RH Q1 2026 Earnings Report

RH EPS Results

• Actual EPS: $0.13
• Consensus EPS: -$0.07
• Beat/Miss: Beat by +$0.20
• One Year Ago EPS: -$0.40

RH Revenue Results

• Actual Revenue: $813.95 million
• Expected Revenue: $817.66 million
• Beat/Miss: Missed by -$3.70 million
• YoY Revenue Growth: +12.00%

RH Announcement Details

• Quarter: Q1 2026
• Date: 6/12/2025
• Time: After Market Closes
• Conference Call Date: Thursday, June 12, 2025
• Conference Call Time: 5:00PM ET

RH (NYSE:RH) (NYSE:RH), formerly known as Restoration Hardware, is a leading retailer in the luxury home furnishings market. The company designs, sources, and sells a wide array of upscale products, including furniture, lighting, textiles, décor, bathware, outdoor furnishings, and select culinary and garden items. RH operates a vertically integrated business model, overseeing product development and manufacturing to ensure high standards of quality, craftsmanship, and design consistency.

Founded in 1979 in Corte Madera, California, RH has grown from a single retail store to a global lifestyle brand. Over the decades, the company expanded its offerings to include custom upholstery, fine art, and bespoke lighting solutions. RH is known for its signature Source Books, which serve as curated catalogs showcasing seasonal collections and design inspirations. The company also launched a membership program, RH Members Program, aimed at providing exclusive benefits to its clientele.

RH maintains a strong international presence, with gallery locations and distribution centers across the United States, Canada, the United Kingdom, and France. Its gallery showrooms, often situated in historic or architecturally significant buildings, are designed to immerse customers in expansive, room-sized vignettes. This experiential retail approach reinforces RH’s commitment to delivering a holistic luxury environment, both in physical spaces and through its digital platform.

Under the leadership of Chairman and CEO Gary Friedman, RH has pursued strategic expansions into adjacent categories and markets. The company’s executive team focuses on enhancing the customer experience, driving design innovation, and upholding operational excellence. With a commitment to craftsmanship, sustainability, and luxury lifestyle branding, RH continues to shape the high-end home furnishings industry.

RH Q1 2026 Earnings Call Transcript

Key Takeaways

• Strong Q1 performance with 12% revenue growth, adjusted operating margin of 7%, adjusted EBITDA at 13.1%, and $34M of positive free cash flow despite housing market weakness and tariff uncertainty.
• Robust European expansion highlighted by a 47% increase in RH England gallery demand and 44% online growth, 60% demand growth in Munich and Düsseldorf, and plans to open an elevated Paris gallery in September.
• Offensive pricing strategy raising RH membership discount from 25% to 30% to capture market share during the current downturn and drive long-term membership growth.
• Tariff mitigation efforts include shifting sourcing out of China from 16% to 2% by Q4 and increasing U.S. and Italian manufacturing for upholstered furniture to protect margins.
• Balance sheet actions feature $2.2B of debt from recent buybacks, $500M of real estate equity and $200–300M of excess inventory to monetize, with 2025 free cash flow forecast of $250–350M and declining capex.

Presentation

[Operator]

Hello, and welcome to the RH First Quarter twenty twenty five Earnings Call.

[Operator]

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Alison Malkin of ICR. You may begin.

[Allison Malkin, Partner at ICR]

Thank you.

[Allison Malkin, Partner at ICR]

Good afternoon, everyone. Thank you for joining us for our first quarter fiscal twenty twenty five earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

[Allison Malkin, Partner at ICR]

Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events. Also, during this call, we may discuss non GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non GAAP financial measures and a reconciliation of these non GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com.

[Allison Malkin, Partner at ICR]

With that, I would now like to turn the call over to Gary.

[Gary Friedman, Chairman & CEO at RH]

Great. Thank you, Allison. Good afternoon, everyone. Let's see if maybe we can get off to a better start than last quarter. I I should ask who is the person that asked to set up a call that got my response that echoed around the world.

[Gary Friedman, Chairman & CEO at RH]

I can't remember, but I'm gonna put you last in the queue. Thank you and thanks for joining us. Let me take you through the highlights of our letter and we will open the call to questions. To our people, partners and shareholders, our industry leading growth continued into fiscal twenty twenty five as revenue increased 12% in the first quarter despite the polarizing impact of tariff uncertainty and the worst housing market in almost fifty years. Both adjusted operating margin of 7% and adjusted EBITDA of 13.1% were at the high end of our expectations and we achieved positive free cash flow of $34,000,000 in the quarter.

[Gary Friedman, Chairman & CEO at RH]

The substantial investments to elevate and expand our product and platform have resulted in significant share gains and strategic separation positioning the Rh brand for continued growth over the next decade. We continue to be pleased with the year demand trends at RH England. With the gallery up 47% in the first quarter and online demand up 44%, Current demand trends indicate the gallery will now reach approximately 37,000,000 to $39,000,000 of demand in 2025, the full fiscal year with the online demand reaching approximately 8,000,000 To put those results into perspective, if an RH gallery in the English countryside with an estimated population of 100,000 in a 10 mile radius two hours outside of London can generate $46,000,000 of total demand in its full fiscal year, what can an RH gallery in the center of Mayfair, the most exclusive shopping district in London with a population of 9,700,000 due in its full fiscal year. We believe exponentially more. While many question the decision to open our storage gallery in such a remote location believing it would fail, What they failed to understand is the value of doing something so extraordinary and remarkable that it breaks through the clutter and creates a conversation that is authentic and uniquely our own.

[Gary Friedman, Chairman & CEO at RH]

We've learned during our journey at RH that when we've done extraordinary and remarkable work, we've always figured out a way to monetize it. And we've also learned that it's hard to monetize ordinary and unremarkable. We are also pleased to report our business in Europe continues to accelerate with demand growth of 60% in the first quarter across two comparable galleries, RH Munich and RH Dusseldorf. We are also pleased with the continued demand acceleration in our non comparable galleries, RH Brussels and RH Madrid. Last week, our leadership traveled to RH England, RH Madrid, and the soon to open RH Paris.

[Gary Friedman, Chairman & CEO at RH]

While we while we, while there, we met with our teams from all five galleries, listening and learning as they identified opportunities that we both believe could double our current business over the next couple of years. We believe RH Paris, the gallery in the Champs Elysees, will be our most elegant and inspiring gallery yet, Located on the famous Parisian Boulevard just off the Avenue Montaigne, it is at the epicenter of fashion and luxury. You will pass through 20 foot gold gilded gates that lead you down a hedge line decomposed granite pathway into a beautifully landscaped garden where we will have have built where we built a freestanding RH interior design studio. Opposite the studio, you enter the gallery through 18 foot bronze and brass doors flanked by trickling fountains and encountered the dramatic atrium with ornate railings, scissor stairs, and a magnificent glass elevator connecting the six floors and two restaurants. While enjoying lunch or dinner from your from our curated menu of American classics at Les Jardins RH, located on the Second Floor terrace overlooking the garden.

[Gary Friedman, Chairman & CEO at RH]

You'll be seated under a soaring curved glass atrium inspired by the Grand Palais with a bar sculpted from and floating above a floor of rare white onyx. Le Petite RH will occupy the Top Floor and the rooftop where you can take in majestic views of the Eiffel Tower and Grand Palais while enjoying a creative menu of small bites, special caviar dishes and seafood towers while sipping a perfectly crafted cocktail or glass of champagne. Our plan is to open RH Paris in early September to coincide with Maison d'Oje, the premier interior design show in Europe that attracts design professionals from around the world. When we assess the current business momentum across our galleries, the upcoming openings of RH Paris, London and Milan, all in iconic locations over the next twelve months, I can honestly say we have never been more excited or confident about the desirability of the RH brand globally. Another topic we could not be more excited about is welcoming Lisa Chi back to team RH as president, co chief merchandising, and creative officer.

[Gary Friedman, Chairman & CEO at RH]

Lisa is a proven creative and merchandising force in our industry as witnessed by the, the product transformation and brand elevation she led over the past four years at our house in her role as chief merchandising officer and prior as a consultant to the company. Lisa will colead all merchandising and creative efforts with Eri Chaya, president, co chief merchandising officer chief chief merchandising and creative officer and a member of the RH board of directors. Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold, Warren Buffett. While we expect a higher risk business environment this year due to the uncertainty caused by tariffs, market volatility, inflation risk and an increasing level of global discord. We believe it's important to separate the signal from the noise.

[Gary Friedman, Chairman & CEO at RH]

The fact is we've been operating in the worst housing market in almost fifty years. For context, in 1978, there were 4,090,000 existing homes sold when The U. S. Had a population of two twenty three million. Contrast that to 2024 for 4,060,000 existing homes sold with a population of three forty one million and it illuminates just how depressed the housing market has been this year.

[Gary Friedman, Chairman & CEO at RH]

Despite that fact, we are performing at a level most would expect in a robust housing market. We believe it's a result of investing with a very narrow focus and a long term view or what we like to call an inch wide and a mile deep. Elevating and expanding our platform by creating the most desired products presented in the most inspiring spaces in the world with bespoke interior design services and beautiful restaurants that generate energy, engagement, and tremendous awareness of the Rh brand while also serving as a profitable customer acquisition vehicle. Our intentions and attention to detail are reflected in everything we do and in every house we turn into a home. While our business has been strong, it has been so due to action versus inaction, innovating versus duplicating, investing versus divesting, and aggressively taking market share during this downturn.

[Gary Friedman, Chairman & CEO at RH]

So we're positioned to create long term strategic separation on the other side of it. We are investing in the most iconic global locations in retail that will likely never be replicated in our lifetimes. We are building a global hospitality company with multiple concepts across multiple content continents countries. We are we are in continent. We are creating a global bespoke interior design business that regularly does million dollar plus full installations.

[Gary Friedman, Chairman & CEO at RH]

We are building a global contract and hospitality business where our products are featured in some of the finest hotels and residential products in the world. And we are creating the most desirable and distinguished brand in our industry, all while forecasting an adjusted EBITDA margin north of 20%. Imagine what our margins and cash flow might look like in a robust housing market once we begin to cycle and leverage those investments. While we began the year with meaningful debt, almost entirely due to our stock repurchases of $2,200,000,000 we also began the year with incredible business momentum and meaningful assets. The assets include real estate that we believe has an estimated equity value of approximately $500,000,000 that we plan to monetize opportunistically as market conditions warrant an excess inventory of 200,000,000 to $300,000,000 in cost that we plan to turn into cash over the next twelve to eighteen months as we optimize our assortment post our product transformation.

[Gary Friedman, Chairman & CEO at RH]

We are forecasting to generate $250,000,000 to $350,000,000 of free cash flow in 2025. And our plans also call for a significant and growing cash flow from operations and lower capital requirements over the next several years as we cycle this aggressive investment period. We estimate that our adjusted capital expenditures will decrease to a range of 200,000,000 to $250,000,000 in twenty twenty six and one hundred and fifty million to $200,000,000 in 2027 and beyond. We remain confident in our ability to make the necessary investments to continue our industry leading growth while significantly reducing debt and lowering interest expense. As Warren Buffett wrote in his 2,016 letter to Berkshire Hathaway shareholders, every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.

[Gary Friedman, Chairman & CEO at RH]

When downpours of that sort occur, it is imperative that we rush outdoors turning washtubs, not teaspoons. Our debt is reflective of the washtub debt on ourselves. We purchased 60% of our outstanding shares that greatly benefited our long term shareholders post the publishing of Mr. Buffett's letter in 2016 to 2017 and recently repurchased 30% of the outstanding shares during this housing downturn in 2022 and 2023. In addition, we believe another washed up bet is to play offense in the current environment by increasing our membership discount from 25% to 30%.

[Gary Friedman, Chairman & CEO at RH]

This incremental incentive will position us to capture market share increase market share and drive additional membership, which all serve us extremely well when the housing market recovers. While the sky in our sector has been darkened by inflation, interest rates, tariffs and global politics, those clouds will soon too pass, and it will not only be clear skies, but also clear that it was a good time to be a shareholder of RH. Reciprocal tariffs. We have continued to shift sourcing out of China and expect receipts to decrease from 16% in Q1 to 2% in Q4 with a meaningful portion of the tariff absorbed by our vendor partners. We've also resourced a significant portion of our upholstered furniture to our own North Carolina factory where we've been operating ten years.

[Gary Friedman, Chairman & CEO at RH]

We are now projecting that 52% of our upholstered furniture will be produced in The United States and 21% will be produced in Italy by the end of twenty twenty five. While there remains uncertainty until the reciprocal tariff negotiations are complete, we have proven we are well positioned to compete favorably in any market conditions. Let's look at our outlook. Despite the speculative and uncertain outcome related to tariffs and the macroeconomic environment, we are maintaining our current guidance for fiscal twenty twenty five assuming the existing tariffs remain unchanged. To mitigate risks, we are delaying the launch of the new concept that was planned for the second half twenty twenty five to the spring of twenty twenty six when there is more certainty regarding tariffs and price of product.

[Gary Friedman, Chairman & CEO at RH]

Additionally, due to significant and unexpected Liberation Day tariffs announced on April 2, shipments and sourcing efforts were disrupted globally. We believe the disruption will negatively impact revenues by approximately six points in the second quarter and will be recovered in the second half, which is reflected in our outlook below. For fiscal twenty twenty five, we are forecasting revenue growth of 10% to 13%, adjusted operating margin of 14% to 15%, adjusted EBITDA margin of 20% to 21% and free cash flow of $250,000,000 to $350,000,000 Second quarter twenty twenty five guidance includes revenue growth of 8% to 10%, adjusted operating margin of 15% to 16%, and adjusted EBITDA margin of 20.5% to 21.5%. The above outlook includes an approximately negative 180 basis point operating margin impact from investments and startup costs to support our international expansion. Every act of creation is an act of destruction, Pablo Picasso.

[Gary Friedman, Chairman & CEO at RH]

We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand. We believe the important investments we are making to elevate and expand our product and platform during this depressed housing cycle are creating a level of strategic separation in our industry that rivals the most important brands in the world. Our product elevation and expansion plans for 2025 include our 2025 RH Outdoor South Sportsbook Arrived in Homes February with aging furniture collections and exciting new textiles offering plus a significantly improved in stock position to start the season versus a year ago. While the business started strong, we experienced a slowdown following the reciprocal tariffs due to the due to the compressed peak selling season and the market becoming highly promotional. We responded by increasing our RH membership discount to 35% for a limited time to maximize market share in this important category.

[Gary Friedman, Chairman & CEO at RH]

The introduction of our new RH Interiors source book arrived in homes mid February. We've been pleased with the early response to the new collections despite what has been a volatile period post the tariff announcements. Our RH Modern source book is in home this week with 18 new collections across furniture, upholstery, lighting, rugs, and textiles. We are introducing a new design aesthetic, Japandi, harmonizing elements of Japanese serenity and Scandinavian simplicity. As mentioned, we are delaying the launch of the significant new brand extension previously planned for the fall of twenty twenty five to the spring of twenty twenty six that we believe will meaningfully expand market size and share of the Arch brand.

[Gary Friedman, Chairman & CEO at RH]

This new brand extension will include a source book and three free standing galleries in San Francisco, West Hollywood and Greenwich, Connecticut. We'll be sharing more details of the exciting new venture later this year. Our platform elevation and expansion plans for 2025. We continue to open the most inspiring and immersive physical experiences in our industry and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry and perfect proportions, spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality, spaces with garden courtyards, rooftop restaurants, wine and barista bars, spaces that activate all of the senses and spaces that cannot be replicated online.

[Gary Friedman, Chairman & CEO at RH]

Our plan to expand the RH brand globally, address new markets locally and transform our North American galleries represents a multibillion dollar opportunity. Our platform elevation and expansion plans for 2025 include the opening of seven design galleries in Oklahoma City and Montreal in the second quarter plus Paris, Detroit, Manhasset, San Diego, and Palm Desert in the second half. We also plan to expand our brand presence in East Hampton this week by opening a freestanding RH outdoor gallery just down just a couple of doors down from our current gallery and are exploring plans to further enhance our design ecosystem with a new concept gallery in the near future. As previously communicated, we anticipate an inflection of our business in Europe as we begin to open in the important brand building markets of Paris in 2025 plus London and Milan in 2026, all with dramatic and brand building hospitality experiences. We believe post each opening, we will begin to have the scale to support the necessary advertising investments to accelerate our growth in Europe.

[Gary Friedman, Chairman & CEO at RH]

Looking forward, we plan to accelerate our platform expansion strategy to include the opening of seven to nine new galleries per year plus two to three design studios outdoor galleries or new concept galleries per year that increase our current presence in underpenetrated markets or open new markets to the orange brand. Every movement has a lunatic fringe, Theodore Roosevelt. America's Nobel Prize winner, commander of the legendary Rough Riders, Medal of Honor recipient, promoter of the conservative movement, conservation movement, leader of the progressive progressive movement, noted for his exuberant personality and ranked by scholars as one of the greatest presidents. Theodore Teddy Roosevelt proclaimed in his famous speech as if so born in Paris, it is not the critic who counts, not the man or woman who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man or woman who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who airs and comes up short again and again because there is no effort without error or shortcomings.

[Gary Friedman, Chairman & CEO at RH]

But he or she who actually strives to do the deeds, who knows the great enthusiasms, the great devotions, who spends himself in a worthy worthy cause, who at its best knows Indiana the triumph of high achievement and who at its worst if he fails, at least fails while daring greatly. So its place shall never be with those cold and timid souls who know neither victory nor defeat. While our ambitions are not political, they are personal. We remain inspired by the progressive thinkers and afraid to push forward new ideas and fresh perspectives. It's a culture of leadership versus follow ship, innovation versus implication, enlightenment versus ego.

[Gary Friedman, Chairman & CEO at RH]

It's believing none of us are smarter than all of us, that we need all the brains in the game and the egos out of the room. It's about thinking until it hurts, until we can see what others can't see, so we can do what others can't do. That's how you transform a money losing restoration hardware store at Aventura Mall in Miami that did $2,000,000 in annual sales into an RH gallery that does $44,000,000 in the exact same space with the exact same square footage. It's also how we will transform that $44,000,000 legacy gallery into $100,000,000 plus RH design compound, a yet to be unveiled multi building design resort of sorts in the parking lot of the same shopping center. We began this journey over twenty years ago with a vision of transforming a nearly bankrupt business that has $20,000,000 market cap and a box of Oxtol laundry detergent on the cover, in this catalog into the leading luxury home brand in the world.

[Gary Friedman, Chairman & CEO at RH]

The lessons and learnings, the insights and intricacies, the sacrifices made and the scar tissues developed by getting knocked down 10 times and giving up 11 leads to the development of the mental and moral qualities that build character in individuals and form cultures and organizations. Lessons that can't be learned in a classroom or by managing a business. Lessons that must be earned by building one. Are we a part of the lunatic fringe? If it means that president Roosevelt said in his speech of the subborn that our place shall never be with those cold and timid souls who know neither victory nor defeat, then put us in that arena.

[Gary Friedman, Chairman & CEO at RH]

Onward, team RH. Carpe diem. Operator, we'll now open the call to questions.

[Operator]

Thank you. Your question comes from the line of Steven Forbes with Guggenheim. Your line is open.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

Good afternoon, Jack and Gary and team. Gary, you started the letter this time focusing on Europe. And it may be too early and not sure if you want to repeat maybe what you had done in the past. But given how demand has ramped at RH England, would love to hear your sort of high level thoughts or initial thoughts on how your demand planning forecasting for Paris, London and Madrid have evolved as many of us sort of try to think about where the business looks in Europe twelve or twenty four months from now, especially as, you have advertising investments behind them?

[Gary Friedman, Chairman & CEO at RH]

Sure. I think, you know, what we've learned in this couple of years and, again, not all the galleries have been open during this time, is that I think that the headline is that when you you really look at the patterns, you look at it closely, you you look at what you're doing right, you look at what you're doing wrong, is that the r h brand as it is today, we believe we've kind of have enough data to say it can be as disruptive and productive in Europe as it can be in America. You know? And that's what the early trends look like, and the early trends are littered with what I'd call, you know, just choppy execution. Right? A company in America trying to open a company in Europe.

[Gary Friedman, Chairman & CEO at RH]

You know, we're not experts there. You know, our brand's never been anywhere there. You know, we've got an ex excellent people, again, in in in in all of our galleries and, you know, leading the teams. But, you know, you you listen to people and everybody tells you, oh, you need you need much smaller furniture or you need color or you need this or you need, you know, picture frames and candles and more accessories and all these things. And, you know, when you find out you start to find out if you're in this yeah.

[Gary Friedman, Chairman & CEO at RH]

You're in business area, you start to get real data on what other people do, what their volumes are. And, you know, we're just able to connect the dots and see the patterns and say, wow. Once we fix, like, three things, three headline things that we got. We were we're in a conference room until four in the morning taking questions from our team. You know, they were they would've kept going if we had to kick them out.

[Gary Friedman, Chairman & CEO at RH]

But, you know, they're so excited. And if we can improve three pieces of this, you know, being in stock, having the right fabrics because with flammability issues in The US, we couldn't have the right fabrics. We couldn't you know, we we stopped this the DC over there a year before we opened. Right? RH England because we had all the COVID issues of trying to, you know, stop and start and build and and so on and so We kept having delays.

[Gary Friedman, Chairman & CEO at RH]

Nobody wanted to come out and, you know, do a check on the property or permit sign off. I mean, it's kinda funny, you know, it's sad. Know, when you build out a remote area like that. But but we opened and we really didn't have the right product in the distribution center. We just went through the biggest merchandising transformation in our history and I'm sure in the history of this industry, you know, by multiples.

[Gary Friedman, Chairman & CEO at RH]

And so, you know, not having you know, you're you're going through a product transformation, you know, with the the best you know, our business the core of the business is here. So we need and you're testing many new collections. We need the goods here. It's just so when, you know, you're figuring out what the best sellers are and so on and so well, those just aren't making it to Europe on the go around or two. We're trying to optimize the business here and we're fighting through the worst housing market any of us have ever been in.

[Gary Friedman, Chairman & CEO at RH]

I've been doing this for forty years now. I've never been in a year of a down housing market. I think every one of them has been twelve to eighteen months. So you've got to stay really focused in markets like these and maximize market share and so on and so Just the execution on just being in stock, looking at the time of special orders because many of our vendors couldn't make, you know, the products with the flame retardant and, you know, the orders weren't that big. So they weren't on the front burner.

[Gary Friedman, Chairman & CEO at RH]

If we just do kind of three big things, our team believes our business can double. That's how many customers, you know, we're turning away, you know, and we've got five month lead times on special orders. So I sit here and go, wait a minute. You know, we can see the trends across all of these galleries and, you know, some better than others as, you know, they're gonna be and and you know? But the most part, you know, they're they're gonna trend, I believe, over the next couple of years to levels that will drive four wall profitability, four wall cash contributions as good or better than The US.

[Gary Friedman, Chairman & CEO at RH]

That's what it's starting to look like. And, you know, if we if we really kinda fix some of these things, like, you know, it it you know, you just start to get really excited what this model can look like. You know? So, you know, I I would say, you know, we're just yeah. We are so excited in Europe.

[Gary Friedman, Chairman & CEO at RH]

We couldn't sleep. Like but when we're just listening and learning and we're looking at the trends building and we're realizing that there's so much more opportunity. So, yeah, we feel enlightened and energized and really good about the potential. Yeah. We're gonna get some things wrong and you know?

[Gary Friedman, Chairman & CEO at RH]

But, yeah, we made we made a big bet. Right? We took multiple locations at one time for Abercrombie, you know, to get the Paris and London locations, which could have taken us twenty years to find locations like that. You know, those were critical critical to the brand. And, I mean, it's it's it's my wife, Bella, is at a a best friend's wedding in London, and she was out last night with a huge group of people.

[Gary Friedman, Chairman & CEO at RH]

And if anybody's been in London, go walk by our Mayfair site because it's, you know, it's the biggest Vitruvian man you've ever seen with our design. He says it's on the building, and people are taking pictures of it and, you know, posting it on Instagram and other places. And she she she She she told me, honey, you cannot believe the buzz you have here in London. You know?

[Gary Friedman, Chairman & CEO at RH]

I mean, I think it's I I think it we are gonna rock when we open Paris and London and Milan. I think think we are, you know, we are gonna change things. And, yeah, we're we're just we can talk about it for hours, Steve, so I better let the next question come.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

I appreciate that Gary. And then just a quick follow-up, the $500,000,000 of real estate value that you noted, is there any way you could sort of break that down into two buckets sort of non operational assets or operational assets as we think about sort of transactions that would be sale leaseback oriented or transactions that would literally just be the monetization of assets?

[Gary Friedman, Chairman & CEO at RH]

Yes. Have quite a few galleries that are opening with some that have already opened that we own that, you know, we'll do sale leasebacks on. You know, not exactly the best time to do a sale leaseback, but, know, you gotta balance that with what the interest costs are and long, you know, long term, short term. You know, short term, you you know, you could say, hey. Let's do sale leaseback now, you know, but you're gonna sell leaseback at a, you know, at a different cap rate.

[Gary Friedman, Chairman & CEO at RH]

Right? And the and and the sale, you know, is gonna you know, we'll we'll determine the rent and we'll determine, you know, how much cash we'll take out of it and and what our, you know, what our long term rent stream and profitability stream would be. So, you know, we're we're trying to be a little patient. We don't like paying so much interest right now, but you know? So there's, you know, good attention there.

[Gary Friedman, Chairman & CEO at RH]

So but, yeah. We we how many right now, we've got about six or so sale leaseback. And then, yeah, we have quite a big portfolio in Aspen. We're, you know, fifty fifty joint venture partner. I mean, people can pull out, you know, the press release from 2020.

[Gary Friedman, Chairman & CEO at RH]

You know, made the initial investment. I I think we have, you know, in the high twenties, low thirties properties, somewhere around there. Call it about 30 properties with, you know, many, you know, we we we invested not only because we were gonna build an eco you know, we're building an ecosystem with a, we call it, a gallery that we call the RH Mountain House, which is on absolutely the best corner in Aspen, and it's gonna be a three level experience that, you know, it's it's probably the only building of its kind in Aspen. I mean, it's it's incredible. It's got a three story atrium going up through the middle with a restaurant on the on the rooftop with views of Ajax Mountain with all day sun.

[Gary Friedman, Chairman & CEO at RH]

And I know the the frontage must be a couple 100 feet, you know, that wraps around that corner. And we have an incredible guest house location. It's right on the street where Lift 1 is off, opening, you know, so it will be a main thoroughfare, and we're on a great corner. It's gonna be a tremendous guest house. You guys have probably followed some of the news, you know, with, you know, our partner in Aspen likes to say building in Aspen is harder than building on the moon.

[Gary Friedman, Chairman & CEO at RH]

You know, it's it's a little political there sometimes and a little difficult, but we finally got our thought approved and we're, you know, getting ready to go. The last couple of permits we're we're waiting on and, you know, then we'll finish out the guest house and we'll be open. And I and I would say just based on the, you know, the kind of incredible clientele we have at our current guest house that has just been built by word-of-mouth, I think Aspen is gonna it'll be it'll be the best hospitality experience in Aspen. Nothing like it. And it's got its own unique flavor versus New York.

[Gary Friedman, Chairman & CEO at RH]

You know, it's it's kind of like a contemporary ski lodge, but, a lot of the core ideas around it being built around privacy and luxury. We like to say privacy is the one thing everybody's given away with social media. And it's one thing that the Internet's taken away because you can Google anything about anyone. And the whole desktop is built around privacy. And that's a really unique thing.

[Gary Friedman, Chairman & CEO at RH]

Well, it's a small town of Aspen. Yeah. We're kind of in the center of town in great area, but you're you walk through and you're transported into know, into this world of privacy and luxury, and we think it's gonna be tremendous. And we've got a great restaurant and a Campaign and Caviar Bar. And, you know, we may or may not open exactly, you know, when we opened with the bathhouse and spa.

[Gary Friedman, Chairman & CEO at RH]

You know, we may get the guest house open and open that later. That's a it's a more membership driven business, and it's a new business. That's so it's not not, like, you know, the thing we wanna allocate capital to right now. We wanna get the guest house open, get the branding open, and we'll probably probably follow that up, you know, at some point with our bathhouse and spa. It's all framed.

[Gary Friedman, Chairman & CEO at RH]

It's the, you know, the concrete framing's all there, you know, for the the beautiful beautiful experience underground. And then we've got, you know, just incredible tenants in our JV from some of the best luxury brands in the world, you know, we get to learn what it's like being a landlord with real estate, you know, and evaluations and things can happen. So, you know, we have we have a lot of a lot of value in Aspen. We have a lot of value in in multiple sale leasebacks. We still own some other properties and some we have an option on a building in Madrid.

[Gary Friedman, Chairman & CEO at RH]

Madrid is one of the biggest buildings in all of Europe. We've opened our Madrid gallery, and it is, you know, ramping nicely. And it's small and it's beautiful, and we're gonna put a little cafe on the Top Floor, you know, kinda like RH Montecito, and we think that'll bring even more energy to it. But, you know, we've we've bought a building to have an optionality to have two buildings, kinda like we we do in Los Angeles. We have a, you know, freestanding 30,000 square foot gallery in Melrose.

[Gary Friedman, Chairman & CEO at RH]

We have a 15,000, let's count the outdoor space, probably 20,000 square feet modern gallery, you know, and we may may expand our ecosystem further there. So we've got an option, you know, that we could do something or we could, you know, monetize assets. So, we have a lot of flexibility. Yes. It's not the easiest time to be, you know, real estate development business, you know, with interest rates where they are, but, you know, you don't get it all right.

[Gary Friedman, Chairman & CEO at RH]

You know, you know, the the timing, you know, do I wish I waited another year or two to buy our stock? You know, did I think that housing downturn was gonna be three years? Yeah. I wish I'd waited to buy the stock, and did I know the house downturn is gonna be three years? None of this did.

[Gary Friedman, Chairman & CEO at RH]

But then again, you know, when we, you know, look back at the assets we have and what we can monetize, we look at the momentum of the business that we have, We look at the cash flow potential of the business. When you think about cycling this, you know, this time that we, you know, we spent a lot of capital, and it's expensive to build today. You know, I made a comment in the letter that I don't think we'll ever see someone build the kind of retail experiences we built over the last, you know, fifteen, twenty years. They just won't be able to afford to. You know, post COVID, the cost of building one of our galleries is, almost twice as much.

[Gary Friedman, Chairman & CEO at RH]

And we've been yeah. You'll hear more about how we're gonna be really creative with capital we've designed. I call it out of you know, necessity is the mother of invention. Right? And we had some great opportunities for new galleries, but, you know, building it, you know, one of our typical galleries with the restaurant on the top with, you know, three stories and a grand staircase and two elevators and all the equipment and so on and so is expensive and complex, and COVID's made it almost twice expensive.

[Gary Friedman, Chairman & CEO at RH]

And so, you know, that economic model is not as attractive. We developed a concept that we called the compound, the design compound. And what we did is we took a gallery and we broke it into six to nine separate buildings and, you know, we're getting department store pads in Walnut Creek. We we've got the Neiman Marcus pad on the best corner in the East Bay of the entire San Francisco Bay Area. In Naples, we get this incredible site into Nordstrom that closed.

[Gary Friedman, Chairman & CEO at RH]

And we've got Aventura in Miami, Bank of America on the street. It's kind of in this shop Aventura shopping center parking lot. We're going to build with three compounds, and I think we we have hit you know, we're hoping that we've got another opportunity with one of our partners that we're doing with the ones with, development partners. But we think we can disaggregate a gallery, build it for half the cost, and, you know, you'd have all these buildings connected by gardens. You're walking indoors, outdoors, you know, under little, you know, down pathways.

[Gary Friedman, Chairman & CEO at RH]

You got outdoor furniture all around. You got a restaurant in the middle. I I think it might be the most exciting thing we've ever done, and and we can do it for half the capital. But, you know, it's it's good to have, you know yeah. I'd like to say humans without deadlines are useless.

[Gary Friedman, Chairman & CEO at RH]

Like, we need deadlines or we don't get our work done. We need, you know, we need crises to kind of figure out our potential. And so, you know, I love the fact. And we always say here, you know, necessity is a mother of invention, and it's when we do our best work. So, some of the things we come up with, whether it's the design compounds, the design ecosystems, we said, hey.

[Gary Friedman, Chairman & CEO at RH]

There's another way to break up the thing. You know, do we have to build the whole thing? Or in Greenwich, Connecticut, you're gonna see we've got our I I, you know, I think you've been out to work that we're we we have the galleries, the historic post office, center town, the best location in all of Greenwich, That building, you know, for retail and especially what we did to it. The next best building was the Ralph Lauren building. They got built, you know, a little after us, right, or right before us, maybe.

[Gary Friedman, Chairman & CEO at RH]

Right before us. And, you know, in Ralph Stein downsizing, I think, three, four, five years ago when they closed some of their their stores, you know, no one was able to really operationalize that building very well. We were able to get in, you know, and get that building. And so we, you know, tied up a lease on that building. That will be a building to support a new concept that we're opening.

[Gary Friedman, Chairman & CEO at RH]

We also transformed our baby child gallery into an RH outdoor gallery because outdoor is a very important business to us long term strategically. And so we will have three incredible locations, and we call that a design ecosystem. You'll see another design ecosystem in Palm Desert. And some of these what what it allows us to do is move much more quickly with less capital. Right?

[Gary Friedman, Chairman & CEO at RH]

Because we're taking buildings and, you know, modifying them a bit. You know, I think and we're gonna have a restaurant in the Ralph Lauren Building there. Right? I'm right. Called the Ralph Lauren, but I can't call it what our concept is because I haven't told you what our concept is.

[Gary Friedman, Chairman & CEO at RH]

Or I call it the, you know, RH SIS Building. You have a vision, like, what would you put in a building that looks like that? Anyway, the area is shaking her head. I I shouldn't do this. But but we're gonna, you know, we're gonna have a a r h all day cafe in there.

[Gary Friedman, Chairman & CEO at RH]

It's gonna be super cool. And I think what are we gonna spend? Like, 2 and a half million of capital? Like, 2 and a half million of capital. Like, for us, it's like a free store.

[Gary Friedman, Chairman & CEO at RH]

And, you know, as I said, we we've just got lots of creative ways to grow and opportunities. I mean, yeah, just like in Europe, we've we've got some very expensive real estate before we built in Europe. And, you know, by next year, you know, that that capital kinda gets behind us, and, you know, start throwing a lot of great cash flow up. But we've also things, you know, at the other galleries that we picked up, we didn't spend that much capital in. You know?

[Gary Friedman, Chairman & CEO at RH]

We we're very creative with it. And so, you know, it's one of the things as you think about just the model and the cash flow, you know, just how we can deploy the brand into market side. I think I mentioned I mentioned about Contessa. We opened our RH freestanding interior design studio. It's really an office.

[Gary Friedman, Chairman & CEO at RH]

It has two sitting rooms, like, outside of the offices where we got the same sofa twice that's, a little kind of cool sofa. It doesn't even have our coffee table. Right? It's got a cool antique, you know, like reproduction cool thing that, you know, that the highest level of design. And, you know, we find things like that so we can actually aspire to sell those if you have any people ask about them.

[Gary Friedman, Chairman & CEO at RH]

But it's just a design office with a, you know, little room in the in the front, and it's can I say how much it's doing? I can say how much it's doing.

[Gary Friedman, Chairman & CEO at RH]

Right? It's it's doing a mill it's 3,000 feet. It's doing a million dollars a month. You know? And the design clients we're getting there because it's just a beautiful space.

[Gary Friedman, Chairman & CEO at RH]

You know? And, you know, I I I didn't replace Lululemon there. Right? They I don't think Lululemon's doing 12,000,000 a year and 3,000 feet. That's just we're warming up and stuff.

[Gary Friedman, Chairman & CEO at RH]

So we've just got a lot of ways to access markets. We've got, as I said, the design compounds, the design ecosystem, the design studios. We have the design concept stores where, you know, it's it's kind of a a where we can, again, go into an existing building, do an RH that's anywhere from 14 to, 30,000 feet, a lot less capital. We have a lot of those in the pipeline that's allowing us to access markets much more quickly. And that's what we communicated in the letter that we're gonna accelerate our openings to seven to nine a year.

[Gary Friedman, Chairman & CEO at RH]

And so we feel good and we think we can do it in a very capital efficient way.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

Thank you, Gary.

[Gary Friedman, Chairman & CEO at RH]

Yep.

[Operator]

Your next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

[Simeon Gutman, Managing Director at Morgan Stanley]

Hey, Gary, Jack. So Gary, a bunch of tactical pivots all sound pretty good. I wanted to ask about the sale. I saw you said it was limited time. Can you assess anything about the underlying newness with the sale?

[Simeon Gutman, Managing Director at Morgan Stanley]

Meaning have you seen demand spike up? Is there still a way to assess what the underlying strength of these newness is doing to the business even with the sale? And then how do you kind of ease off of it? Thank

[Gary Friedman, Chairman & CEO at RH]

you know, we just increased the the value to our members, right, for how many weeks? Six, four, five weeks? Like that.

[Jack Preston, Chief Financial Officer at RH]

Outdoor.

[Gary Friedman, Chairman & CEO at RH]

Outdoor.

[Jack Preston, Chief Financial Officer at RH]

Outdoor. Yeah.

[Gary Friedman, Chairman & CEO at RH]

And then and then, really, what we've we we've been we've been thinking about taking membership from 25% to 30%, I don't know, for five years. You know, it's not a new idea for us. You know, it's a long term strategic move because, you know, we live in a really promotional world and, you know, we're a market market leader and other people, you know, try to do things. But for one, start with nobody sells furniture at regular price anywhere in the world. You know?

[Gary Friedman, Chairman & CEO at RH]

All furniture is on sale, basically. And it's just a sale industry. It's just it even starts at the highest end with interior designers. Every interior designer gets 20 to 40% off. You know?

[Gary Friedman, Chairman & CEO at RH]

Most of them get 30 to 40% off with design showrooms. So, you know and then, you know, more of the other, yeah, other people in our industry, you know, try to figure out, like, what can we do? You know, one time we had a competitor that put their entire assortment on sale. It's 30 off, and they were running their business that way until I think, you know, they found out the government doesn't let you do that. And and, you know, so but they were just trying to say, hey.

[Gary Friedman, Chairman & CEO at RH]

You don't have to You can sell buy something similar here because, you know, you have to, you know, get pay PRH $200 for a membership, then here, we'll give you 30 percent off. And it wasn't really 30% off. You know, it's mark up the goods and yeah. So but we we just always thought at the trade level, the discount's more 30 to 40, and and we just think that'll open up the market. It feels more compelling.

[Gary Friedman, Chairman & CEO at RH]

I don't really look, if we did it during a difficult market like this, we're going do something like this, might as well do it now because people are really sensitive. Yeah. We made a move on outdoor furniture for x number of weeks and, you know, picked up significant business. And it was important that is more important there, you know, like, you know, when we went to 35 is outdoor has a peak, and it's a, you know, it's a short peak. It's an all all you know, we sell outdoor all year round, but you have a massive peak in the outdoor business, you know, the March, April, May, June period.

[Gary Friedman, Chairman & CEO at RH]

And we wanted to, you know, just capture more market share during that time. And and and that business got a little rock, like, everywhere got rocked from kind of the reciprocal tariff announcements. When the market went down, our business went down, you had to pull forward, you had to give back. You know, it's like a noisy noisy time right now to run your business. Yeah.

[Gary Friedman, Chairman & CEO at RH]

If it's not, it's simple time. You know, there's I don't know how anybody keeps up with the news of, you know, what's happening with tariffs, what's happening with, you know, Israel or this or that. You know, there's, like, this is noise all over the place. And, you know, I think it's in the gut, and and you're sitting there with a down housing mark for the year. I don't know.

[Gary Friedman, Chairman & CEO at RH]

Anybody even knows, if go back in history, when's the last time that's happened? If it's ever happened. It hasn't happened in my career as long as I've, you know, forty years in this industry. I haven't seen it. So, you know, so this this isn't a normal time.

[Gary Friedman, Chairman & CEO at RH]

But the the 25 to thirty is a strategic thing. We've been thinking about it for five years, debating it back and and we said, hey. Look. We we ought to do it now. Like, why not take the market share now?

[Gary Friedman, Chairman & CEO at RH]

And, you know, when outdoor is a kind of a onetime thing, will we anniversary that next year? I don't know. Maybe, maybe not.

[Simeon Gutman, Managing Director at Morgan Stanley]

And as a quick follow-up, in the path back to the 20% plus or EBITDA margins, does this compromise? Do you think I know it's you sound like you're confident that won't, But how do you get confident in that, you know, that you're not harming the brand in any way by offering this type of discount even for a short period of time?

[Gary Friedman, Chairman & CEO at RH]

You mean the 35% off for, like, five weeks in outdoor or less?

[Cristina Fernández, Managing Director & Senior Equity Research Analyst at Telsey Advisory Group]

It's three and

[Gary Friedman, Chairman & CEO at RH]

a half weeks.

[Jack Preston, Chief Financial Officer at RH]

Three and a half weeks. Just so you know, Simeon, the 30% is a strategic move. It's not it's not, it's not temporary. And and our cash

[Gary Friedman, Chairman & CEO at RH]

It's it's it's our guidance. The 30 off membership is forever.

[Jack Preston, Chief Financial Officer at RH]

And our guidance is 20 to 21. And yes, not.

[Simeon Gutman, Managing Director at Morgan Stanley]

Oh, sorry. Yeah. Okay. Thanks for the clarification.

[Gary Friedman, Chairman & CEO at RH]

Yep.

[Operator]

The next question comes from Steven Zaccone with Citi. Your line is open.

[Ariana Warden, Equity Research Associate - Consumer at Citi]

Hi, this is Ariana Warden on for Steve. Thank you for taking our questions. So my question is what gives you the confidence in the second half sales improvement? Is it just a function of timing of deliveries between second and third quarter? Or is there some risk that demand shifts out to 2026?

[Gary Friedman, Chairman & CEO at RH]

What what's the question?

[Jack Preston, Chief Financial Officer at RH]

I Then what gives us the confidence for the half, you know, applied sales plan? Yeah.

[Gary Friedman, Chairman & CEO at RH]

I don't know. This is what we do for a living. Yeah. You know, we're generally more right than wrong.

[Gary Friedman, Chairman & CEO at RH]

I mean, there's a lot of factors. You know, it takes me too long to explain all of it, but, I mean, our current performance, you know, what we have in the pipeline, the number of new galleries we're opening. I mean, there's a there's a whole, you know, this whole built up model of pieces that says this is what it looks like. And but we we are in the, you know, most unpredictable market I've ever seen. So, you know, we're more confident than less confident.

[Ariana Warden, Equity Research Associate - Consumer at Citi]

Got it. Thank you. And my follow-up is how did product margin perform in the quarter? The last few quarters you spoke to sequential improvement. So what's your updated view on product margin for the full year?

[Jack Preston, Chief Financial Officer at RH]

So our core business product margins were up year over year. Some of the other businesses were were down slightly year over year, and you can see that just mentioned in our MD and A. But I think the most important part of the story is our

[Gary Friedman, Chairman & CEO at RH]

core Core core business margins Year over year. Yeah. Year over year. And we expect it to be up year over year the rest of the year.

[Jack Preston, Chief Financial Officer at RH]

We don't comment on quarter over quarter margin trend, but I think it's important to look at the commentary about the year over year.

[Ariana Warden, Equity Research Associate - Consumer at Citi]

Great. Thank you so much.

[Operator]

Your next question comes from Michael Lasser with UBS. Your line is open.

[Michael Lasser, Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group]

Good evening. Thank you so much for taking my question. So you came into the year with EBITDA margin guidance in the 20% to 21%. It sounds like the decision to increase the discount for members was made more recently. So what is the offset that is allowing you to offer a greater discount and yet still keep the same probability for the rest of the year even as it does seem like sales have proven to be a bit more volatile than what you had originally expected?

[Gary Friedman, Chairman & CEO at RH]

Michael, like I said, we've been thinking about this for five years. So we decided to do it now because it seems like a strategically good time to do it. And, you know, we we always have a lot of optionality, you know, and a lot of things we're thinking about strategically, you know, based on, you know, the market, the competitive market, what's happening, you know, it's like so yeah. So, you know, just we thought it was a good time to do it for all the reasons I've kinda said, to take market share. You know, if you read the letter, it does kinda play offense, right, and take market share.

[Michael Lasser, Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group]

Yeah.

[Gary Friedman, Chairman & CEO at RH]

And we have the margin structure, you know, to be able to do things, you know. So yeah. We're always tweaking our mark you know, our mark our model and, you know, looking at ways to build a better brand, build a better business model, and so on and so So, know, our base would, you know, that this should work well. Yeah.

[Michael Lasser, Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group]

Yeah. Guess my question, Gary, was are you have you taken up some prices to compensate or offset for the increased discounts such that your profitability is where you thought thought it would be?

[Gary Friedman, Chairman & CEO at RH]

Yeah. Well, we we generally will take a price change, you know, at the beginning of the year, every year. And I don't think there's many times that we haven't. And then we were reacting to tariffs appropriately, but we were coming out with some pretty big margin flexibility. You know, just if you look at kind of our more recent trends as we're coming into this year where the new product was margins were, you know, where we've negotiated bigger bets and better pricing and and so on and so And so we've yeah.

[Gary Friedman, Chairman & CEO at RH]

And we, you know, we think our our offer is, yeah, is really distinctive. And, you know, the the, you know, the environment that we sell the goods are in is distinctive. The brand is and I think the I think everything that we do, the the galleries, you know, the restaurants, the design services, all these elements render the product much more valuable. Our source books render the product more valuable. And as you build a brand and the brand becomes, you know, more desired and more distinctive, you have more flexibility.

[Gary Friedman, Chairman & CEO at RH]

I mean, people will pay more for better things. Yeah. And so, I mean, we've been doing this, like, the whole time. Right? Like, you know, we're selling many less categories, much higher quality product at, you know, higher prices, and we have fewer customers doing more volume, and we have much more leverage in that model.

[Gary Friedman, Chairman & CEO at RH]

And so, yeah, we've been building and tweaking this model for twenty five years.

[Michael Lasser, Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group]

Got you. Thank you very much for that. My quick follow-up question is on the six point deferral of revenue from the second quarter into the back half of the year. Is that demand that's already been realized and you simply will deliver the product later on? Okay. I mean, given that, can you give us a sense for how how demand has trended? Yeah.

[Gary Friedman, Chairman & CEO at RH]

This you think For for that for that to happen, Michael, the demand was much higher than the revenues. Okay? But what happened when the reciprocal tariffs hit, we stopped shipments, you know, people stopped producing this, you know, manufacturers thought, yeah, like I mean, it it created disruption, you know, for several weeks in the supply chain. And when you try to ramp back up quickly in a chaotic time like that, things are just you know, things are late, things get backed up. You know, when you stop the factory for a week or two.

[Gary Friedman, Chairman & CEO at RH]

It gets backed up and then you got to catch up. And so, you know, so you're just gonna have deferral, you know, kind of a lag of shipments and a deferral. So that yeah. This is a big one. Yeah.

[Gary Friedman, Chairman & CEO at RH]

You'll usually, know, only have things like this if the demands, you know, really up there, like, percent or 20%. Like, when we were running some really high numbers earlier, we said, hey. We're gonna have a four to, I think, eight point, you know, lag during during a certain period. But this was a disruption lag. You know, I I wouldn't be surprised if other people because people haven't reported that period yet, have they? Other retailers? Are we the to report

[Jack Preston, Chief Financial Officer at RH]

Well, the q one no. Q one were the last. Q two, obviously, what we're guiding. So some of that's in there. Yep.

[Gary Friedman, Chairman & CEO at RH]

Yeah. So I think I think I think you're gonna see this in a lot of places that sold furniture and stuff because you know, when all of sudden you get, you know, 45% tariffs, 35% tariffs, a 100 something percent tariffs, you don't just go, oh, yes. Business is normal. You know, business is usual. Keep on shipping.

[Gary Friedman, Chairman & CEO at RH]

I mean, we're like, hey. Stop the shipment. Like, you know, the, know, the manufacturers don't know what to do. They're like, hey. Can I ship this?

[Gary Friedman, Chairman & CEO at RH]

It's gonna cost a lot more. You know, that it was a that was a shocking thing that happened, you know, liberation day for business. Yeah. I mean, we're lucky for a big business. I mean, it's devastating for small businesses, you know, that don't have flexibility.

[Gary Friedman, Chairman & CEO at RH]

So yeah. Yeah. Think so you're gonna have things like this. I I mean, I'd be surprised if other people in the furniture business, you know, that have, like, special order, things like that that, you know, that's all gonna get hung up. And some of your other goods, you're gonna get hung up, right, back orders and so

[Michael Lasser, Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group]

Thank you very much and good luck.

[Gary Friedman, Chairman & CEO at RH]

Thank you, Michael.

[Operator]

Your next question comes from Max Reklinkel with TD Cowen. Your line is open.

[Max Rakhlenko, Managing Director at TD Cowen]

Hey, guys. Thanks a lot for taking my question. So how much of the excess inventory did you work through in 1Q? And given that your 1Q free cash flow generation was sort of in the mid-thirty million dollars range, can you just help us bridge the gap to the full year guide? Thanks.

[Gary Friedman, Chairman & CEO at RH]

Well, I don't think inventory wasn't down year over year, was it?

[Jack Preston, Chief Financial Officer at RH]

Well, in but I think importantly, that sequentially inventory, you know, was down just slightly from Yeah. You know, a a 20 to a billion eight, so down 12,000,000. Yeah. So making, you know, making a little bit of progress, but, clearly, that's implied.

[Gary Friedman, Chairman & CEO at RH]

Yeah. That that that's a the bigger move will be In the half of the year. As we keep going. Yeah. So we've got ability to meaningfully, you know, reduce inventory this year and next year.

[Max Rakhlenko, Managing Director at TD Cowen]

Got it. Okay. And then switching gears, you guys have an incremental, it looks in the '10 Q to be about $3.00 $8,000,000 available on the ABL. So just given this level and your goal to generate free cash flow, can you discuss whether or not you think, you may need to raise capital or opportunistically look to raise capital to shore up the balance sheet?

[Gary Friedman, Chairman & CEO at RH]

No. But I mean, yes. Would we raise capital opportunistically? Maybe. Not at this stock price.

[Gary Friedman, Chairman & CEO at RH]

I mean I I mean, we're kinda famous for doing zero coupon convertibles. I mean, you know, probably missed the window at $4.50. We should have done one and, know, I mean, the great thing is we've got a highly volatile stock, so we can monetize the volatility and, you know, raise capital in the convertible markets pretty easily, but not not at where the stock is, you know, today. But, you know, if it goes up to to a much higher price, would we think about it? Of course, we would.

[Gary Friedman, Chairman & CEO at RH]

You know? And because it would lower interest rates than yeah. So so but we there's nothing there's nothing we're not doing that we wanna do right now. I mean, if you look at what we're doing and the amount of activity that's happening here, yeah, we're opening we're we're opening maybe the most beautiful and magnificent retail stores that have ever been ever opened anywhere in the world. Like, there's nothing like them in Europe.

[Gary Friedman, Chairman & CEO at RH]

There's nothing like them in The States. You know, the the big investments, the whole Europe piece were yeah. We've made big real estate moves here, opened really important galleries here. We've got a pipeline full of galleries here. We're launching new concepts that we're opening with three physical locations.

[Gary Friedman, Chairman & CEO at RH]

That that kinda means we're excited about that concept. And, you know, we're I think, you know, we just we just went through the biggest product transformation anywhere. We built a restaurant company. Don't think anybody realizes that. Like, how many restaurants do we have now?

[Gary Friedman, Chairman & CEO at RH]

22. 22 restaurants. And we're opening how many what do we have in the pipeline this year? We can't. You know, we got two in Paris.

[Gary Friedman, Chairman & CEO at RH]

We've got two. You know, I think, yeah. We're gonna have 30 restaurants very soon here. I mean, a a restaurant company. How many retailers have a restaurant company that have that really actually people go to and they do volume?

[Gary Friedman, Chairman & CEO at RH]

Yeah. I don't know if anybody saw it, but we just we just got named restaurant in the year in Orange County, the RH Ocean Grill. I mean, we just built Newport Beach for god's sake. That wasn't cheap. Yeah.

[Gary Friedman, Chairman & CEO at RH]

But, you know, no one will ever build anything like that. Again, we have a 270 seat restaurant that is trending right now at 22,000,000, and we're not feeding the whole thing quite yet since we're building up the capability and team. So that gallery is trending at yeah. With the record gallery and restaurant, it'd be our $100,000,000, you know, gallery. I mean, we just opened it.

[Gary Friedman, Chairman & CEO at RH]

You know? So I mean, you know, like, we're we're doing everything we wanna do.

[Max Rakhlenko, Managing Director at TD Cowen]

Awesome. Thanks a lot, guys. Best regards.

[Operator]

Your next question comes from Andrew Carter with Stifel. Your line is open.

[W. Andrew Carter, Vice President at Stifel Financial Corp]

Thank you. Good evening. question is on the disruption. Of course, Liberation Day was in the last month of your quarter. Was there any headwind in the quarter?

[W. Andrew Carter, Vice President at Stifel Financial Corp]

And then kind of a question, if you've got six points coming out of 2Q, then that means demand should be 14 to 16. And if it's three points, therefore, coming in the back overall that comes back, that means demand slows to seven to 12. Can you give us anything on the exit rate in June or why you have that kind of slowing in the half here? Thanks.

[Gary Friedman, Chairman & CEO at RH]

Yeah. That's not what our numbers look like. You know, I just that you know, I don't

[Jack Preston, Chief Financial Officer at RH]

Yeah. Andrew, I mean, you you're asking a lot of Yeah. Monthly level, and and I think you know us well enough to know that we don't we don't get into into those kind of details unless there's a there's a purpose to do that. I think our guidance speaks for itself and and our confidence in the business.

[Jack Preston, Chief Financial Officer at RH]

And and and there's obviously a level of you know, as we've stated before, there's, you know, naturally level of, you know there there's our internal plan, then there's what we communicate externally. And those aren't yeah. There's there's there's there's some, between us.

[W. Andrew Carter, Vice President at Stifel Financial Corp]

I'll have to try. I guess question I'd ask is then, in kind of in this environment right now, are you seeing a lot of like incremental traction on the To the Trade business? I mean the To the Trade guy or the trade guys out there, things are being canceled. The start the pauses really don't help. It's starting and stopping.

[W. Andrew Carter, Vice President at Stifel Financial Corp]

Are you seeing, like, a lot of incremental traction or not really?

[Gary Friedman, Chairman & CEO at RH]

And we have very strong to the trade business. Yeah. We have trade teams in every gallery. We have interior design teams, and we have trade teams there. The trade team service the exterior, you know, the external air interior designers. And, you know, our business is strong.

[W. Andrew Carter, Vice President at Stifel Financial Corp]

Fair enough. Pass it on.

[Gary Friedman, Chairman & CEO at RH]

Okay.

[Operator]

Your next question comes from Marius Morar with Zelman. Your line is open.

[Marius Morar, Director - Research & Securities at Zelman & Associates]

Good evening. Thank you for taking my question. Just a quick one on out store, you mentioned some slowdown. I was just curious, it seems like it was more pronounced than in some of the other product categories. And I was just wondering, why that is? Is there something about outdoor or something else that might have driven it?

[Gary Friedman, Chairman & CEO at RH]

I I think it's the timing. You know, the the outdoor season is relatively a short season. If you miss that season, you know, the peak to that season, that's hard to make up. And so, you know, that, you know, during the disruption and, you know, around the tariffs and all that noise that was disrupting a business that you only got so many weeks. Right?

[Gary Friedman, Chairman & CEO at RH]

So you can't make you can't make up the peak months in the out months. So and we just thought it was the right thing to do. It was an unusual, you know, situation that happened with the with the tariffs and everything else. And, you know, And we're an unusual world, in an unusual world, should do some unusual things. Because if you try to do the usual things in an unusual world, that's how you fall behind.

[Gary Friedman, Chairman & CEO at RH]

So, I mean, we think very deeply about what we do, but we think really hard about what we do and we usually make decisions that are very strategic and long term in nature. But there's times like in an outdoor season where you're gonna make a tactical decision because the math says it's a much better thing to have those sales at a slightly lower margin. So, yeah, it's just day to day business calls. We're in a messy time, very unpredictable time, you know, things, you know, you've got to be flexible in times like this if you want to if you want to win and take share and position yourself for the other side. I mean, there's a lot of people going bankrupt.

[Gary Friedman, Chairman & CEO at RH]

You know, a lot of the ankle biter businesses, the little online things they know that they can't raise capital, their business are a lot of them are blowing up. They're going away. Yeah. It's gonna be other businesses that I think don't make it through the rest of this year. Don't have the scale to deal with the tariffs.

[Gary Friedman, Chairman & CEO at RH]

They don't have the leverage. They don't have the strategic flexibility. So you wanna position yourself for the other side. The other side's where all the upside is. So if you're in a position like we have been, you know, and get it's not free.

[Gary Friedman, Chairman & CEO at RH]

You know, we're paying interest on the debt, and, you know, and that wasn't by choice. I mean, we knew we were gonna pay some interest. We didn't know interest rates were gonna rise the fastest in history. You know? Got it.

[Gary Friedman, Chairman & CEO at RH]

You know, we're not we don't have a crystal ball. We can't see things like that and neither can anybody else. But I I wouldn't get too hung up on we took outdoor to 35% for x number of weeks during a, you know, extraordinary political, you know, and product turmoil around the world. Like, do you think Apple's doing anything different? You know, Apple is flying jets, you know, of iPhones to The US, you know, to get on the tariff.

[Gary Friedman, Chairman & CEO at RH]

Apple's opening factories in India, you know, like, everybody's got problems right now. Tesla's got problems, not just because of, you know, Elon being involved in the government. You know, it's a different world. Lots of things are changing. You have to improvise, adapt, and overcome.

[Gary Friedman, Chairman & CEO at RH]

So changes aren't always bad. You know, I I read a lot of analyst reports like, oh god. They did this. So yeah. You know, I'm like, holy cow.

[Gary Friedman, Chairman & CEO at RH]

Get out of the weeds. You know? Look at the big picture and get are we heading in the right direction? Are we more right than wrong? Is anybody building a platform like us?

[Gary Friedman, Chairman & CEO at RH]

Does anybody have the product assortment that we do? Does anybody have a restaurant concept, you know, that it drives the kind of energy and engagement that we do, you know, that is a profit center, you know, that driving traffic. Yeah. Anybody have our interior design business? We're I think we're the largest residential entire interior design firm in the world today.

[Gary Friedman, Chairman & CEO at RH]

You know, we've we've built really important foundational things here that I I just don't think anybody sees it yet what's gonna happen over the next ten years. They don't understand because the investments don't look like anybody else's. No one's ever done it. So I think people are afraid of it sometimes. Oh god. Look at what they're building. Oh, man. They're spending a lot of money. Well, okay. We are.

[Gary Friedman, Chairman & CEO at RH]

We're also making a lot of money in a shitty housing market. Oops. I'm gonna go, you know, I'm gonna go national on that. See why I said that word again. I could say, oh, this, but I didn't. You mean that to me?

[Max Rakhlenko, Managing Director at TD Cowen]

Helpful.

[Marius Morar, Director - Research & Securities at Zelman & Associates]

There we go.

[Gary Friedman, Chairman & CEO at RH]

Yeah. Thank you.

[Marius Morar, Director - Research & Securities at Zelman & Associates]

On the contract and hospitality business, you called it out in the letter. Just curious internationally, how's the adoption there? And is that something that's in line with the design business or the general retail business? Or is it sort of following it? Is it leading it? Any insight there would be helpful.

[Gary Friedman, Chairman & CEO at RH]

We we've been in that business for twenty years.

[Marius Morar, Director - Research & Securities at Zelman & Associates]

No. Internationally, I mean, in Europe.

[Jack Preston, Chief Financial Officer at RH]

Oh, well well, contract too.

[Jack Preston, Chief Financial Officer at RH]

We've been selling internationally in the contract division for for many years.

[Gary Friedman, Chairman & CEO at RH]

So Yeah. I I think fifteen or twenty years.

[Jack Preston, Chief Financial Officer at RH]

Yeah. Probably.

[Gary Friedman, Chairman & CEO at RH]

Yeah.

[Jack Preston, Chief Financial Officer at RH]

I mean, those were our international customers in it. Right? Yeah. Before before the consumers.

[Gary Friedman, Chairman & CEO at RH]

Yeah.

[Jack Preston, Chief Financial Officer at RH]

So I'm not sure what fit, but, yeah, we don't we don't comment specifically on the trends in that in that particular business. But Yeah. Follow it follows the strength of of our core business given the product transformation.

[Marius Morar, Director - Research & Securities at Zelman & Associates]

Thank you.

[Operator]

Your next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

[Jonathan Matuszewski, Senior Vice President at Jefferies]

Great. Good evening, Gary and Jack. I had one question and it was on Waterworks. Didn't catch any comments on that business in the prepared remarks. So maybe just give us an update on your efforts to elevate the brand there.

[Jonathan Matuszewski, Senior Vice President at Jefferies]

I think you've been working to integrate that business more with RH. So where are you finding success? What's the updated pacing for working that product into RH galleries? And maybe what still needs to be refined? Thanks so much.

[Gary Friedman, Chairman & CEO at RH]

Yeah. Yeah. Well, what I've just done, I think I've commented not too long ago, an incredible job building the brand, the assortment, the positioning in the market, the off offshore sourcing. I think Peter Peter Ralph and the leadership team have been tremendous partners for us. And we've learned a lot from them about the industry, about the business and the dynamics.

[Gary Friedman, Chairman & CEO at RH]

And there's it's there's, you know, there's a retail kinda the the world's been set up historically as retail and trade. You know, when you have architects, interior designers, and everything interfacing at the trade level and consumers more interfacing at the retail level. And we think that that that the trade platform is is a dated platform because it's not a transparent platform nor is it an inaccessible platform. So it really limits the business. And I think Peter and Ralph see that and understand that, and that's why they wanted to partner with us.

[Gary Friedman, Chairman & CEO at RH]

You know but, you know, they've spent, you know, the time with us building a really great base. You know, the business is double the size. The EBITDA went from, I don't know, two to 16% this year or something like that. I mean, we don't disclose that, but, yeah, let you know. I mean, it's it's yeah.

[Gary Friedman, Chairman & CEO at RH]

It's turning into a really good strong business, and it's a bad housing market still. And and we think that they're we we we always wanted to partner with them and, you know, integrate the two businesses because we thought it completes the home. And we were already in the business, but nowhere near, you know, at the level they were. And, you know, it it is the best brand, I think, in in the in the bath and kitchen area in the world. Any great house, most of them, it's the jewelry of the house.

[Gary Friedman, Chairman & CEO at RH]

So we love the association. We're starting to test integration efforts. We put in a waterworks kind of shop in Newport Beach. We've been open, I don't know, five, six months now, six months. We're learning.

[Gary Friedman, Chairman & CEO at RH]

We're seeing how it's going. Customer you know, you know, what happens to the customer, they're not expecting to find it there. You know? And so, you know, we're testing and we're learning and growing. And I think we'll over the next couple years, we'll connect some dots and figure out, you know, a big move.

[Gary Friedman, Chairman & CEO at RH]

You know? So but, you know, it's a great brand. I think it renders us more valuable. I think, you know, we can, long term, also render Waterworks more valuable and and, yeah, helping expose one of the great brands in the world to a much bigger audience. And especially now is I mean, they they were global before us.

[Gary Friedman, Chairman & CEO at RH]

You know, they were in Europe before we we were. But, you know, we're we're gonna you know, I believe over the next ten years have kind of a global assault almost. Right? And, you know, it could combination of us, you know, doing it all ourselves. We could, you know, do some licensing and franchise deals to go faster and more capital efficient.

[Gary Friedman, Chairman & CEO at RH]

I think I think RH and Waterworks are two brands that should be global. I think the world would want those two brands. I think they'll be very successful two brands. And and so we'll do a combination of, you know, some integration, some standalone because you still have an important business there. All good.

[Gary Friedman, Chairman & CEO at RH]

Their business is strong despite the housing market and so we're really proud to be associated with them.

[Jonathan Matuszewski, Senior Vice President at Jefferies]

Thanks for that update. Best of luck.

[Gary Friedman, Chairman & CEO at RH]

Thank you.

[Operator]

Your next question comes from Cristina Fernandez with Telsey Advisory Group. Your line is open.

[Cristina Fernández, Managing Director & Senior Equity Research Analyst at Telsey Advisory Group]

Hey, good afternoon and thanks for taking my question. I just have one. I wanted to see if you can expand on the tariff mitigation efforts. The product that's moving out of China outside of upholstery, where is it going? And you also mentioned on the letter that vendors were absorbing a significant portion of the cost.

[Cristina Fernández, Managing Director & Senior Equity Research Analyst at Telsey Advisory Group]

So the portion that RH is absorbing, what savings or what, what areas are you finding offsets to to, you know, to to offset that cost?

[Gary Friedman, Chairman & CEO at RH]

Yeah. I don't know if I wanna educate our competitors, yes, how we're doing, what we're doing, and, you know, what specifically we're doing. But, you know, I we we have tremendous partners that we've been working with for years. You know, in a lot of ways, we operate like one company. And so there's just incredible collaboration and big picture thinking and how do we win together.

[Gary Friedman, Chairman & CEO at RH]

And so yeah. I mean yeah. It's not it's not new that you know, what it's what it what it is right now is it's kinda chaotic and unpredictable. You don't know what the tariffs are gonna really be. You don't know how long they're gonna be.

[Gary Friedman, Chairman & CEO at RH]

You don't know, you know, what countries are gonna be what exactly. And, you know, there's a lot of smart people that I know, that that have government connections in multiple places in the world that believes that where the tariffs are now is kinda where they're gonna be, except China is an outlier, and and the other ones will be minor changes that is that right or not? I'm just telling you what I'm hearing. And I I think, I don't think we're gonna see The US all of a sudden swinging the pendulum back and, you know, to kind of the initial I mean, the initial moves on the tariffs, right, were I think they're well articulated. I think there was a lot of logic to them and here's the imbalance and therefore here's the reciprocal.

[Gary Friedman, Chairman & CEO at RH]

I think that was the start of a negotiation and I think that it's not just about tariffs. We're all seeing now it's also about the materials for AI chips. What do they call them?

[Jack Preston, Chief Financial Officer at RH]

NVIDIA?

[Gary Friedman, Chairman & CEO at RH]

What? No. No. The the the

[Jack Preston, Chief Financial Officer at RH]

Rare minerals?

[Gary Friedman, Chairman & CEO at RH]

Yeah. The rare mineral minerals.

[Jack Preston, Chief Financial Officer at RH]

Rare I'm sorry.

[Gary Friedman, Chairman & CEO at RH]

Rare minerals. There's I mean, there's lots of things that are you know, I think the current administration is trying to kind of kind of rebalance trade, but also rebalance other strategic things at the same time.

[Gary Friedman, Chairman & CEO at RH]

And so it's probably a bigger negotiation than any of us really understand. And so, you know, we're not privy to those details. So it actually seems more chaotic when, you know, you can't anticipate something. And so I you know, but I I think what I what I hear from behind the scenes of people who I think are relatively well connected is things are gonna get resolved over the next few months, and the world will kind of go back to a more predictable operating outlook, and it should be better for The US. So we'll see.

[Gary Friedman, Chairman & CEO at RH]

I mean, I you know? But, yeah, everything we said, you know, we wanted to say it's kind of in in the letter about tariffs. You know? We don't need to kind of disclose things that, you know, that we think each to whatever 10 competitors that were listening in on our call. We don't have our experience or our relationships.

[Operator]

And your next question comes from the line of Brian Nagel of Oppenheimer. Your line is open.

[Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.]

Hi, good evening. Appreciate you sneaking me in here. I know the call is quite long, so I'll just ask one question. Look, a lot of talking about balance sheet and cash flow. Is there as you're looking at the business now and particularly with the shifting tariff dynamic, Is there are you working towards or you think about some kind of a target debt metrics or coverage metrics for the balance sheet or income statement that you guys really want to gear towards?

[Gary Friedman, Chairman & CEO at RH]

Yeah. I'd I'd look at history, what we've done. Yeah. This is a little unusual. Again, you know, we we got 2,200,000,000.0 of debt.

[Gary Friedman, Chairman & CEO at RH]

And, you know, we got caught like everybody else did with the fastest rise of interest rates in the history of America. You know? So yeah. Do we like the debt ratio we have today? No.

[Gary Friedman, Chairman & CEO at RH]

Like, do we like paying 230 or $40,000,000 of interest a year? Of course not. Are we profitable in spite of that? Can we drive free cash flow despite that? Yeah.

[Gary Friedman, Chairman & CEO at RH]

Of course. Yeah. We we're we're a real company. You know? But like I said, we're we're in a crappy housing market and we're gonna you know, we're we're guiding to north of 20% adjusted EBITDA. Don't know to say that.

[Jack Preston, Chief Financial Officer at RH]

No. We don't. I mean, we've said this before, Brian, but we don't, you know, have specific targets. We don't also have any covenants that, you know, that that require us. I mean, obviously, I heard with Gary that, you know, do we wish the ratio was better?

[Jack Preston, Chief Financial Officer at RH]

Sure. But if you also look, you know, we peaked last year at five five times. We're at 4.6 times nationally delevering from the growth in EBITDA. So, you know, and I think our guidance speaks for itself, you can do the math of where that's going. Again, just to reiterate, no specific targets.

[Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.]

Okay. I appreciate it. Thanks.

[Gary Friedman, Chairman & CEO at RH]

Thank you, Brian.

[Operator]

This concludes the question and answer session. I'll turn the call to Gary Friedman for closing remarks.

[Gary Friedman, Chairman & CEO at RH]

Great. Thank you, operator. Thank you everyone on the call. Thank you, team RH for fighting the good fight, living and breathing our values and moving us closer and closer to the top of that mountain and becoming one of the most admired brands in the world. So onward. Thank you.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect.

Participants

Executives

• Gary Friedman, Chairman & CEO
• Jack Preston, Chief Financial Officer

Analysts

• Allison Malkin, Partner at ICR
• Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities
• Simeon Gutman, Managing Director at Morgan Stanley
• Cristina Fernández, Managing Director & Senior Equity Research Analyst at Telsey Advisory Group
• Ariana Warden, Equity Research Associate - Consumer at Citi
• Michael Lasser, Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group
• Max Rakhlenko, Managing Director at TD Cowen
• W. Andrew Carter, Vice President at Stifel Financial Corp
• Marius Morar, Director - Research & Securities at Zelman & Associates
• Jonathan Matuszewski, Senior Vice President at Jefferies
• Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.