Restoration Hardware: Climbing the Luxury Mountain - [Business Breakdowns, EP.112]

23:44They will provide capital sometimes to help them scale because the RH orders are so much larger than what they typically do. The one change that's happened in the past year is they actually did go out and buy one of the first Atelier's upholsters, custom furniture maker. And so for And right now, that seems to be more tied to interior design services and for someone who wants higher end custom product. But over time, the same way LVMH felt the need to get more integrated with their suppliers and taking over the manufacturer to make sure they can ensure quality, we could potentially see that happen over time.

24:16Is there any way to measure how much of a difference that's made in terms of the margin profile of the business, just being able to have direct manufacturer relationship versus 20 years ago when it was curating from other buyers? I don't know within each product line specifically. The company as a whole had negative margins when he took over. He originally was targeting for a mid -single -digit margin. And then in 2021, they hit 25%. That might temporarily have been a little elevated just because of how much COVID -induced demand they had by 20 % last year. Again, maybe a little cyclical. It looks like it's going to be lower this year, but it's clearly a lot higher.

24:53I don't know exactly how you could say how many points of margin they would get from that though. one piece of a broader pie that drove the change. So that makes sense. And the sales model itself, you referenced the membership, which I want to get into a little bit. But the actual stores, the brick and mortar experience is unique, because I have had the experience before where I've needed something from a restoration hardware, and I was not able to actually leave with that particular thing. What was the decision behind not actually selling goods that you could walk away with from the stores? I think it goes back to this idea of the store experience and curating the pieces in them.

25:34And right there in the language, it alludes to a museum, which is how they're thinking about it in a way. You have all of these pieces on display, you look at them, you're able to interact with them. But ultimately, it's something that you're there just to experience and then later order. And you can imagine that is quite good from logistics and operational perspective, where now you don't have to have a backroom with a lot of inventory that frees up the room for more selling space. It also means employees aren't shuffling products around. It also means that then you can better centralize a lot of your inventory in fewer distribution centers because you're not worried about something running out of stock in store.

26:10It also means that you don't have to worry about theft, even though furniture is hard to steal. But it also means you don't have to deal with cash registers. So you have more selling space once again, and you're freeing up employee time, cash and carry, which is people paying in store and walking out with something that's less than 1 % of their business. It's holistic into the whole experience of going into an RH. And it helps keep the stores clean versus maybe if you go to a pottery barn, things can look messy. You're having employees constantly having to fold stuff and put stuff back in its place.

26:39That makes sense. And it's not something that I was completely aware of, but I'm sure subconsciously, I was aware of it. Do they break out how much of their sales are done online versus placed within the store? No. So what they do say is they have direct business, which was traditionally just the source books that I mentioned, and then later included online. They haven't disclosed that in a few years, but at last disclosure, it was about half of the business. However, he will at the same time say it doesn't make sense to focus on a channel. You should be channel agnostic because the stores are very clearly driving the book purchases.

27:14they're driving the online purchases. And if you're focusing on where the customer just finishes the sale of the product, you're missing the bigger picture. So he talks a lot about how all of these online companies, people say, oh, online, it's more profitable because you don't have a storefront. And he says, what you're missing is that the storefront at the same time is an advertisement for us. So this is the whole tack is the new rent argument that everyone talks about. So your advertising cost of an online -only store went up drastically. So how are you going to think about the profitability if you have both the storefront and then also the online channel?

27:48He doesn't like to. He just says, think of it holistically. There's so many things that I could have easily looked at describing your stores as a museum. And I could have been cynical and gave it that snarky, oh my goodness. But when you look at the results, it really... Sometimes these things and these differentiated views come from a real place and they're visionaries and they just sound crazy at first before their visions come true. The membership model, every finance person, I'm sure loves a membership model and the positive effects that it has on working capital. But can you actually go into a little bit of the reality of when it was launched, how much impact it's actually had on the business?

28:29Can you bring it to reality in terms of how much impact it's actually had in the storyline there? I think when a lot of people think of a membership model, they're thinking of Amazon Prime or something. So they're thinking, oh, this will be a churn reduction tool. And you're also going to get the stream of recurring revenue that's high margin. I don't think it's that at all for them. I think if we rewind for a second, they had a problem. And that problem was promotions. I don't think it can be understated how problematic promotions can be to a retail business. So let's think about what's happening.

29:02When you put an item on sale, you're habituating a consumer to defer purchases until that item goes on sale. At the same time, you're telling the consumer that this item is really worth something less because we regularly put it on sale. So you have that negative association. You have to basically make the decision to either overstaff or understaff for the period of promotion because everything becomes busier, either you're taking on part -time staff, in which case they're not that knowledgeable about the products. So customers are not going to be very impressed with that level of service, or you're staying understaffed, in which case customer service is also not great.

29:38So you have that issue there. And then on top of that, you also are basically trying to compel someone to purchase something impulsively. And I think a lot of MBA types might think this is great, we got them, except in the back end effect of that is that your returns are much higher. And we should get into logistics later, but when returns can be quite problematic to a business, especially when you're shipping something as bulky as furniture. So you have that aspect as well. So they really wanted to get around this disruptive promotional aspect where employees are running around trying to restock stuff.

30:10The managers are spending all their time trying to plan for inventory. He had this quote that said, when we had promotions, we would spend three quarters of our time just managing the inventory. They wanted to get out of this business. And that's what the membership really allowed. Now, instead of discounting at a specific period, we're always discounting, but only for members. And then this fits back into that original thing where we were talking about the interior design trade, where they get the special trade discounts. That's basically what the membership is. Here's your trade discount. And I think the same way by stating a higher price up front first and then a lower membership price, it still does help signal that the items are of higher quality than if they just stuck to the lower price.

30:51The other thing I think it does is that once you pay for that membership, they don't give churn stats. I would have to imagine the membership churn is pretty high because you do a project, you buy the membership because you get the 25 % discount, then you churn off. So people would probably think of that as a negative aspect. Except when you are a member, you feel a need to take advantage of RH as much as you can. So the average ticket of member holders is much higher than those that aren't members. And at the same time, oh, I already get this free design service. Let me go ahead and check out what that's about.

31:24And then they're also upselling you on all sorts of things at the same time. So I think that's the idea behind the membership. The promotional dynamics are super, super interesting. thing. And I think that taps into the reality of being a luxury brand. If you want to be a luxury brand, you do not discount. Are there any of their peers that are doing something similar? Not in the membership realm. Not really. And there's peers like Our House is one of their public peers. They're also higher end luxury retailer. They've copied them in that they've done larger store formats now. But no one has really gone to the complete full extent that Gary has.

32:01And it's also hard because we can talk about how disruptive this was to the business in 2015, 2016. There was a lot of things going on, but it sent the stock down 70 % over this period of transition. Again, there's a couple of things happening over that time, but it's very disruptive to switch your model over and you're not sure if it works. And at the same time, a lot of these other furniture sellers, they're relying on interior designers as their customer acquisition tool. So they don't have a restaurant. They don't have these ornate buildings to bring people in. They don't have the grand awareness RH does.

32:32And without that, it really is, are you going to cut off the hand that feeds you? Before we get into the operational side of things, just on the sales side, does it tend to be a traditionally cyclical business that macro plus or minus GDP in terms of sales growth? When you reference 2015, 2016, I think of industrial recession, but I'm just curious how it's trended over time and how you would think about from a sales perspective, the macro exposure? It's definitely a cyclical business. It's cyclical, slightly on top of what you consider to be cyclical. And that when they launch a new collection, you can see demand increase.

33:10If a collection gets tired, demand could potentially slow. So if you're looking at the past, call it since 2012, sales have compounded at about a 10 % CAGR. But within that, there's three periods where it was 3%. So it's definitely pretty cyclical. And then you also have the aspect of them upgrading their galleries and growing through that as well. In the last year, Gary talked about how luxury home sales were down 45%. And if you're thinking about what triggers would lead you to refurbish your home, home sales are obviously a big piece of that. It's not the only piece, but that clearly has an impact on sales as well.

33:45But the way they're building their model with driving people into the stores, as long as affluent people still want nice things, they're being exposed to it enough, there's a better chance that they're going to ultimately make that purchase. Cyclical on top of cyclical. I like that one. Put that in the pocket. The operational model and specifically logistics, how do they operate their logistics model in terms of distribution centers, transportation, anything unique? Furniture is a very unique category in terms of the logistics and the challenges there. What are they doing on that side? I'm going to take you back to 2015, 2016, where RH really went through a lot of growing pains.

34:24And this will help exemplify how logistics can be an issue and how to solve for that. Before they had promotions, we talked about the issues with promotions. We could think about it from the logistics side. When you do have a promotion, you're running low on stock and inventory, you're paying to rush ship stuff. But there's also the fact that when many people are ordering something at the same time, you have to ship it all out at the same time as well. So you're stacking deliveries in a closer window. That means there's more likely it's going to be late. So consumers will be unsatisfied. And also that there's going to be mistakes and damages.

34:57That's one aspect of it. And then I mentioned also on the promotions, when you compel someone to purchase something, they might not otherwise, there's a higher return rate. And so now you also at the same time as you're rushing all these shipments out, you also have higher return rates. And so now you need to stress your logistic system more. Around the 2015 time period is when they introduced the Modern collection, and this was a very large collection for them. And it's expanding their skew count. I've never heard anyone else talk about it this way, but Gary likes to put it in terms of horizontal and vertical inventory.

35:29When you expand your skew count, he calls that horizontal inventory. And when you're stacking up more of the same skew, that's vertical. Modern kind of hit this critical point where now they had just way too many SKUs. It was at this point that he really rationalized all of the rest of the shots, skis, and lower end items that they were reluctant to get rid of for a while because they were still driving sales and traffic and now they're gone. So then you have that aspect of too much inventory in the system. And it's funny because they worked with this consultant and the consultant told them, as long as you have the inventory in the system, it doesn't matter what distribution center it's in, you'll be able to send it to the customer.

36:07What they actually found out, what that meant was many frivolous touches of the product and a lot of redundant DC transfers. So you have maybe someone buying a sofa on the West Coast, it's shipping from the East Coast warehouse all the way to the West Coast by the time it gets there. The system didn't catch that the restock would be coming into the West Coast at a time that it was probabilistically likely that they'd also have an East Coast sale. The figure they gave at the time was about $9 million was being wasted on just these excess transfers back and forth. But the bigger factor really here is all of the capital that they're tying up in inventory.

36:41If you look at their working capital dynamics as they're growing, inventory is just sucking up more and more capital. The amount of money tied up in inventory, just the increase in 2015 was greater than their entire operating cash flow for the year. So this was the problem. And as they continue to grow their collection, it would only get much worse. Is there just a rule of thumb for inventory as a percentage of revenue for furniture? If you're looking at inventory turns, that are turning about three times a year, which is basically in line with some of their other peers. My guess is though, the reason why it's not better, even though they have this gallery model, is just because they have a lot of horizontal inventory, but they probably do carry much less vertical inventory.

37:24That would be my guess there. Okay. So the amount of working capital tied up in inventory at the time was more than what their cash from operations was. The way they solved for this at the time was they were slated to open to distribution centers. Instead, they actually cut how many distribution centers they had. They rationalized their footprint. And so now they're keeping less redundant inventory. This is vertical inventory is now shrinking. So from the period 2015 to 2017, you actually saw all of a sudden inventory reduction became their largest source of working capital. That increase alone was more than half of all operating cash flow for the year.

38:01So that's just how they alleviated the issues. But then the other thing they noticed was that with these returns, the reverse logistics were very messed up. So what you had was you had a sofa going to a warehouse, was sitting there, it was waiting until other damaged products could come to fill up a truck. Then that truck was taking it to a sorting center. And then the sorting center was sending some of it to a retouching facility and the rest of it to another distribution center. That amount then would go to an outlet store, whereas the other amount in the retouching center would end up at a separate distribution center.

38:31Alts usually end up either being sold at a discount or to a customer who might have noticed that it's damaged because you can't ship furniture that much. What they did was they more than doubled their outlet footprint and they just started sending furniture returns directly to the outlets and that helped alleviate the pressure on the system. That's a really interesting solution. When you now look at where inventory is, I'm sure COVID provided another interesting time in terms of the inventory challenges and supply chain challenges. But have they generally gotten towards a normalized run rate or just a restructured supply chain now where they feel they're comfortable operationally?

39:08What he did during this period was he paused basically growth and he said, we got to adjust this logistics platform and re -architect it. So it works for our company going forward and we're not dealing with these issues. Some of that was the business model changes. Some of that was cutting the distribution centers. And then the other piece of that is they wanted to get more involved in last mile. I think I mentioned this briefly, but the same way that it doesn't really make a lot of sense for the delivery experience of a pottery barn table to be the same as an RH table. They want to get more involved in that.

39:38They want to come in with an RH truck. They want someone in their home helping set up all of that. So that was the big logistics changes there. But there's never really any so typical period with them because they had this big boom. Now it's, I wouldn't say it's a trough. They still are doing around $3 .5 billion in sales this last year. But it definitely is slower moving than it was just a year ago when they were growing 30%. And working capital, what does that look like for RH, maybe for other furniture peers? How much is tied up in the business or should be expected to be tied up in the business?

40:12Again, it varies a lot. But there's a lot of aspects to it, whether or not it's we're expanding a collection, we need more inventory ahead of time for that. They're opening up international. There's going to be a new distribution center there. The way I would want to compare it, which we're not able to, is how much inventory you would have to have tied up per SKU. Unfortunately, we don't have the granularity to do it. But what I would suspect is that RH has less vertical inventory than other people because of the gallery model, whereas these other stores have to have more. That makes sense. But if you want to look at free cash flow or something, free cash flow conversion is roughly 60 % of net income.

40:50But the big difference there is really just the capex as they continue to grow. Margin profile, I think you mentioned, got up to 25%, which is pretty impressive. What do you view as, again, assuming there's no true normal, but normalized range, a reasonable outcome in non -extreme periods of recession or COVID stimulus boom? It's tough because it's not only cyclical, it's also a business that's growing their floor trough to trough. Gary said, okay, think of 20 % EBIT margins as our new floor. And then they put out guidance that said it'd be a mid -teens, except that includes 300 to 400 basis points of extra expenses to open up international.

41:33So maybe it's a little higher, but then it's still below the 20. And then, well, that's a normal cycle, not a stream cyclical cycle like it is now with home sales down 45 % and interest rates this high. So it's tough. What I would say, though, is if you're looking at where they started out from zero negative to a mid single digit, he has consistently improved that over time. He can be trusted to do that. I don't know if you want to consider 25 % once they're done with all of this upscale improvement. I think that's fair. Ultimately, he thinks they could reach other luxury peers at 30 % to 35%.

42:07It's hard. I think that's definitely where a lot of judgment as an investor comes in. And ultimately, it's a question of what do you have to pay for today? Do you have to pay for them to achieve 35 % margins? Or can you make the math work at 15%, 20 % if you can? Then it's a different decision. How does the peer group average? You could take our house on one side and maybe Pottery Barn, Williams -Sonoma. Our house, low single digit, near zero sometimes. And this is even during a pretty good time for them. So it is all over the place. William Sonoma, who owns Pottery Barn, is also doing quite well, high teens to 20 range.

42:41But it's tough because there was obviously a lot of demand from COVID for all of these companies. And what a lot of them said is we're not going to promote anymore. And we know that the pain that RH went through to get to that position. But it's also, can you imagine when you're a CEO of a public company, you're watching sales fall a lot, you have all of your capital tied up in inventory, and you're telling your investors, we're not going to promote because it's good for the long term, you're really more worried about losing your job. So until all these companies are tested, I'm not so sure. I think you'll see there's a lot more volatility in their margins, and they will ultimately end up promoting.

43:16But it's a trustworthy threat with Gary, because not only has he done it in the past, he owns over 20 % of the company. He doesn't care. That's the promotion option is a drug that's sitting there and waiting for you, which is really interesting to think about. The conversion to free cash flow, looking at CapEx, I think they're going to spend north of $100 million on this Aspen location that they're opening up. So there's big budget being spent. Does that look like it's a temporary dynamic? And how does CapEx compare to DNA? Or how do you reference CapEx as a percentage of the business? And think about where that would net out on a run rate basis once you see spending come down, which I assume it eventually will.

43:58CapEx to DNA is run at roughly two times, but it's tough because what is maintenance and what is growth. And then the other aspect of it is a lot of times when they're putting a lot of money into a business, what they've done a lot of is the sale leaseback models. So they'll buy a building, they'll refurbish it, and then they'll sell it and lease it back to themselves. And when they do this, they usually end up recovering most, if not all of their capital. They gave one instance where they actually made money doing this. And then in other instances, since RH is now becoming such a draw of traffic, they're able to get real estate developers to actually give them better deals, which is what happened with Aspen.

44:35So the other aspect of the CapEx thing really is, I don't know how much of it is really the gallery model versus also experimenting with new things. Whether it's the planes, guest house, they're going to open a spa now. There's a lot of things going on. They have experimented with residential apartments. They made a house called, I believe it's like 8 Palms House a few years back that Gary lived in for a little while before selling it. So they are experimenting with these other things, which is also an aspect of the CapEx. But I think ultimately when it is mature business, you will see free cash flow conversion converge to about 100 % of whatever net income is.

45:09Inventory sounds unique where, to me, I would suspect for a furniture business, a major percentage of your cash flow could be tied up in inventory from year to year. but you would see that as something that is not overly a drag on this business. It's definitely a significant use of capital as they grow collections and all that it continues to increase but I just think relative to other players it's not an issue it's definitely a characteristic of the industry though is that you do have a lot of capital tied up in an inventory but that's also not unusual for a retailer. If you think about the upside from here where they've got in this business, a bull case for investors, how would you lay it out in terms of the opportunity and what you think are key things that either need to go right or the major bets that you're investing into if you own the stock?

45:59So you think about someone who's maybe affluent, and they just bought an apartment, or they're redoing their house, and they just want to make everything nicer. There's no one brand that comes to mind that can just do that for them. If you think about what is a nice car, a lot of brands come to mind, Rolls Royce, Bentley, Ferrari, Lamborghini. If you think about nice watches, you got a lot of other brands, nice clothes, a lot of brands. There's no top of mind brand that comes to mind where it's just, I want nice home furniture. So that's ultimately the spot they're trying to achieve. Now, what they've said before is that when they transform a gallery from the smaller footprint legacy gallery to the larger gallery, they get about 100 % uplift in sales at that location alongside at least a 10 % uplift in the direct business, the source books online.

46:48If you put those two factors together, and believe it or not, they're only about halfway through the real estate transformation because they can only do about five of these galleries a year. If you look at just that math of completing it, the 100 % uplift from the transformation, the direct uplift, that will get you to about $4 .5 billion. So they used to guide to $4 to $5 billion in North America. Now they think it could be $5 to $6. It's basically doing that full transformation and then getting some more boost from just more awareness and higher utilization of their existing footprint, which if you look historically, is exactly what's happened.

47:19They have fewer stores now than two decades ago. But obviously, sales per square foot have increased, I believe, about five times. So that's just the guidance side of that. And then we talked a little bit about the margin. Let's say it's a 25 % midpoint margin once they're done with this luxury scale. That gets you to a billion, a billion and two and no pat. And this is against a $6 billion market cap company right now. And then there's also the international opportunity that's not layered in there at all. And the way they think about international is they say, look, look at LVMH. They do 20 % in North America and 80 % in the rest of the world.

47:54We're a luxury player as well. We think our mix shift can ultimately be the same. So that implies 20 to 25 internationally. You don't need to make that assumption. But that's definitely their target there. And then we didn't talk about it much, but they have these other experiments they're working on. You alluded to Aspen. That's not only guest house, which is basically a hotel, which again, Gary would go apalyptic if you described it that way. They have a spa. And now they're also potentially getting a little bit more involved in real estate development, selling an RH house, an RH apartment. I'm trying to picture an RH couch in a European apartment.

48:28And I'm not really sure that logistically that can squeeze in there? They get that question and they say, oh, we have a lot of different sizes for our sofas, different sizes and what you see on display. Little tight, little tight. But there was a question that I had there on the international opportunity. It sounds like that is there, but it's not core to the thesis. They're just opening up England this summer or spring. And that I think I mentioned, it's this huge 73 -acre aristocratic estate with white deer, three restaurants, an orangery. People can picnic there. And then I guess it also sells furniture.

49:03That's just one of the stores. They have another one coming up in London. They have Paris and they have a few other locations. So on one hand, it is okay. Maybe Europeans are a little snooty to an American brand trying to do luxury where they all historically have been European. On the other hand, that's incredible. Who else is doing something like that. Our very own Dom Cook of Colossus once told me, I hate when you Americans say heritage brand. You don't have any heritage, which was almost perfect. But we'll see how the actual restoration hardware brand does when they show up there. I want to tap into capital allocation and some of the history.

49:38It sounds like a high capex spending period right now. Just historically, have they done anything else? I think they've had buyback programs historically. But how do you think of them as capital allocators? Gary has hit it right when he's made major business model changes and he has somewhat of a magic touch. But is there anything else in terms of dividend or buybacks that you would mention? Definitely. So when I talked about that 2015 -16 period where they're reorchestrating the logistics platform, this was also alongside sales falling a little bit. And they said, look, we haven't refreshed the collection yet.

50:11We also self -inflicted some of this because we delayed shipping the source book because we wanted to fix logistics before we tried to increase demand. And Wall Street didn't buy it. The stock was down 70%. And Gary gave them the little finger and bought back 40 % of the stock in a little over a year. That's one of the biggest capital actions they've done. They have bought back stock at other points. That was one of the most meaningful. But then you're talking about in 2001, 2002, now's the time to raise money. They raised $2 .5 billion across a couple term loans, and they just kept hitting it as much as they could.

50:42In this downturn, they did have debt, but they came into it with over $2 billion sitting on their balance sheet to take advantage of whatever opportunities they want. Very interesting. I love that move by Gary. And I think the alignment of interest is very clear with how much of the stock that he owns. Personally, there's the furniture market itself, which it feels certainly will have trends. I can see a house and say, oh, that kitchen was renovated in the late 90s or early 2000s. I see that granite. Yeah, that was early 2010s. What gets you comfortable on Restoration Hardware, who seems to have a particular aesthetic, not moving out of style in the future?

51:23They work with a lot of different designers to refresh and roll out different collections. It is changing. There definitely is a bit of an RH style. And okay, that cannot be some people's style. There's a lot of people out there, though. And at least in the channel checks we did, there's plenty of people that like their style and fond of it. and they do have leading interior designers working with them. They're always going to be on that leading edge. And I actually think that's going to be even bigger in the future because the more of a presence they become, the higher end they become, the more people that are going to want to work with them, but also the more of ability they have to actually set that trend.

51:59It's not like they have in -house designers coming up with things. They're curating, quote unquote. And the other side of curating is they could get the criticism, they copy a lot of things. So the same way Zara is very quick to take up a style that's popular, they'll do the same thing. So you can critique that, but it also de -risks the fact that something is going to be irrelevant. And what Gary likes to say is, go to Trulia, go to Zillow, look up homes over $5 million. They're all really ugly on the inside, just really ugly on the interior. This is the whole idea of trying to do luxury at scale, trying to become an arbiter of space.

52:31These homes don't need to look ugly. You have money, give us that money, we'll make it look better for you. And that's their whole idea of trying to sell spaces. And then the next leg of that is their whole products, places, services, spaces. But that's more reach thing. I was actually surprised as I went on the website and looked at more of their offerings to see that it was more diversified than I actually had thought in the back of my head. I had my idea of what I thought Restoration Hardware's aesthetic was. And it certainly does exist. I think there was a great tweet recently that whoever is in charge of Banana Republic has redesigned their collections and their stores to just match restoration hardware.

53:08And it's been quite successful and it's spot on. So there is something there. But I think whether it's the collections giving them a little bit more horizontal freedom or something else just in terms of expanding horizontally in the SKUs and what they're doing, they have branched out. And there's a lot of things that I wouldn't have known. Restoration hardware has certain couches or certain pieces where you know it's them. But there's a lot more beyond that that I didn't realize. So that makes sense. And then in terms of the magic touch that is Gary Friedman, he is on quite a bender at the table right now in terms of his numbers coming up every time.

53:42And do you fear at all for someone who makes big bets and zigs while others zag and has done this well historically, how comfortable are you in just being on his back and his decision making with big capital budgets, doing things that are very non -traditional. How do you think about that and the risk associated with that if anything doesn't play out right? I think you've seen some things that didn't work, they curtail it. You got to go deep in the history for that. So I mentioned the concerts, the art gallery, but then there was also a tableware line that they introduced and then they quietly killed.

54:15There are things that if it's not working, they'll change it. They're very open to experimentation. Before they did Aspen, they did a smaller 10 -room guest house in New York. And that was the first demonstration to see how that worked. And then once it worked, then they went on to the next thing. So it's not so material that if any one of these bets fails, it takes down the company or not. And I do feel they do responsibly scale it over time. I'm not terribly worried about that. And at the end of the day, it is all of his own wealth basically invested in RH as well, which I guess that gives him a little bit more leeway to make the decisions he wants to make, especially when he's coming from the history he did from taking a near bankrupt company that was selling Aquatrol wand dolls as their big sellers.

55:01He has earned the right to experiment with 100 million plus Aspen locations. But to your point, I think to the extent that there's this history with pulling back if things aren't working and casting a wide net in terms of experimentation, I can understand where you're coming from there. You mentioned a little bit on the sale and lease back. Are there any other things from a capital structure perspective that they have ever talked about doing? They seem like smart in terms of capital allocation, but also just thinking about when to be in the capital markets, when not to be in the capital markets, when to sell stock, when to buy back stock.

55:33But also, I'm just thinking about when I hear something, having 10 rooms that are rented out of restaurants, have they ever talked about developing those and spinning those out? Anything that they're doing on that side structure -wise? The way to think about these other things is supporting the main business for now. They did get the question, is this ever going to be a standalone guest house hotel business? If you're doing the math on it, you'd have to scale it pretty big for it to work. 10 rooms, even though they do charge $2 ,000 a night for the cheapest room, you still can't get it to be a billion dollar business unless you've got 80 of these.

56:04I still think of that as just more advertising, helping grow their brand, all that. At the same time, though, they do call themselves luxury at scale. That's their thing. So you can't totally cross that out as a possibility. All of these efforts, I do consider to still be just a relatively small portion of capital. So I don't know that there's anything else to touch on in terms of CapEx. But the one thing I will say is the way they think about their model, it's interesting. He always brings up RH in terms of Apple. And he talks about Apple's integrated ecosystem, where each product supports itself.

56:35And when you get into the Apple ecosystem, you tend to stay. So he's trying to do the same thing with RH in a way. You're going to the restaurant, you're going to buy their furniture. Okay, you learn they have a hotel, guest house, sorry. You're going to trust them on aesthetics and all that. Maybe they're going to get into private jet design services and you'll trust them to do that. That's the more ambitious product places, services, spaces, really catering to these ultra affluent people. But it's interesting because then he also talks about himself in terms of LVMH. And the LVMH model is very much opposed to the Apple model.

57:08You have a house of brands versus a single brand. And you're managing many brands. It's interesting because they bought something called Waterworks. It's a small acquisition for them back in 2015, I believe, and their faucets, kitchenware, that stuff. But they basically left that brand alone and they haven't done anything with it materially. In fact, most people know RH don't even know they own it. So that was their LVMH play, if you will. And then they left it there and they realized the more we do for the RH brand, the more Waterworks doesn't make sense because Waterworks isn't getting any of the knockoff that's driving the RH brand awareness.

57:40So that's just an interesting dynamic that's going on as we think about all of these other initiatives and what could portend for the future. It's also interesting, and I could be wrong, but it feels like Restoration Hardware has been moving their way up in terms of categories. You mentioned at the very beginning, at some point, they were just trying to be higher tier than Pottery Barn. I think of LVMH, Hermes, some of these historical luxury brands. I assume, I mean, I know Hermes was making horse saddles, which was probably not really luxury way back when, but they've been luxury for as long as I can remember luxury.

58:17And to work your way into that category is very unusual. You see many that work their way out of that category. So that's an interesting approach. And it's pretty neat to see a case study that you can follow as that effort goes. No one's really done it before. And Gary calls it climbing the luxury mountain. And he wants to be one of the first companies to ever really do it and to be along that Mount Rushmore with the Hermes, the LVMH. And we'll see what happens. He's a modern day Gatsby. He's always going to be on the other side of the water. Well, I think we've covered a ton. We close it out with the famous lessons question.

58:54Do you think there's any lessons here that you can take away and apply when you're looking at other businesses, other sectors? So many. I touched on promotions, so I'm not going to bore your audience with that again. But I do think just how disruptive promotions can be to a business, at least for me, was not fully understood, all the different aspects of that. Also, just focusing on untraditional advertising. You don't need to go out and blanket the market with TV commercials and magazine ads. You could do these untraditional things. The press is going to write about you on their own. And it's also funny because RH says, we don't worry about having an Instagram presence.

59:29So that doesn't matter what we post on Instagram. What matters is what people say about us on Instagram. It's really just doing cool things out in the real world and letting word of mouth, but then word of mouth via social media also take hold. So that's another thing you learn from him. And you see Elon Musk, Tesla doesn't do a lot of traditional advertising, but everyone knows what Tesla is. So there really is something to that, that you can get much more creative with how you're advertising. And I'm sure there's other lessons from capital allocation, raising money, even if you don't need it, but when the time is right, dying back stock and doing so aggressively and having the trust and faith in your business.

1:00:03But then also the 2016 period, pausing growth when something's not working in your business and stop adding fuel to the fire. You could think about what ultimately almost bankrupted Restoration Hardware originally was when Steven Gordon kept growing stores when they weren't working. If he could have just paused there, maybe they could have figured something out. But that's just a few takeaways from him. But he is a really interesting character to read about. One of my new favorite people, I had heard of him many times and had heard him referenced and saw some of his absolutely classic quotes that he's had in conference calls over the years, but did not fully appreciate his whole backstory and what he's done with the business.

1:00:38This has been awesome, Drew. A pleasure. Thank you for coming on again and joining us. Absolutely. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joincolossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S dot com.