RH (RH) Q2 2023 Earnings Call Transcript

RH (RH -1.28%)
Q2 2023 Earnings Call
Sep 07, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2023 RH Q&A conference call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] Thank you. I will now turn the conference over to Allison Malkin of ICR. You may begin your conference.

Allison Malkin — Investor Relations

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 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 our 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 more detailed descriptions 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 Friedman — Chairman and Chief Executive Officer

Thank you. Let me begin with our letter to our people, partners, and shareholders. Revenues of $800 million and adjusted operating margin of 22.2% exceeded our guidance for the second quarter due to a $25 million revenue benefit from faster-than-expected deliveries and it shifted for approximately $40 million of advertising costs from Q2 to Q3, reflecting the later mailing of our RH Interiors Sourcebook. We are raising the low end of our revenue guidance for the year and now expect revenue in the range of $3.04 billion to $3.1 billion versus our prior outlook of $3 billion to $3.1 billion and are maintaining our outlook for adjusted operating margin of 14.5% to 15.5%.

We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20-year highs and the current outlook for rates to remain unchanged until the second quarter of 2024. The company repurchased 3.7 million shares in the second quarter at an average price of $325.65, representing approximately 17% of the total shares outstanding at the beginning of the second quarter. Product elevation. We recently mailed our new 604-page RH Interiors Sourcebook.

And while it’s too early to read the response with only 40% of the mailing in the home this week. The early indications do look promising. We continue to expect our business trends to inflect in the second half of this year with the mailing of our RH Contemporary Sourcebook in late October and our RH Modern Sourcebook in early January, as well as the refresh of our galleries over the next several quarters. We begin — we believe our inflection point will peak in the first half of 2024 as our new collections fully ramp and we begin another cycle of Sourcebook mailing completely transforming and refreshing the assortment across the entire brand over a 12-month period.

We believe the new collections reflect the level of design and quality and accessible in our current market and a value proposition that will be disruptive across multiple markets, positioning RH to gain market share throughout fiscal 2024. While a product transformation of this magnitude will be margin dilutive in the short term as we cycle out of waning collections, we believe it will once again become margin accretive as selling rates stabilize and allow our supply chain and sourcing — for supply chain and sourcing efficiencies. Platform expansion. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multibillion-dollar opportunity.

This summer, we introduced to the United Kingdom in a dramatic and unforgettable fashion with the opening of RH England, The Gallery at the Historic Aynho Park, a 17th century 73-acre estate that is a celebration of history, design, food, and wine. We had a spectacular turnout for our opening event in early June, and the national and global press coverage the brand received was multiple times greater than any gallery we’ve ever opened. Due to RH England countryside location, we expect the majority of revenues to be driven by our interior design and trade businesses, which are dependent on building — books of business with high-value repeat clients like interior design firms and hospitality projects. The quote books are building and will soon mail our first Sourcebook in the United Kingdom.

While pleased with the early response, there is still much to learn about the seasonality of the business in the English countryside, especially in the winter season. We’ll know more once we start mailing Sourcebooks and experience a couple of seasons. Our global expansion also includes openings in Dusseldorf and Munich later this year with Paris, Brussels, and Madrid scheduled for 2024 and London, Milan, and Sydney for 2025. Regarding our North American transformation.

We continue to plan opening RH Indianapolis and RH Cleveland in the second half of this year, while RH Palo Alto and RH Monaco will now open in early ’24. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years. We also believe there is an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation. We have several existing locations that have validated the strategy in East Hampton, Yountville, Los Gatos, Pasadena, and our former San Francisco gallery in the Design District where we have generated annual revenues in the range of $5 million to $20 million in 2,000 to 5,000 square feet.

We have just secured our first new location for Design Studio in Palm Desert, which should open in the first half of 2024. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Outlook. As mentioned, we are raising the low end of our revenue guidance for the year to a range of $3.04 billion to $3.1 billion and maintaining our outlook for adjusted operating margin in the range of 14.5% to 15.5%.

We estimate the 53rd week will result in revenues of approximately $60 million. For the third quarter of fiscal 2023, we are forecasting revenues of $740 million to $760 million and adjusted operating margin in the range of 8% to 10%. We expect to have increased advertising costs of approximately $50 million versus Q2 2023 reflecting the shifting of the RH Interiors Sourcebook from Q2 to Q3, the mailing of RH Contemporary Sourcebook, and the mailing of our first Sourcebook into the United Kingdom. For the fourth quarter of fiscal 2023, we are forecasting revenues of $760 million to $800 million and adjusted operating margin in the range of 14.4% to 16.6% with incremental advertising costs of $5 million versus the fourth quarter of last year.

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 taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces. By building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste and place maker.

Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses where our goal is to create a new market for travelers seeking luxury and privacy 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 and 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 brand, and amplifying our core business while 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 earnings 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 start 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. The end of COVID confusion at the beginning of the next evolution. We spent far too much time over the past four years debating if this was going to be the decade of home or the death of retail.

If inflation was transitory or fiscal tightening was mandatory, home sales and prices shooting up like a rocket and now falling to Earth like a rock. For the first time in my career, retailers were comparing their growth rates to any one of the past four years in any given month of any given year. The fact is we’re directionally in the same spot we were four years ago, worrying about the financial recession and the polls saying we might have a presidential regression. If there was ever a time the world needed a compass, this might be it.

For the people of Team RH, our compass is our vision, values, beliefs, and culture, those things that drive us and unite us, those things we look for, would fight for, and die for. After several years of being apart due to COVID, we finally returned to The Palace of Fine Arts Theater in San Francisco for what used to be our annual Leadership Conference, and we talked about those things. For the first time in the past four years, everything came into focus, clear replaced fear, and connections were personal and not virtual. It felt different because it was different.

There’s a different level of accountability when someone is standing in front of you, looking straight into your eyes, and making a suggestion or a request versus blankly into a screen, not knowing if those on the other end have you on mute or just aren’t very interested. It’s time to break the bad habits of COVID. It’s time to get off the screens, get out of our home office, and reconnect in our team office or as we did at the Palace. It just felt different because it was different.

And I’m sure it’s going to lead to an outcome that’s different. Yet it also felt familiar like finding our way back home — back with our people where none of us are smarter than all of us, getting all the brains in the game and the egos out of the room, listening and learning, discussing and debating, elevating and aligning. It felt like the beginning of our next evolution, and it felt like we were beginners again. 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. At this time, we’ll open the call to questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Steven Forbes from Guggenheim Securities. Please go ahead.

Steven Forbes — Guggenheim Partners — Analyst

Good afternoon, Gary, Jack. Gary, I was hoping you could maybe just expand on what’s driving your confidence in seeing an inflection in the business during the back half and what the early indications from the RH Interiors Sourcebook and, I guess, RH England as well. Inform me about what the potential reacceleration in demand could look like as we think out to ’24 and beyond.

Gary Friedman — Chairman and Chief Executive Officer

Sure. I think there’s a couple of dynamics happening. I think you’ve got kind of a cycling of the backside of COVID, and you’ve got a cycling of the — the dramatic rise in interest rates and the falloff of the highs of what I call a COVID and a federal funds rate-driven home market. So, from our view, I think that cycling happens at the end of this year.

And the question is, is there a longer downdraft in the home cycle? I think that the answered questions really deal with. If you say what’s the problem with the housing market today? You’ve got this real delta in interest rates between people who bought a home over the last several years at dramatically low interest rates that are sitting there with 2.7% to call it 3.4% interest rates, 90% of the market is fixed. So, you’ve got 90% of market owning homes with really low interest rates, and you’ve got an interest rate gap. Current 30-year mortgages are going for 7%, somewhere between 6.8% to 7.4%.

It’s kind of the range depending on credit. So, you’ve got a huge spread there. And what’s compounding that huge spread is you haven’t had home prices drop enough yet, right, to offset that margin spread. If home rates dropped, home prices went up 42% in the two years and the two years post the COVID — through the COVID boom.

Once COVID hit and there was a — everybody was stuck at home and focused on exiting cities. You had the biggest migration from cities to suburbs in history and biggest migration to second homes in history. So, you’ve got a lot of people that moved at a record rate. You’ve got a lot of people locked into really low interest rates.

Now, you’ve got really high interest rates and you have no inventory in the market, and you have no inventory in the market because people can’t afford to buy a new home once they sell their home because they’re going to trade 2.7% to 3.4% interest rate for, call it, a 7.2% interest rate maybe at the midpoint. And so, you’ve got a lock on that. We’re going to begin to cycle this. So, if the Fed has CPI, if they have inflation under control, and we don’t — doesn’t have to continue to be kind of tightening.

The question is, when do home prices come down enough for people to step up and pay the higher rate, or when do rates come down and close that gap? Either housing prices have to come down or interest rates have to come down or the gap doesn’t close, right? So, you may kind of wallow at the bottom, or there could be further downdraft, if there’s a more broader economic issue in the economy or if anything is happening with the commercial market with offices is not a good market. And our view is not all that negative news is kind of unveiled itself. So, there’s — from our view, we’re kind of at the end of the worst of it. It’s — is there going to be a bounce? I mean, if you look forward at the market saying that we should expect interest rate cuts starting next year in Q2, Q3, Q4, maybe 100 basis points.

It’s 100 basis points of interest rate cuts, move the housing market much, maybe it moves it a little. But I think there’s going to be a bigger — you got to close this gap. It’s a gap that I’ve never seen. I don’t think anybody on the phone has ever seen.

That’s created kind of a conundrum in the housing market. And then you’ve got — look, the news in the press is new houses are up 20%. Well, new house is only 10% of the market. The existing home sales is 90% of the market.

So, until you get existing home sales and this market stabilized, not a downdraft, that’s going to be critical. So, we expect stabilization, we think, next year. We don’t think there’s going to be acceleration until there’s interest rate cuts or pricing comes down. Home prices come down to kind of close that gap.

So, let’s put that off to the side. That’s one issue. Then you’ve got what we’re doing, which is a complete transformation reimagination refresh of the brand that we’ve been working on now for several years. It’s going to be unveiled here over the next several quarters, so the early indications on the books.

And again, we’re hitting 40% of the books in home by the end of this week, look really good, the early indications. Now, you got to be careful on how you extrapolate that because you have to extrapolate it on, OK, what does this look like when all the books get in home, what does this look like when the in-stocks reach their best — their optimum levels, what does this look like when you start refreshing the galleries in the stores with those. There’s all life factors to all of that. So, when we look at this and we extrapolate this, we think there’s going to be a real inflection point.

How big is that inflection point? To us, it looks like a meaningful inflection point. And then there is part of our decision to kind of push the mailing into Q3 was to kind of take a longer-term view of what should be our contact strategy as we’ve now — are going through this brand refresh and reimagination and repositioning. And our view is we, through history, we went through cycles where we contact the customer twice a year with each book and periods where — years where we contact the customer once a year, one kind of big cycle of mailings. And our view is, I think, we better reacclimate the consumer to the RH brand to the newness, the excitement that’s in the brand and everything we’re doing.

And our view is to set up a two-contact strategy. So, the timing of those contracts — contacts, we should — we believe should be a full contact and kind of — all contact in the spring contact. It’s how I’d frame it. So, all being kind of a mid- to late August contact that gets in-home by end of September, our book — especially our interior books, our interior book is 604 books, nobody does a 604-page book than us and getting that printed and bound and through the system takes longer than it will on our other two books that will be more in the 300-page range.

So, we’ve got this first contact that will get all in-home kind of, call it, end of September, first week of October. And then we’re going to come out with the Contemporary book kind of mid-October through late October and then we’ll come with the January book with the Contemporary book in the October period and then the Modern book in early January when people get back from holidays and so on and so forth and everything reopens again. Then we’ll cycle back around, and we’ll hit everyone with this next contact, if you look at over a 12-month period and that will be kind of a March, April, May, June contact. And so, the three books we’ll hit again will have another meaningful round of newness coming.

And by the end of that context, we will be kind of fully transitioned. It doesn’t mean we won’t have new product in the next contact when you think about the next fall. But the percentage of newness will be more in the 15% to 20% range, where this is basically an 80% refresh of the brand. It’s massive.

It’s the biggest product move I’ve ever made in the history of my career, and I’ve made some pretty big product groups. So, you’ve got to kind of think about how you’re spreading out how much can the consumer digest at a time, how are you going to read it correctly and how are you going to have the contacts not overwhelm them and the new news not overwhelm them. So, as we kind of took a bigger view at it instead of this kind of one view and looked at it more, how do we think about it strategically, maybe, call it, over the next three years? We think this is the right contract strategy and we’ll create — by the peak of the inflection, I think it will be really meaningful. I think we will gain significant market share versus anybody else in our category.

And I think the other thing to put into context is just how we think about disruptive pricing from a circular point of view, which I think we’ve — in our efforts to elevate the brand, I think we weren’t as kind of critical-minded looking at price I mentioned last conference call, I thought we probably were a bit arrogant looking back. And now, I think we’re laser-focused and laser-sharp. So, we’re going to be very aggressive. We’re going to use the size and strength of our platform and the leverage it gives us to be disruptive from a pricing point of view.

And I think that’s going to make a meaningful impact. I think if you look at the new book, and you look at the messaging and you look at the key items and you look at the key collections and you look at the quality of the product, the design, the quality design, and the quality of the make of the product. And you look at the value that the price — value of that product, I think it’s going to disrupt a lot of people. And so, I think we’re as confident as we’ve ever been.

I think that’s the timing. And then the unknown is what does the housing market do? Is it flat? Does it go down another 5% or 10%, or do we get a bounce? Regardless of whatever happens to the housing market, we’re going to have a meaningful inflection point with the business and the brand. And that’s why we deployed the capital. That’s why we bought back 17% of the shares, 3.7 million shares.

And so, we like — what we see early with the books here. We like our strategy. I think we’re laser-focused on this. And I think we’re going to come out looking really good.

So, that’s how we see it.

Steven Forbes — Guggenheim Partners — Analyst

Thank you, Gary.

Operator

Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Gutman — Morgan Stanley — Analyst

Hey, Gary. Hey, Jack. My question, one question, maybe two parts, is you mentioned product transformation and margin dilution. Is that all contained to ’23? Or does some of it move into ’24? And then, Gary, to your point, if this market wallows a little, and we do have another downdraft, given that you have leverage or the business has leverage now or a little more than it’s normally used to do you operate anything differently if the macro just takes longer to come out and then maybe the curve is steeper in later years, but it’s flatter in the medium term.

Gary Friedman — Chairman and Chief Executive Officer

Yeah. I think by the first half of next year, the inflection is going to be much more significant than the macro. So, I don’t think it changes anything for us.

Jack Preston — Chief Financial Officer

On the margin dilution, Simeon, look, I think about it also just relative where the margin — or the discounting activity and clearance of that inventory will be in Q1 of ’24 versus Q1 of ’23. So, yes, there’s going to be still some of that in the first part of the year.

Gary Friedman — Chairman and Chief Executive Officer

But there’s going to be — I think that there’s two things, right? You’ve got margin dilution from a product margin point of view as we’re transitioning the assortment, but you’re going to have leverage and margin accretion throughout the model based on what we believe what will happen with our top line. So, yes, I just — I think ’24 is going to be a very good year unless there is some kind of crazy crisis that we don’t believe is on the horizon. I think that — I think the history would tell us if things really got worse that the Fed is going to ease. I look back at the last 20 years, I mean, the Fed has been very consistent.

We’ve lived in a very long period of really low interest rates with just a few slight blips that are high. And I think the Fed will act in a way that will stimulate the economy again. And then housing will — at some point, a housing will take off, right? You got a lot of pent-up demand. It’s just that the demand can be super pent up that if the gap doesn’t change, right, if either pricing doesn’t come down or interest rate gap doesn’t change, interest rates have to come down.

One of the two things happened. If they both happen, prices come down and the Fed is you can get — I think we can get a really good bounce in the housing market. But we just can’t control that. We have a point of view on it, to share our point of view.

We look at a lot of things, and we’ve got a lot of data that we study. The key for us is like we think about the balance sheet, which we do, I mean, we deployed a lot of capital. We have a lot of confidence in the model. We’re in the middle of a transformation.

It’s not — this is not, by any means, the first time we’ve done it. It’s the biggest thing we’ve ever done. But our experience in making moves like this is deeper than anyone in this industry. And we’re laser-focused on it.

And we understand our balance sheet really well and what our cash flow is going to be like and the timing of capital and outflows and projected inflows and we — all kinds of downside models and know how to operate and any kind of environment, any kind of difficult environment. So, we don’t fear the leverage, and we’ve had a lot more leverage on this business and people have seen us navigate through those situations in a relatively uninterrupted way, except for the real depth of 2008, ’09 or something like that. So, we feel great. But I think the key headline, I’d say — I just would be really — it would be shocking if we don’t outperform whatever macro might happen in the first half of next year unless it is so severe that it becomes some kind of a crippling thing across the economy.

And I just don’t think that that’s going to happen. I think the Fed is going to do the things that the Fed usually does. And if we get any kind of stabilization or uptick in the market, we’ll have an incredible year. So, I think we’re set up better than we’ve ever been set up in the history of the business.

And I think we’ll have the biggest inflection point we’ve ever had is my view by Q2 of next year. Like there’ll be an inflection point before that, but I think we’ll peak when I look at all the lines and I think about production and in-stocks and floor sets and all the transition moves we have to make. I think that in the second cycle of the books, I think it will start to peak then, and then I think we’re going to have an incredible run.

Operator

Your next question comes from the line of Steven Zaccone from Citi. Please go ahead.

Steven Zaccone — Citi — Analyst

Good afternoon. Thanks for taking my question. So, I wanted to shift to the RH England opening. It sounds like it’s a good successful opening event, but it will take some time to maturity.

Do you expect the rest of your international openings to resemble this maturity curve? Or is this the longest one since it’s kind of your first? And then similarly, the letter confirmed nine international openings by 2025. Can you talk a bit more about the pace of annual openings for international going forward? Is three kind of the right number? Thanks.

Gary Friedman — Chairman and Chief Executive Officer

Yes, Let’s start with first one. RH England, unlike anything we’ve ever opened, not just because of an international perspective but really the kind of location and our view of how we wanted to introduce the brand and when we wanted to introduce the brand. One, we wanted to introduce the brand in a very unique and unforgettable fashion. Just because the U.S.

isn’t really seen from a European perspective when you think about design, taste and style, luxury market, so on and so forth, that’s not really the game we play really well. I think I made the comment before. The only true luxury brand, we’ve had, I think, in the United States, is Tiffany, and now the French own it, right? And all the luxury brands are from Europe. So, how are we going to go into that world and introduce ourselves? We thought that was really important.

And we also thought the timing, like how do we kind of get the name known and establish ourselves in a unique way. And we could have waited and opened Paris first or we could have waited and opened London first. We would have had to wait longer, and we came across this opportunity at this property, and we thought this could be something remarkable. It could be a really great introduction for the brand.

And I’ve always said that we’ve made the decision on RH England because of its location, it’s an hour and 45 minutes outside of London. It’s in the Cotswolds. It’s around wealthy and affluent people, but it’s not around density. You don’t have anybody kind of walking by this gallery.

Like it’s not — it is a true destination. And you kind of got to go out of your way. But you’re going to something that’s spectacular that you’ve never seen before. So, the impression of it is like nothing else.

And I don’t want to make the wrong comparison here, but if you just think about kind of things that have went into what I call the middle and nowhere and changed everything. You think about Disneyland. Disneyland opened in the middle of nowhere. If you went back to when they opened that in the middle of an orange orchard and there was no one around, no one — there was no population density anywhere near it.

And it changed everything. If you think about Las Vegas, Las Vegas didn’t exist. It was created. And I don’t — I’m not trying to make a correlation that’s exactly right.

What I’m trying to say is we’re trying to create a brand at a level of the market that hasn’t been created before. And our view was that this was a decision that was more to drive a conversation than it was to drive commerce. We never thought this was going to be a high-volume gallery. But we didn’t think it’d be no volume.

I think it’s going to be fine. I think it would take much — if you took anything like this and put it in London, I mean, it’s going to do multiple times — immediately multiple times faster. It’s a little inconvenient but it’s extraordinary. And a lot of really extraordinary things in the world started as being inconvenient, right? It was inconvenient to get an iPhone, inconvenient to get a Tesla.

How long did people wait to get a Tesla? How long did people wait — how long have they waited to get the new Roadster or the Cybertruck? So, it’s — you’ve got to kind of think about what are the long-term things you’re trying to do? We’re trying to shape the brand in a way that a brand has never been shaped before, introduced the brand to Europe where the luxury brands are, I think, create the right conversation with the right people and create the right halo for this whole thing to then — as you introduce it in the other places, there’s an excitement about it. They’ve heard about it. It’s coming. They’ve seen it posted.

They’re seeing it written about. I mean, the press we’ve got on it is just incredible. It’s multiple times higher than any gallery we’ve ever opened because it’s something nobody has seen before. And given the world something to talk about.

And we have really interesting and high-profile people showing up there, setting up appointments there, and wanting to do collaborations with us, some of the highest-end car brands in the world want to do car shows on our property and things like that. I mean, I think it’s just going to open up all kinds of new opportunities and new conversations and new perceptions and possibilities for the RH brand. But it’s not the gallery I would use to kind of say, “Oh, let me extrapolate what happens here. We don’t have anything like this in America.” Yes.

We don’t have any kind of location like this. It’s similar to this at all. And that’s why I think it’s giving so much conversation, but it’s not the most convenient place to shop. We knew that going in.

So, this is really to kind of introduce the brand, create the right conversation let it build, let’s go through a winner. Let’s go through a cycle. Let’s see what we have to do. And remember, we haven’t nailed the book yet in the U.K.

So, we’ve got very little advertising. We’ve got all the press that everybody’s written about, and then we’ve run a few ads and some magazines and stuff like that. And so, I think in all the other locations we’re opening are highly visible in the major markets, lots of trafficking around them, more what I call typical from a location point of view, not typical from a competitive or market point of view, they’re going to be extraordinary galleries. They have some more extraordinary than others.

Some of the markets are more important. In some locations, we took some of the Abercrombie locations that we might not have taken to get London and Paris because there are such incredible locations. And so, there’s some things that are smaller that we’re not investing much capital to, but we’re going to open them and we’re going to learn. But I’d say you can’t use this as a proxy.

It’s not — I don’t know if we’ll ever build something like this again. We may but it’s not what anybody would typically do, but that’s why everybody is so interested in it, and that’s why they’re writing about it and that’s why they’re talking about it, and that’s why the quality of people that are going there are people just probably wouldn’t — you might not have had them come as you open something ordinary, but they’re coming because it’s extraordinary. But it’s just one small piece of a much bigger, much bigger composition and puzzle we’re putting together to build the RH into a truly dominant successful luxury design brand.

Jack Preston — Chief Financial Officer

Second part?

Gary Friedman — Chairman and Chief Executive Officer

The international opening cadence. Yes, I think this is a start from the opening cadence. I like our start. I think yes, I was moderately aggressive, I think.

So, we’ve got — we’re planting a lot of flags in important places and really dominant fantastic real estate, and we’re super excited about it. And I think we’re going to learn a lot in the next three years.

Steven Zaccone — Citi — Analyst

Thank you very much.

Gary Friedman — Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Brian Nagel — Oppenheimer and Company — Analyst

Good afternoon. 

Gary Friedman — Chairman and Chief Executive Officer

Hi, Brian. 

Brian Nagel — Oppenheimer and Company — Analyst

So, my question with regard to the buyback. So, you clearly stepped buyback significantly here in the quarter. So, the question I have is how should you think about this. Was this a more or less a kind of a one-time adjustment? Or is it — should we expect the buyback to stay aggressive here going into future quarters?

Gary Friedman — Chairman and Chief Executive Officer

You know, we communicate our intentions with every kind of buyback, we still have open to buy and the buyback, I think, a few hundred million, in 100 million. And so, yes, I think we made a relatively aggressive move here. And it’s — and we think we bought the 17% of the business at a really attractive price. And I think our shareholders are going to benefit from that.

And if we’re right with our view of the next couple of years, it’s going to look like a really great investment. How aggressive we’ll be in future quarters, I think you’ve looked at us historically, we’re kind of opportunistic. We’re not like a big corporation that set at a regular buyback every quarter and stuff like that. I mean, if that was so smart to do, Warren Buffett would do it, right? Warren Buffett is a very opportunistic, repurchase for their stock.

And we’re trying to be opportunistic investors, whether it’s in our stock, whether in anything that we do. So, we think this was a great time to deploy capital and buy back a meaningful position in our company. And it depends what the market goes, depends on what we see and how we feel — what we’ll do in the future.

Brian Nagel — Oppenheimer and Company — Analyst

Appreciate. Thanks, Gary.

Gary Friedman — Chairman and Chief Executive Officer

Sure. Thank you, Brian.

Operator

Your next question comes from the line of Curtis Nagle from Bank of America. Please go ahead.

Gary Friedman — Chairman and Chief Executive Officer

Hey, Curtis.

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Hey, Gary, how are you doing? Thanks for taking the question. So, I just wanted to go back on the point. You mentioned the shareholder letter just about some of these early signals that we’re reading pretty positive in the Sourcebook launch, right, like you said, still early, but curious maybe just elaborate just a little bit in terms of what you meant? Are we seeing more people come back in the brand? Are we seeing conversion rates go up? The larger order size, would just love to hear a little bit more about some of those signings in detail if you could.

Gary Friedman — Chairman and Chief Executive Officer

Yeah. Well, look, the new collections that we think are the meaningful collections or acting like they’re going to be meaningful collections. And the markets that the books are getting in to look good. The responses look good.

And so, you just got to see it over a period of time. Our business is — our business is — it’s driven mostly by advance — it’s driven by people buying a new one, remodeling a home, or deciding to redecorate a home, all of which don’t happen very often, right? So, it’s a very high transaction value kind of business. So, if you look at our customers over a period of several years and take their peak day, it’s been roughly 80% to 85% of what they spend with us in kind of a 90-day period, right? And then they spend very little if you look out the next couple of years on the end. So, you’ve got to kind of get them when they’re buying.

And that’s why the business will get impacted more than others during a cyclical down market like this. And look, we know when we exited the holiday businesses and all the — whether it’s the Halloween business and the Christmas business and the accessories business, we’re not very dominant in those businesses than we used to be. And in a down cycle, we wouldn’t take as big of a hit because people are still buying the small things. We don’t sell really much in small things, and we don’t sell any kind of seasonal holiday stuff, right? So, we’ll take bigger hits than other people in these down cycles, but we’ll have bigger ups in the up cycles because of the mix and stuff like that.

But you’re not going to see people right away like the books won’t hit and you’re not going to see the full potential. You need to let these books kind of get in. And usually, we get ramped in a book by three months. We hit kind of ramp rate.

And that’s the in stocks happen well and so on and so forth, and things build and so on and so forth. Well, but — we like everything we see. I mean, we really do. I mean, the early signals are good, and we just want more time, and we want to transition and set a few stores with some of the new goods.

We want in-stocks to build. We’ve got a lot of new things that some look like they’re going to be runaways. And so, you got to say, OK, how do I get in front of that? And how do you reallocate production time and so on and so forth? And you got some things that are — you’re always going to have things that outperform what you think and underperform than what you think. So, you take all the pluses, minuses and aggregate those, but then focus your efforts to optimize your real winners.

But everything real early, everything looks, I’d say, real good for only 40%. So, just keep that into context. I’ll have a lot more to say next quarter. And if something really is meaningful enough, maybe we talk to everybody or do something sooner.

We’ll see. I mean, this is — we’re very early. And we’re very positive, but we’re still in a not-so-positive housing market and environment. So, it’s going to be a conservative tone to a degree, but we’ll be a lot smarter in another eight weeks.

And then yes, we’ll have enough information to make moves to kind of think about investments in the first half of next year from a mailing perspective and how big, how deep do we go, how right are we and how big do we go? But we’re going to be some degree of right here. This is not going to be a swing in a miss. I mean, I don’t want to jinx anything, but we’ve been doing this a long time, and we’re good at reading the data. So, it’s just — I think it’s what degree of really good to great is the outcome.

And then what was worth as a reset? And then how do you compound on kind of that reset?

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Got it. And maybe just a follow-up. International, so you got into stores coming up, right, I think technically within four months, just looking at the newsletter. How are you feeling about those openings? And I guess just curious, why lead with those two cities?

Gary Friedman — Chairman and Chief Executive Officer

Those are just smaller ones. Yes, smaller wins that don’t have a lot of capital.

Jack Preston — Chief Financial Officer

Nor hospitality.

Gary Friedman — Chairman and Chief Executive Officer

Nor hospitality or anything, right? So, those are some locations that we thought the locations were decent. It will give us some — without putting on capital in, just give us some feedback at the brand out there. I mean, look, I mean, Abercrombie didn’t have any bad locations. These were just — we think we’re going to get — we’re going to learn and get information, right? And then we’ll decide how long might we stay in these locations because we acquired some leases.

And are there bigger, better places to go? And what do we do? But I think one of the key things is just kind of get the brand out there in a good way. But the real key is what did we do first? When people met us or heard about us, what did they hear? What do they get pointed to, how do they think? So, now, we kind of not — I don’t think people will think Munich and Dusseldorf aren’t beautiful galleries. They’re just not going to be at the level of London and Paris and Milan and — some of the other ones we’re doing, yes. But there are locations that we were required to take to get some of the really key locations that we really wanted and that was Central London and the Paris location.

So, we think these are fine. OK. Let’s get going. Let’s learn, let’s see how the business builds.

Let’s quickly learn how to operate in these different countries at a relatively low investment and much lower effort than doing the really big ones with a lot of work that take multiple years that — and that have hospitality and other levels of complexity.

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Got it. Thanks. Appreciate the thought.

Gary Friedman — Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Seth Basham from Wedbush Securities. Please go ahead.

Seth Basham — Wedbush Securities — Analyst

Thanks a lot, and good afternoon. My question is around margins. How should we think about the product margins on the new product lines that you plan to be much sharper on pricing? So, would you be thinking about consolidated gross margins in the mid-40% on a run-rate basis going forward?

Gary Friedman — Chairman and Chief Executive Officer

I think, you know, we’ll have more to say. I think we believe long-term emergence can be at our historical highs. I think we’ve got to kind of win some share here. And we got to play a little offense and just be sharper.

And so, there’s a few points of investment we’re making there. But we also have places where we’re playing aggressively, but our margins are at historical highs. So, it all tends like what we’re targeting, how we’re targeting certain categories. So, more to say, yeah.

Let’s see how these books do when they get in, let’s see what’s performing, let’s see what we’re responding to. There’s going to probably be places where we’ve taken pricing that’s really sharp. There are many places we’re going to take pricing up, right? We’ve already got one collection that’s kind of through the roof. It looks like our best collection ever, then we’re going to probably take prices up this week.

So, just as we’ve got so much demand. And we think we can — the product is still going to be positioned at a disruptive value. We’d probably just swung the pendulum a little too far on some this is — the business we’re in, day to day, week to week, you’re learning, you’re getting data, you’re rethinking things, you’re — everything you do when you buy a new product is speculative based on backward-looking data. So, you’re never — everything we buy is 100% wrong.

We’ve never bought anything and we go, that thing is exactly how it’s selling. That’s exactly right. So, you’re only suggesting, right, you’re getting real data, real information. And then you’re learning from that, and you’re extrapolating that you’re making the next best decisions.

So, I wouldn’t jump to any conclusions just because of our, what I’d call, more short-term view of just trying to transition from the current kind of products to the next-generation products and playing offense from a disruptive value equation point of view. It’s how we got here. I just think it’s probably we should have kept that edge the way we did. But you go through a period where you’re in COVID and your business is running at 40% and your prices are going up and you’ve got — you went — we went through multiple rounds of tariff increases and price increases and supply chain increases and COVID increases and ocean freight increases.

And I think that’s why I made the comments I did at the end of my letter, like I think we’re finally at the point of everything that kind of like made everything go up with COVID is one of the kind of the backside of the cycle of everything going down and everybody is everything washing through. And I think if you just like kind of take those years and say, OK, what are the best things I learned to now get them out of the way and you got to kind of rethink about your business, but I think, you know, I just wouldn’t make any long-term assumptions based on anything that’s happening on a short-term basis right now in this transitionary period. I think you’ll see us return to a really good model. If we get the inflection that we believe it’s going to happen in the top line, especially where we think it will take as we get into kind of the first half of next year, you’ll see our whole business model snap back.

Seth Basham — Wedbush Securities — Analyst

Right. But just to be clear, Gary, so the margin — the product margins on the new product that you guys are launching over the next, say, six to nine months is going to be lower by a few points and what you are earning on products during the pandemic. And then the real benefit that gross margins could be from volume, improved volumes?

Gary Friedman — Chairman and Chief Executive Officer

You know, that’s not necessarily — we weren’t that specific. We don’t guide gross margin. As you know, we don’t disclose product margins. We’re trying to tell you just a directional flavor.

And I think just to recap a lot of what Gary said, some products are going to be higher, some products going to be lower. We’re not making a general statement. I’ll just — you can roll back the tape on what Gary said as far as the investment we’re going to make, that’s right. But as far as like what the future is going to look like, let’s just let that play out, and we’re going to make margin commentary, especially gross margin commentary after each quarter’s results because, again, we don’t guide that particular line.

Seth Basham — Wedbush Securities — Analyst

Understood. Thank you, guys.

Gary Friedman — Chairman and Chief Executive Officer

Thank you, Seth.

Operator

Your next question comes from the line of Max Rakhlenko from TD Cowen. Please go ahead.

Maksim Rakhlenko — TD Cowen — Analyst

Great. Thanks a lot. So, if we were to bucket your initiatives over the next 12 months to U.S. salary openings, European openings, and then new product introductions, how would you rank order their magnitude? And then just for clarification, how much of a refresh inside the gallery should we expect both over the next one to two quarters and then a year from now, both in terms of new products, as well as the number of galleries that the new products will hit? Thanks a lot.

Gary Friedman — Chairman and Chief Executive Officer

Sure. Like I take the product, and the product is by far, the most important thing we’re doing, right? And the new openings and building out the platform, those are — it’s the platform for the product. So, what we’re doing with the product is going to make the most meaningful impact over the next several years So, when you think about the investment in gallery floor sets, we just began setting RH Marin next door headquarters and we will all see it over the next — it gets fine-tuned over the next couple of weeks. It’s kind of a Phase 1 move of it.

We have kind of right now, Phase 1 and Phase 2, and then we’ll have a Phase 3. I think you’ll see the majority of the galleries reset by Q1 next year and as we call —

Jack Preston — Chief Financial Officer

All the galleries.

Gary Friedman — Chairman and Chief Executive Officer

Yeah. Yeah, all the galleries, yeah, resets. And then you’ll have some winners and some losers in kind of the product mix. And as we mailed the Modern books going in, in January.

I mean, you’re going to find out there are some things in Modern that are probably really good and better than some things we might have just rolled out into the galleries, and you’ll make some adjustments. But I’d say we’ll be — by Q2 of next year, we’ll be really educated especially by the late Q2, we’ll have had two cycles of drops. We will have a lot of newness. We’ll have kind of the first phase of major phase, second phase, still not as major as the first phase, but still more meaningful than normal.

And we’ll have had a good period of time to measure and have seen Phase 1 of the product transformation and first drops. And then we’ll have some data on this second cycle, and we’ll be fully ready for the second half of next year, but to kind of keep optimizing it, right, because we’re going to just get a lot of data, a lot of information, be making a lot of adjustments. And we’ll keep doing things that kind of, what I’d say, build the trend. When you go through a big move like this, it’s you’re going to get some of it really right and you’re going to get some of it wrong.

As long as you’re throwing more things above the line and below the line, then you’re going to learn and then you’re going to make adjustments. And those adjustments will move the business higher right? So, I’d say we’ll hit max inflection in Q2 doesn’t mean we’ll pick max run rate. When I talk about the inflection, I talked about the early inflection, then we’ll build on that. right? So, I would assume that the first half of next year will be very good and the second half of next year will be better than the first half.

Operator

Your next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Brad Thomas — KeyBanc Capital Markets — Analyst

Hi. Good afternoon. I was hoping to follow up on the topic of operating margins. And I’m just hoping we could maybe frame up some of the puts and takes.

Obviously, the full year implies kind of the mid-teens level for the operating margin. Can you help us think about maybe your latest thoughts on structurally what the operating margins look like in this world where you’re opening up stores internationally in this world, where you have a new product coming out, there’s more Sourcebooks? What do you think sort of normalized margins start looking like as you get back to revenue growth again? Thanks.

Jack Preston — Chief Financial Officer

You know, I don’t think, Brad, we’re ready to talk about that. I think we’re talking about some short-term changes, near-term impacts to the margin, and especially moves related to — and making some investments due to competitive reasons, as Gary had talked about. So, what the other side of that looks like, we have our discussion with you about each year’s guidance in March, so we’ll do that and give you a better look then. But as far as we sit here at the end of Q2 and the many sort of changes in levers we’re plowing forward with.

We just don’t have that visibility or that ability to tell you what the study looks steady state looks like other than as revenue grows and we get leverage in the business, we expect margin to increase from here. Where that baseline level is. Yeah. I’ll let Gary chime in here.

Gary Friedman — Chairman and Chief Executive Officer

No, I think that’s correct. I mean, I think we’re — for the most part, we’re giving you color today maybe slightly more different or a different angle on the color than what’s written in the letter. But we don’t want to kind of talk about things that we don’t — that we haven’t really released, right? And we’re not really releasing kind of that far out. But yes, all of us on this call are going to know a lot more next quarter and the next quarter.

And we’re either going to be more right or more wrong. We think we’re going to be more right than wrong. And everything that we said we believe in. And it’s — there’s some level of speculation, of course, but there’s a lot of data that we have based on doing what we’re doing, introducing newness mailing Sourcebooks, resetting floors.

We know all the lift factors and what will happen if we do this, that. And we’re directionally usually right on those things. And so, we’ve been rusty. We’ve been somewhat out of the game, and we’re going to come back into the game in a very impactful way.

So, yes, we’re looking forward to kind of get into data. But look, the good news is the early data shouldn’t look at that. It looks good. So, so far, so good.

That’s as much as we know right now.

Brad Thomas — KeyBanc Capital Markets — Analyst

Gary, maybe if I could ask you another way, when you did some significant share repurchase back, and I think it was in 2017, you later described that time as a period where you’ve kind of taken the racetrack of — car off the racetrack and done a lot of surgery on it. Does it feel like it’s that significant of a time for you as you think about how you’re positioned in the company?

Gary Friedman — Chairman and Chief Executive Officer

Yeah, bigger than that. We’ve redesigned the whole fleet of cars. It’s really the biggest repositioning of the business we’ve ever went through and I think the best work we’ve ever done. So, it’s much bigger.

I think it’s going to be much more significant than that. And look, we just bought back a lot of stock. We played — we put our money where our mouth is, right? We took a really big position in the stock, and we’ve allocated a couple of billion dollars that’s twice as big, I think, it’s the buyback back then. So, we wouldn’t have done that if we weren’t confident and our board wouldn’t have let us do that unless they weren’t — unless they were confident, right? So, this is a fully informed kind of position we’re taking from an investment perspective on inventory, on share repurchases, but we’re not a new team, experienced team and experience board.

Like you said, we’ve done this at just a smaller magnitude. We were a smaller company, too. So, we’re a bigger company to place in a bigger bet. So, I kind of like where things are.

I think, look, there’s — everybody is speculating, right? Like if you just like — just look at what happened in this quarter, our stock started this quarter, the day after earnings, $274 a share.

Jack Preston — Chief Financial Officer

$247.

Gary Friedman — Chairman and Chief Executive Officer

$247. $247 a share. At the end of Q2, it ended today at $369. It peaked at $402.

It went up 49%, and it peaked at 63% up. Within a quarter, with the only information and disclosures was we bought back 17% of the shares. So, everybody could do the math about how many shares we bought back. And because there’s new disclosure that have to be made every time my ownership goes up by one point, there’s a lot of disclosures.

There’s a lot of filings. And so, you would’ve thought, “Hey, you don’t know they’re buying back the stock up 17%. This go up 20%. It’s about 14%.” I mean, it went all the way up to 63%.

And at the end of today, it was up 49. After hours, it’s still up 36%, even though it’s down, I don’t know, 28, was it now 28 points down? So, like that, they just flashed it over here a second ago. And people like, wow, like, well, is it a bad day? Now, it wasn’t a bad day. I don’t know.

We’ve had 1 million good days, 1 million bad days within a quarter — not a million, but like so many — so much volatility in the market because so many people are guessing like what’s next, what’s this, when is the Fed going to ease? What are they buying back stock? What does this mean? And I would just say stay focused on what we write. You don’t want to know what we mean, read the letter. That’s why we write these letters. So, it’s on there.

It’s not random comments from a conference call that can sometimes be less focused and just everything I spent a lot of time right in those letters. And the team spent a lot of time together saying like crafting what we believe is the best version of the truth and what we believe is going to happen with the business. We’re not going to always be right. But yes, we have a pretty good track record over a long time.

But there’s just a lot of volatility at the time of speculation, right? Or is that going to ease? Or are they going to tighten the housing market bottoming? Is the pent-up demand — there are going to be more inventories as it relates to our market. And RH’s new book is going to work or the good is going to be, or is the customer is going to accept the goods, where the margin is going to be at, OK, all kinds of stuff. We just put out a release today that confirmed the year’s numbers, confirm them and stock stand $30 after hours. I don’t think any of it made sense going up.

I don’t think it makes sense right now going down, but maybe it does just to kind of say, hey, where should it be? But yes, but we’re all kind of looking at the same information. I mean, that’s the funny thing. So, I’d say it’s like one of the things you learn — if you really study Warren Buffett, there’s a real long-term consistent view about how they operate and what they do. And yes, we try to learn from people like that or Bernard Arnault and how he’s built LVMH and how people have built things.

And even if you look at like a lot of people think that there’s so much inconsistency with Elon Musk, I see consistency. He consistently innovates. He consistently keeps innovating. And so, have you ever hit a launch target on anything or an intra target? No, he consistently doesn’t because he doesn’t manage the business.

He leads the business and he innovates consistently. And so, there’s always going to be kind of more fluctuation short term. But long term, he’s building one of the most incredible businesses the world’s ever seen. And so, I was just kind of stand back and look at the long term, I hear people snipe it Elon Musk, he bought Twitter and that’s stupid, he turned it into X, like whatever.

Those are little sideshows. The guy is building one of the great companies in the world. Like people say, oh, he lost his head of HR, or he lost this like — now if you look at it over a number of years, he’s building one of the best thing in the world. And anybody that’s bet against them has lost a lot of money.

And I think we’re just trying to build one of those great things. And so, we just try to stay focused on the long term, learn from all the short-term data, but don’t overreact. We know we made some mistakes, and we know we are arrogant in pricing, and we know we kind of — or muscle atrophy a bit in new product introductions, and trying to ramp back up was in our — yes, it wasn’t our best work. We learned from that.

We’re going to snap back from that, and you will see us not only snap back, you’ll see us better than you’ve ever seen us and I feel real confident like and so we’ll see how it plays out. We’ll see how right we are.

Operator

Your next question comes from the line of Jonathan Matuszewski from Jefferies. Please go ahead.

Jonathan Matuszewski — Jefferies — Analyst

Great. Good evening, Gary, Jack, and thanks for taking my question. It’s on the Contemporary business. In the past, you referenced $1 billion milestone over three years.

Just hoping to see if we could get an update on how that business is looking today as more product has been rolled out across the galleries and how we should maybe think about the run rate of that business, maybe by the time of early next year, which would be a couple of months after the October Sourcebook mailing. Thanks so much.

Gary Friedman — Chairman and Chief Executive Officer

Yeah. I think about the totality of what we’re doing here. I wouldn’t just isolate Contemporary. Like Contemporary, it’s a new book.

Do we think it’s going to be a billion dollars? Yes, we do. But you’ve really got a — you’ve just got to look at the whole thing in concert, right? The biggest book is our Interiors book. We’ll continue to be Contemporary; Modern, No. 2; Contemporary No.

3. Contemporary might ramp bigger than Modern. We may make decisions like a lot of times, what exactly goes and Contemporary versus what goes in Modern versus what those of Interiors can be somewhat subjective. Like there’s sometimes some blurred lines that are going to be there.

I’d say — I wouldn’t go kind of micro like that right now. I think you’ll miss the bigger idea. The bigger idea is the totality of the product transformation we’re making — and I think about it as we’re going to mail about 1,200 to 1,300 pages of product and across that 70% to 80% newness. I think the next biggest book that competes with us is 228 pages.

We haven’t mailed anywhere near those number of pages in a long time. And we’ve never had this much new product hit a market like this. the design quality, the quality of the make, and the — what we believe the value equation. And any time we’ve done anything like this, we’ve moved the business meaningfully.

And so, this is the biggest thing we’ve done. I think it will be the biggest — the most meaningful thing that we’ve ever done strategically. It will reset the company for the next five years.

Jonathan Matuszewski — Jefferies — Analyst

Appreciate the color and best of luck.

Gary Friedman — Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Steve McManus from BNP Paribas. Please go ahead.

Steve McManus — Exane BNP Paribas — Analyst

Hey, afternoon. Thanks for taking the question. So, a question on suppliers. We’re seeing more and more suppliers go out of business here, a pretty big one on the high-end side last week.

So, just curious what you’re seeing with respect to the financial health of some of your key suppliers. Any challenges that you’re facing right now that’s worth calling out?

Gary Friedman — Chairman and Chief Executive Officer

Yeah. I mean, you’re probably referencing one of our suppliers that filed for bankruptcy, Mitchell Gold and Bob Williams, really terrific people. It’s an unfortunate thing. I think they went through some private equity hands and there’s some — they stepped back in the business, and that’s some wrong leadership.

It’s bad decisions, and it kind of goofed up the company. And there’s, I don’t know, probably $30 million, $40 million of demand with them. We can resource it all pretty easily. We don’t see any meaningful interruptions or anything.

They’re not one of our big suppliers. And I think it just goes to show how hard it is to do every part of the business, right, when they’re — typically, there were a furniture manufacturing company, really great aesthetic, great marketing, great style. They got into the retail business, too, and that added a lot of complications. It’s hard to when you try to do both.

You try to be a wholesale business, a retail business, manufacturing business, you’re kind of in three kind of complex businesses right there. So, I think there’s always going to be some people that kind of don’t make it through different down cycles like this. There could be more on the retail side, there probably will be. But yes, we don’t see any real fundamental risk to our business that is going to be meaningful.

Otherwise, we would have talked about it in disclosure.

Steve McManus — Exane BNP Paribas — Analyst

Got it. Appreciate the color. Thanks, Gary. Best of luck.

Gary Friedman — Chairman and Chief Executive Officer

Sure. Thank you.

Operator

Your next question comes from the line of Michael Lasser from UBS. Please go ahead.

Michael Lasser — UBS — Analyst

Good evening. Thanks a lot for taking my question. Gary, is it right to interpret your statement that you expect the business to inflect in the first half of next year to mean that it’s going to flatten out in the first half of next year before resuming a growth trajectory in the second half of next year? And my follow-up question is would you expect, based on everything that you know today that your totality of investment spend independent of it’s going to be in the gross margin or in the SG&A is going to be greater than equal to or less than what you’re spending this year? Thank you so much.

Brad Thomas — KeyBanc Capital Markets — Analyst

Sure, sure. So, yeah, let me just try to be real clear and direct that we expect the business to inflect in the second half of this year, right? Meaning — and when I talk about inflection, what does that mean? That means a meaningful move in trend, and this means to the upside, right? So, we think our business will inflect and our trend will change to the upside vis-a-vis where we’ve been trending where — how the rest of the market is performing. We think we’ll have an inflection that will make a meaningful move against all those metrics, right? We’ll inflect up against our trends. We’ll inflect that against the market trends, will inflect that against the competitive trends.

We think we will reach kind of a peak of that inflection of this first phase from these books, we think we will hit that in the first half of next year. So, I’d say, think about an inflection happening here over the rest of this year will inflect up. And then in the first half of next year, there will be another kind of inflection above whatever that run rate is, right? And that’s against our trends against the industry’s trends against our competitors’ trends. And then as we cycle and get into the second half of next year, I think we will build on that trend, but it may not be as bigger than inflection, but it will be a building of momentum again, kind of disregarding any kind of meaningful thing that happens in the economy and whatever happens in the economy, I would be surprised if it’s if it’s more dramatic than our positive inflection, right? So, if the market goes down, some step-down, our inflection point will be bigger than that step-down.

Does that make sense? Is that more clear?

Michael Lasser — UBS — Analyst

I think I catch your drift. If you’ve been trending down high teens, low 20% range. The inflection is, look, we’re not going to be trending down at this range. The counterargument would be low.

You’re going to be facing easier comparisons. It’s harder for us to dissect how much is due to just the market getting better.

Gary Friedman — Chairman and Chief Executive Officer

Yeah. No, you just got to think about — think about all those things I just said what’s the industry doing? What are the key competitors doing? What are we doing? We’re going to inflect against all of that, right? So, it’s not just our trend. Our trend will be one of those comments, but we’re going to inflect against the industry. We’re going to inflect against the key competitors.

That’s how to think about it.

Michael Lasser — UBS — Analyst

OK. And then on the —

Gary Friedman — Chairman and Chief Executive Officer

[Inaudible] which means we’ll be taking market share, right? So, I think we’ve been giving market share. We will go from giving market share to taking market share.

Michael Lasser — UBS — Analyst

That’s clear. And then as you think about 2024, will the magnitude of the investment that you’re making be larger than, smaller than, or equal to this year?

Gary Friedman — Chairman and Chief Executive Officer

We haven’t guided to that yet. So, yes, we’re not prepared to kind of talk about that.

Michael Lasser — UBS — Analyst

OK. Thank you very much, and good luck.

Gary Friedman — Chairman and Chief Executive Officer

Great. Thank you, Michael.

Operator

Your next question comes from the line of Cristina Fernandez from Telsey Advisory Group. Please go ahead.

Cristina Fernandez — Telsey Advisory Group — Analyst

Yeah. Hi. Good afternoon, everyone. I wanted to go back to the advertising spend and the shift you’re making to the twice-a-year cycle.

Like does this mean you go back to 4% of sales spent on advertising? I know the last couple of years, it’s very low, or with the product introductions you’re making and the new store openings in Europe, if it makes sense for that spend to be at a higher level. Just want to get a sense of directionally where that spending goes.

Gary Friedman — Chairman and Chief Executive Officer

I don’t know yet. We’ll know a lot more when we see the inflection in the business.

Operator

And we have no further questions in the queue at this time. Gary Friedman, I’ll turn the call back over to you for closing remarks.

Gary Friedman — Chairman and Chief Executive Officer

Great. Thank you, operator. Thank you, everyone, for your time and interest. Thank you to Team RH for your leadership and efforts.

Your hard work is going to pay off. And thank you to all our partners around the world who are part of this team, your support and efforts mean the world to us. And I can tell you, all three constituencies that are all probably listening into this call, I think, share the sentiment that we shared with you today. I don’t think we’ve ever been more excited about the future.

And I believe we’ll demonstrate that to the other constituencies and that’s the shareholders that are on this call. So, thank you, everyone, for your time and attention today. We look forward to the next few quarters. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Allison Malkin — Investor Relations

Gary Friedman — Chairman and Chief Executive Officer

Steven Forbes — Guggenheim Partners — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Jack Preston — Chief Financial Officer

Steven Zaccone — Citi — Analyst

Brian Nagel — Oppenheimer and Company — Analyst

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Seth Basham — Wedbush Securities — Analyst

Maksim Rakhlenko — TD Cowen — Analyst

Brad Thomas — KeyBanc Capital Markets — Analyst

Jonathan Matuszewski — Jefferies — Analyst

Steve McManus — Exane BNP Paribas — Analyst

Michael Lasser — UBS — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

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