our platform. Our plan to expand the RH brand globally, address new markets locally and transform our North American Galleries represents a multibillion-dollar opportunity. Our platform expansion plans for 2024 include: the opening of 5 North American Design Galleries, including Cleveland, which opened last week; Palo Alto; Raleigh; Newport Beach; and Montecito, all with integrated RH interior design offices, restaurants and wine bars.
The opening of our first RH Interior Design Studio in Palm Desert, California. We believe there's 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 as well as augmenting some of our Design Galleries in larger markets with additional design services in stand-alone design studios.
We will also be opening 2 international galleries, 1 in Brussels, which opened last week, and Madrid opening this summer. Both galleries are located in beautiful historical buildings that elevate our products and render our brand more valuable. Unfortunately, RH Paris has been delayed until spring of '25 due to construction restrictions relating to preparations for the Olympic Games this summer.
We are also pleased to announce RH Sydney, The Gallery in Double Bay, a 5-story development with a rooftop restaurant and wine bar, received council approval last month with plans to open in fall of 2026 in what we believe is the most vibrant and desirable location in Australia.
Now let me turn you to our outlook. While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024. Due to the extensive transformation of our assortment, we do expect revenue to lag demand during the year by approximately 4 to 8 points until we read and react to new collections, reduce back orders and shorten special order lead times. Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze the business.
We believe it's also important to note that we are forecasting to end the year with an increased backlog of approximately $110 million to $130 million due to the revenue -- due to revenue lagging demand throughout 2024, which will negatively impact operating margin, adjusted EBITDA margin by approximately 140 basis points for the year. Additionally, investments and start-up costs to support our international expansion are estimated to be an approximately 200 basis point drag for 2024.
For fiscal 2024, we are forecasting demand growth of 12% to 14% and revenue growth of 8% to 10% on a 52- versus 52-week basis. We are forecasting adjusted operating margin in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%. For the first quarter of fiscal 2024, we are forecasting demand growth of positive mid- to single digits and revenues of negative low single digits. We are forecasting adjusted operating margin in the range of 6% to 7% and adjusted EBITDA margin in the range of 12% to 13%.
Now let me turn you to the 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 4 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, 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. Never underestimate the power of a few good people who don't know what can't be done. For the past 23 years, we've heard others tell us what can't be done. And for the past 23 years, we failed to listen. We avoided bankruptcy while being accused of lunacy. While others have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world.
When Wall Street didn't think our stock was worth buying, we bought 60% of it ourselves. When everyone told us we should be working from home, we're in the Center of Innovation working on rebuilding our new home and it's almost ready for primetime. From the largest product transformation in our history, to the most inspiring retail experiences in the world, from couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels, guesthouses, from Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich and San Francisco to Sydney, soon the world will be within our reach.
Never underestimate the power of a few good people who don't know what can't be done, especially these people. Onward Team RH, Carpe Diem.
And now we'll open the call to questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Simeon Gutman with Morgan Stanley.

Simeon Ari Gutman

I think the most important element of the outlook is the sales guide because it hasn't been growing and now we're flipping to growth. So I wanted to see if we can approach it from two sides, and I'd love to hear your perspective. First, on one side, if you end up meeting or beating this outlook that you've given us, if we look back, I mean, it's clearly could be the products resonating more than you thought? Or should we look at it as you gave us more of a conservative trajectory than what even the business is implying today?
And on the other side of that, if you end up falling short of it, was it either product didn't resonate or maybe there was more pent-up demand and you're overreading that curve? Curious how you think about both sides of it.

Gary G. Friedman

I think you just covered the answer in many ways. I would say, look, we have visibility to trends in our business that can help us connected dots. I mean you read the letter a few times and you look at the kind of pieces that will -- that add up to directionally where we're going, we feel very confident in the plan we've laid out, the guidance we've laid out. And this is what we've been working on for the past 18 to almost 24 months.
So there's been a lot of thought, a great attention in detail. We've been flying at the highest levels, and we've been into the lowest levels of detail inside the company and the organization to rebuild the brand from the bottom up. And I think this is the best work we've done. I think this is the best team we've ever had. And I think what we're about to do is going to create another leapfrog for RH just as we've done every 7 or 8 years, if you looked at our history when we've done transformations like this.
So we're highly confident. We think we have enough data and information to read. If you were in our Center of Innovation, right now, you'd be looking at all the whiteboards that I'm looking at that every category of our business laid out every month with demand this year, last year, 2 years ago, percentages, trends, book drops, collection newnesses. I mean this is built up at a very detailed level.
No one has a crystal ball. We're going to -- I tell the team as we buy inventory or do anything. And every plan we have is some degree wrong. The question is, is it more right than wrong? And is it directionally right? And have you identified the risks in the plan and the things that maybe you haven't seen as you've been building something up from an optimistic vision perspective? And we believe we've done that. We are -- we've been here with all of the key leaders, all the key team members at every level building this.
Again, for a long time, talking about how many trips to Asia, how many trips to Europe, how many -- we don't have meetings in our company. We have adventures we say because we say meetings, it's about arranging or organizing the status flow and ventures is about leading people somewhere they've never been, doing things they've ever done and in search of better ways and brighter days.
So we've been through countless adventures. We've -- I think we've -- look, all the data that's available and created new data. So I personally feel great. I think the team feels great. I think it's -- if you came here and you spoke to the people really doing the work, I think they all feel great. Our competition might not feel great over the next couple of years, but that's not really our problem.

Simeon Ari Gutman

As a follow-up, if I can ask about Europe, if -- what -- if you can share how much of Europe sales is in this guide? And I guess you'll ever get comfortable sharing the Europe forecast, I don't know every gallery may be different than there's a wide range. And then I get the 200 basis points, that's, I think, the first time, maybe we've got an explicit quantification. Does that taper quickly or slowly? And is that like the peak or call it, international investment and now that revenues build, even as you add more galleries, we don't step back from that level further.

Gary G. Friedman

It's a long question. So let me maybe take the same amount of time and process it. Look, Europe, I'd say there's few points if you kind of motor up and think about, we're in the very early process of doing -- first stand at back and say what have we done so far? Last year -- mid-June or so, we opened an extraordinary, a never seen before, multidimensional experience in the English countryside that we opened through a lens of conversation, not commerce.
And the why that we've articulated between that was we, fortunately and unfortunately, we did a package real estate deal that enabled us to get 2 irreplaceable locations in London and Paris, but also required us to take other locations we had to open sooner. As a result, these smaller markets are not benefiting as we first up, and we didn't think they would from the brand awareness (inaudible) the key markets would provide, right, and will provide.
So RH England was born out of that kind of conundrum of (inaudible) not really opening in the places we'd want to open first. And there was a big expense if we didn't do that and other lease requirements and other hurdles that would have been a little messy. So that's what drove us because we weren't going to be able to open London and Paris first, that drove us to say what can we do? What would we do? What kind of investment would we make that would introduce RH to Europe in the broader United Kingdom in an inspiring and unforgettable fashion? And why is that important?
I think it's important because just about every luxury brand in the world is from Europe and the U.K., except for a couple. You can argue that we have Ralph Lauren and Tiffany. Ralph isn't pure luxury, right? So there's a bigger broader distribution strategy there. That's a big part of that business. So if you said pure luxury, what are the pure luxury brands in the U.S. that are really top of mind internationally and have been for a long time? I'd say it's Tiffany. And the French just bought it, like a couple of years ago.
So I'd start with first and foremost, I wouldn't say Americans are described internationally as tastemakers, as architectural thought leaders and so on and so forth. You look at the beautiful historical architecture across Europe and the U.K. and then you look at the U.S. and you go, okay, if you start on the East Coast, you've got some and you start moving West and it kind of falls off a cliff pretty quickly, right?
And so as an American brand that hasn't really been doing what it's been doing for very long. And it looks like we did 15 to 20 years ago kind of little (inaudible) with [backtstrappers] -- selling [backstrappers] with moon pies. Things that (inaudible). How do you want to introduce yourself if you want to earn the respect of the tastemakers, of the placemakers, of the people that kind of not only set the standard but set the direction for consumers broadly around the world. And that's how we came up with the idea for RH England and opened in Aynhoe Park in a historic 17th Century Estate, 73 acres. That's why we invested in probably among the best architecture and design libraries that's not an institutional location, but private collection in the world. That's why we have 3 restaurants, the third one opening this spring is -- we wanted to introduce ourselves in a way that no brand has introduced it out to Europe and the United Kingdom.
Did we think we're going to do a lot of volume out there? No. Not initially. Did we think we're going to open market to the Internet? Yes, and we've learned from that. And we've learned likely from how the design trade profited from. That came to us and connected with us and interacted. And we also knew that we're opening somewhere where in the kind of winter months in the late fall and earliest the spring months, it gets dark as early as 3:30 out there. And it's really cold and not a lot of people are going out there.
I mean, they might have been going out there more during COVID because there's nowhere to go. Lastly, you want to be big city. So we did something very unusual. That's why if you go to that gallery or if you've been there, the first thing you see when you walk into the entry, it's a unicorn. And it talks about how unusual and inspiring we believe the place is. And I think we've introduced ourselves in a way that's captured people's attention and imagination.
And I think the conversation is the right conversation. And I think that conversation will build as we're open for a full spring summer, and we have all 3 restaurants open, and we'll really learn a lot more. But that's why we did that, right? Since the next galleries we've opened, have been opened in weeks -- we opened in November -- mid-November or something in the 20 weeks for the (inaudible).
Yes. Okay. So yes, so (inaudible) in places we've never been and not necessarily what I'd say like Paris and London are 2 of the most famous cities in the world. There are 2 cities anchored in fashion and style and so on and so forth. And I'd throw Milan in there, too. Hence, we also have -- we're making, I think, we're doing something extraordinary in Milan, but those all were going to take longer. And so we're not opening in the order that we wanted to open in. But it's always our intention to open in Paris and London, first in iconic locations from a brand awareness point of view.
But what we've learned so far, I'd tell you, it's like there's a higher mix of trade than we anticipated or have seen anywhere. And trade is exterior/interior designers and more of a B2B business, hospitality [contracts] kind of design. So it's a much higher mix of trade right out of the gate. And what -- should that surprise us? Not really because the consumer doesn't really know us yet. But if you're someone who's aware of the home, if you're aware of design, if you're an interior designer, if you're doing commercial projects or residential projects, you know RH. And you may have likely shopped from us in the U.S. or you've been to our key galleries.
And so what I like about that it's really the right people and the most influenced people who are out indexing today. We didn't anticipate that, we think about that. But when I do think about that, I think I'm very, very happy about that. I think it wouldn't be good if it indexed the other way because you want to get the right people, especially where -- if you think about where we're trying to take this brand.
So the right people, the people most interested in architecture, interior design and taste and style are coming to us at a higher mix. And that deals with building our book of business, which is an important part of this business. Building the pipeline of design projects both in our trade business and in our own internal interior design business. And so when we look at the book of business for RH England and we look at the trends now that we've been open, that business from a retail point of view, like a gallery point of view is going to be right about where I think we thought it'd be directionally for opening in such an unusual location and thinking about what might happen.
What surprised us the most, I'd say, is the direct web business is slower than expected. We thought that the web was going to be a much larger mix of the total since we are opening in entire country, right? And so when we stand back and reflect on that and say, okay, what did we think about? What did we miss in that analysis? I think it's just the overall time it might take to build the brand and ramp the brand to a consumer. And also the first gallery in the U.K. kind of not been by anybody.
I mean what puts this population of Aynhoe Park, 200 people?

Unidentified Company Representative

300 people.

Gary G. Friedman

300 people, right? Like we opened in a town of 300 people. And there's nothing really that closes, no. 30-minute to Oxford. So we had some major things, few other places. But it is a place that people aspire to go to spend time with, especially in the late spring, summer, early fall periods. All right. And also, we have plans once we get our feet on the ground to think about long-term doing events and other things on that property to bring the right people and we also have some partnerships happening that actually have source stuff to do different events dealing with whether it's beautiful high-end car brands or the racing and things that happen and a lot of the prestigious things that happen out in the English countryside.
So -- and then I think the other thing I'd say, I just think -- I'm just giving you kind of context of how we think of Europe right now is we didn't open with the full assortment. And I think when we go back and we're analyzing that with you, that part of the assortment that we didn't open with is probably really important to consumers in the web business. So building awareness that opens up the Internet and the web business to get that -- to move more quickly is going to be important.
But I think a lot of it is going to take opening the key iconic galleries in London and Paris and Milan and so on and so forth. These big wins with restaurants and champagne and caviar bars and wine bars and [barista] bars and architectural and design libraries and all the really incredible experiential things that people are going to discover the brand and say, "what is this?" But right now, the only one with those experiences is in a very unpopulated part of England, and it's going to take longer to be discovered.
But when people discover it, it is the right people and it is the right conversation. So we're super happy about that. But I'd say we're -- so still early, right? Like you got to let the book of business build, we've got to kind of get our feet on the ground in massively optimistic long term, and I'm massively optimistic because I think there's no one like us in the market. I think we've got to open these big galleries. That's what's going to build the brand. We've got to open in the big key cities that define fashion and taste and style and be in that conversation.
And I like that the trade business is over-indexing because those are the right people. They are the influential ones. But it's going to think a while. We're just out of the gate, and we're not out of the gate with -- in the order that we would have liked to. But nonetheless, we're out of the gate and we're learning. That's the important thing. So -- and all of these things are going to benefit from the product transformation that we're going through and all the things we're doing that we have in the pipeline.
And look, I only listed out what we're doing in '24, like what we're doing beyond that and what we have come for '25 and there's some things I didn't even -- I can't even put in the big [mind] view but I don't want to be too specific and give any information to the broader industry competitive set.
So -- but like next year, I think we're going to launch something that really big. And it's like going back and forth. I put it in this letter or not. But we've got enough in this letter. When I look back at this letter, I go like, okay, it's kind of ridiculous. That's just rather exciting. We don't need to tell everybody with for the pipeline. But we're feeling really, really great about where the brand is, where it's going. And I think Europe is going to take a while, like building great brands and you've got to be very, very strategic, you've got to be very smart, you've got to be patient. You don't go rushing and build one of the great brands in the world rushing to the finish line.
It's like, we say fast, this is as slow as we go, but we also say we have to do less and think more, so we can do more. So I spent a lot of time thinking, deepen the data, really analyze things right to the next thing, to the next thing, to the next thing. And -- but I really like where we are. I like where we're going, I like everything that's unfolding. And I especially like how we're positioned or the other side of this kind of difficult housing market, right?
There were some sales in 30 years, that's a long time. And how we're positioned for that rebound, I think, is better than anyone on multiple levels, too. Like when I look at the whole assortment, whether I'm looking kind at the level we're at, if I try to look at people above us and I look at people below us, I just think we're going to be holistically disruptive across a pretty big size of the market we're trying to hit. It's like I think we've opened up the aperture a bit without compromising the most important tenets of what we're trying to build. So long run answer. Hopefully, it gave you few data points that were important.

Operator

Our next question comes from the line of Steven Forbes with Guggenheim Securities.

Steven Paul Forbes

Gary, given the spread between the first quarter demand guidance in the whole year, I was just curious if you can maybe help us better think about how the business is rescaling or ramping on the back of the recent store resets? And then how should we think about the cadence of resets on a go-forward basis married together with the cadence of sourcebook mailing that you talked about in the letter?

Gary G. Friedman

The spread between Q1 and full year, I mean it's just the building, again, everything -- if you just read the letter carefully and -- I mean those are all meaningful things we're doing, right? Those are all meaningful books that were unveiling, that were completely remerchandised and you have a lot of a lot of revenue. And if you just look at the contacts that we're making year-over-year, I don't know what if every company doubled their customer contacts in circulation, I don't know what might happen. It's going to be meaningful.
We don't introduce new products and get zero. We don't introduce -- we don't mail sourcebooks and get 0. And we just, I think, post-COVID because we tipped a little over a year off because we're trying to catch up on backlogs, we lost our muscle in an atrophy and we tried to get restart what I call the engine here or the machine and the machine stuttered a bit. And it took us a while to get back into our group and with new products and sourcebooks and just all the things you've got to do.
And it's probably one of the bigger mistakes I've made in my career. And -- but now we've rebuilt the machines, we've better muscles than we had before. We're way more intelligent. We went to a much deeper level, and the quality of the work is just the best work we've ever done. And so -- and we've got enough internal data, right? When you see your business and how you're rebuilding it from down mid-teens to where we are and you look at the mix of business and the categories and kind of out of the gate, you look at what outdoor is doing. I mean, outdoors, it's exceptional right now.
And it's -- I think that the design and quality and value equation is so unmatched in the industry that we're going to take tremendous market share. And it's just setting up what we're going to do with outdoor in '25, '26, '27 because when you see what we're going to do from a physical perspective with that business and how we're exploited, I think we're going to own it. And so like there's real numbers here in outdoor. Outdoor is a meaningful part of our business. And the work and learnings that we did in outdoor that's also applied to every kind of category, you can just trace it all and see how it's going to come together.
And we have enough data and numbers from RH Interiors and the new collections and RH Contemporary. With new collections and the adjustments we've made, the adjustments we've made to exceed the value equation perspective. And as we -- and I think we went back to just having more edge, like the edge that it took to build this brand and business, I think, it is returned. And like I think I said a few calls before, I don't know, it's widely quoted. I'm going to be careful what things are saying -- I think I said we were arrogant about pricing because of all through the period of tariffs and supply chain disruptions, elevated raw material price, prices escalating that forced price increases and it has drove inflation.
I think -- yes, I don't think we had our value edge and hats on as we kept client in the luxury brand. And I think integrate luxury brand, it doesn't mean that price is a matter, like everything has to have a value equation. Everything has to go through a lens of design, quality, value in that order. If somebody doesn't love the design, they don't even look at the quality nor the price.
But if you have -- you win a design, then you're through kind of door #1. And then you've got to win on quality because then the customer will get closer to it, now read about it, touch it and interact with it and they'll make their own perceptions about quality. And you can influence that with what you say and how you communicate. But at the end of the day, the consumer is going to make the decision about how great is that design, how great is that quality, and for that design and that quality, what is the value? Like how do I think about the price that you're asking for that? And is that a lousy value? Is that a decent value? Is that a good value? Or is that a great value?
And I think we are highly focused on having a great value, a disruptive value with clear comparisons of anything that might resemble or be like and as we set in the market. And so we're laser focused. We're into the greatest amount of detail. And I think that the design, quality, value and that's -- if you took that lens against outdoor, which you guys have visibility to, if you really takes the time to go through that book and go through the collections and look at the quality of the -- I guess the extraordinary design and extraordinary presentation of that design.
And then you do some work on the quality, whether it's materials it's made of, how it's made, where it's from, all the different things. And then put it through value lens like try to find any product similar, find the most similar products from other places, put them up all in a wall and compare it to ours. Then you might understand why I'm saying outdoor is exceptional, out of the gate. Because it's -- it wins door #1, we win. Door #2, we win. Door #3, we really win.
And yes -- And because of our size of our platform and our scale and because at the most senior levels of this company, we're in the factories, we're with our partners, we're helping to conceptualize and put the same creativity to how we source and how we buy and how we -- the scale we have in negotiating the price. And it's not really a negotiation, where one person wins and one person losses, it's how to you get all the brains in the game and think about it and figure out how everybody wins.
And that's how we're able to, I think, to have extraordinary value. It's like you can't delegate greatness. And so all of us here at the most senior levels are leading the work. We're learning together -- we're listening together, we're learning together and we're leading based on that. And I think the work that's having is, I think, the best work in the history of my career, and I've been in this industry a long time, and I think it's the best work in the industry. And I think it's going to be disruptive, and it's going to create strategic separation and it's going to -- I think we're going to gain a lot of market share.
So I don't know how to give you a more specific thing, but it's like that's what we're doing. And so if you want to build the ramp, like, look, you could take where Q1 is going to be and you know what that demand looks like and you can take like where we think we're going to end the year, you can build your own little graph. I gave you guys (inaudible) but everybody gets too myopically focused on that, like it's just got to be directionally right. Like if we have it a little wrong, like why that? Exactly right.
Well, it's not going to be exactly right when you're building something and transforming something. You've just got to be directionally right. And we believe we're directionally right. We believe we're going to deliver these numbers or more, and we're very confident about that.

Jack M. Preston

And Steve, you asked about the piece of that. That's -- as Gary has talked about, that's one piece of the puzzle, right? You have the new product from the evolution of the product, you have better availability of that product, you have sources of contacts, again, all things Gary have said and forceps another -- one of these factors that drive the business and we (inaudible).

Gary G. Friedman

(inaudible) so and so forth, Yes.

Jack M. Preston

We've been doing forceps that continuing and we have a one particular collection that we talked about in the last call that's still coming in and will be in all galleries in the second quarter.

Gary G. Friedman

And throughout the year, we'll be reading like the floors will continue to evolve, the galleries will continue to evolve all year, right? And so there's a lot of newness coming in, there's going to be several cycles and adjustments that we'll make. So there's just -- we're going to have a lot of choices and a lot of optionality. That's what else I like. It's just like when I look at the bigger picture and I stand back and go, whether it's sourcebooks or advertising or contacts or forceps or in-stocks or placing bets here, reacting to this, dimensionalizing different parts of the business, I mean, we just have a lot of things in play and a lot of opportunities, and you can mathematically take all the pieces and build it up.
And we're not -- look, we're not new at this. We've done this for a long time. And I think I'd say put it in context is, how are you thinking about the guidance in the context of the market? We're guiding with looking at through a lens of market neutral. The housing market doesn't get meaningfully worse or meaningfully better, right? So we're seeing neutral market. Yes, there will be interest rate cuts, we're probably going to be quarter point cuts that are going to come later in the second half of the year. A quarter point cut isn't going to massively move mortgage rates.
If you look at the delta between where people are locked in on mortgages and where they'd have to step up to, you really need two things happening. You need home prices to come down and you need interest rates come down. And that gap, I think, is going to take longer than three quarter point interest rate cut. But hopefully, those happen, and you put some more interest rate cuts on the other side, again, in '25 and people can't hang on as long from a pricing point of view and some of that giant inflation that build the housing market, which really one of the biggest impacts to the markets how prices in America went up 42%, 2 years, the 2 years of COVID.
And then they've been stubbornly high because there's been no inventory. There has been no inventory, people had record low interest rates and they have to trade up to higher interest rates. So the data is like it's all super logical. Why were they freeze and where we are. The key is what really happens has to happen for the thaw and for everything to get moving again and interest rates and housing prices. And it's a combination -- we believe it's a combination of both. Unless interest rates go down really quickly, mortgage rates get readjusted, you get a big move down there, then maybe housing prices hold up.
My sense is that you've got a lot of people just holding out as long as they can. A lot of people have to move, they've got a new job somewhere. It's going to be -- and some people they've grown their families, they have more children, they've gotten married, they need to buy a house. And so there's pent-up demand. And I think that's a good thing when you look at it.
In fact, if I still think -- you got to have movement, we got to have real movement in the interest rate market. And we have to have some movement in the pricing market. And when those things start to converge, I think we're going to see a snapback. And I think no one is going to be better positioned for that snap back than us. Like we're going to be in the absolute best position. So that's what we're super excited about. Like right now, like we're looking at market neutral, not going to get meaningfully worse, not going to get meaningfully better.
If it gets a little better, do we feel better about the guidance? Of course, we do. Of course, we do. We're going to feel a lot better. So -- but I just think in all ways we look at it, it's all some form of good to great. And less time unfold, and we'll keep doing what we're doing and playing our game.

Operator

Next question comes from the line of Curtis Nagle with Bank of America.

Curtis Smyser Nagle

Gary, maybe I'll just start with what it was kind of a small piece of business right now, but it sounds like it's getting a bit bigger over time. Waterworks, I think it's the first time you've called out a long-term outlook at $1 billion. So implying it would effectively quintuple. I guess just at this point, you've had it, I think, since 2016, what give you, I guess, the confidence to put out a pretty bold, pretty impressive target? And I guess kind of why now? What's driving the excitement, maybe ask more simply?

Gary G. Friedman

Sure. Sure. Good question. Yes, we said back -- well, I don't know if we said this publicly, but we said internally that Waterworks was 1 of 2 businesses I had on a strategic framework math when I came here 24 years ago. I think when I walked in the door. I said, okay, here's the long-term vision, here's where we're going, and I had 2 acquisitions, Waterworks and Dean & DeLuca. I thought Waterworks was the best brand in the high-end bath and kitchen -- mostly bath packs and now kitchen too. And I thought Dean & DeLuca had a really interesting brand with more of a food focus, some hard business, but it wasn't merchandised well to make money. And I knew enough about the model that I thought like we could create a really cool next-generation kind of Williams-Sonoma with a different kind of sensibility, aesthetically and pace of style and maybe integrate a little bit of fresh food focus, all that that's so much -- that's the reason why Dean & DeLuca never get sale and make money, too focused on fresh food, they didn't have the hard goods part.
And so Dean & DeLuca didn't make it. I got passed around a couple of times. So we looked at buying it multiple times. We have almost got it. And Waterworks came along, it was the right brand at the wrong time, but it might not come available again. So if you think about when we bought it, we're middle of membership, supply chain transformation, all kinds of things.
They just launched Modern, and we said, look, we may not have another chance to partner with a brand like this. We thought it was a great strategic fit. So we did that. And -- but the business was always relatively small, right? I think we bought it at just north of $100 million. And you had to think about -- when you have to learn that part of the business, we had to kind of build the relationships with the team. We had strategically aligned and without using a lot of time because it's the wrong time. So we spent very little time in the first few years.
And how do you kind of build the business model and the assortment logic to support the business model and a lot of things. And so we -- through the years, we've spent a little bit of time and got aligned and the team has done an outstanding job. I think almost doubling the business, more than doubling the EBITDA. And now it's, I think, a business that's positioned to grow. And I think we have a platform that is a perfect platform to scale the business on.
Direct-to-customer component, we have a consumer part of the business that -- even though they have 14 showrooms, they're not in places that consumers really shop. And we have experience taking mostly trade-focused businesses and brands over our years and putting those brands on our platform, putting their assortments on our platform and doing multiple times the business, right, just because it's now the best products in front of the consumer. But most of these products, not in front of the consumer. Consumers don't really go into Waterworks showrooms. I mean stumble in, but they're in design districts to the trade, they're set up for business-to-business and not really set up for consumer, even though they have a showroom no different than any of the furniture brands like that, so on and so forth.
And then they have some distribution and third-party distributions. They're in there with other brands and where they don't have total control of the brand. But I think when you look at the platform we're building and the stage we're building for the best products in the most important categories, this is a perfect fit. I mean, it couldn't be more aligned. And it's also really hard business. I mean we've been in the business. We sell water delivery, faucet (inaudible) we sell about hardware and stuff like that, but we're not experts. I mean they have what, 45 years more than that experienced family business.
They have Peter Sallick, I think is CEO and leader there in their most of life. And it's (inaudible) of the business. And Ralph Bennett has been CEO for, I don't know, 15 years like -- the leadership team there, it's really smart, has a great view and graph for their high-end market that weren't (inaudible) from and learning from. And we think we're pretty smart, and we have a great view of the consumer market, but what we're trying to do is merge both of those markets. And we think that's where we think long term, the world is only going to be more transparent. And (inaudible) but best products, not facing the consumer in these categories.
And that's what RH has been trying to do for our entire journey since I've been here, has slow going in the beginning. We were on the edge of bankruptcy for almost my first 10 years. And so we made through that. And now we're doing what we've always wanted to do, and we're getting smarter and better and Waterworks is just great synergies. And no different than -- you'll hear us talk at some point later about (inaudible) and picture upholstery brand we bought and Joseph Jeup, Bespoke furniture brand and just having these people and the talent inside our organization, learning from them, then leading us to higher quality, better taste how to think about the trade market. There's just so much synergies.
It's like -- a lot of times you take 1 plus 1, you get less than 1, right? Every time there's another thing or another person involved, there's more complexity in -- Einstein said the only way to battle complexity is through simplicity. But once in a while, you've got 1 plus 1 equals more than 2, right? And I think we've found that with Waterworks, we found that with Dmitriy, we found out with Joseph Jeup. And other things that we're doing sometimes maybe not it's not necessarily an acquisition, but it's a deep partnership and relationship.
And I think that's where we're really good at. In Waterworks, again, I mean, it's really funny. It pull out the power from 24 years ago, there's Waterworks in this little grid. It looked so amateur when I looked at it back (inaudible) but it's always been in our radar, and we think it's just a great fit. And RH with restoration hardware, it had hardware. It had bath. I mean it didn't have faucets and fittings when I came here. I added bath, but it had towel bars and hooks and a few things like that.
And then when I added faucets and fittings, the model was looking at Waterworks is the best. So always, obviously, inspired by them. But we were never going to be Waterworks, right? So much better to just partner with and integrate with Waterworks. I think it's going to be unbelievable. I really do. And I think it's going to bring the other thing -- the other benefits is it's going to bring the highest quality trade customers to RH that may be not a frequent in us yet. And you get into the business at an earlier point in the design stage. We sometimes get interactive with the consumer at a much later stage. The home is done, they're ready to furnish it, so on and so forth.
Interactive with Waterworks consumer here at the front end, you're at the architectural point. You're at the plumbing point and all this other stuff. So the opportunity to get access to that customer, integrate that customer, be building the design holistically all the categories that we're in and the categories that will continue to expand into and become more dominant, I think it's -- I mean it's really like if you can ever say there's match made in heaven, I think it's a match made in heaven like it's was supposed to be. So we're really excited. I think they're really excited, and I think it's going to be big.

Curtis Smyser Nagle

Got it. And then just another quick one, Gary. Just in terms of the mid outlook, I think on the last call, you said something the effect of -- you had expected a peak reflection -- peak demand or something like you had in 2Q or spring? Any changes there? Obviously, the outlook is strong for the year, but...

Gary G. Friedman

I think there's going to peaking because we've done more work since then. Like there's more things, we can see more things. So yes, I think like Phase 1, so what I think about that like kind of phases. There's multiple phases of this transformation, right, as we -- that will be unveiling. But kind of Phase I will kind of hit peak, I think, in late Q2. But then there's a whole Phase 2 now that we've got coming that will be unfolding, right? And we've -- I think we've got a Phase 3, which is coming. There's a lot of excitement, a lot of great work that's being done.
And the data around here is how do you sequence it? How should it all unfold over what period of time? And so I'd say -- that's peak inflection on like Phase 1, RH Interiors, RH Contemporary and Outdoor and Modern, right? Like Modern would be coming in, that's like next of the big books. And I think it looks incredible. I am glad we actually delayed it a bit, took a little bit more time because it took a leapfrog. I mean it's steady. And I think it's so fresh and cool and people just see the images, and it's all laid out.
And it feels like, wow, okay, it's not a walk on by. I guarantee you. It's not an Aretha Franklin Walk On By. But it's -- so that's -- I mean, that's going to create a big kind of move in Q2. And in Outdoor, it's going to be hitting peak March, April, May June, and you've got the learnings and interiors and that's cycling through. And then we've got in-stocks that are going to get meaningfully better. Back order rates are going to go down, which means demand goes up. When back order rates go down, there's all kinds of metrics here that you can just add them up and it tells you what to do and all the adjustments from like -- so yes, I think at Phase 1, you'll kind of get kind of peak inflection, might peak a little later at that, but you're going to kind of know like the arrow, like when I talk about inflection, it doesn't mean that the outcome, right, like the curve, the line will be pointed in that peak direction.
How high it will go? That might take to Q3 or Q4, like the inflection point will angle up, right? And we'll see that in Q2. So that hasn't changed. Maybe it has changed a little because we pushed Modern house a little, but you still -- Modern is going to get in there in Q2. You'll get enough of a read, you'll see where that's going.
And then you got like just Phase 2 and Phase 3 and things that are coming through the pipeline. And I think it just all keeps building. So yes -- so we're directionally correct Tried to give you a little bit more color there. Hopefully, it's helpful.

Curtis Smyser Nagle

Yes, very helpful.

Operator

Next question comes from the line of Christopher Horvers with JPMorgan.

Christopher Michael Horvers

So I'm just going to put my two questions out there. So my first question is the $40 million that was deferred of January, that why wouldn't it come back much sooner if it was a lot of domestic and we're hearing from other retailers that the Red Seas (inaudible) weeks of delivery?
And then my second question is, if you look at non-occupancy gross margin pressure, it looks like it got a little bit worse. I guess how far -- is that all clearance? And how long before we get through all of the clearance and do you expect to recapture all that pressure?

Gary G. Friedman

Yes. I mean -- well, look -- for when we're -- you've got to think about like -- there's a lot of people in the home furnishings or home goods, and you have to say like, okay, what's their furniture content and what's their special order content. And when you think about those goods -- and then what's kind of Asia and coming around the pipeline. So now that's coming around Africa and not through the Red Sea and the canal.
So we probably have the highest content, right? We have a significantly bigger outdoor business, I think, than anyone. I don't think anyone holds a candle to us in that category. And so that's all had travel and take a couple of extra weeks. And so that's a meaningful number. Our special order business or any of our other businesses, all our newness, all our things attached to back orders, right, that got delayed. So you've got that delay. And then you're delaying kind of everything looking out, like when does shipping lanes reopen? That's the question. How long is this 2-week delay? You're not going to catch up with it until the shipping lanes opened or like it's just kind of permanently deferred for 2 weeks if that makes sense.
And then there's the piece with the weather and the ice storms that hit, yes, that piece comes back now and is coming back. So you generally have a delay with that. But it's not like it comes back tomorrow design price up to design projects, it's special orders that they're doing is outdoor furniture that they were going to buy. If they bought anything that has the 2-week delay, that's delayed more so. Yes, it will all cycle back. It's just what's the timing.
Like if you're selling things that are cash and carry, got it, yes. Like if you look at the product mix of people that had Christmas product or actually all the Christmas stuff that was on sale in December and January, it not like of course, all that stuff comes back, like yes, no problem. If you're selling any home furnishings categories and if you're selling tabletop, food-related products, accessories, cookware, name all the categories that are cash to home, there's all cash and carry kind of businesses or just domestically shift from a DC. We've got a very different product mix and model than anyone else. We probably have the highest furniture content of anybody that you might compare us with.

Jack M. Preston

And Chris, on that gross margin side, there was -- it continue to impact on the product margin.

Operator

Next question comes from the line of Max Rakhlenko with TD Cowen.

Maksim Rakhlenko

Gary, Jack, congratulations on strong demand that you're seeing as well as the recent openings. I was curious, given all the new galleries that are coming online in the U.S., can you provide an update to the new gallery economics as you convert a legacy gallery to a design gallery? You provided color in the past, but just curious how that has evolved over time.

Gary G. Friedman

(technical difficulty) So yes, it has been a while, as I think about it. So that's good. Let's pull that together in the right way to make sure we distribute it in the right way, so everybody's got the same data.

Maksim Rakhlenko

Got it. Sorry, could you repeat that? It went blank for a little bit.

Gary G. Friedman

Okay. I'd say it's a good question. It has been a while. As you said, there's been a lot of things that have changed. We have restaurants and galleries now, hospitality aspects. It depends where they are in the cycle, how many square feet you're expanding into. There's a lot of things to consider when you look at these. And so I think what we ought to do is update that data set and create a framework and let us distribute that next quarter in a fashion that everybody has the same information at the same time, and it's all accurate.
(technical difficulty)
Can you hear us? We might be having audio issues. Max, can you hear us?

Maksim Rakhlenko

Yes. Okay, great. And then my follow-up question is, can you speak to how you're balancing the sharp price points with maintaining elevated product margins? And then just how much are your vendors stepping up and then the opportunity to expand product margins over time from the current level?

Jack M. Preston

One second. Repeat the question because we are just recognizing that the line was -- sounded like it had gone dead for a bit. So repeat the question for both me and Gary, please.

Maksim Rakhlenko

Okay. Yes, no problem. Just can you speak to how you're balancing the sharp price points with maintaining elevated product margins how much are your vendors stepping up just directionally? And then the opportunity to expand product margins over time from the current levels?

Gary G. Friedman

Yes. Again, I wouldn't -- we're not a price -- kind of focused, price first business, right? I think I spent a lot of time earlier in the call talking about design, quality and value in that order. And we think about those things -- from those 3 dimensions always, and we try to look at the bigger picture and say what's going to be a compelling value. And we don't have vendors, we have partners, right? So that's why my letter is addressed to our people, our partners and our shareholders.
And -- and so we try to work with people as partners and it's not necessarily so much as are they stepping up? It's more -- are we together thinking about how to win the market, right? Like if you -- if it's one person that wins and one person that lose is that's kind of partnership and that never works long term. So we try to take a real strategic view with our partners. We spend a lot of time with them. We talk directly about how we're thinking. We try to understand their business deeply and where their leverage is and opportunities are. And we try to stand back and say, "Hey, look, we're -- you're manufacturers without stores and we're shopkeepers without factories. So how do we partner and how do we win?"
So -- but we have no intention in taking margins down. Margins have to be looked at holistically not just at the product level. And I think that's probably what your point is. We're going through a massive transformation, rearchitecting the assortments and positioning things. And I think as you think -- see things unfold here, we believe if you're thinking about operating margins and so on and so forth, that operating margins over the next few years can return to the 20% range and that our model is it'd be a great model.
But from a timing point of view, we're going through a product transformation, and we're building an international business from scratch. And so there's investments and there's going to be margin pressure. And based on investments, we're making on both of those pieces. And that will create some different periods of higher or lower margins or not. But I wouldn't say there's anything different strategically at all, I think how we've built the company and keep on that path. But it's not about like, hey, getting the next nickel out of a vendor.
I mean maybe people that have vendors do that. To us, it's about the next idea. Let's get the next big idea, whether that's product idea, positioning idea, market idea. And if you can get all the brains in the game and then ego goes out of the room, if you truly believe that none of us are smarter than all of us, you're going to work in a partnership and 1 plus 1 is going to equal a lot more than 2 if you do it that way. And that's how we work with every -- we just try to share all the best information and perspective, and we try to listen to them and we try to really think about how do we win in the market. That's it. And so I would say, hey, long term, do we think that these lower margins that are aged? Not at all.

Operator

Our next question comes from the line of Seth Basham with Wedbush Securities.

Seth Mckain Basham

My question is just thinking about your comment earlier about opening your aperture a bit more without compromising what you're trying to build. Can you elaborate on this, Gary? Are you trying to win back customers that you "fired" during the pandemic? And are you getting lower in terms of the customer income demographics that you're targeting?

Gary G. Friedman

Yes. We've never fired customers. So I don't know, maybe this is your words, not our. Nothing I've ever said. I said, look, you're going to -- like if you think about where we started and the journey we've been on for 24 years, yes, as we shed customers and transitioned to other customers, yes. Of course, like best selling sofa in this company is to be a $999 Chanel Green Sofa. We don't have $999 Channel Green Sofas. So not even if you task inflation to it, maybe $2,000 Chanel Green Sofa. We don't have those. We don't have a lot of things that we used to sell.
So of course, when you're building something -- when you're trying to become something that you never were, and you're going to evolve and acquire new customers. And the customers might come with you and some might not. But there's no intentional firing, but there is an awareness that as we're heading in certain directions with certain categories, things will evolve the change. Through that journey, we're always going to get data and we're going to learn, and we're going to adjust and it provides an adapt and always, always in a state of change, right?
We're in an evolutionary world. I said the world is evolving and you're either evolving faster than the world and gaining -- acquiring knowledge and capabilities and market share how do you want to think about it, or you're evolving slower and getting behind. And so I would just say, I think (technical difficulty)

Seth Mckain Basham

Are you still there, Gary?

Gary G. Friedman

(inaudible) Okay. Can somebody call separately the conference call, operator? Seth, can you hear us now?

Seth Mckain Basham

I can hear you now, yes. I think I got most of your answer. I appreciate that. And just a follow-up question. Along the same lines, you're sharpening your value edge, as you've referenced. To ask the question differently than it's been asked before, I assume you're not taking quality out to lower price? And if not, why should merchandise margins, excluding freight, be the same or better on new product NAV versus the product you were selling in '22?

Gary G. Friedman

Sorry, I don't know if I get that. Seth, give me that question again towards the end that why would -- or what would the product margins be or something -- say it again.

Seth Mckain Basham

Yes, if you're not taking quality out to be more sharp on price as you're sharpening your value edge, as you call it, why should the merchandise margins, excluding freight, be the same or better on a new product relative to what you're selling and earning in 2022?

Gary G. Friedman

Sure. Well, it's about how you buy it and the commitments you make and the long-term view you take and working in a partnership, but with your manufacturers and figuring things out together. But -- yes. So it's -- yes. It's just when you do that well, you can have a better (inaudible). When you have a platform as large as ours, you have the scale and you control the platform, you can be really disruptive. So yes, it's -- we didn't just take pricing down on things we have, right? It's -- you think about it as all the new product that's coming in, value equation that's coming in. And there's no intention to ever take quality out, not at all. Not at all, ever. So yes, that's not part of our strategy. That's nowhere in that one pager, right, in the long view.
And I think you've ever heard us talk about that at all in my 24 years here. It's about taking -- elevating the design, quality and value of the product that's all we focus on. So -- but it takes, yes (inaudible) in creativity and partnerships and being smart about what you're investing in and what you're leveraging and what you're buying and that's how we got here. So I think my prior comments were through a period of multiple cost increases because of trying to tariffs, and we had a pretty big content back then coming out of China, much smaller now.
And those price increases that we needed to take and then that price increases we need to take through the COVID period. And through the COVID period for a 2-year period, the -- I mean, everybody had leverage, right? Like meaning that there's only so much products. When you have more demand than you have supply, prices can go up and margins can go up. But when you have lower demand and supply, if you want to move your inventory, prices are going to come down. It's no different. And it's no different than during this period, right?
It's down housing market. And so -- and we're the same thing we're doing with investments. So you're looking at gross margin, well, inside of the gross margin, there's a lot of investments that not -- aren't necessarily just product, right? And so -- but -- yes, there's no intention here to be crystal clear about taking quality down to take price down. Never been uttered in our company and get the opposite. Yes, so that's what people are thinking that they're just dead wrong. There's no value engineering. Okay.

Operator

Our next question comes from the line of Jonathan Matuszewski with Jefferies.

Jonathan Richard Matuszewski

First one was on gross margin for 2024. Imagine you may have some elevated clearance lingering early this year, but then you should have some good margins with all this newness that you mentioned. So how does that all net out for the year? And does the year-over-year trend in gross margin sequentially improve each quarter as product launches build upon each other?

Gary G. Friedman

Yes, we're not guiding gross margins quarter-by-quarter. But you can...

Jack M. Preston

And we're not guiding, we don't and we don't no longer guide gross margin on the year. So we'll talk about it as result. But the guidance is through (inaudible)

Gary G. Friedman

Yes, it's all implied in the operating margin and EBITDA guidance.

Jonathan Richard Matuszewski

Got it. And then, Gary, you recently hired a new Chief Real Estate Officer. How should we think about changes to the real estate approach going forward with Jarrett on board? And should we expect any changes to other development-related aspects in the company, like food and beverage or anything like that?

Gary G. Friedman

Jarrett, how long you been here now?

Jarrett Stuhl

Eight weeks.

Gary G. Friedman

Yes. Jarrett has been here 8 weeks. And so he's a very bright guy, a very creative guy, strong point of view, learning the business, and we're excited happy to hear him. And I think when we all give a little bit of time to really assess the situation and the opportunities and at some point, you likely meet him. And he can kind of share his thoughts. But I think it's going to be a big step up for us. Like I think he's going to prove to be the best leader we've ever had in this part of the business on multiple levels. So we're very excited about and being on the team, and that's about it for now.

Operator

Next question comes from the line of Michael Lasser with UBS.

Michael Lasser

A cursory view of the communication that RH had during the fourth quarter would suggest that it was more aggressive cleaning out inventory, messaging on price. And then it was also evident from the gross margin compression that was experienced during the quarter. And yet, if we adjust the sales growth in the fourth quarter for a like number of weeks, your sales growth trailed behind some of the peers in the space.
So, a, how much do you think you saw from -- in terms of sales from some of the pricing actions that you took in the fourth quarter? And b, why do you think you might be losing share to some of your key competitors in the sector?

Gary G. Friedman

I don't know if I get the question what -- one second, Michael, we're trying to kind of break down your question. I mean...

Jack M. Preston

His first part is that we underperformed peers in the fourth quarter with being down 11% on a 52-week basis. So...

Gary G. Friedman

Yes, that I know. It's like is there a specific people you're talking about? There's a lot of -- I don't know who you're calling peered, who you're not. If you look at people that (inaudible) furniture business, I think we've performed positively in line, some better, maybe some were a little better, some were a little worse. But when you say we broadly outperformed peers, I don't know, but I'd say, like I don't think there's anything different that happened in the fourth quarter than what we expected, except for the major storms that I think impacted everybody. And again, it will impact furniture people who have longer lead times and deliveries more. And the people that are more exposed to sourcing and specifically, if you think about the size of our outdoor business and the amount of that comes out of Indonesia, which is the capital (inaudible) affected us. So I'm not -- do you want to be more specific or like -- I'm not sure where you're going.

Michael Lasser

If we look at some of the competitors out there, they were down 6% to 7% in the fourth quarter versus down 11% for RH and that's even with a more aggressive path on clearing out inventory. But...

Gary G. Friedman

What's their product mix? Are you talking about people that sell tabletop and cookware and seasonal businesses and Christmas ornaments and all kinds of things that we don't sell. Yes, those are going to get hit less in a housing market downturn than furniture, okay? If you want to talk about furniture-related people -- comparison furniture-related people. But don't compare us to Home Depot, don't compare us to Pottery Barn, don't compare us to Williams-Sonoma. You're talking about apples and oranges.

Jack M. Preston

And compares people with the same fiscal year-end or quarter -- fiscal quarter end.

Gary G. Friedman

Yes, fiscal year-end, yes. If you don't...

Jack M. Preston

We don't end in January. It's not even (inaudible)

Gary G. Friedman

Yes. They didn't end in January, they didn't get hit by the Canal and then didn't get hit by the ice storms. That's why I said you want to be more specific like I'll try to answer your question, but a broad sense like that, like not as relevant.

Michael Lasser

Okay. My follow-up question is, if we add back some of the margin drags that you highlighted this year, you would put to have a 16% operating margin in 2025. Is that the right way to think about the basis for how we should be modeling over the next few years? Or would you expect the investment cycle that is going to happen this year is going to persist for multiple years, which will pressure profitability for an extended period of time?

Gary G. Friedman

Yes. We're not guiding to 2025. We're guiding to 2024, and we're giving you all the data as it relates to that. Like I think I just said a couple of questions ago that we feel very good about getting back to 20% operating margins over the next several years. So we're still in a challenging market with the housing market is at record lows. So I don't think anybody is guiding '25 yet. Are they?

Jack M. Preston

No.

Gary G. Friedman

Yes, I think no.

Michael Lasser

I guess I was more so asking about the persistence of the investment cycle and how long that might impact your profitability rather than looking for specific guidance for (inaudible).

Gary G. Friedman

Is anybody guiding on that in '25 yet because that would be guidance, right?

Michael Lasser

Yes.

Gary G. Friedman

I mean -- yes, so we're not guiding to '25 yet. We never have, but we have a long-term view. We know that we can return to 20% in operating margins. And yes, we have some investment cycles that we'll have to roll through. And we'd say all the people (inaudible) they're trying to build a model that's beyond where our guidance is. You're going to have to connect the dots and come up with your own assumptions. I can't do your work. I mean, I'm not asking you to do my work, don't ask me to do your work.

Operator

Next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

Bradley Bingham Thomas

Just in light of you wanted to focus a little bit more on the demand trends this year, given some of the timing nuances, I was wondering if you could just share a little bit more with us about perhaps how demand has trended quarter-to-date? You did reference this exceptional reaction to the outdoor catalog. Curious what you've been seeing of late? And maybe just as we think about the comparisons you're up against from a demand standpoint, are there any quarters that you'd call out or something had been unusual and not aligned with the sales?

Gary G. Friedman

Look, we're pretty close to -- pretty far down the first quarter, right? So you can probably come up with some kind of a demand -- we gave the first quarter demand, yes. So...

Jack M. Preston

Mid-single digits, so...

Gary G. Friedman

Yes, mid-single digits is where we think demand is going to be in Q1.

Jack M. Preston

We're not providing any quarterly guidance or monthly breakdown anything with that.

Gary G. Friedman

Yes. I would say our demand trends are building, and they're going to build through the whole year. So that we expect -- let me give you a couple of more bread crumbs. The outdoor business is off to an extraordinary start. And its biggest part of the year is coming up, right? So we have a lot of confidence as we look at the next quarter or 2. We have a lot of confidence in the whole year, but we have a lot of visibility if you think about that, right?
Like the outdoor business, you can -- again, just think about when people are buying outdoor furniture, they're buying a lot less in February. And they're buying a lot more in March and they're buying even more in April. So you should -- if that business is off to a great start, that's really easy to connect those dots and forecast as we've -- there's good been out there now for several weeks, and we've got real, real data.

Bradley Bingham Thomas

That's great. I appreciate the bread crumbs. And if I could add a follow-up on supply chain and sourcing. I guess, for one, are you contemplating any sort of disruptions relative to the closure of the Baltimore port right now? And then can you talk about kind of your confidence in your sourcing partners, your suppliers ramping up with all these new products that you can have this year?
And I presume that's partly why you're assuming you end the year with a greater degree of backlog, but just any more color on your kind of confidence in executing with all those new products would be great.

Gary G. Friedman

Yes. The -- look, the unfortunate devastating accident that happened in Baltimore is super recent. We obviously have a big facility center in Maryland. Fernando is here right in the room right now, and he's shaking his head, but we don't think there's any major disruptions.

Jack M. Preston

And let me maybe discuss -- it's Jack. But on an inbound perspective, some of our -- much of our goods are actually offloaded in New York. We do the cost-benefit analysis of getting the product out earlier in New York before the boat then comes down to Baltimore. For example, the boat that was in the accident had 4 containers on it, but that we unloaded in New York as per our practice. So we don't have any containers stuck on that particular boat and other boats are getting to rerouted. So minimal impact from that disruption.

Gary G. Friedman

Yes. And I think your second part of the question is what confidence we have in our partners ramping with our new product. We have great companies, but it's with new products ramping -- so you're never going to forecast the new product exactly right. I never told it before it's going to be some degree on something you're going to be more right and something is going to be more wrong. And the things that you're more right on and overperform your expectations, there's going to be a period that's going to take for our partners to scale that product and respond to the trends and on and so forth.
So -- but so far, so good. I mean we've had in very minimal issues like it's more has to do with, I think, the biggest issues are just being able to forecast the newness. And so -- but once we start getting the data, then we're improvising and adapting and let's say, we directionally right on the orders, but we get the finishes wrong. Well -- and we're reacting to and changing the finishes if they're still in the factory. And the last phase of that is the finish and we're shifting from one collection to another collection as we get data and all those kind of things.
And so -- and we have -- like we always have developed new partnerships and so on and so forth. And sometimes, some of the newer partnerships haven't -- maybe they haven't worked at this scale yet, but we try to anticipate that. But every once in a while, someone knew it's that, one of the big collections. And so that maybe is a new experience for them, but we have really great people inside the organization and in country that partner would help and we just try to work with partners and get to the right outcome once we have the data.
So I'd say there's no -- there's nothing lurking out there right now. We don't have anything other than some kind of ramp-up issues that you expect doing anything at this kind of a scale. And -- but (inaudible) I don't know if you guys have any other. No? Okay. I mean everybody is in the room here, the team and everybody is shaking their head like, no, no problems. So nothing new came up so far today that we haven't heard.

Operator

And we do have our last question comes from the line of Steve McManus with BNP Paribas.

Stephen James McManus

So clearly, very upbeat about the outdoor collection. You've got the data there. Just hoping you could speak to what the customers' reception has been and how demand is ramping for the interiors and the contemporary collection versus what you were expecting? That would be helpful.

Gary G. Friedman

Yes, I'll be responding as from our latest expectations, all responding as we'd expect and we have -- the next big book is modern, and we feel very optimistic about that. And then we have emails of interiors and contemporary and new refreshed with new selections and new creative and better data and information, better in-stocks and so on and so forth, more of the product because we've got a chance to read and react to it in the galleries, which then gives us a lift. And so we feel really good, really optimistic. And so I don't think there's any other commentary that I have got .

Stephen James McManus

All right. And if I could squeeze one more in. On the commentary into like digital and print advertising, I don't think that's something you really done in the past, like what drove the pivot and piecing that together with sourcebook rampings, how do we think about the right run rate for ad (inaudible) business?

Gary G. Friedman

Yes.
It's kind of what we always do. There's nothing really new. It's what we generally do when we're in launch mode like this. And so we're generally marketing print and digital with all those kind of key publications, where the consumer -- generally, if you're talk to anybody or see anyone who's building a home or furnishing a home, remodeling a home, so on and so forth, they're kind of fishing where the fish are, right? They're looking at for inspiration and home magazines and design magazines and so on and so forth.
And those websites get a lot of traffic with really people with a purpose, right? So we tend to invest in that way. There's difference in our direct mail business and thinking about our -- the list customer files we've built out and how we prospect and where we get new names from and some of the sales force.
So I wouldn't say anything is different, I think you see a ramp-up in the investment. And you see that based on our confidence of what we've learned thus far. And that's given us indications of what the right investment cadence is -- investment cadence and contact cadences. So yes. I wouldn't say anything has changed.

Jack M. Preston

It's not a pivot. It may have sounded like that, but I'd like, as Gary said, that's what we do around launches.

Gary G. Friedman

Yes.

Operator

There are no further questions at this time. Mr. Friedman, I turn the call back over to you.

Gary G. Friedman

Okay. Well, thank you, everyone, for your participation. And I'd say thank you to the Team RH, you're efforts and leadership have been extraordinary. It has been in a tremendous amount of work, I know for everyone, but I think I feel so proud and excited about what this team has accomplished. And I think our partners and teammates all through the country, especially our teams in the galleries and interior design, we're going to be handing you off the baton as all these products unfold and the teams across our supply chain and distribution and everybody's help work with supporting their teams in Asia and other countries around the world.
I think this is going to be our finest moment. And it really is a result of your commitment and courage and your leadership. So we just want to thank you for that, and we'll speak to everyone next quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect.