Restoration Hardware 2015 Annual Report Download - page 5

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2
Increase Operating Margins. We have the opportunity to continue to improve our operating margins by leveraging our fixed
occupancy, advertising and corporate general and administrative costs, as well as leveraging our scalable infrastructure. Key areas in
which we believe we will increase operating margins include:
• Occupancy Leverage—We believe that our real estate transformation will allow us to better leverage our fixed occupancy
costs. Our next generation Design Galleries are expected to generate increased sales volumes in each market. We expect
that these increased sales volumes, coupled with the favorable anchor tenant-type economics and lower rent per square
foot, as compared to our legacy Galleries, will provide significant leverage of our retail occupancy costs. We also expect
leverage in our supply chain occupancy as we optimize our inventory investments over time and further leverage our
distribution center infrastructure.
• Advertising Cost Leverage—We believe the physical expression and retail experience in our next generation Design
Galleries serve as the best form of advertising for RH. Our next generation Design Galleries are expected to generate
increased sales volumes in each market as compared to the legacy Gallery in that market. As a result, the higher sales
volumes achieved will leverage our fixed advertising expenditures in each market. We also continue to explore
opportunities to further optimize our Source Book strategy and enhance our on-line marketing initiatives.
• Improved Product Margin & Shipping Efficiencies—We believe we can obtain additional operating margin expansion
from improved product margins and shipping efficiencies. We believe we have pricing power that should continue to
improve as we continue to take market share in the highly-fragmented luxury home furnishings market. As our newer
categories and products gain scale, we also expect improved vendor pricing. In addition, we anticipate further efficiencies
of in-sourcing our home delivery locations and opportunities to optimize our shipping model over time.
• Other Selling, General and Administrative Expenses—We believe we still have significant opportunity to leverage our
fixed corporate and other general and administrative expenses as we increase our sales.
Pursue International Expansion. We plan to strategically expand our business into select countries outside of the United States
and Canada in the future. We believe that our luxury brand positioning and unique aesthetic will have strong international appeal.
Products and Product Development
We have positioned RH as a lifestyle brand and design authority by offering dominant merchandise assortments. We are
merchants of luxury home furnishings and our luxury products embody our design aesthetic and reflect inspiration from across the
centuries and around the globe.
We have developed a proprietary product development platform that is fully integrated from ideation to presentation. Key
aspects of our product development platform are:
• Organization—We have established a collaborative, cross-functional organization centered on product leadership and
coordinated across our product development, sourcing, merchandising, inventory and creative teams. Our product teams
are focused on maximizing the sales potential of each product category across all channels, which eliminates channel
conflicts and functional redundancies.
• Process—For many of our products, we work closely with our network of artisan partners who possess specialized
product development and manufacturing capabilities and who we consider an extension of our product development team.
We collaborate with our global network of specialty vendors and manufacturers to produce artisanal pieces on a large
scale with a high level of quality and value, including both distinctive original designs and reinterpretations of antiques.
• Facility—We have built the RH Center of Innovation and Product Leadership, a facility which supports the entire product
development process from product ideation to presentation for all channels.
As a result of our proprietary organization, process and facility, our typical product lead times are 3 – 9 months, which enhances
our ability to introduce more new products with each collection. In addition, our product development platform, sourcing capabilities
and significant scale enable us to reduce our product costs.