RH Stock

Hello everyone, thank you for joining us and welcome to the RH Second Quarter Fiscal 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] I will now hand the conference over to Allison Malkin of ICR. Allison, please go ahead.

Thank you. Good afternoon everyone. Thank you for joining us for our second quarter fiscal 2026 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. 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 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. And now I'd like to turn the call over to Gary.

Good afternoon, everyone. We're coming live from New York City today. We got in last night for the opening of our first RH Estates Gallery in Greenwich, Connecticut. I know I saw some of you there last night, and those who haven't seen it, I would encourage everyone to get there. It's our newest, latest, greatest work. So let me start with the letter to our people, partners, and shareholders. GAAP net revenues of $922.2 million exceeded the high end of our guidance, increasing 2.6% versus last year and accelerating 4.2 points over the first quarter as our momentum begins to build from the significant growth strategies we've recently put into motion.

Normalized adjusted EBITDA margin of 13.4% also exceeded the high end of our guidance for adjusted EBITDA margin. And we generated $72.3 million of cash in the quarter inclusive of free cash flow and a $42 million distribution from our Aspen joint ventures, excluding tariff refunds of $69.2 million. We received the tariff benefit, $55.1 million in the second quarter, and expect to recognize an additional $13.9 million tariff benefit in the second half of the year, which we plan to use to offset $50 million of unplanned cost increases across our supply chain with a significant and sustained spike in oil prices as a result of the continued conflict in the Middle East. The remaining $19 million of tariff proceeds will benefit earnings and is included in our updated adjusted EBITDA margin outlook for fiscal 2026.

Updated fiscal year 2026 outlook. Revenue growth of 5.5% to 7%. Adjusted EBITDA margin of 15% to 16.2%. Free cash flow, asset sales, and distribution of equity method investments of $300 million to $400 million. The above outlook includes an approximate negative 340-basis-point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. Third quarter 2026 outlook. Revenue growth of 5% to 6%, inclusive of backlog reduction of 2.5 points, RH Estates of 2 points, new galleries and other 1 point. Adjusted EBITDA margin of 12.5% to 13.5%. The outlook includes an approximate negative 310-basis-point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion.

Fourth quarter 2026 outlook. Revenue growth of 16.1% to 21.2%, inclusive of backlog reductions of 6.5 points, RH Estates growth of 8 points, new galleries and other of 4 points. Adjusted EBITDA margin of 19.7% to 22.9%. The above outlook includes an approximately negative 190 basis points of adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. Expanding the brand and doubling the TAM. We believe the introduction of RH Estates, our latest brand extension, introduced with a 268-page sourcebook that arrived in homes late June through mid-July, has the potential to double the total addressable market of the RH brand.

Over 60% of luxury homes across North America have traditional or classic architecture with a higher concentration in Europe. A home's architectural vernacular is generally the driving factor influencing stylistic direction for both interior designers and consumers. Additionally, we believe traditional and classic furniture will anchor the next major style trend across the industry over the next 20 plus years as the dominant trends from the 1980s through 2000, 2010, such as eclecticism, based on classic design and antiques, highlighted with contemporary modern pieces, and the California look, pioneered by Michael Taylor, who Architectural Digest called one of the 20 greatest designers of all time, and who twisted eclecticism towards a more rustic yet refined point of view, blurring the lines between indoors and outdoors.

Michael Taylor's California look was amplified and refined by Richard Hallberg, Daniel Cuevas, and Barbara Wisley, designers who together launched Formations, one of the most admired and respected design firms to the trade of luxury furniture showrooms in the United States, recognized and respected globally. The three later acquired Dennis & Leen, giving them authority in authentic classical European furniture and antiques, blending them masterfully and creating a stylistic vocabulary that was layered and looked to have been collected over time. Their flagship showrooms on Melrose Avenue in West Hollywood Design District have been the first stop for many of the best interior designers and collectors from around the world.

Our acquisitions over the past 6 years of Michael Taylor Designs, Formations, Dennis & Leen, Joseph Jeup, and Dmitriy, plus our decades-long relationship with many of the world's distinguished antique collectors such as Ed Hardy of San Francisco, Ludovic Messager, who set the tone and trends at the world-famous Paris Flea Market, and [ Rebecca Hill ] of London, and Eugene, who now leads product curation for RH upholstery, plus designers such as Anouska Hempel, the inventor of Blakes, the first and most famous boutique hotel in the world, who also designed the world of RH bar and lounge and the perch restaurant at RH London, plus the many designers, artisans, and manufacturers who are all part with the intricate and inspiring RH ecosystem of design have come together to lead, form, and ride this next wave with the launch of RH Estates.

This is a collective effort with a level of talent, experience, and scale unseen before in our industry. While we launched RH Estates with a conservative initial mailing, our plan is to aggressively expand the assortment and circulation in November, where we will have Estates on the main floor of our galleries that represent 80% of our business. In-stocks will be at an adequate level to meet and fill demand. Hence the fourth quarter acceleration in our outlook. You can expect this to continue to rapidly expand the assortment over the next 5 years, and we predict it will represent 50% of our offering at that time.

We also believe RH Estates will be margin accretive on multiple levels. 1, we believe the quality, design, and exclusivity of the offering will command higher margins. And 2, the average price point is currently 45% higher than our existing assortment, creating cost leverage and margin accretion throughout our operating model. It's also important to note that we will aggressively protect the exclusivity of our products and the integrity of our brand. Almost the entirety of the RH Estates collection is currently protected by trade dress or have design patents pending due to the acquisitions of Michael Taylor, Formations, Dennis & Leen, and Dmitriy, as well as pieces developed with internal and external designers.

You will note on the back of the sourcebook, it reads, RH vigorously protects and pursues appropriate legal remedies against unauthorized copying, imitation, or misuse worldwide of its product designs, photographs, and collection names through intellectual property rights, including design patents, unregistered design rights, trade dress, trademarks, copyrights, and pending applications. Extraordinary takes more time, costs more money, involves more people, doing more things, in a more complicated matter, but it's worth it. Over the entrance of RH Center of Innovation, it reads, RH, the home of the extraordinary, the remarkable, and the amazing. I'm sure there are people who visit or come in for an interview and think the above is some corporate nonsense.

I'm here to tell you it's not. It's logic, experience, and I would argue common sense. What we've learned on our 26-year journey of transforming Restoration Hardware, a nearly bankrupt company with a $20 million market cap and a box of all laundry detergent on the cover of its catalog into RH, the leading luxury home brand in the world, with almost $4 billion in annual revenues, is that we always figured out how to monetize extraordinary and remarkable work. And we found it very hard to monetize ordinary and unremarkable. And yes, it has taken more time, cost more money, involved more people, doing more things in a more complicated manner. And yes, it has always been worth it. And this time will be no different.

If you're a long-term shareholder and owner like I am, thank you for belief and patience. While we've been running through the mud for the past 4 years of the worst housing market in 4 decades, we've also made some amazing investments, done remarkable work, and expect extraordinary results over the next several quarters and years. Let me take you through a few of them. RH International. We expect the drag from international to decrease from 450 basis points in H1 of this year to 250 basis points in H2, or 340 basis points for the year. We further expect the drag from international to decrease from 340 basis points in 2026 to 150 basis points in 2027 as we cycle the significant investments of opening our 3 global flagships in Paris, Milan, and London over a 10-month period from September 2025 to July 2026.

On June 27, we opened what I believe is our most innovative and extraordinary brand experience yet, RH London, the gallery in Mayfair. If you want to see our very best work and maybe the best work in the world of retail, it's at Seven Burlington Gardens in the heart of [ NACA ]. I'm happy to report the design pipeline reached almost $7 million in the first 8 weeks, rivaling the design pipelines of RH Newport and RH New York. It will take several months to turn these high-caliber complex design jobs, some in the $1 million range, into demand and revenue. But the response to RH London has been nothing short of spectacular. As I mentioned on our last call, I believe RH London will be the amplifier of the RH brand recognition across Europe and the Middle East.

A record investment cycle is now post-peak, which will result in lower capital spending and higher returns on invested capital. We expect adjusted capital expenditures to decrease from $240 million to $260 million in 2026 to $175 million to $200 million in 2027. We expect new gallery opening costs to decrease from $48 million in 2026 to $18 million in 2027. We have cycled through our real estate pipeline that included 3 global flagships and several multi-story galleries with rooftop restaurants where construction costs doubled post-COVID. We have 1 multi-story gallery left to complete in Houston in 2027.

Our new real estate strategy includes RH Compounds, a multi-building shopping experience with connecting garden courtyards and a central atrium restaurant under construction in Naples, Florida, scheduled to open at the end of 2026 or the beginning of 2027, and another RH Compound that should be under construction soon in Aventura, Florida, opening in 2027. Both projects are projected to have a payback in the 12- to 18-month range, with return on capital metrics we were accustomed to prior to the pandemic. Additionally, as previously mentioned, we have developed a single-story RH Design Gallery with integrated restaurants with similar expected 12- to 18-month payback ranges.

And we are confident that our multiple go-to-market retail strategies of RH Compounds, RH Ecosystems, RH Design Galleries with a single story, and RH Interior Design offices will significantly increase our return on invested capital and decrease construction timelines. Our long-term success and strategic separation is the result of innovating and investing during uncertain times, and this time is no different. Launching RH Estates, the most compelling collection in the history of our industry that has the potential to expand the brand and double the TAM. Opening 3 most innovative global flagships that will likely never be duplicated in our lifetimes.

Developing a global hospitality brand with restaurants that drive significant traffic, brand awareness, and generate on average 65% of the aggregate gallery's rent they reside in. Building the world's largest residential interior design firm that is moving our brand beyond presenting and selling products, conceptualizing and selling spaces, all during the darkest days and most prolonged housing downturn in 4 decades. It's not for the faint of heart. Never underestimate the power of a team of people who don't know what can't be done, especially these people. Onward Team RH, Carpe diem, Gary. Operator will now open the call to questions.

We will now begin the question and answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. Your first question comes from the line of Steven Zaccone with Citigroup. Please go ahead.

Fun party last night in Greenwich. Congrats on the opening. Maybe we could start there. Gary, could you talk a little about the early demand trends for Estates? Are you seeing new customers? Maybe how this launch has played out relative to ones in the past? The price point premium of 45%, that seems sizable. There was a point in the past you talked about pricing being a bit too high. Why is Estates different in terms of pricing?

Sure, thank you, Stephen. Thanks for coming to our opening last night. Let's, I'll kind of try to take the questions backwards. Why is 45% reasonable and why is this different? Well, 1, the product's completely different. So start there. If you think about the kind of pricing miscues we made with contemporary, that was more of a simple modern aesthetic and contemporary aesthetic. That was, you know, product that was simpler to make. And I don't think there's anything like RH Estates in the market today, at least nowhere we can find. If you try to do a reverse Google search on any of our product, you're not going to find it. You might find a, you know, a foreign website that tried to pick up some of our pictures and, you know, pop them on a no-name kind of location. So it has to do a lot with the exclusivity and the quality and the desirability of the product.

These products were being sold for 2 to 3 times our retail. I don't know anybody selling this level of quality, these kind of finishes. If you look at the Estates book and what we did with the product, you open and you see the pictures of the photos are very close, tight shots showing that level of detailing, the carvings and the hardware details, the finished details you see. Pages of finishes up close, the size of, you know, real life finishes. I mean, no one's ever done anything like that in this industry because no one's ever had finishes like this in this industry. It's available to a consumer, right? That wasn't a design showroom, only available to the trade and with long lead times and special order finishes and where you might have to wait 4 to 6 months or longer.

You know, my first wife is a high-end interior designer and that's why I understand this industry. I was her client on 2 projects and then her business partner for 11 years, and saw the inefficiencies in the industry. That really framed the opportunity, I think, for RH. We see it today, that experience. So, when you're the only one with the level of design and quality in a marketplace, you can command a premium. Like, are the prices too high? I think they're incredible value. You can't find this kind of product at these kind of prices. So we don't think about price so much as we think about value, right? We think about design, quality, and value in that order. If nobody likes the design, nobody cares about the price. So first you have to, with a consumer, you have to love the design.

They love the design, though, they'll look closer, they'll either click on the website or they'll walk up to the product. And then the second thing a consumer generally does is they perceive the quality, right? So they'll walk up to it in a gallery, in a store, they'll zoom in on a website, you know, look closer at a page, if it's a sourcebook or catalog. And they'll make a perception. And then they'll look at the price. And at that point, the consumer will make a decision about that design at that quality, is that price a good value, right? So it's not a one-dimensional price discussion, or it's always a design, quality, value discussion. We don't care about the price of anything if we don't love the design, right? And neither does the customer. So I think you've got to start with where can, you know, 1, you know.

If you're a consumer, what do you think about the design? How do you think about the quality? Walk up to it, touch it, open a drawer, look at the details, look at the hardware, look at the finishes, and then look at the price. You know, and I think that's the hierarchy everybody should look at any product with. So for this design, this quality, we believe this is a tremendous value. I should probably read it, maybe the next call, I'll read some of the letters we're getting about RH Estates, because they're incredible. We have people that have never bought from us, were never a customer. And all of a sudden they stumbled into Estates, they got the book or they walked into an RH. And now we've got a large design job. We just recently had someone in RH London who their interior designer was going to augment a $1 million plus design job with probably about $50,000 to $80,000 of RH and brought their client into RH London and now we're doing 95% to about $1.1 million design jobs. So I think this is, I think you asked me about incrementality or what was it? Really, new customers, yes. Our people in the galleries will tell you it's almost entirely a new customer.

And I think that makes sense. You know, it's, like I said, you know, I think we turned the company over the last 8 years or so too modern, too contemporary, too one-dimensional. You know, but we're quick learners here and as we mature and understand the industry and the consumer even more, I think if you watch the earnings video, I think I did 2 quarters ago, I tried to outline how we think about RH and the opportunity, and how we see 3 major design vernacular, call it kind of traditional classic, which we call Estates, contemporary, which we call Interiors, and modern, which we call RH. We kind of think about ourselves now as kind of a juggler, if you will. There's 3 balls, and then there's always 1 ball in the air. And the ball that's in the air is generally the ball that's the major trend.

You know, for anywhere in our industry, a short trend might be 7 to 10 years, that the major trends are more 15 to anywhere 15 to as long as 25 or 30 years. And people have asked me before, they'll ask me, where did the trends come from? And I think I've said it on conference calls, that the trends come from the dead. Generations passed away, they're going to go into estate sales. The estate sales feed the high-end antique markets. The high-end antique markets feed and inform the high-end interior design market. The high-end interior design market informs the high-end reproduction market and then it kind of trickles down. And so the next trends I outline, I talk about them pretty fulsomely in the letter to try to help people see why we're so excited about Estates because it's almost a magnifying opportunity.

So 1, we're not addressing the traditional classic market today very well at all, I think hardly at all. I think we're dominant in contemporary modern. So, you know, if you've got 60% of the luxury homes in America that are classic and traditional, we're probably not addressing that customer. We might, maybe we're getting 5% of that market. They we're getting 10, we have a few older collections. So, you know, the math would tell you that this could and should be half our business or more than half our business. And the data, all the data we look at, once we start digging and think about it, I mean, we've been working on this now, God, I don't know, 7 years. Yeah, it was been conceptualizing this opportunity and we're getting smarter and smarter and seeing a bigger and bigger market.

And we think this is, you know, and we think for metal or more incremental than when we did RH Modern. You know, when we did RH Modern, no one was waking up in the morning saying, hey honey, we need some modern furniture. We just got a modern condo or new house and it was modern. Nobody was thinking about going to RH for modern furniture in 2012, '13, or '14 until we launched RH Modern in 2015 and our RH Modern is highly incremental. 1 of the most incremental things we've done and very quickly, you know, went from 0 to $1 billion. And we think this is as incremental, might be more incremental. And we were in Greenwich last night for our open party and I mean, I don't know how, like, we'd take some back roads, we're coming from the airport, and you go through the neighborhoods and you realize, like, you could drive around here for hours and you might not see modern homes, you know, and some of the homes might have remodeled with some contemporized interiors.

And that, you know, might play, but when you really look at the bones of the houses, the exterior of the houses, my sense is the whole of Greenwich, Connecticut, Westport, New Canaan, you know, that whole area, I kind of believe it's like 90-10, 85-15, somewhere like that. And by the way, we have, I mean I, we don't talk about our store, but I'll let you know. Our competitors know this one. Like we do like $47 million in Greenwich, right? We have 14,000 interior selling in the post office and we have about 4,500 in the outdoor gallery today, right? And it's all contemporary. And so I think if we're doing $47 million in Greenwich, Connecticut, 14,000 feet of interior selling space, what could Estates do? You know, we have, I think, 12,000 feet of interior selling in the new, um, you know, the former Ralph Lauren building, which is a perfect building for Estates, by the way. Thank you, Ralph.

Um, you know, so we didn't have to build that one. So it's highly capitalized, efficient for those of you going to ask me that question. So this is a big deal. It's a big deal. We've been working on this for a long time. We've never made so many acquisitions to set ourselves up for a business. Michael, if you saw the projects that I did, early on, whether it's my condo in San Francisco or the home I still have in Belvedere that has Michael Taylor dining diamond table in the kitchen, I let the team reproduce the 17th century antique monastery table I have in the dining room. That it's almost identical. I mean somebody could switch, my daughter saw it and our Center of Innovation, you know, they grew up at that dining table and they're like, Dad, why is our dining table here at the Center of Innovation? I go, it's not our dining table. But Dad, this is our dining table. I mean they didn't know, like, but it's a very expensive antique.

I mean I guess I could say it. I bought it 27 years ago for $58,000. You know, statement dining table, built a nice house in Belvedere, never spent that much on any piece of furniture or anything. And I'm not saying that to show off. I put it into context. It's an 11-foot table that has 2 extensions, 14, 15 feet, you know, can seat up to 16 people because it's, uh, I think almost 50 inches wide. You can sit 2 people at the end. So it's really great if you're, you know, you can entertain and give a big family. And I don't think anybody addresses that business very well. Those are the kind of businesses that we're addressing with Estates. We said our initial goal when we're launching, we want to dominate the primary bedroom, the primary living room, the primary dining room. That's where we'll start. And then we'll continue expanding, expand and dimensionalize the assortment.

But that table today, if you take that $58,000 dining table and you just did natural inflation over 27 years, I think it's about $140,000 dining table today, somewhere like that. And if you look down 1stDibs, you know, when you looked at dining tables, they go up to about $250,000 to $300,000. That table would probably get somewhere between $100,000 to $200,000 if it was on 1stDibs today. So we got that, we would finally land, we were going back and forth. So that was $14,995 and that's for the 12 to 1, for the, you're Level 4, which is fine. It's like, you know, and it's an incredible value. I mean, I think a lot of people, again, it's, talking about a higher-end customer, of course we are. Should that scare anybody? No. We've moved this brand up over 27 years, right?

The way we built this brand is we went from selling knickknacks and tchotchkes and had an average order value of $125, an average order value of $10,000. You know, from around $10,000. And so, and that's with our order split, you know, if you really look to get, we split a lot of design orders, we deliver them, so our true average order is much higher than that. But we kept elevating the brand, we kept shedding lower value customers, acquiring higher value customers, and we'll continue to do so until we kind of say we've hit the right spot. That doesn't mean we won't sell bedroom furniture that's appropriate for second, third, fourth bedrooms in houses and second homes and things like that. But we think we're going to be like alone in the market for a while here. I mean, I challenge anybody, take the RH Estates book, go scan the internet, tell me who's going to compete with us.

And then, then look at the second drop, which is really kind of like the first drop, you know, because it's going to, oh, it's basically the same book with about 30% more items in it and product in it. But we're just going to an increased number of customers. So we're not mailing the same people. We're just broadening, you know, broadening the contacts, which will significantly lift the business. And when we do that, we're going to do that in concert with the product will be unveiled in the galleries. It'll take over the first floor in all of our big galleries. It'll be the main thing. It'll be well represented, it'll be in stock. So November's, you know, transition time, like, you know, early mid-November, we'll galleries transition that are somewhere between 75% and 85% of the business. And then it'll continue to go to the rest of the galleries, and I think all galleries by December, right? Yes, so the last 15% to 20% of our volume.

So that's when it's really meaningful, right? And I think these products will get an even bigger lift when the customer sees them. The finishes are so intricate and the detail and the quality is, I think, important to see. And data today would say that, you know, like 90, when you look at the furniture industry today, about 80% of furniture is done in retail stores. When you look at the luxury furniture industry, it's like 95-5. And that's just because the customer's more discerning, they're spending more money, it's more of an investment, and, you know, has everything to do with comfort, you know, sit, a finish, color scale, and all the things. But you don't want to get wrong. It's 1 thing if you're an internet shopper today, you order 5 things and you return 3, or some people order 10 things and they keep 1, or send all 10 back. You really can't do that with the furniture business. You'll bankrupt people. And most people charge for restocking fees. We haven't yet, probably change that because we do think some people take advantage of like ordering stuff and then just go, we'll just, you know, this is what we keep, this what we send back. But it's very expensive to make mistakes in the furniture, when you're buying furniture.

Okay, thanks for all that detail, appreciate it. The follow-up I had is just international. It was helpful to get the context of where you see the drag going in 2027. Can you talk a little about the assumptions there? Because you'll be cycling flagship openings, right? And I guess we haven't really gotten the revenue, but curious, when you think about in the U.K. versus continental Europe, are we at the point where the U.K. can be much larger from a revenue perspective, and that's really helping from a profitability perspective? Thanks very much.

1 of the biggest things is just the cost to open in Europe. The number of people that we have to have fly from America, put up in America for much, you're training, the 3 global flagships were the first hospitality experiences. Yes, in RH England we did, but you know, there's not a very high volume hospitality experience that's out in the countryside. These were real complex hospitality experiences. So you have, you know, a typical gallery for us, we might employ 30 to 40 people on the gallery side, and we'll employ 120 to 130 people on the hospitality side. And so when you're opening restaurants and hospitality, it's longer training. It's more complex, more people, and just to support that that you're needed from America.

We had a lot of people on the road for a long time, making sure we're opening these right. You don't get a second chance to make a first impression. You know, we're not the most popular people or continent right now. So we want to open correctly, we want to be able to do things, be respectful, you know, a lot of things that are important.

But assumptions wise, Steve, again, it's obviously the drag of the opening plastic here as you mentioned. Yeah, build up the revenue that's helping to reduce the drag, obviously the absence of these large costs. We have no more European openings in 2027. So those are the building blocks and they're just kind of self-evident, just pointing.

Okay, thanks for all that detail. Best of luck. Thank you.

[Operator Instructions] Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

I guess maybe more of a math question. So if you look at the progression within your back half guide, it looks like there is a bit of a stair step to the third quarter in terms of the underlying stats and then another step up into the fourth quarter. Is that explicitly Estates or? And can you speak to the momentum you're seeing within that brand? And then what else is it if it's not just Estates?

Yes, it's listed right there. So you have it in front of you, the press release. If you look at it, inclusive of backlog reduction is 6.5 points. RH Estates at 8 points and new galleries, you know, another at 4 points.

And that was Q4. I'll just do Q3 there as well. So you've got that in, you see the quarter-over-quarter increases in this.

Okay, I guess if I may restate, I guess what gives you confidence and I get the backlog reductions, but can we talk about the confidence in that acceleration?

Yeah, I mean, that's what we do, right? That's how we built this company, is expanding product, mailing books and setting products and galleries and you know, we have a lot of math around this and you know, the big important launch we think is meaningful. And we've done meaningful things a lot. I mean, even if we, if you look back at, you know, product transformation, we went and accelerated into, after we kind of stumbled on the first contemporary round, we doubled down and we were able to move business 15 to 20 points. So, yeah, this could be conservative. I mean, if you look at our history, like if you think about Modern, how Modern moved the business, when you think about, again, when we accelerated product transformation in contemporary, I mean, we moved the business, you know, looked at the prior 2 and a half years. Yes. I don't think this is that aggressive.

Okay, thanks guys, good luck.

Your next question comes from the line of Stephen Forbes with Guggenheim Securities. Please go ahead.

So Gary, maybe just following up on RH Estates as all of us try to gauge your conviction here in the 8% net revenue growth contribution in Q4. Can you confirm whether that's based on sourcebook only demand, you know, and or maybe just comment on how much footage you're dedicating to the collection in the fall? And we'd love to just hear how weekly demand scaling, you know, at the collection level is telling you where that 8% can go over a relatively short period of time versus that 50% you sort of 5-year target.

We have data right now with the Estates building just in the mail and just, you know, on the website with, um, you know, long lead times and, you know, not in stock. So, you know, we know what, you know, when it, if something has a 4-week wait, a 6-week wait, an 8-week wait, if something's running backwards of X, Y, Z, there's math around all of that that we can use forecast demand, right? Based on what we're seeing. Then there's, you know, so there's in-stocks, there's wait times, then the big move is when the product goes into the galleries. You know, and I think we've said publicly, list factors, like, you know, maybe not, you know, our competitors know all that. Okay. I can't remember, I've been doing this a long time. Yes, something like that. You know the list factor for putting something on the wall? Yes. Who said it? We've said it. Yeah, 50% to 100%, you know, and it can go as high as 100, but not yet.

So, we have that. And then the other thing, like when we say other and stuff like that, just think about, we're going to make a big transformation. Like think of our big galleries that are mostly 2-floor galleries. Yes, so when we do a flip and we're bringing newness onto the main floor, 1, not everything that's on the main floor leaves. What we do is we look at what's, what are the best sellers, everything's ranked, and we take the bottom stuff off the floor, right? So you take the least productive goods on the floor, and hopefully, again, this is why we don't put it on the floor right away. We generally like to look at things for 3 to 6 months here because we believe it's so incremental and we have data of classic things we've sold and still sell. Things that we didn't realize we couldn't kill it, right? So we just know the market's still there. I mean, we've been selling St. James since 2008. We still have St. James, can't stop selling St. James. You know, or some of our other, you know, just classic things like that.

And we realized that we, you know, we transitioned the business too far. And, you know, if you look at most specialty brands, most specialty brands are built around an aesthetic point of view, you know, whatever category, apparel or this or that, you know, it's got a stylistic point of view and you usually stay within the stylistic point of view and I think we saw it about the furniture business. Most of us here started in apparel. And so Armani looks like Armani, Ralph Lauren looks like Ralph Lauren. Yes, it's got their point of view, American Eagle's got theirs, or Abercrombie, whoever you're looking at. Chanel's got their point of view. Armani's got a point of view. So most of us come from that and the longer we're in this, the more we learn. And again, if you go back and look at the video, I think I outlined it very clearly about what we want to do is own this kind of 7 major product categories and 3 major aesthetics and we think that we do that really well, um, we can have, we can be relevant to all the customers at that level in the market across, you know, all the architectural vernaculars and major, you know, major stylistic points of view.

And there might be some stuff like, you know, I'm likely not going to let the brand go after grandma chic, right? It's a little trend. I mean, you know, Kendall Jenner. So in Architectural Digest, we did a tour of her new cabin. And you know, Kendall Jenner, like, great for a brand, right? She had the clout and, you know, this and that and took people to her home then. And I don't know, maybe it's just because it's me, and I don't like flower sofas and stuff like that. So you do have to kind of keep your brand a little disciplined. So we're going to let everybody else have grandma chic or things like that, and I don't know what some of the other weird trends that we're seeing right now. We're not, we don't have to own everything, you know, and to this day people think that, you know, we're going to go bankrupt because we don't sell enough color. Those are the same people that haven't really looked at that many homes.

You know, go in Zillow or Redfin, you know, go look at 100 homes and stuff, find out how many have a red sofa. But you'll realize, like, not a lot of people in the world have red sofas. So if you want to be in the red sofa business, go right ahead. Why don't you be in the flower grandma chic, you know, printed sofa business, go for it. Like I'm happy for you. You're not going to see us in those things, so. But I think when you think about just the contribution of revenue for Estates and it's, you're going to see the big ramps happen when the goods get in the galleries, the in-stocks, you know, got to start to peak. And we expand the circulation meaningfully, right? So we have a lot of customers lined up right now just waiting, when can I see this in the gallery? When can I see this in the gallery? So there's pent up demand, people waiting, just want to know when they can see it in person. Because again, the data will tell you at the luxury end of the market, it's like 90-10 or 90-20. People want to see the goods. Thank you.

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

So first question, when we think about the Q4 contribution from Estates, that's on a delivered basis. So just curious how we should think about how much higher the demand could be. And then given how your demand builds and sort of some of the color that you've given us in the past couple questions, Q4 is obviously just a jumping off point for when H1 '27. So curious if you could just provide a little bit more color on how we should think about how big Estates can get into next year.

I don't know, Max, I was going to ask you how you like the pizza or any of the past because they saw you in the restaurant. How do you think that the menu wrote? He clearly maxed out.

Clearly Max, demand is in excess of the revenue growth as this business is building and ramping and you're leading us to the same conclusion. It's evident that in Q1 that that continues, especially with the investment, but you know, presentation product in the galleries. And newness that Gary talked about, 30% of the book and whatnot. So we don't talk about demand growth, at least at the moment we don't. There's times and conditions we do, but today we don't. And so this is a growing business, so clearly demand growth rates, yes, we just did during that transition.

As we build in-stocks, as we present the product, et cetera, that Gary's talked about, are some level higher than this. When you think about how H1 versus H2 looks, Max, maybe, well, we're just leaning into H1 2027, how does that, you know, that trip? I mean, across the 8 points growth Estates how that pertains. We're not guiding here in 2027, but clearly there's a stepping stone for elevated growth. Yes. I would say there's... I mean a good 5 years of building here, like a, you know, it's going to be like a new business, a growing business. I think the most similar thing is RH Modern. Right, I mean, we weren't known for modern, we didn't have that aesthetic, um, no one was coming to us, you know, they're going to find within reach or going somewhere else. I mean, uh, but we hopped on it because we saw an explosion of modern architecture happening around the world. We saw the verticalization of cities. We saw the influence of technology, influencing customers to have a more modern point of view, where all walk around with iPhones. The big commercial architectural trends were all modern.

And if you look back in the 1950s at mid-century modern, it wasn't really that big. I mean, you had the Bird Streets in LA, you had different places, you know, Miami, Florida, places like that, but you probably didn't have too much mid-century modern, you know, Boston, New York, Philadelphia, places like that. Like probably none in Greenwich, maybe there's a collector too, you know, but, and then you saw a lot of places being remodeled. All of a big boom in LA, that's why we opened the first RH Modern. It's the first and the only standing RH. They were building the big, it was 1 in Dallas, briefly. I want to tell you briefly, remember, yeah, we're Dallas for a little while. Yes, that's why we wanted to open in Greenwich, right? To really get a sense for, okay, here's a market. We do a lot of volume for 14,000 square foot main gallery with a 4,000 or 5,000 square foot outdoor gallery. It was 47, the right number, I suppose. Yes, yes, yes. 46 something. So, okay. Yeah, and I don't know. Could we do another, I mean, could we comp up 50 or 70 in a market like that.

I don't think that the customer who's looking and buying contemporary or modern is all of a sudden jumping up and down at Estates. I think people buying Estates are looking for something like that. And then right now that something like that doesn't exist. I mean there's a lot of classic traditional, like really, you know, I mean like, let's see, not good looking furniture out there. It's not like there's not, there's a lot of, I mean, you go look at a lot of the classic furniture stores that have looked the same for 40 years or something. There's a lot of them out there. So the market share, I mean, the people doing business, I mean, go to High Point, North Carolina, it's a lot of furniture. Go to the furniture market in Nebraska and get a big Berkshire Hathaway thing. I do like $700 million now here. Like, gotta be 85% classic, traditional. So it's there, you know, I think and I think in a lot of ways we'll create a new high-end market for the aesthetic, the way we're going to build it out.

And the whole point of view and the aesthetic point of view will evolve and change. We will shape part of it. We're going earlier than we normally go on a trend. So I usually like to let the wave break and kind of see who's riding it and how we could exploit it. I think because of the platform we have, because we've, yes, this is I mean good and bad for me, right? I lived through this trend. I was a consumer, so first trend I actually participated in consumer, that's really good news. I've got it. I mean yes I have the Michael Taylor diamond tables. I have a lot of the things and stuff. Yes. I've got a point of reference so and on all this stuff and you know, that's good and bad too, by the way, because the trend never come through exactly the same. Always, you know, get shaped, you know, by designers and yes. It always comes through fresh yet familiar. But it has to be fresh and it has to be familiar. And so, but I think, you know, I think we can help shape this one. We're going to evolve it. We're going to be inspired by other people. They're going to be inspired by us. Other small furniture businesses that are run by highly aesthetic people will do some really great things. And then the market will evolve and we'll hopefully get a very good share of this evolving new trend, and be a permanent player in classic traditional.

Got it. That's helpful. And then just quickly, I appreciate the color in the compounds and the design galleries. Can you just compare and contrast how unit economics could look compared to the legacy gallery formats that you've opened for the past decade? Should revenues and margins be pretty similar or could the margin profile actually be a little bit stronger given maybe less SG&A associated with the new format compared to what we've seen previously?

Yes, like we think, so it happened. We were building our multi-level design galleries with a restaurant and roof pre-COVID, anywhere from a lower cost market, I think we hit a low of like $27 million in a couple of them. Yes, yes, yes. So some of the lower costs, 27 to 30. More expensive market builds might have cost us 35. And the cost of those went to 40 to 60. I mean, with all the inflation costs that happened in construction, especially better quality and construction, so that, you know, necessity is the mother of invention, right? We, you know, we were already pregnant with a lot of real estate we had to build. We were committed, under construction or too far down the pipeline to change course. But, uh, you know, we've invented a new concept. We said, look, if you say what's really good about 1 of our multi-level galleries with the restaurant and, you know, that whole breed, there's really a lot of good things about it. What are the bad things about it?

You know, multiple floors require grand staircases, they require elevators, generally 2. They require 2 sets of exit stairs, are not cheap to build. So you've got multiple stairways that, by the way, do $0 per square foot. No transactions happening in the elevators, the stairways, the grand stairwells. There's a lot of square footage. And then when you take that and start compounding floors, then you put a penthouse on the roof, then all of a sudden you've got a whole different code. You need different footings and foundations and steel gets upsized and with all the inflation in steel, that was a big problem for us. And those just became very expensive. And then everything you do on a multi-floor building, right, you've got cranes and pickers, you've got guys trying to put metal awnings on windows on the second floor, the third floor, and you've got cranes and everything all around, and you're trying to plug the whole building multiple floors.

So if you think about a compound, we disaggregated 1 of those big galleries and we said okay what can we get rid of and you know, you know, there's some fortunate real estate opportunities because of, I think Saks went bankrupt first, right? And then Saks came out of bankruptcy. And then Nordstrom went bankrupt, then Saks bought Nordstrom's. You mean Neiman's? Neiman's, yes, Neiman's went bankrupt too. So different opportunities were coming up for real estate. We think more will come up, high-end pads. Also, you think about what's happening with transportation and driverless cars, even Uber and driverless cars. There's going to be a lot of parking lots in very good shopping centers that have way too much parking, very soon, right? And it's already happening now, the zoning laws are changing. So, we said how could we be opportunistic with, which we think is the reduction of real estate, like, you know, Saks and things like that.

Come out of there. The staff did. Yes, they did. Oh, they did. Okay. Yes, but again, I think they're not going to keep the same footprint. So there's going to be opportunities with luxury department stores kind of closing.

1 of them we're taking just a parking lot space in Alpharetta and the Naples was a Nordstrom's enclosed. And, you know, and so they're relatively big pads. And what we did is we said, hey, what, you know, if we build this really interesting and design this really interesting. And we said, well, what if we, yeah, build multiple small buildings connected with beautiful garden courtyards and pathways and fountains and fire pits. And we put a restaurant in the middle and it's beautifully landscaped. And so we have a fraction of the square footage under roof. When you really look at all under roof, we have individual buildings that don't have to have connected mechanical systems, so much less complex. Mostly the buildings are 4 to 5,000, 5,500 square feet. Have 1, 2, 3, 4, 5, 6, kind of 7 connected, uh, 7, you know, independent structures in Naples.

And they're designed in a way that it's designed for outdoor furniture, outdoor, and the rooms for design, you know, very efficient ways we actually get more product per foot, but I think it's going to feel just as elegant and brand. You know, it doesn't take any cranes, doesn't take any stairways, doesn't take any exit stairs, doesn't take any elevators, doesn't take the footings, or does that, in fact, most of them, even in, I think in Naples, right, it's all wood, no steel, yes, 100% wood. Some of these we believe we can prefab, build the walls, and just tilt them up, you know, plaster the outsides. We designed them so they only have a couple of kind of windows because we thought we could, you know, manufacture the windows and do a lot of things. So, you know, they're going to cost us, um, we were hoping the price was going to be half and it's half. And we get more product density. And I think they're going to be more exciting to shop.

I mean, you're really walking, it's like a resort. I call it like a design resort. Walking through, depending on where you are in the U.S., in Florida you're going to have palm trees, banana palms, all kinds of tropical foliage and stuff, where you have all the trees and other things, and they're going to be cool. They're going to be very interesting. And the restaurants are going to be beautiful. It's like a glass box in the middle of an atrium, indoor, outdoor, indoor seating, outdoor seating. So we're super excited about it. Everybody who's kind of seen them, Dave, you just got back from Naples, right? Like walked through, it's like, feels good. Like even though it's a construction site still, you get the feeling like it's nothing, nobody has anything like it. And what else is, you know, Dave and I were talking about, it was a bit about it for the landlords. They'll take more risk on these and I think participate more financially because we're building all these smaller buildings. So they're always worried like, oh, what if something goes wrong with RH, I'm stuck with this 3-story building with a restaurant on top, like, who's going to lease that from you, right? Not a lot of people. But, you know, you sell them on, hey look, I built you a little village. You know, you could put 8 retailers in there.

It's beautiful, we all connected. It's just an extension of your shopping experience. So I think we have a good selling point. I think we're going to be really good partners for developers.

So we're excited and the single floor galleries that we're doing that are anywhere from 18 to 20, right, 23,000, 24,000 square feet with beautiful courtyard restaurants in the middle. We have our new Italian concept that we just opened in Greenwich. Cucina Angelina, so it's named in honor of my Italian mother. Now some of you are going to ask if my mom was a good Italian cook, and she wasn't. But, and that doesn't mean I can't honor it, right? She did like to eat, but my uncle Gino was the cook of the family. So I also talk about him, the menu and stuff like that. But, um, but some of these concepts we're doing, it's really fine, you're going to see big pizza oven and you know, we think we have the best pizzas in there. Okay, like if...

If any of us here really wanted to take a flyer, I think you could take our pizzas on the road and we might have the best pizza concept in America. I wouldn't want to be any of those Papa Johns or anything competing against our pizzas. They're so good. We have this pizza expert that works for us in Europe.

Who's perfected the crust. You had pizza last night. Max next, no? I did not, no. You eat last night, I saw you, or you just. He's trying to get information on the gallery. But no, like, anyway, these compounds are going to be great, and I think the returns are going to be as good or better than anything we've ever done. And I think single floor galleries will be as good or better than anything we've done. And so I think you're going to see capital spending go down, returns go up, and I think you'll very quickly see our return on investment capital return to where it was at our peak.

That's great. I appreciate all the color. Good luck to the entire team in the second half.

Your next question comes from the line of Christopher Nardone with Bank of America. Please go ahead.

Can you guys elaborate on the health of your core inventory and can you talk about whether you foresee a need to step up promotional activity to help clear way for the Estates rollout as we look into 2027?

It's not really clearing way for Estates, right? Estates is going to be incremental to the assortment. Not really clearing out Estates, I mean, we're going to get some of the things that are in the galleries today will come out of the galleries and you know, we've got a pretty good outlet network and ability to, you know, rotate through that. But Estates isn't going to cause, it's not going to cause markdowns. I mean, the environment in our category is very promotional right now and has been, right? So there's, I mean, there's a lot of data out there. You know, people are, I mean, down to the, you know, by week how many, you know, how promotional, how many, you know, SKUs does our average have versus a Pottery Barn versus our house versus this. I mean, everybody, when you're in the home business like this and you get a down housing market, 4 million homes in 4 straight years, unless you want to lose market share, you've got to be competitive.

So it's been somewhat of a promotional challenge environment, you know, margins are holding up fine, you know, and I mean, if you just take our model and extract a lot of these drags, our underlying model on RH is a really good model. It's a really good model. We weren't, we didn't have the drags from international and you know, I don't know, like right up there with anybody, right? So we're happy to cycle through here. Our stage is going to be incremental. Think of a stage like a new category. It's like when you've got a new aesthetic like that, it's really like a new category. But we get to sell it on our platform, so it becomes very incremental and it's very leverageable. I mean, this is it. Things like this are the biggest drivers of profitability, right?

Yeah, we've spent some capital here, yes, we bought some businesses, you know, things like that to, to build this, but you only have to do that 1 time and built a freestanding Estates store here. We bought Formations. We also bought the Formations real estate, Formations and Dennis & Leen. And we're going to transform that property to an RH Estates Gallery with a design district on West Hollywood on Melrose Avenue. So on Melrose Avenue, we will have the RH Interior Gallery, we'll have the RH Estates Gallery, and then we 3 doors down from the RH Estates footprint, which is at almost 195 feet of frontage, right, on Melrose. And our current gallery is 145 feet. And then we took another smaller location for RH Outdoors, so a freestanding RH Outdoors. And then on Beverly Boulevard, a couple blocks away, we have an RH Modern freestanding.

So, the question is, do we need to keep Modern, is Modern consolidated into the kind of core, had some modern and contemporary that we may keep the whole footprint, we may consolidate some of it. But I think you'll see us test, I think we've talked about it in the past about our ecosystems where 1 of the capital efficient ways to deploy the brand, especially if we've got, we don't want to leave the historic post office, probably the best location in Greenwich, um, we were able to get the second best location in Greenwich, the Ralph Lauren building. Um, and so we call that an ecosystem. So we'll have the historic post office will have RH Contemporary and RH Modern space. We'll be in the, a former Ralph Lauren building and then we've got a 5,000 square foot, 4,000 square foot large outdoor gallery.

Outdoors is a very important business to us and so a lot of the key markets we might have a freestanding outdoor presence. But instead of trying to get rid of our real estate that we're in and going out and having to build a big new thing, we, so being at the location, I'm Brent Chaf. We have to go off the beaten track. And I don't know if you want to there. And so we call that an ecosystem. We've got an ecosystem in Palm Desert. We're doing 1 in West Hollywood that I just described. And so just a much more capital efficient, uh, way to continue to deploy the brand and to rationalize the brand.

All right. Thanks, Gary. Good luck. All right. Thank you.

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

I wanted to see if you can expand more into the trends you're seeing in Europe. It looks like London's off to a very good start. Are you seeing the end consumer shop more there, or is it more geared towards the trade, like what you're seeing at the other European locations? Maybe an update on how Paris and Milan are ramping up, thank you.

Yeah, you're asking at a funny time, right? In August, it's not usually the best month. They're just on vacation, so people are just getting back. Especially in Milan, like, you know, we fire cannon down the streets in most cities in Italy. Yes, but same thing with Paris. I mean, everybody in Europe is on vacation in August and everybody starts getting back in September, you have business, you know, we'll ramp. Yes, our focus is, you know, how to build the brand in each of those countries. I think they're all different. It's interesting. Each 1's culturally somewhat different. Shopping behavior's different. I mean, obviously the languages are different. I think that surprised us a bit, just how unique they are. So, you know, how do we market? How do we build awareness? How do you build the business with the trade?

We have a lot of learnings. We're flying early tomorrow morning to Paris. And so we'll be in Paris tomorrow night and Saturday and then Saturday, uh, evening we fly to London, we'll be in London Saturday evening and Sunday. Yes, we'll be in Europe a lot this year. And, you know, connecting with our teams, listening, learning, finding out what we're doing smart, finding out what we're doing dumb. Yes, no different than, you know, building businesses and kind of new markets. These are very different, right? I mean, London had a running head start for multiple reasons. 1, the country speaks English, right? His primary language. 2, it has the most expats and we have the most customers over there. So we ship, London's the #1 place. We don't ship to other countries, but customers can buy from us and we help them get their goods containerized, right, and they take control of the shipping. But London, we have the most shipping to.

And then we've had RH England open for 3 years. And RH England kind of ramped up by around $38 million demand. So you see an awareness that's been built up there over 3 years. And yes, that's why we expected London to open London first, it's just that was the most complex of the deals and was going to take the longest and so on and so forth and that's why we did our RH England get positioned in the marketplace. So, we're happy, we're learning, you know, about the business and lots of opportunity and the key is you can't be an absentee kind of leadership team. Like, we can't leave everybody on an island in these individual, you know, geographic. So if we're ever going to be on the East Coast, likely we're going to hop over to Europe. Then we're going to go to Europe at least, yeah, at least 4 times a year just to go to Europe, you know, spend, you know, half a week or a solid week and really spend time with their teams.

Going to stay inside our company, the smartest people in the company, those people closest to the customer, and those of us that have gotten promoting, you know, generally get farther and farther away from the customer and we get dumber and dumber, right? So the only way you can lead is if you, you know, first listen, second learn, and then you can effectively lead. So we're in listening and learning mode and trying to be better leaders of our business. But we have to do a lot of listening, spend a lot of time. And our people, they've been very helpful. We've learned a lot. So, you know, we've got to get in-stocks, we've got to deal with the different, you have different raw material issues and different plantability issues, you know, upholstery, lighting, things like that, it's been a little bit more complicated for us. Uh, and so we're, you know, we're working through a supply chain to be more responsive and compete better.

But, you know, I like the direction we're going, you know, and I think, uh, I think we're going to get better and better and better and, you know, drags are going to go away and so, and London's, yes, very exciting. I mean, we had our fingers crossed that I wasn't a come on. I mean, what should this be, what could it be? And I mean, to see the first 8-week ramp there, it was really, we've got a great team, we've got a great leader, building a great design team there. And I've never seen customers like that. I don't think it's 8 days, it's like 9 days or something like that. So I was in the gallery quite a bit at the opening. And I've never seen a level of customer and a level of wealth like that and in our galleries. These are really important, big projects. So I would say it wouldn't surprise me in 2 years, maybe by year 3, that London's not the #1 RH in the world, you know, unless we open the Middle East, you know, sometime before then, because the more we're learning about the Middle East, we...

A lot of people believe that would be our #1 gallery. See you on Dubai.

Your next question comes from the line of Marius Morar with Zelman. Please go ahead.

I'm just curious, Gary, you mentioned that most of Estates is protected by IP. And obviously, you know, the furniture industry is notorious for knockoffs. And there's a long history going back probably 150 years of mixed success in defending designs in court. So I was just curious, I wanted to ask if you could give us maybe a bit more insights into what you think will make Estates easier to defend. Is it maybe, you know, that the finishes are more intricate and just easier to defend in contemporary or is there something else?

Well, there's a lot of levels to it. So in cases where we bought the brands, the brands have IP and you know that's pretty strong that we think is good but a lot of the businesses we bought were, uh, more item focused, you know, we, um, dimensionalize our assortments and so yes, use our design teams to dimensionalize things and so forth. So those become original RH designs. So we filed 9 patents on almost everything. And, you know, we're pretty big in our industry. I think if you get a letter from us that we're patent pending on a design, I don't know if you want to go to court with this. I don't like to go to court with people. My people screw up and we've been maybe too much spice at the end. We get a letter here, I usually hold the tent. Like why do I want to fight in court and spend a lot of money? So, it doesn't happen to us often, but I tell people, let's not waste our time. We don't want to spend time with that, but we think, you know, you know, the work is very defendable. We have yet. I don't think the government invested this much into design patents and, so, we'll see, maybe no one's ever invested in protecting intellectual property in this industry that well. I mean, look, go try to knock off a Giacometti table. There's a reason we haven't. They will take your ass to court. So unless you want to go spend millions of dollars fighting over it, we don't have any Giacometti influenced coffee tables. Even though I'd like to, I think they sell great.

So a lot of it is, I just don't think, your business hasn't really been a sophisticated industry, hasn't been well capitalized, you know, a lot of mom-and-pop stores, you know, so nobody really had, you know, the legal department. We've got our new chief counsel sitting next to you here, Ryan, and yeah, yeah, he's going to help get us all teed up and, uh, not to play defense, to play offense. Um, so, you know, that's why we're, you know, we're moving like that and, um, you, I don't think people want to get sued by RH.

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

This is Casey McKenzie on behalf of Brian Nagel. You mentioned tariff refunds will help offset the $50 million of unplanned supply chain costs across the full year. Do you think that amount is still ramping as fuel costs remain increasingly volatile?

What do you think, I think look, everybody's mitigating where you can mitigate, um.

If the costs persists into the next year, how do you think about possible mitigation efforts as we lap next year's oil price spikes in the absence of refunds?

I mean, we're oil today. I broke 109. Yes, okay, so you're at 109. I mean, oil is 63 like beginning of the war, like you're not going to be able to mitigate that. You know, there's, I mean, costs are going up, inflation is going to go up. You know, there's a reason why the administration said that the war was ending and we were going to have a deal in 1 day or 2, 38 times. There was an urgency to end this war and end this conflict because it's likely not good for the election. Now it might be too late. So now the administration, what I saw offered voters $5,000 to every American votes for the president and the administration. That's interesting.

Yes, I think we're in a time of conflict, we're going to be in a time of inflation, I don't think they're going to be able to keep the lid on interest rates. Yes, so I keep thinking, gosh, it's like my entire career, and I've been doing this a long time, I never saw a housing market that was down longer than 18 months. So it looks like we're going to go to year 5. Yes. So I like the game we're playing. I think we're playing offense. We're going to build our own bigger market. So I think we'll be able to grow pretty well through any kind of market as we look forward. But there's going to be costs. So I think, I don't know, like what was it, Walmart had a $2 billion tariff refund and it's all going to increase costs in some lower prices. Home Depot, like $700 something million. All going to increase costs. Yeah, there's massive increase costs. Nobody's got a magic wand. Nobody's going to get that much better price than somebody else, you know, if you have leverage you use your leverage and you know, but you can't make your partners go bankrupt, right? Or you have no partners.

So it's going to be in a higher cost world for probably at least the next 6 to 12 months. I mean unless and I mean, even if tomorrow they end the war, there's too much inflation in the pipeline. I mean all the raw materials are going up everywhere and everything is impacted by oil. And so, that's why, I mean, you're seeing crazy things, right? Trying to manipulate currencies, buying back things like this. It's a crazy time.

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

Gary, it was on the recent revamp of your trade program. I was curious if you could speak to any indications of early success, how the trade community is embracing it and relatedly, are you doing anything to activate the interior design community with the Estates launch that's perhaps maybe different from how you've sought to build awareness for prior brand launches in the past? Thanks so much.

Really good question. Yes, our teams, our trade teams are over the moon that you know, we launched a new program, I think designers are, you know, happy firms are reengaging us. We've seen an acceleration of our business, a meaningful acceleration that we're already at a level that offsets the discount, you know, so we've hit the volume levels we needed to kind of offset the discount. And the pipeline is building, so it's been fantastic. And our teams are working on different engagement methodologies. We're looking at doing more events in our galleries. We have very nice spaces, so we're getting even smaller events if designers want do things that, you know, we're, we're going to be a lot more open on multiple levels, you know, with the trade. So, and I think the trade is very happy that we're doing bespoke couture, right? That we're doing COM, we're doing bespoke furniture, you know, custom sizes they can specify.

So that's the big deal and I even, I a gentleman and his family last night that we talked for about 30 minutes and we've done 3 homes for him and they were building a big new a contemporary home and he didn't think that we were going to be able to do it. And then he said, I thought it was great that you guys just launched this bespoke thing because now you're going to get the fourth home from me. I thought that was great, because it's a big home. And they're huge fans. Talking to the family last night, I was like, I mean, just right there. I mean, you don't want to lose customers like that that are building their fourth home and might not have been able to do it the best. So, yeah. So again, we're learning, you know, we've got to stay close to our trade teams and our leaders and, you know, there's more we can do. And, yes. But I don't think that anybody offers the trade more support and services than we do, right? We support them with, you know, doing floor plans, doing renderings, doing, you know, we work as like a back office, not just, you know, sort supporting them with products, but supporting them with designs, supporting them with installation.

The hard part of competing with us in the design world is that we've got such a broad assortment and we've got such good experience and tenure in our interior design business and the services we offer. And just the design, getting it all delivered at 1 time, getting it installed, you know, we, we have a lot of resources supporting that part of our business that I think, you know, as far as someone who also, you know, furniture retail business, you know, at our core, I think we're, I think we have real strategic separation from the next best person here.

There are no further questions at this time. I will now turn the call back to Gary Friedman for closing remarks.

Thank you everyone, appreciate your participation and all the questions and we look forward to talking to you next quarter. Thank you.

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

Hello, and welcome to the RH First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Allison Malkin of ICR. Allison, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2026 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I'd like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our outlook, of our business and other matters referenced in our press release issued today.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for 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. And now I'd like to turn the call over to Gary.

Thank you, Allison. Hello, everyone. Let me start with a reading of our letter to our people, partners and shareholders. First quarter revenues of $800.3 million and adjusted EBITDA of 7.1% exceeded the high end of our expectations in the first quarter despite backorder and special order balances, approximately $75 million higher than a year ago, primarily due to tariff-related resourcing.

As a result of our better-than-expected first quarter results, we are raising our outlook for fiscal year 2026 and providing the following outlook for the second quarter fiscal year 2026 outlook. Revenue growth of 4.5% to 8%, adjusted EBITDA margin of 14.2% to 16%, adjusted free cash flow of $300 million to $400 million. The above outlook includes an approximate negative 270 basis point adjusted EBITDA margin impact from preopening and start-up costs to support our international expansion.

Second quarter 2026 outlook. Revenue growth of 0.5% to 2.5%, adjusted EBITDA margin of 11.5% to 13%. The above outlook includes an approximate negative 380 basis point adjusted EBITDA margin impact from preopening and start-up costs to support our international expansion. The bridge from here to there. How many may ask in an economic environment like the one we are navigating through, do you get from your half 1 numbers to your half 2 numbers necessary to make the year.

There are 3 parts that formed a proverbial bridge to the other side, supporting the case for our business to accelerate from flat in half 1 to up 12% in half 2, as we've done many times before. We've listed them below. We plan a backlog reduction that's worth 4.5 percentage points in the second half, new store growth of 2.5 percentage points and new concept growth of 5 points RH estates, building the foundation for a global luxury brand, similar to structures that stand the test of time. Those rewarded with historical recognition and reference. Luxury brands are designed and built in the same fashion, on incredibly strong foundations. Both endeavors are considered hard and in many cases impossible. They always require more time and capital and are generally built by unrelenting and unrelatable individuals and teams.

You've heard us talk over the years about climbing the luxury mountain, how it's not for the faint of heart, as the higher you climb, the air gets thin and the odds become slim. We believe the work we are about to unveil is akin to those difficult last steps and gasping for those vital breaths. We believe the openings of RH Paris, Milan and London, arguably the 3 most immersive and inspiring brand experiences anywhere in the world will form the foundation necessary to earn the respect and recognition of not only the European and U.K. customer, but a global one.

They communicate a sense of permanence, a brand that has been dedicated to crafting their skills over decades. The last foundational piece -- RH estates. Mr. Gorbachev, tear down this wall - Ronald Reagan. We believe that there are those with taste and no scale, and those with scale and no taste. The global design market has spent the last half century comfortable with that division. It is an industry defined by exclusion versus inclusion.

For decades, the highest echelon of home design -- the masterfully tailored upholstery of Dmitriy & Co, the uncompromising bespoke casework of Joseph Jeup, the classical grandeur of Dennis & Leen, the meticulous reproductions of Formations, the artisanal fixtures of Waterworks and the iconic designs of Michael Taylor, to Architectural Digest named one of the greatest interior designers of all time has been hidden. Trapped behind the metaphorical iron curtain.

This curtain is the closed door trade-only showroom network. Unless you hold a professional license or hire a gatekeeper, you are forbidden from seeing, experiencing or purchasing the finest expressions of human craftsmanship. The public is left outside, while some of the very best design and quality remains hidden inside. Nearly 40 years ago, standing at the Brandenburg Gate, a former American President looked out at a divided world and issued a defiant historic decree, Mr. Gorbachev, tear down this wall.

Today, we look at the luxury home industry and ask the same. With the launch of RH Estates, we are removing the barriers that have segregated taste from scale. We are amplifying the work with the world's most elite designers, artisans and manufacturers on our global platform. This is not a compromise of quality, it is a liberation of mastery. By uniting these legendary ateliers and elevating their work in architecturally significant spaces, we are providing access to some of the most beautifully designed, highest-quality classic contemporary and modern furniture in the world.

Pieces that not only furnish a home, those that define it. But tearing down the walls means more than just opening the doors. It means eliminating the creative limitations that has historically forced designers to choose between our scale and the uncompromising specificity of trade-only showrooms.

To empower the design community, we are introducing RH Bespoke Furniture and our RH Couture Upholstery. With RH Bespoke, we are offering a level of customization never seen before at scale. Interior designers and architects can now specify dimensions for dressers, dining tables, sideboards and cabinets to fit the exact proportions of their architectural canvas.

Simultaneously, RH Couture Upholstery will redefine the boundaries by integrating custom sizing with COM, customers own material into the RH ecosystem. We are giving designers the creative freedom to specify custom sizes and fabrics for sofas, sectionals, chairs, ottomans and beds. You source the fabric from anywhere in the world, we provide the atelier level construction and craftsmanship.

The scale of taste. Our critics will argue that true luxury cannot be scaled. They are wrong. They failed to understand the ability to scale taste creates higher quality and value for both the customer and the designer. It has the ability, as other innovations have to create a larger market, enhance the way we live and elevate humanity. By moving past the antiquated model where each piece is built in isolation, we are building these elite designs and highly disciplined batches.

Scale gives us unprecedented leverage, allowing for vastly superior sourcing of raw materials, rigorous quality control and significant manufacturing and transportation efficiencies. Make no mistake, we are not mechanizing art. The intricate hand carvings and finishes are still executed individually by the world's finest artisans. Because of this human touch, every single piece remains a one-of-a-kind masterpiece in its own right.

However, by integrating the fragmented supply chain and presenting these products on an equally unrivaled inspiring architectural platform, consumers now have the access to a level of design and quality previously only available to a select few, a new covenant with the trade. We recognize the ultimate expression of our products requires the vision of incredible talent.

To honor the design community, we are redefining how we partner with professionals. We are introducing an exclusive program for interior designers, architects and trade members. The program ensures that professionals are compensated for the tremendous value and aesthetic clarity they create for consumers. We want to incentivize the world's best talent to build their campuses using our platform, creating a symbiotic ecosystem where design mastery is both accessible and rewarded at every level.

The separation between taste and scale is over. The curtain has fallen. It's time to tear down that wall. Carpe Diem, Gary. Operator, we'll now open the call to questions.

[Operator Instructions]

Your first question comes from the line of Steve Forbes with Guggenheim. .

Gary, given the commentary around customization within the shareholder letter that you just went through, curious if you can maybe just give us a high-level view on what you think this really means for the brand's reach an addressable TAM, especially once you layer in that new trade program, like how much of the market really gets opened up. I don't know if there's a way to contextualize it for us on how you're thinking about it today?

Well, it really opens up on multiple levels. So one is I mentioned on the video last quarter, the traditional classic market represents about 60% of the luxury home market. And today, we're just vastly underpenetrated in that market. and if you look back, if you looked at an RH source book from 2014, I think we had 704 pages, and it was all classic, all traditionally based. .

And if you look at our business today, because of the evolution and the expansion of modern then the evolution into contemporary [ as the train hit ], our brand, like many brands and many of us grew up in the fashion industry, I grew up with The Gap. And so learning to build a specialty brand, you're generally keeping it in a very focused kind of limited point of view. So it will break through the market. And I think one of the things that I feel to kind of recognize, if you think about the bigger picture of the home industry is that the trends kind of kind of lift kind of aesthetics during cycles.

But the other things don't really stop selling. They just sell kind of less because the architecture is really the driving force in the market. So as we went back and just kind of studied our history and said, look, what are the smartest things we've done, what are the things we think we missed? What could we have done better, our view is that we could build as I outlined in the video, build our business around the 3 major aesthetic kind of pieces, and that's traditional contemporary and modern, and we'll refer to it as estates, interiors and modern.

So this is -- I would say, I don't know, there's maybe a chance to -- we might have given away over the last 10, 12 years, $1 billion, yes, maybe more. As we assess the market and try to go back and just do the math and try to extrapolate things, so that's one piece. And then I say, every time you do something new, I mean, it's not 100% incremental. There's going to be some level of cannibalization as you expand a market, whether it's your expanding product or in physically in penetration.

There's going to generally be some level of incrementality and there's going to be a level of cannibalization. Our view here, this is one of the most incremental things, I think, we've ever done. Yes. Modern was very incremental, but it was a very small market when we launched our RH Modern. The amount of modern architecture in the world. While it was trending, and the world was moving in that direction. Still it's a fragment of the size of this market.

So that's how I think about the first piece. The second piece is looking at it not just from aesthetic point of view, but really a market point of view, a design and quality point of view. RH Estate is, from our view, the first step up to the top of the luxury mountain, if you use that metaphor. It is the highest level of quality and design that exists in the world, unless you're really buying rare antiques.

But if you think about the brands that we've aggregated over the last 5 years and what we've learned over that time and what we're bringing to market with estates, which you guys have only seen just a little teaser, I mean that's such a little teaser. It's -- this is just a level of design and quality that is not available to the consumer. We own showrooms. And one of our very best ones, there are 2 of them. The door is not open to the public. There's the doorbell. So even if you're a consumer and you're walking down the street and you want to go in, you bring a door bell and you may not be able to get in if you don't have an appointment.

And if you're not a member of the trader and you don't have an appointment. So the design and quality and then you've got the acceptability when whenever we develop any product, we always do searches on the products. We'll do all kinds of visual searches across all platforms, right, to see who might have something like this. The world is looking at different things and seeing different things and understanding different trends and then you're trying to scale things.

And I can tell you, we've never had such a low hit rate versus what we're bringing in the market. Now you can take a negative view and go, well, maybe nobody wants that. That's why you're not seeing it. Now you're not seeing it because nobody -- I don't believe anybody else can really sell it because they don't have the platform, and they don't have the brand and they don't have the ability to source it at a value equation that we can.

I have -- I've been lucky and this one, this is -- I mean I say lucky and not so lucky, I joke with the team, this is the first trend that I'm old enough that I was the customer. When you think about the next thing that's coming the age of [indiscernible] and the California look with Michael Taylor, there's a few different kind of names. I think I'll come through somewhat differently, but the foundational elements of these giant trends that come through is this is one of the biggest ones ever.

This is -- this one was bigger and longer than modern or any trend we've addressed in my history of RH. But I was a customer. I joined our RH as I was moving into my house in Belvidere, which is the first house I ever lived in, in my life, the only house built in my life. And my first wife was a luxury interior designer. I was her client for a condominium in San Francisco. I had the round Michael Taylor dining table in that house, I had reproduction of the Coco Chanel sofa. I had a lot of these different kind of products that are trends.

Now I probably shouldn't say some of the stuff, I got to be careful because all of my competitors are on these calls and they can wait for me to slip up and let them get them here see something. But I lived through this trend. And so at my house in Belvedere, how many things I have from formations that I bought. 6 or 7 items from formations that I bought years ago. I have the Michael Taylor rectangle Diamond table in my house.

So I bought 2 of them, I had the round one in the condo, the first job we did together and the rectangle one. I know how much I paid for those 27 -- 26, 27 years ago. And I know what they've been selling for recently because we own those businesses and the value equation, the quality we're going to bring to the market and the value equation we're going to bring to market has never been seen before.

And I don't say that lightly. I usually never go out on a limb like this, but never been seen before. And you try to do a visual search online, it is not out there unless you want to go in first dibs and buy antique, which is fine. We can't stop you for buying an antique. I had to read everybody with what we have on the back of our catalog, right? Because if anybody tries to come after any of these goods, that's going to be a bad day because we own the intellectual property on the vast majority of what we're bringing to the market.

I mean we could -- we have patent pendings on what would we say, what percent of this book 65% to 80% of the book, we should go down. And we should go back and just actually add it all up. Yes. So there's just so many things we're doing, we've never done before. And the way we're addressing the market and the way we're sourcing these goods, I mean the people that are making these goods grew up making these goods. The manufacturers that are making these, they were part of that industry, making for the highest end showrooms before we met them and started to scale with them.

And they're also excited to be able to make this quality again because they're -- the market is so fragmented. But it -- so the design and quality aspect of this is huge. And then the next piece you have is, we're going to open the market up to what do we call them, super buyers, furniture. I mean we have a very big trade business. We provide excellent service to the trade and to hire interior designers and design firms. Our teams act as back office, we'll do designs and renderings and presentations for them. We'll support them in any way we can in many times in delivery and installation.

And -- but at the same time, there is an aspect of just recognition and compensation that we haven't done. And the team jokes around because every time they go to a high point, someone comes up to me and says, like, I love your brand, "Oh my god, and please help us make money." Let us make money on your brand. And we haven't offered and identified the design trade.

And I look back and I think when because I came from a family situation that had Interior Designer and I have the insight of looking at just how complex and difficult that was. And it was also -- it was -- not only was it not transparent, it's just not accessible. You can see it, can buy it. And I just thought, over time, just making high-quality goods available with -- that the consumers would drive designers to our brand.

And I think they have. But at the same time, there's really great interior designers that they're running a different model. And even the mother of my girls who is here consulting us, what, 10 days ago, 2 weeks ago, just give us the insight of a high-end -- she runs a designer firm. She said, "Listen, do I buy RH? Of course, I buy RH. Do I want to spec that first? No. A lot of times, my clients will say, "Hey, look, okay, do your designs in the primary living room and the primary bedroom in the primary dining room, but like do RH for the family room and the media room and all the rest of the bedrooms.

And she was saying like, okay, I will. And she said, but I'm thinking of myself, I can't make any money. Like interior designers have a markup model, right? And an hourly model, right? But they kind of need both to make the business work. And I think we just haven't -- we haven't been an open platform like that. And I think we are just overlooking kind of a super customer.

I mean, they're -- they buy furniture all day long. That's what they do for a living. So it kind of doesn't make sense that we're not doing it when you really look at it critically. But I think it really makes sense here, too, the timing of this because. And not only are we going to have this design and quality that is at the very highest level of the market, we're going to also empower the designers and consumers for that matter, and all of our designers with the ability to customize and the ability to do COM and customers own material. And the ability to do all the things that they need or want to do to do truly custom work at the highest end.

And I would say this is just the beginning, right? It's not not the only thing we'll do. If someone asked me the other day, hey, are your price is going to be higher? Well, yes, they're going to be higher. I mean the quality is massively higher. But it's such a tremendous value. And the price should be higher. This is not just kind of smooth wood with the right on finish or a contemporary piece with curved edges. This is [indiscernible] hand carved, hand distressed, so many details to get it right. And every piece is a one of a kind because of the hand work and how it's made.

And so -- yes. But someone said, "Oh, well, how do you know you're not going to make a mistake like contemporary." Well, contemporary wasn't -- didn't have the hand work, didn't have that level of detail, didn't have those things. And we just -- we were a bit arrogant at that point in time. But because we're out here with a unique product also, I think that we're offering such an incredible value. But I think that there's also an opportunity because of how long we've been thinking about this, working on it. I mean I think it's the most intelligent, deep thinking launch of a brand we've done. We really started investing in this in 2000. So here we are in 2026 that we acquired Dmitriy and Joseph Jeup in 2000.

2020.

2020, not 2000.

Yes. Thank you.

2020. Yes. Thank you, not that long ago. But it's been a long-term investment. So so many like -- think about the opening of the high-end design market on this, and there's nothing that we're doing to value engineer the product. I mean we are making identical quality. The diamond table is made with the identical molds of Michael Taylor, the tops and everything at the same quality that finishes that we're offering.

The array of finishes is that at a whole different level. You're going to see -- when you see this book [ BNC ] at home next week, or we saying end of next week ...

Early following week.

Yes. Okay, Early following week. We kept tweaking it and tweaking it, we had a lot of last-minute ideas to kind of make it better as we're working on it. But it was also taken us a little longer because it required a different level of thought and discipline and compositions and presentation to do it at the level that it deserved to be presented at. And so it was laid to us, it's not a big deal. I know I read a couple of analyst reports. We're Going, my god, it's late, like I don't know, like it was test live around time, changed the whole car industry.

So it's not about like, hey, I'm rushing to mediocrity here. We're trying to make big moves that are industry redefining. And I think this is one of them. I think this is -- the biggest move we've ever made is fundamentally different on so many levels and opens up so many dimensions of the market but it also opens up the learning, right, that can be applied to modern and to interiors and so on and so forth and thinking about how big is our market?

Like when you think about what I just said about my daughter's mother and she said, yes, customers will say, "Okay, do the primary rooms and then use RH for these other rooms. Well, that's really interesting about that. Our whole focus with this initial lens, the key part of the lens was -- because we knew that, by the way. So we said let's win the primary rooms. Let's make sure we get the primary bedroom.

If we get the primary bedroom, we have the assortment to get the other rooms. Let's get the primary dining room. When you see some of the dining tables we have, you go in first dib, and start at $250,000 with expense dining table and go all the way through it down to the prices. We have it at, you won't find anything of our quality or design. We went through all of it. We know every dining table on first dibs at every competitor at the highest end to down.

We spent a lot of time studying this market. So the goal is the dining room, the primary living room, the primary bedroom but these guys can also eclectically be presented in a very cool way. This thing you'll see it when it's all presented, it looks different than RH today, but it does look like RH today. I think you'll see a very big move. You're just going to see like, well, I mean, I think the design community is going to go, "Well, I didn't know they had this in. So I know that's a long ramble, but like I'm so excited, if you guys want to talk to the next 5 hours about estate, you're going to have my attention.

And maybe a very quick follow-up for Jack. Given the tariff refund commentary in the Q, maybe just help us or confirm whether or not any refunds are included within the guidance?

No, no further refunds. I mean the refund started coming, but there's no -- there's been kind of pause. You might be following some of that activity as far as the DOJ and how those are playing out in the courts. But as far as the guidance reflects -- it does not reflect the free cash flow -- specifically does not reflect any further tariff refunds. .

Your next question comes from the line of Michael Lasser with UBS.

I wanted to dig in on the 500 basis points of contribution that you were expecting from RH Estates in the back half of the year. So just under $100 million. What is the basis for that expectation. And you've already alluded to a need to evolve some of the elements of the model or the way you interact with core customers like to trade. Do you think you need to make further changes to your customer acquisition engine beyond the legacy model of just simply mailing out a book and then expecting that the consumer will come, especially in this age where your competitors are going hard after social media and other forms of manners that they're reaching the consumer.

I don't know. They've been doing that for the last 3 years, and we've outperformed all of them. So I think when you say we're mainly in a book and expecting people to come. We've built the greatest physical platform on the planet Earth for our kind of products, right? So I don't want to overlook the physical platform.

And if you -- Michael, if you look at that video, I did last quarter, I outlined that furniture is the least digitized business, 80% done in stores, it's 20% done online at the luxury level, it's 95.5%. So this is a business you need to see, touch, sit in comfort scale, all these kind of things. So I mean the book is just a small way. We use it to integrate the whole thing. People look forward to getting our books. It's a physical thing, it's still said, we have a digital book, too. But we just don't.

I'm just not a believer in following the trends of a lot of people that are following other people. We just think it's massively unauthentic to pay some stranger to some influencer to go talk about our goods, and they don't know nothing about us. They know nothing about the product. They're not an expert in the field. And I think that's a lot of noise. Maybe it's good for building beauty brands to teenagers or other stuff like that it doesn't affect what I buy, and I have a lot of homes.

And so I don't think it affects our customer or we wouldn't be the biggest brand of our kind. We wouldn't have outperformed everybody. I mean, indeed, if you look at this last quarter we have, and if you look at it at over a 2-year basis or 3-year basis, over a 2-year basis, only West Elm has performed as well as us. On a 3-year basis, we're better than everybody. And West Elm just had a great quarter. And I think they're doing a great job.

But if you look at anybody buying furniture, it's -- I tell people, when you go out there bang pots and pans and try to get attention, doing inauthentic things, you're just creating noise, you're creating your own noise. And you wind up chasing things and thinking that they're relevant when they're not. And we tried and tested different things, and we have a lot of data behind what we've done and why we're doing what we do, and nobody thought we were smart to build the stores we did and the galleries we did and those turned out pretty well.

And yes, everybody stopped mailing books and we're still mailing books. The only difference like right now in a point in time, you can put our model against anybody, put it against today's very best customer, back out our investments in international expansion, back out our investment in building estates, which is not like some little introduction of a 80-page book that, that 5 or 7 years later, you wind up with one store. This is -- we're making serious investments to build a platform unlike anybody else.

And so in a down market like this, are we going to -- is our model not going to look as good? Yes. Yes. Okay. But you're looking at people that aren't even investing. They're not building anything. They're trying to be great cost controllers. So yes, just wait till the other side this cycle for us. And I think we're going to have a cash generation machine that this industry has never seen.

Understood. My follow-up question is about the margin profile of RH estates? Is it sufficiently higher than the legacy business in order to on the investments that you're doing provide the incentives to the trade community as well as anything else you might have on the horizon and still drive the margin expansion that you embedded in the back half? Or do you see other building blocks arrive at the margin expansion that you're expecting?

Estate has got its margin profile based on the quality and exclusivity and desirability of those goods, right? If you've got a level of design and quality and scarcity and build desire, who knows what the margins will be. I think we determine our margins based on a competitive nature. And if there's others selling something in the market, okay, is there a quality differentiation?

How big is it? How different is the design? So on and so forth. What access do they have to the market? Do they have a big enough platform to matter, all kinds of things, like we're not really doing margin building paper, something like incentive for the trade, the incentive for the trade, it's a simple model, like we give x and we need a -- we need a lift of y. And it's so minor on a model like ours because we have such leverage and flow through.

I mean just you have to think about our model, like even think about estates on a -- our whole business has a different model than everybody else just because kind of the price points of our product, right, versus most people selling furniture. So we have significantly more leverage, just handling goods, shipping goods, delivering goods, so and so forth. And we have tremendous leverage in our interior design business because we're selling high average orders.

And yes, there's an investment to do that work, but we have such leverage on the incremental sales. And again, it's a little masked today because of the investments we're making in international in things like Estates and so on and so forth. But yes, we've got plenty of margin to cover what we're doing. We'll have plenty of margin growth going forward.

Like I said, we're looking at our -- what we believe the cash generation model of this business is going to look like because we think that's the most important metric. And I think as we move past the peak investment cycle this year in our -- we believe our top line is going to reflect that. Kind of the relevant of what the external market does unless it really -- look, if we get into a war that's massively impacts the economy, the inflation, so on and so forth, it's going to put pressure on everyone. Those things happen.

But we don't need a big move in the housing market to grow. We don't even need a move in the housing market. I'm not counting on the guidance we just gave you everyone, I'm not counting on the market getting any better and the market could get worse. And I'd be surprised if we don't beat those numbers. So incremental move on estate is really conservative.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

I want to follow up on 2 items. First, estates and top line trajectory and then my follow-up will be on the balance sheet. So first on Estates, can you give us a sense of sequencing how much of the collection is being launched. I assume it will be continuous. What percentage of items on floors and galleries will be estates?

When should we expect that fully ramp? And then should we be seeing the customer deposit line pick up a bit, not just from these back orders, but from estates? And then I'll wait for the follow-up.

How many questions did you just ask here. That was good. I mean I just saw you in Milan. But I thought you asked me all the questions you might have had. You probably have -- maybe everybody on the phone should ask you questions about Estate. You're one of the few people that saw it set up in Milan. But -- okay.

So sequencing that the products coming into stores, we will be kind of tariffing in stores. When do we get to like 60% of the sales, 65%, what was that? End of September. So end of September, we'll be in the galleries that represent roughly 60% to 65% of the business, roughly 2/3 of the business. And then what's the next wave that hits.

Every month.

So every month, we kind of have -- so December will be all galleries. Our second mailing of estates will be early part of November. So -- and that will be a pretty meaningful expansion of the assortment. So you'll see us building this assortment over the next couple of years.

and then -- yes, yes should we expect deposits to ...

I mean they follow our business. So as revenues grow and demand -- which has driven customer deposits tick up.

Yes.

So then I'll put the follow-up. It's 2 parts in the follow-up. Should the deposits already be ticking up as these back orders exist or no, if that was already on deposits? And then just thinking about balance sheet. Like the business improves and in flex, as you said, Gary, there's a lot of leverage in it. The balance sheet cash flow stuff should resolve itself.

But can you remind us this path to getting debt free by '29. What -- is there an update? What other steps are you taking to get to that? How much of a priority is it versus just letting the business now -- let the Estates collection speak for itself and then drives the natural deleverage of the business.

I think we were pretty clear. It's a big priority. And we outlined asset sales of, what, [ $200 million to $250 million ] a year over the next 2 years. We just completed a transaction inside our Aspen Real estate, where we sold some properties to our partner and sold the property to us and we now have more independent control across a lot of properties that we can monetize more quickly than less quickly, how many properties did we take control of...

8 in total.

8 in total, we have 100% control now. So we don't have to work through a JV and partnership to kind of monetize things. And Dave stanchak is back, and Dave knows how to get deals done, buying or selling. And so -- and we are holding -- also have real estate outside of the JV. And so there's that and there's the business performance, there's the pending inflection down, deflection, I guess, call it [indiscernible] Jack at any point jump in with anything, but it's really the spending comes down, the sales are going to go up that we'll have asset sales...

and free cash flow will build through that time period. So again, I think I just reiterate what Gary said, which is it remains a priority. The exact timing of being debt free, I mean, again, it's our target, it's our goal. But I think importantly, just that making progress on those initiatives. That's what we're focused on. .

Yes. And I think, look, we have a history of being relatively creative with the capital markets. We've had a lot of good timing before this 4-year downturn of the housing market. So our buyback wasn't as well timed as maybe our other buybacks and in our capital approach to it, we would have locked it in, but we didn't.

Many big banks that you guys worked for told us, "Oh, no, you don't lock it in. Interest rates aren't going up, no, there's one little move. We had the fastest rise of interest rates in history of our lifetimes. So you don't always get these things right. But I mean, yes, when our stock gets to the right levels, would we exercise convertible option to take down debt and move debt.

Like we have so many ways to work the balance sheet to do things. You don't want to do any convertible debt at this level. But we don't think our stock is going to be at this level very long, and we think it's going to move with our business and as we execute. And again, we're kind of on the side of the cycle. We just -- we're in our most prolific spending period of all time. Unfortunately, it was post COVID, we're building some of the most important things we've ever built, and it all cost a hell of a lot more than we'd have built pre-COVID, unfortunate timing.

But nonetheless, I'll kind of short-term things to navigate around. I mean once you spend the money, the money is behind you, right? And I look at it and I say, yes, I mean there are some people that want to focus on operating margin, and we're going to carry a lot more depreciation, but for investors who want to focus on that line, right? Focus on that line. Maybe some people are going to be a few hundred basis points better than us. But we're going to be focused on EBITDA and cash flow. And I think smartest investor is going to be focused on that line. And that's where we're going to be able to create, I think, the best returns in this industry.

Product looks great.

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

So as a follow-up, as you guys exit the investment cycle, following the opening of London and the rollout of states. How should we think about what that margin inflection could look like over the medium term? You've obviously provided a second half outlook. But how should we think about the medium-term margin power as you do start to benefit from the investments that you've made over the past few years?

I mean I think we gave you a longer-term outlook, and we believe that's the right outlook and the right -- refer to the video.

Yes. We've kind of laid all that out. we believe there's -- again, we think we believe there's meaningful margin expansion as whether or not the housing market gets any better just because of the cycle and coming around in the growth that we expect from these investments. And yes, I mean, we don't -- I mean Europe is -- and the U.K. is an even worse than the U.S., right?

And it's even getting hit more than the U.S. from the war and stuff like that. But you're talking about we're not -- we didn't exactly open at the most optimal time and from a housing point of view and from an economic point of view. But the good news is, I've never seen an economy that stayed down forever. Now I used to say I never saw housing market that stayed down over -- stayed down longer than 18 months in my career.

But now we're going into -- yes, we'll definitely probably -- Yes. I don't think it's going to recover this year. So we'll see 48 months. Will it go into a fifth year? It may. It all depends on inflation and interest rates. So -- but -- so we -- I think we're going to see a lot of leverage in this model either way. I mean we're just really excited. We can -- it's one thing that talk about and conceptualize Estates and work on it and work on it and tweak it and tweak it.

And then when you see it all come together, you go through this accelerated learning at the end of a development of a new business like this. And it's just -- I don't think any of us have ever worked harder because we're doing -- we have some of the most important galleries and opening the most important markets in the world and doing some of our best work from platform and physical point of view and we're doing our best work from a product point of view and a presentation point of view.

And so -- but I don't think there's ever been a higher level of excitement here. We have a lot of people here that have been a long time, 10 to 20 years and men, like I don't think -- I think everybody sees it very clearly just how unique the product is just how unique the positioning that the brand is. And so we're excited to see our efforts and work pay off and monetize for our shareholders, and we're all shareholders here, right? Everybody has got skin in the game and everybody's got upside in this effort. So no.

Got it. That's helpful. And then, Gary, as you guys scale and begin to open galleries in the U.S. with the new photo type, how do you think about the unit economics there? Do you think that you can generate similar revenues as the boxes that you've opened over the past decade? And then should we assume that the new galleries because they are going to cost less, should take you higher unit margins as well?

We do. yes. Yes, we'll have a -- I think we're going to have a great return on investment. We laid out for you guys in the video, the compound and the logic behind the compound, right, it's tentative. Yes, disaggregating the multilevel 3-level gallery and saying, what can you take out? You don't need -- in a compound, you don't you don't need elevators. You don't need a grand staircase. You don't need exit stairwells.

I don't think a lot of people know in all these big buildings, there's 2 exit stairwells that are all concrete going up. There's a giant grand staircase, there's generally 2 elevators. There's all kinds of levels. When you're building a where -- there's a restaurant on a rooftop that takes steel and bigger foundations to carry the load and takes complex mechanical systems to operate a building like that.

We spent several years here dissecting that. We started seeing post COVID, the cost become meaningfully more 2x, 2.5x more in some cases. And so we broke it down and said, "Hey, how can we have an experience that's no less inspiring and beautiful." And we came up with a compound. And I think it's going to be -- I think people are going to think it's the newest, great physical experience out there.

In some ways, it's going to look to people like we may have spent more money, right? Because they've never seen anything like it. It still looks like it's beautiful gardens you're walking through and but all that area doesn't need to be air conditioned. You've got minimum lighting, garden lighting and stuff like that. We're aggregating all the bathrooms and toilets in one place. Like we're building a -- lot of these buildings, they have electric and a small pipe with sprinkler heads. And it's not -- it's like imagine building a house without bedrooms and without bathrooms and kitchens and all the things that are really expensive, and you just aggregate everything in the center where the restaurant is, I think we've -- I think these things are really smart.

And would be really exciting. So we're excited to unveil them. And then I think our secondary market salaries, I think we expect everything to be as productive, if not more productive. And I would think all the new things we're going to open are going to be more productive because we've got a bigger assortment, and we've got estates. And we have -- if you think about how we've grown, we've grown through product expansion, primarily in the early years because we had no capital and then platform expansion when we presented those goods at a physical level and the kind of lift that we've talked about historically.

So yes, I think the -- all of that we're so excited about, like when we talk about going plus peak, from a spending point of view, the things that we're going under construction, we saw a couple of leftover ones that are -- some cleanups that are a little bit more than that we wanted to spend just we couldn't redesign them. But I think the whole model is going to look different.

The return on invested capital is going to hit back, I think, to the levels we were at in our peak. And I think we hit like 75% return on invested capital, Yes. And I think we'll be at that kind of level. And yes. So yes, the good news is, we've -- we're just so much smarter and have so much more experience and you'll -- that will all be reflected in the outcome and the economics.

But we got a little stuck, we're building in some expensive places an expensive cities that, yes, it's not like we can unwind that -- those things together whoops, let's not build in the most expensive cities in the world with some of the most complex projects at exactly the most expensive time. I mean -- but the good news is what doesn't kill you makes you stronger, right? So we're still here.

Your next question comes from the line of Brian Nagel with Oppenheimer.

I'll give it short. I guess the question I want to ask is just on the guidance, Andy, you've already discussed this a bit. the ramp in sales growth is expected in the second half of this year. And I've been talking a lot about the Estate. I guess the way I want to frame the question is, as you look at the business today, the piece of the business today, I mean how much of a ramp do you to have in that existing business in order to achieve -- with the components you talked about, these new pieces to achieve that guidance for the second half of the year?

Well, if you really look at the -- at the build of the backorders of special orders, right? Our business is better than kind of reflected in the revenue, right? Like we've got pretty big balances. So those balances are being created now. But we're not shipping those revenues. We're not shipping that demand yet because of -- we still have transitional things and impacts from major resourcing. .

And a lot of our people in all categories are the people are still catching up. And so we'll just see that -- I mean you have to kind of look at it and say, okay, what does that look like? Where are we really -- what is it building to. You have to think about that flop that's kind of coming across. And a lot of that. When you think about that, Brian, there's a pretty big number that we don't have to drive demand to hit it.

It's -- we've already driven that demand, right? And you've got a big chunk of business that's going to just flop over to the second half. Does that make sense?

No, conceptually it makes sense. So I apologize, but have you quantified that piece, I'd like you to use your term, Gary.he piece of the business will flopover to the second half. That's already there and can you quantify that?

Yes, it's in the little table.

Yes, in the letter, it's the $75 million or 4.5%...

Okay. Is that in demand now?

Yes, that's in the demand now. We're not reporting demand, but we're reporting revenues. But yes, all that -- that $75 million is on our books and will ship.

Again, back orders and specials orders over and above normal -- we always have [indiscernible] business. But this is elevated because of unnatural things happening between things that are taking more effort like resourcing, transportation impacts whatnot. So that piece, that elevated piece over sort of "normal" is what is Gary and I were talking about for the second half. That's [ 4.5 ]

Yes.

Your next question comes from the line of Zach Fadem with Wells Fargo.

so first question on the initial response from Milan and your expectations for year 1 in the market. And now that you have galleries open in both Milan and Paris with London around the corner, any revised thoughts on sales trajectory from the 3? And if you think New York is a good benchmark for what those markets could look like?

Look, I think they'll all be great markets over time, and we've got to build the brand and build the customer base, build our design business, continue to build the pipeline. And I think I used before with the ramp, the first one was RH England, and that's been opened the longest.

And with that ramp to not a great economy for the home business in the U.K., but in a store outside of London with not a lot of people around. So that gives us high hopes, and we have greater brand awareness in London for 2 reasons. There's a lot more expats. There's a lot more people that have lived in New York and gone back and forth. There's a lot more people that know the brand. Everybody speaks the same language so on and so forth. So we meaningfully hire brand awareness, and we've been open out in the Cotswolds, the English countryside, yes, for 3 years.

So and then kind of just getting started in Paris, and we're just kind of open in Milan, and we like what we see. We like the responses that we're seeing. And the key for us is to build the design books and get the ramps. And so I think we're going to -- as these mature and grow, I think we're going to like the outcome. But I think London, I was just talking to the team about this, London is kind of the accelerator for all of it, right?

Because everybody goes to London, it is the financial hub and just -- if you were going to be in one place, you'd be in London. And if you're going to be 2, you'd be in London and Paris or London and Milan, pretty close for a slightly different reason, Milan is to center the universe for the home design business because of Salone and Design Week and the eyeballs, you can get not just from designers and from true customers, they come that fly in with their architects and their interior designers, and they're shopping from all the brands at the shows.

So I think it's -- look, I think these 3 are the core of the platform. These are the 3 key things the foundation of building a global brand outside of the United States of America, right? And I think I'd say someone told me once they heard Bernard Arnault was asked the question, how do you build the brand in China. And apparently, his responses, you build great stores in Paris, London and New York. And so we've just done it backwards, and we threw Milan in there because it's so important for our industry, right?

And so yes. This is -- it's really once we get London going, I think the whole thing is like game on. I think London will create the biggest echo. The biggest -- it's where we're known the most, it's where we should ramp the fastest, do the most volume. And because everybody travels into London for so many different reasons. You've got a huge Middle East customer there that lives between London and the Middle East and the U.S. for that matter that I think, knows our brand and it's going to respond to our brand. And I just think the echo of London is going to amplify Milan and Paris and every other gallery that we've opened.

And just a quick 1 for Jack. I think the opening costs in Q1, you said would be about 420 basis points if that ended up being the case. And for Q2, you're guiding, I think, 380 basis points for London. Could you just help us out on which of those costs should we consider transitory and come out in the second half of the year versus costs that are now in the base and will persist?

Q1 ended up 450 basis, so right there with the 420 basis points. We're not guiding specifically the quarters. So you got the year at 270. I guess you can back into some math as to 450 and 380 and how they average out to 270 on the year would be one way to approach it and that delta being transitory being let's call it, mid-100s in the back half and the delta between that and the numbers for Q1 and Q2 are the transitory sort of preopening driven related to the openings.

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

Just 1 question here. Gary, could you share some context on why now is the right time to pursue loyalty program that compensates your trade clients. Presumably, you've maybe considered this pivot in the past. -- what makes now the right time to roll this out? And if you could discuss maybe just the overall growth trend in your trade business in recent years relative to the end consumer business, that would be helpful, whether trade has been outperforming consumer, and this is the playbook to supercharge it. Or has trade been underperforming and this is a way to improve the trend?

Yes. For those competitors that report trade, I think we've been overperforming in the last 3 years. So we've got a very strong trade business. We have great leadership, great teams, very high-quality people that are live and breathe our values that have built great organizations. And this -- yes, it supercharge.

Look, I'm the guy that we used to have a trade incentive program, and I took it out against a lot of people debate. So -- but when we were making the move to membership, just -- is it at the right, Paul, or not? I don't know. Probably not now that I reflect on it with the wisdom I have today versus what I felt in, what was that 2016 right 2016, right, 10 years ago. Yes, I just don't think I was thinking about it correctly.

And why is now the right time is because of Estates because Estates opens up the very top of the market for this brand. No other brand has goods at this level of design and quality, no one at the retail level. They may tell you they do like -- they have probably never been into these businesses that we bought. So -- and so we -- and we've taken what we do really well and amplified those assortments.

So like you're going to see things you've never seen before. And dimensionalized in a way and presented in a way, just doesn't exist. And why wouldn't you want to open up the best interior designers in the world to what we're doing today. I mean we're just smarter honestly. Like I flip back and if I said today, if I knew what I know today, would I have made the same decision. No, I would not have made the same decision. So I'm smarter today. I know more today, I have more knowledge. And it's funny because I was married to a interior designer. Kendall and I were together for 11 years. I knew her newer business pretty well. It helped me conceptualize what to do with RH, quite frankly.

That helped me see the opportunity. But I don't think I really -- I don't think I really understood the market correctly, and it's changed too. I mean there's more and more people that you have growth in wealth, right? There's more and more people that have the financial ability to use interior designers. Yes, there's more used people -- are more exposed to design and quality more people are better houses and better design everywhere.

So anyway, but yes, we're happy to the advocates and partners and open up our platform and support them in a greater way. And I think, look, today, it's a big part of our business today. Our trade business is a big part of our business. So it's not a little part, but we think it could be meaningfully bigger. And people say, "Oh, you're going to incentify them." The lift we have to get is very small on incremental business, with massive flow-through on this model.

That concludes our question-and-answer session. I will now turn the call back to Gary Friedman for closing remarks.

Great. Thank you, everyone, for your time and your questions and for the conversation today. And I just want to say to our teams across the country, across the world, across our campus here, I think everybody knows what we're working on. Everybody knows we're aspiring to do. I think this is one of the most important times in the history of RH. And I couldn't be more proud of the work everyone is doing, the organization that's been built here based on our values and beliefs and our work is going to a new level. I think our performance is going to go into a new level, and it's all because of the team members who have built this thing over the last 25 years that I've been here.

So I just want to thank everyone. Everybody's effort is important and contributes to this cause. And I think we're going to feel very proud here very soon, even prouder than we've ever felt. So I can't wait to share it with you. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

There's pieces that furnish a home. And those that define it. There are places you visit. And those you remember. There are spaces you move through, and those that move you. Welcome

Welcome to The world of RH. Albert Einstein's 3 rules of work: out of clutter, find simplicity, from discord, find harmony in the middle of difficulty, lies opportunity. Seem especially relevant at this moment. We're compounding clutter from tariffs, global discord as a result of war, and the most dire housing market in decades can make it difficult to separate the signal from the noise. It's important to remember necessity is the mother of invention. And our most important innovations were -- during the most uncertain times. Transforming a nearly bankrupt restoration hardware into RH, the leading luxury home brand in North America was not a feat for the faint of heart.

While the external challenges are somewhat familiar, our internal opportunities are massively different. We're not closing stores and fighting to survive. We're building a never seen before brand that's positioned to thrive.

Before we get into the details of our strategy, let's start with a few facts that you quiet some of the noise. In 2025, RH achieved revenue growth of 8% and 2-year growth of 15% far outpacing our furniture industry peers by 8 to 30 points. Adjusted EBITDA reached $597 million, or 17.3% of revenues versus $539 million or 16.9% of revenues in 2024. Free cash flow of $252 million versus negative free cash flow of $214 million in 2024, increase of $466 million year-over-year.

Those results were despite 2025 being our peak investment year with $289 million of adjusted CapEx to support our global expansion plus an additional $37 million to purchase the Michael Taylor formations and Dennis & Leen brands to support the launch of our new concept, our estates, strong performance considering the unusual circumstances.

Let me shift your focus to our strategy and how we expect our growth to accelerate over the next several years. We believe there are those with taste and no scale, and those with scale and no taste. And the idea of scaling taste is large and far-reaching. We believe our goal to position RH as the arbiter of taste for the home will prove to be both disruptive and lucrative as we continue our quest at building one of the most admired brands in the world.

We like to use a simple question to frame our significant opportunity. who is the home brand for the luxury customer, the LVMH, Hermes, Cartier or Cucinelli customer, RH has curated the most compelling collection presented in the most inspiring spaces in the world. our brand attracts the leading designers, artisans and manufacturers scaling and rendering their work more valuable across our growing global platform. Our product is both categorically and stylistically dominant, enabling RH to address the largest market of any brand of its kind.

We curate across the 7 major product categories: furniture, upholstery, outdoor, lighting linens, rugs and decor, and we integrate across the 3 dominant product styles, traditional, contemporary and modern, which we refer to as RH Estates, or RH Interiors and RH Modern. RH Estates our newest brand extension, launching this spring. We'll address the traditional market where the RH brand is currently underpenetrated. 60% of luxury homes feature classic or traditional architecture, which influences the majority of furniture purchasing behavior.

RH Estates will feature the introduction of RH Bespoke Furniture, customizable collections from our recently acquired Michael Taylor, Joseph Jeup, formations and Dennis & Leen to the trade brands. RH Estates will also include the introduction of RH Couture Upholstery by Dmitry & Co, tailor-made sofas, sectionals and chairs of arguably the highest quality upholstery available anywhere in the world, designers will be able to order custom made sizes and finishes plus specified COM fabrics. RH Bespoke Furniture and RH Couture Upholstery will enable interior design firms to now specify RH for their most discerning clients and custom projects.

RH Estates also include collections from many of the most talented designers and artisans in our industry. Let's take a look at some of their work.

[Presentation]

RH Estates will opening of the gallery on the Corso Venezia, a 70,000 square foot former Palace during alone the largest design show in the world with an estimated 500,000 visitors to sending on the city that week. The launch of our RH Estate will include a dedicated source book mainly mid-May, and international advertising campaign and freestanding estate galleries in Greenwich, Connecticut and the San Francisco Design District opening early summer.

And the West Hollywood Design District opening in 2027. We believe RH Estates will become our largest and highest margin brand extension, driving significant growth over the next several years.

Let me shift your attention to our multidimensional physical-first global ecosystem. The world of our age that goes far beyond a typical multichannel approach, inspiring customers to dream, design, dine travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in our industry. The question we often are asked is why physical first in a digital world.

Let me explain. Furniture remains the least digitized large retail category with an 80-20 store online split, with luxury furniture estimated to be as high as 95.5%. Why do e-stores still dominate? Comfort, scale, finish and quality are hard to judge online. Even when customers purchase on a website, most experienced the product in a store. We believe the physical manifestation of a brand will continue to be significantly more valuable than an invisible online way. We also believe most retail stores are [indiscernible] windowless boxes that lack any sense of humanity.

That's why we don't build retail stores. We create inspiring spaces. Spaces that are a reflection of human design, a study of balanced symsymmetry that creates harmony. Spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality, spaces with garden courtyard, rooftop restaurants, wine and barista bars. Spaces that activate all of the senses in spaces that cannot be replicated online. While most have been closing or shrinking the size of the we've been building some of the largest and most immersive spaces in the history of our industry. Let's take a look at our most recent work.

[Presentation]

We believe our investments in building completely unique, immersive experiences in Paris, Milan and London, we'll set the stage for RH to become a truly global luxury brand. It's important to understand that there are several strategically significant businesses embedded in our galleries, including RH Interior Design, where we become the largest residential interior design firm in the world. with projects from San Francisco to Sydney, Los Angeles to London, Miami at Milan and Dallas to Dubai. We offer design services, including interior architecture, landscape architecture, art net curation and turnkey installations.

Another important business embedded in our galleries is RH to the trade, a specialized team that calls on services and supports interior design firms assisting in the design, curation delivery and installation of many of their projects. RH hospitality operates beautifully integrated restaurants, wine and barista bars in our galleries that generate significant traffic and brand awareness. While our galleries might see several hundred customers per week, our restaurants feed several thousand. With 26 restaurants in operation today and are scheduled to reach 40 by the end of 2027, RH is 1 of only 7 globally owned and operated luxury restaurant brands with 20 or more locations worldwide. We believe our galleries create a unique competitive advantage that will likely never be duplicated in our lifetime.

As the cost of construction at the luxury level has doubled post COVID. To address that challenge, we've developed several immersive new gallery concepts that will enable us to scale in a faster and more capital-efficient manner. The first, the most revolutionary is what we call an RH design compound currently in development in Naples, Miami and Walnut Creek, a compound is 6 to 8 independent buildings connected by beautifully landscaped garden courtyards with a sun-filled atrium restaurant anchoring the project.

Due to the absence of multiple stories that require steel structures, grand staircases, elevators, complex mechanical systems and long development time lines. we believe we can build design compounds significantly faster and more capital efficient than our prior design galleries.

Another new approach to deploying the RH brand in a faster and more capital-efficient manner is what we call a design ecosystem, currently under construction in Greenwich and Palm Desert and in the development process in West Hollywood Design District, an ecosystem is a multi-building brand presence on a street, in a neighborhood, design district or shopping center. Our first ecosystem will be in Greenwich, Connecticut, and includes our gallery at the [indiscernible] post office, our new outdoor gallery opened last year and our new RH States Gallery with an integrated restaurant opening in the former Ralph Lauren building this summer.

We've also developed a new single-story gallery, ranging from 15,000 to 20,000 square feet with a dramatic Courtyard restaurant targeting secondary markets. We're currently under construction in Laskatos, California, and are in design development for galleries in Richmond and Milwaukee. We have been extremely pleased with our performance of our first freestanding RH Interior Design office in Palm Desert, California and have plans to open a second interior design office in Malibu this fall. In total, we have an opportunity to expand our presence in 27 existing markets. and open 1 of our new design concepts in 48 new markets across North America, representing a $2 billion opportunity.

Let me shift your attention to our business model and balance sheet. While we believe it's prudent to plan conservatively this year due to uncertainties around interest rates and inflation, and have planned revenue growth in the 4% to 8% range in 2026, we do expect growth to accelerate to 10% to 12% in 2027 and reached $5.4 billion to $5.8 billion by 2030. Adjusted EBITDA in the 14% to 16% range for 2026, reaching 25% to 28% by 2030. We expect cash flow of $300 million to $400 million in 2026 and $500 million to $600 million in 2027, inclusive of $200 million to $250 million of asset sales each year. We expect cumulative cash flow of $3 billion by 2030, inclusive of the asset sales and expect to be debt-free by 2029.

While one might look at the current market discord and argue that RH has been in the wrong place at the wrong time. I would argue we've used this period to position our brand to be in the perfect place at the perfect time. Let me explain why. There are two important factors that will meaningfully expand the size of our market over the next 10 years. One is the exponential spending of high and ultra-high net worth consumers on the home. Ultra-high net worth consumers with a net worth above $20 million, own on average 3.7 homes, billionaires own 10. Ultra-high net worth consumers spend 6.4x more on home furnishings than a consumer with a single primary residence.

Two, is the estimated $30 trillion to $38 trillion wealth transfer projected to take place over the next 10 years. which is more than double the past 10 years. Not only does the absolute dollar amount more double, it's estimated that the dollars transfer from one to an average of 7 people. It's possible over the next 10 years, our market will be multiple times larger than the past 10 years. When you combine that with our efforts to elevate and expand our product globally expand our platform, generate significant revenues and brand awareness immersive hospitality venues. I would argue that the RH brand is in the perfect place at the perfect time. and we will emerge from this period of clutter, discord and difficulty as one of the highest performing and most admired brands in the world.

[Operator Instructions] Your first question comes from the line of Simeon Gutman with Morgan Stanley.

First question, I want to talk about demand signals from the consumer. This has been a transitional period for the company. I realize the demand is outpacing a lot of other home furnishing companies, but it's come at a pretty big cost to margin. So expectations around demand improving while we see the margin of the business begin to turn. That's my first question.

Simeon, the margin pressures somewhat disconnected and unrelated from the demand. The margin pressures really from kind of the investment cadence we have as far as expanding the business throughout Europe and some of the margin pressure coming from the tariffs from a transition and timing and resourcing. But you basically have kind of an inflection point of we're in kind of a peak investment period from a capital and an expense and cost perspective based on the investments we're making, both from a global expansion and North American expansion point of view and from a product point of view, with the launch of RH Estates.

I think you have to think about the launch of our RH Estates in Q2, we'll have significant costs with soft book and advertising and launching costs. without having much revenue until we get into the third and fourth quarter. And Estates is remember, is basically running late. Our original plan of establish Estates in the third and fourth quarter last year. So we have some timing issues. I think when you think about the significant investments we're making, both from a capital and expense perspective, and we're going through kind of an unpredictable time.

So I think that's why it's important as you're looking at the business, you're looking at the model, if you're thinking about being an investor here, you have to have a longer-term view than a shorter-term view in periods like these, and in many ways, a lot of people are going less than we're going right as people are pulling back and trying to manage the margin side of their business we're investing in the most significant way we have in our history, and that's just going to create some timing dislocations from an earnings perspective.

And then my follow-up, you made a couple of executive leadership changes on a new President and to a second person. And in the release, you talked about potentially helping monetize some of the real estate. So can you talk about both of those hires, what prompted them? And then what does it speak to about the direction the business you are heading in?

Well, I think it's explained in the press releases. I don't know if there's anything difference than that. We mentioned, we're extremely happy to have Dave Stanchak joined Team RH. He's has made a significant impact while it was here, both from a North American transformation point of view and a global transformation point of view and was involved in really setting up the structure of the real estate for European expansion. And so it's go to have Dave back.

And I think, Dave, it's probably the most, I think experienced real estate executive on a retail point of view because the both not someone who's just been involved with mall leasing which is typical, when you think about most retailers, Dave's been involved in real estate investments. He is an investor. He's had his own shopping centers and controls real estate themselves. So he comes out from an investor perspective, a much bigger perspective and it's a kind of a transformational leader as you think about a unique business like ours and the platform we're building, which is unlike anything anybody else is doing or has done at a level of quality and locations and so on and so forth.

So there's not anything that we talk about, I think, in the press release. And then with Veronica is joining RH, we've known Veronica for a long time. We've been able to observe her and her leadership and her ability to build what we think is one of the leading manufacturing businesses in North America for an Upholstery point of view. But mostly what we think about here is not just the Upholstery part of our business.

But if you think about the best luxury models in the world, whether you're looking at Vuitton or [indiscernible], CHANEL or others. One of the things that's very unique with their business models as they have a very concentrated core business, 80% of their business is in the leather goods and accessories part of the business. It's very similar to our business from a penetration point of view, 80% of our business is furniture that's typical if you look at the home furnishings business. So if you're in all categories, that's going to directionally be the mix depending on how you position those categories.

And we think there's an opportunity when you look at our business from a global scale and building a unique platform that's synergistic and appropriate for the unique platform we're building from the selling side. I think we've built and are building the most unique physical selling platform in the world. And I think it deserves and will be positively impacted by building the most unique manufacturing and sourcing platform in the world. So eliminating, when you think about the inefficiencies of manufacturing, when you don't when you don't control your distribution, there's quite a bit. So long term, we think we can build a unique manufacturing platform. And as I said in the press release, a combination of owned joint venture and outsourced that can be very unique and significantly accretive from a -- we think both a revenue and a cost perspective and a margin perspective.

So yes, so we're excited. We think Veronica is the best person in the industry we've met. I think she's a unique talent leader. She's engineer by education and experience and has a big and very big and kind of strategic view of manufacturing and sourcing. So it's a new level of talent in the company. We've never had someone this kind of pedigree and experience and talent, and we think she's going to do some incredible things long term.

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

Gary, with Milan and London center open here in short order. Curious if you could give us an update on RH Powers and/or just comment on the anticipated revenue contribution from the broader RH International strategy behind the 2030 reference year you laid out in your prepared remarks. Obviously, just looking today, [indiscernible] help support or build conviction around those longer-term outlook you laid out today?

Not sure, if I take that question correctly.

The impact of international as it relates to the 2030 targets, how we think about that growth of that.

Yes. Well, I think what we've articulated most recently over the last few quarters and really since, I think, our start, really that the opening of Paris, Milan and London is kind of the brand foundation to build on when you think about European expansion. There are the three most important cities in Europe, we think they're important from a positioning of the brand and a brand awareness point of view. And all three of those are really the besides, again, RH England, which is out in the countryside, which was important from a brand impression and awareness perspective and how to kind of make an entry into the European market. But these really are where we have significant investments in the presentation of the product that hospitality experience, which we think is going to be critical long term to building brand awareness throughout Europe.

And then one of the keys here is really not just these key stores because if you -- as we assess the business in Europe, and we have since day 1, I believe that the basic distribution and where the sales will come from will be long term, more important in suburbs and second home markets than cities that the cities are really going to be the key to brand awareness and driving the brand positioning the brand, and we'll do significantly more revenues, we believe, in Paris and Milan and London than we will in other cities. And if we were ranking them clearly lending, we believe, going to be the biggest market for us as it should be.

But our distribution of business is significantly suburbs and second home markets in North America. 90%, 92% of our business is in suburbs and second home markets. and final markets are kind of like a suburb, right? And about 8% of our business is in the cities. And we think that distribution is going to be similar throughout Europe. And if you looked at Apple's real estate strategy and you look at their distribution throughout Europe, which we believe was a good kind of model for us to look at as far as a higher-end consumer. And you looked at like Apple's North American kind of distribution versus our North American distribution, their penetration in suburbs, our penetration in suburbs. There's similarities there. We're more highly penetrated in second home markets than they are. Most people have their phone with them.

But one of the keys for I think, Dave is joining the company, too, is just to continue that leadership into Europe and building out into the suburbs and into the second home markets to cover the business. So strategically, we're setting up the business in the kind of key markets that you would from a brand and awareness perspective and not that we don't think that the business is going to have revenues there. We just think the biggest revenues are going to come long term when you think about the longer-term plan as we expand into the suburbs and markets where people really buy much more furniture, both indoors and outdoors.

Maybe just a quick follow-up. Obviously, great to hear Dave rejoining the company. You talked about you talked about $250 million of asset sales in each of the next 2 years. This is sort of a 2-part question. One, can you speak to sort of the value of the non-core assets or the assets that you don't plan to operate in the future versus the value of the assets, are you still planning to operate in the future. And then maybe any color on sort of timing for 2026 asset sales as we think through the potential interest expense savings.

As far as that mix, I'd say the majority of the asset sales are assets that we will be operating that are in a sale leaseback kind of properties and then there's some investment properties that we had in Aspen. And a few other things that we've decided not to pursue for whatever reason, we own a building in Milan -- not the Milan, excuse me, Madrid, and we're not going to pursue the development of that. We're fine with the location we have today. And so it's just looking at taking a look at our balance sheet and just turning the facets into cash, as we said we would be doing.

So we've said we have about $0.5 billion of real estate assets that we could monetize. And we're going to begin to monetize those Dave has got dense experience on that end of real estate. And he feels very confident in what we're going to be able to do. And some of these are properties that we had purchased and had developed over the last 2 to 3 years, I guess, you got to think about a lot of our investment horizons are pretty long from a -- when you think about some of the galleries that we've built, you've got you've got significant time to design and develop and get through the approval process and then you've got significant time building them. So you have a relatively long holding time. And I think post-COVID, all of the construction cost have went up, particularly at the luxury level.

And those prompted us as we communicated in the video, to develop just other faster, more flexible ways to deploy the brand. And when you think about the design compounds and think about where the first couple are going in Naples, we're taking what was the formal [indiscernible] site in Walnut Creek, we're taking what was formerly a Neiman Marcus site. And then in Miami, we're developing kind of a parking lot size kind of a key visible area in Miami, that is [indiscernible] Bank of America. But we think about those opportunities to be significantly faster and more capital efficient, we've built most of our big kind of, I'd say, the higher investment, higher capital side of the business. We've been transforming the real estate here now for 15 years.

And so even on a European and global point of view, I would say that we have Sydney coming, but that's a different model that's really being built by the developer. It's not going to take much capital from RH. But yes, we have significant assets. We're going to now monetize, turn into cash, and then we've got some assets in Aspen and other things like that, that will monetize over time. So yes, so a lot of that will come off the balance sheet.

I don't know, Jack, do you have anything to add on?

No. I think from a timing perspective, Steve, we'll just keep you posted. We're not ready to commit us to show the cadence to 2026, and we'll just update you as things as appropriate.

Your next question comes from the line of Max Rakhlenko with TD Cohen.

So first on the states, can you provide color on how you're thinking about scaling the collection. We know when the books will hit, but how are you thinking about the cadence product rollout into the galleries? How are you looking by inventory, et cetera? Just if you could compare and contrast this collection versus the Modern and Interiors launches that you had a couple of years back.

Sure. Sure. So the books will hit kind of mid-May, and we will -- we've got a handful of stores that will get the initial product that we'll be able to kind of test and then we and get some reads on, but we feel very confident in this election. So we went out with a bigger inventory by -- and a lot of it based on just the data. You have 60% of luxury homes in America that have classic and traditional architecture.

And it is really the next big trend as you think about how the trends cycle through, this trend is a lot of the product you're going to see cycle through. It's why we've made some of the acquisitions that we made, whether it's the Michael Taylor brand and the famous diamond table and so on and so forth to really be able to not only have authority, but be able to have intellectual property rights for a lot of the kind of key products that are coming. And so we just think it's going to be a big building trend. But in the second half, will be and how many galleries do we think? 30?

Yes.

About 30, 40 galleries, our top 30, 40 galleries in the large design galleries, we'll take over the first floor with RH Estates. So this is a significant launch and a significant bet.

Got it. That's helpful. And then just a two-parter on margins. If you could just isolate how you're thinking about the impact of tariffs for 2026, both the cadence and magnitude as I don't think you discussed that in the letter this time around. And then separately, if we exclude tariffs and some of the timing shifts that you discussed earlier on the call, how healthy is sort of your -- or how healthy your product margins as we think about the long-term targets you laid out, how much higher can the product margins go as you do continue to add these new collections that I think come with much higher margin. So if we just think about the core, where can the business go from a product margin perspective.

Yes. I think we're not giving detailed margin forecast. But our margin our product margins are relatively healthy, except for some bumps we're going through from a tariff point of view. I think we've been able to perform reasonably well if you exclude kind of the weight that we have from this investment cycle and the drag from Europe and you kind of take a look at the business.

And I think one of the things we're doing, as we think about this business, a lot of times with brands as you go through the history of brands, you've got kind of the levels and the transformations you make to kind of get to where you want to go. And this next -- this cycle we're in now, it's a key investment cycle. Clearly, we've spent a lot of capital. We've made big investments to kind of position the brand not only in North America, but positioned in Europe for the long term. And once you get past those cycles, we're going to have great leverage. Opening galleries like we're opening and restaurants like we're opening or significant costs, especially when you're doing them in a different country. There's just more travel more expense from hiring people and building new organizations and so on and so forth?

So from a -- I just think, it's not just the product margins, it's really just the overall margin structure of the business once we go post peak here on this investment cycle, both from a capital and from an expense and cost point of view. I think the model of this business is going to look like one of the best models people have ever seen in our industry. So if not the best model, I think it's going to be the best model anyone seen.

So we feel confident in that. I mean, we're also just -- from a global perspective, navigating through very uncertain times. And we do have a product mix that is going to be somewhat more cyclical and have more of a drag. So when you're really focused on the furniture business versus the home furnishing, the broader furnishings business, accessories business, tabletop, kitchen businesses and so on and so forth. You're going to have more weight during times like these. So that's going to require you to fight for more business. But that's throughout our history, we've always fought through the business in times like these. We've always been more promotional than less promotional in times like these. And we think it's times like these that there's a lot of fallout. And there's going to be a lot of competition that's not going to make it through these times. There's been greater fallout in the furniture business. As most people know, over the last few years than in any time in history.

And I think there's going to -- as long as the housing market remains difficult. There's just going to be a lot less competition, and we're going to be better positioned than we've ever been for the other side of the cycle. As we build out the assortment, especially in the Estates over the -- think about the Estates expansion over really a 5-year horizon from a product point of view, I'd say over the next 5 years as Estates assortment is going to grow, it's going to build, it's going to become more dominant. The trend is going to -- that wave is going to keep building over the next 5 to 10 years, right?

So I think about the whole model of the business in this way, we're very confident in the long-term model. I think what confuses people is most public companies go public and they kind of manage the business, right? They have a simple rollout and they're going to do so many stores a year and the stores are all the same and everything is really predictable and most of them go through their rollout cycle of 5 to 7 to 10 years, however -- what amount of time they stay relevant for. And then usually, becomes kind of a dated concept over time. And that's why we like to say that most retail malls or graveyard for short-lived ideas. Most retail companies don't even concepts don't live out the first term or second term of their leases.

So we're going through one of those investment cycles that will leapfrog this business forward and you're looking at kind of peak investment cycle and kind of trough kind of economic cycle, right? So an even with those two, you still get a business here with a kind of a mid-teens EBITDA margin to high teens EBITDA margin. And once you get past this cycle, there's a lot of leverage in this model. So...

Max, I'll add on tariffs. So in Q4, we talked about last year, tariffs having an impact of 90 basis points in terms of a drag. And Q4, we had talked about $170 million. We ended up at $190 million in Q4. And the way we characterized that in the last call is that, that's ultimately by Q4, you're fully baked into the sort of prior tariff regime. Obviously, things have changed now with the Supreme Court decision. But tariffs come out in and out of turn, as you know. And so while in the -- let's say, in the first half, you might have some tailwinds from that relatively lower rate that exists under Section 122 today. Who knows what happens in the second half. There's obviously a sprint to replace all those tariffs and potentially more as Trump first said under Section 301 in the back half.

So we're just -- we're playing by year being, as you know, we're nimble and we're dynamic. But as far as last year's tariff impact was sort of fully baked in a bit of an indicator as to how it plays out in the first half, but obviously, the math will tell you that there's going to be some relief there as far as that tariff drag concern. So we'll keep you updated if there's -- as things play out. Obviously, we're watching it like you guys are watching.

Your next question comes from the line of Steven Zaccone with Citi.

I wanted to ask about the cadence of the year from a revenue growth perspective because the first quarter, obviously calling for revenue to be down, but in the full year, it looks like an acceleration in the back half. Can you just talk through the points of the acceleration? I assume the Estates is a big piece? How much is international? Any details you could share would be helpful.

Well, yes, clearly, International and the Estates, the cycling of -- it Estates across the entire platform, International from opening cadence and just what we think the growth in the first couple of years. We really -- RH England is kind of our best point of history and -- we know how that ramps. So we expect the International stores to have a ramp to them over the first several years. But when you think about the back half, sure, you've openings in North America, you've got openings in Europe. You've got Estates which will -- in Q3, Q4, you'll start seeing the revenues flow from demand in Q2. And you'll see a ramp in the Estate. You'll have a second mailing of the book. You'll have newness in both Interiors and Modern. So all of those things combined, we believe is a big step up in the business in the second half. And we would have expected more in the back half of last year in the first half of this year because the Estates would have been part of that cadence.

Okay. Understood. And then the second question I have is just on the margin recovery of the business, right, because we've been an investment period for the business for some time, and I think you've used the term leapfrog in terms of margins in the past. For the longer duration investor, when you look at the business, what do you think is the biggest factor holding back margins for improving? Is it just the fact that some investments have taken a little bit longer and have been a little bit higher than expected? Has it been the top line, the macro environment? How do we think about some of the unlocks to see that margin improvement on the other side come back stronger.

I think you've just outlined it. Yes, I mean we've we're in peak investment cycle in trough -- economic cycle, especially from a home point of view. So the -- I mean, not just trough investment cycle, you've had the whole kind of chaotic tariff cycle, that has caused kind of significant disruption on the business. I mean we've resourced 40% of our assortment. Business of our size, resourcing 40% of your -- core assortment, which is really -- 40% of the assortment is bigger -- it's a larger part of the business.

So, yes. It's all of those things together, Steve. So this is a good time to buy our stock this is when people create generational wealth, right? This is no different than trough times in a real estate market, tough times in any kind of a transitional time for an industry or business. And all businesses in our industry get hit in these times and all businesses that survive to the other side, get a lift in this time. I think what's different is we've historically been investors during times like this is when we've seen the biggest opportunities. But this time is, I think, different than previous times because we're in a kind of a real peak investment cycle. We're opening Europe [indiscernible] launching new businesses.

And so the opportunity to have a leapfrog, if we're more right than wrong, and we don't have to be completely right, we just have to be directionally right here. And so we say don't let perfect be the enemy of grapes. And yes, we've got a lot of experience here in this company. We've been doing this a long time. And I think we've proven that we've been a lot more right than a lot more wrong. I mean if you think about the transformation from what was Restoration Hardware, before of what is RH today, if you think about the transformation of this brand, over a 20-plus year period and try to say, name other brands that have made transformations like that, name other brands that are positioned like we are.

These are the times that businesses like ours separate ourselves even further from the pack. But you have to make those investments, you have to take that level of risk to be able to do that. So we are not kind of a management culture or leadership culture. And we're constantly innovating and investing, but this is one of those significant cycles. It just happens to be during a significant down cycle, especially focused on our industry. And so -- but we're in a better position than we've ever been from a historical point of view to weather the storm.

And I think if you just think about what does the next 5 years look like from an investment point of view. I mean we're going to come off, if you take that -- the $37 million and the $289 million, you've got kind of a peak type of investment year historically. And then we come off that peak. Can we come into the $250 million to $260 million and then that's going to drop to $150 million to $170 million a year. So you think about the company growing, the capital investment period coming down, and it's not just the capital, right, the investment, but it's also all the expense that's connected to that capital. All the expense that's connected to bringing up those stores, training the people, building the infrastructure, building the distribution capability in the business. All the marketing and advertising that supports a launch, all the time and energy to kind of build out the assortments, develop all the products at scale to create a leapfrog, not to kind of slightly outperform.

But it's no different than taking a $300 million business that was losing $40 million a year. That was Restoration Hardware and creating RH that's a $3.5 billion business. I mean that -- think about what the next cycle looks like. The next cycle is, I think, even more magnified that -- we [indiscernible] our framework for the model. And the biggest pieces of the model are the pieces we're talking about. If I was on the outside, looking at this, I'd say, hey, what is the outlook for capital investments as they go forward and not just thinking about the capital, but what is the expense, the cost investments that are connected to that capital how does that change over the next 5 years? And how does it change over the next couple of years, right? Just over the next couple of years, the investment cycle is post peak, and it's going to turn down and accelerate in a downward way just as revenues are going to accelerate in a positive way, right?

And when you have those two things going in different directions, that's when you have inflection points in return on invested capital, margins, earnings, et cetera, et cetera. So the framework for the math is pretty simple. I think the strategy because it's never been seen before is -- can be suspect and could be hard to understand. There can be less believers than more believers at certain times. So look, I don't blame anybody for kind of saying, "Hey, this is it looks like an uncertain time to invest," whether it's in our stock or any stock in our category. But especially, you've got to kind of believe in the longer-term debt here. And we think this is going to be the -- one of the best bets that people will make. As referenced by my personal investment here. So that's how we think about it.

Your next question comes from the line of Michael Lasser with UBS.

Gary, you've laid out this ambitious and aspirational plan to take advantage of what seems like a very large and growing addressable market, and yet the market is not really willing to give you the amendment, sort of a doubt. And part of that is RH has been averse to and does not really look at its business on the things [indiscernible] basis, which is understandable, and that's long how you've articulated it. But at this point, that has defaulted to the narrative where rate needs to grow concepts and its physical footprint in order to drive growth, and that comes with a significant cost. And as a result, you may not be able to realize its aspiration, understanding that it's come a long way from its origin, but it's the market's relying heavily on the recent experience. So why based on the recent experience is the default of the market wrong?

I think it's what I just said. You have to think about peak investment period and what hopefully is a low point in the trough from a market perspective. It's -- again, I think if you pull out the investments, if just pull out the European drag the investment of -- think about -- we're investing in Europe. The European market is worse than the American market right now, it's -- we're investing at a time you likely would like to not invest, but you can't make long-term real estate investments and expect to get them all right, right?

So the -- why is the simple model, Michael, of saying I'm cycling peak investments, and I'm cycling hopefully what is trough growth, right? And we've got significant growth opportunities as we've laid out. And the cost, they're going to kind of go away. So a lot of people thought Amazon wasn't going to make a lot of money until he did, right? That's -- I think it's that simple. Think about -- yes, I think the key is don't take this cost structure into your model right now. You're looking at the a peak cost structure, both from capital and an expense perspective. These galleries that we're opening are the most expensive galleries that we've opened, both from a capital and a cost point of view.

Got you. Very helpful. So put it in [ parallel ], the investment community would think about it is essentially, this is the peak of the disruption, there will be significant same-brand growth that will lead to sizable margin expansion, especially as the investments moderate. Now the counterpoint would be, hey, we're living in a world of high uncertainty between the geopolitical, technological and other factors. So what would be the sensitivity to your outlook for free cash flow in the event that sales in the back half don't materialize like you would expect. And without asking you to show your hand, but it is important to the investment case, what options would you pursue in the event you needed more financial flexibility to execute on your strategy?

Yes. I think it's a great question, Michael. Look, we've got the ability to pull back investments further, right? When I think about the major strategic investments that we had to decide to go international, invest into Europe, years ago, right? These weren't short-term decisions. These were 5, 6, 7, 8 years ago, right? We're making some of these decisions and investments. And those decisions are easy -- are not easy to pull back on, right? But we're cycling those. We've got a lot of flexibility. When you think about the next wave of investments, whether it's expanding in North America, whether it's expanding in Europe, you're looking at much smaller investments, you're looking at much more flexible real estate, many more choices, et cetera, et cetera.

And you're just not going to have the same kind of cost. I mean we're going to -- the cost of building some of the new concepts that we've laid out, just the way we're thinking about deploying capital in North America through compounds and ecosystems and secondary market galleries that are in the 15,000 to 20,000 square foot range. Just the real estate risk, the investment risk of those, the financial participation of developers and landlords is much higher than when you're investing in major cities internationally. It's just a very different investment cadence. And we just have a lot -- and you don't have the same time horizon, right? So there's just a lot more flexibility.

And -- so when I look at -- I would say, peak investment, peak risk right now. You're looking at peak investment, peak risk. And who knows from day-to-day or hour-to-hour about the geopolitical and economic environment. Of course, this is -- it's kind of different times. And there's major news headlines are made by tweaks and post today, right, and they happen all day long.

So I just think that if you're just trying to say, okay, how do I think about the go forward? There's just a lot less risk -- there's a lot more risk, I'd say, over the last couple of years than over the next couple of years. I mean there's -- is there further risk in the housing market? There always could be further risk. There always could be other things. I mean, could the war escalate? Could China try to take Taiwan? Could -- yes, there's a lot of things that can go the wrong way. We can all kind of imagine what those look like.

But it's no different in calculating what the federal funds rate is going to be, right? Like everybody has been wrong on that. And unfortunately, that's been bad for our business, right? They're supposed to be 3 cuts to the federal funds rate this year. Now it looks like there's going to be no cuts, then there might be hikes. Does that reap some short-term risk? It does. Can we navigate through that? We can -- do we have more upside to downside in the second half from a revenue demand and revenue point of view, we do.

But I kind of say, look, if I was on the outside of this today and I had the information that the outside world has that we're giving you today. I'd say it's or you could -- I would -- look, I bought the stock at what, $2.16 a share, I bought $10 million of the stock. I was wrong, which is at the low point. But I don't see too much more downside risk in the model. Most of the work is behind us building the galleries, getting the people trained, bringing up restaurants internationally. We -- the product side, I think, is a lot less risky. We're not going into some unknown aesthetic or trend we're betting on what is kind of the biggest market, the traditional classic market. And it just so happens, if you look at the trend that's going to come through that is going to be the next trend.

So -- but yes, your question is correct. We have toggles that we can pull. We have asset that we can monetize. And we're pretty good at navigating 3 times like this. We've got -- yes, this is my 26th year here. So I've seen cycles and the teams seem cycles, and we've navigated through, I would face somewhat similar times, not completely similar times.

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

Gary, first, I wanted to follow up a bit more about the RH Estates line. And you, I believe, alluded to working more with designers and decorators in this. And so I was hoping you could talk a bit more if the selling process or how you go to market needs to be different on this line that seems to have so much potential for you.

Well, we do a big business with design -- interior designers today. We have, I think, like I outlined in the my comments that we have multiple businesses embedded in our galleries. We have a trade team that services interior designer and decorators that's a meaningful part of our business. We think it will become a bigger part of our business, especially with the launch of RH Bespoke Furniture and RH Couture Upholstery because that's going to open up the ability to have kind of more customizable product from a size fabric, finish, so on and so forth. And that will open up -- I think it should open up that market pretty significantly. We have some other strategies to address that market that you'll hear more about that will kind of support what we're doing from a marketing point of view.

So yes, Estate, I think, is when you think -- again, if you think about kind of the high-end part of the business that we're going to address with the Estates, and that's just kind of the beginning. We'll also address that throughout the entire brand. But let's say, a stage represents the launch of RH Bespoke Furniture and the launch of Rh Couture Upholstery kind of framing those. Think about those across the whole business long term.

That's helpful. If I could ask a follow-up on the 2030 margin targets. Just wondering if there's any high-level framework to think about perhaps how International fits into that, and how much mix or leverage of sale -- from sales factors into that?

Yes, I mean, we have some data now. We kind of know as we've opened some of these how they're evolving, how to think about how they might evolve and grow. And so I think we have very reasonable targets internationally, mixed into this. I don't think there's anything that's a stretch perspective.

So when you look at -- you just look at the total composition of kind of the top line accelerating in the out years to 12% growth. I think the way I'd think about that is you've got about 4 to 5 points from the platform expansion, you've got 3 to 4 points, maybe 5 points from the product expansion. And you've got -- at some point here, we think, there's a couple of points from the housing market coming back. I mean, I don't think we're going to be in a 9- or 10-year downturn of the housing market. Let's hope not.

But if it doesn't come back, it's not like we've got a big number out there for the housing market. We've got kind of a 2- to 3-point hope in the out years of that plan that we'll see some lift in the housing market. If we see a lift in the housing market, you could see -- I mean, based on where it's been, I mean, you could argue there's a 10-point lift from the housing market in the out years. And if that happens, you don't have us growing at 10% to 12%, you have us growing at 18% to 22%.

Your final question comes from the line of Marius Morar with Zelman.

Just a quick question on the growth outlook for next year. Gary, I think on -- in the video, you mentioned that it's a bit conservative. I was just wondering at the low end, do you sort of embed any sort of deterioration in the housing market or maybe an increase in interest rates?

Yes. I think we're conservative throughout the second half. I mean, obviously, we have embedded the growth from our platform and the new galleries and the galleries that are cycling, and we've got growth from Estates and some of the newness and expansion of the assortment in Interiors and Modern. But do we have the housing market getting worse? I'd say we have embedded in this -- the current environment right now, which I believe is worse and mostly from a geopolitical point of view and a perception point of view, of more things can go wrong then maybe can go right. And I think that's how the market's generally risk times like these, when you've got uncertainty and you've got global tensions and war and oil issues and the endless amount of things that oil impacts, right?

So, yes. I mean -- but did the housing market gets better when interest rates came down somewhat? Not really. Is -- the housing market going to get worse if they go back. If we get 25, 50, 75 basis points, you get three hikes, I don't think it gets much worse. I think you've got to think back in history and say, in 1978, we sold -- there's 4.06 million homes sold, and that was a low point. And in 2003, '04 and '05, you had 4.06 million homes sold on average, 4 million to 4.06 million of somewhere about 4.03 million. And that's -- and that's with 53 -- I think it's 53% more people, right?

So it's hard to believe it gets worse than this to get worse in this for a small period. I mean, none of us have seen a world war in our lifetimes, right? Is there a risk of a world war? I don't think so. I mean I think, cooler heads will prevail. But this is uncertain times. So I think the -- whether the interest rates go up or down 25 to 75 basis points. I don't think it's going to change much in the housing market. If the interest rates go up 300 or 400 basis points, I think that's different. I think they go down 100 basis points with pricing coming down, which is pricing is coming down across the market, I think you're going to see a housing market acceleration.

So I'd say short term, handicap it, as even. I think we're seeing pressure right now. Longer term, I think you have to kind of handicap it as a positive because we've never we've never seen -- we're now in the fourth year of the worst housing market in 40 to 50 years. That hasn't happened in my lifetime, I've never seen 2 down years, seen 1.5 down years. in my career. I've never seen 3 down years, and I surely never seen a 4 down year. I don't think anybody has. So how long does it stay here? I don't know. It's all today the new normal and build out from here. At some point, I think how the market comes back. And I think it's more likely to come back than go down. But if the interest rates are moving 50 to 75 basis points to 100 basis points, I don't know if that moves the needle plus or minus.

On the minus side, you're getting closer to affordability, right? On the upside, you could have some moderate slowing, I think the bigger thing is if we have real inflation and interest rates have to rise 300, 400 basis points, that's a problem.

That's helpful. And maybe a quick follow-up. In the first quarter guidance, do you also embed any drag from the back order and special order similar to the drag you had in the fourth quarter?

Jack, do you want to take that?

Yes. Yes, that's something that's going to take probably until the second half to fully resolve itself just because of the complexities of resourcing. So that is just -- yes, there's something that -- we that...

We that drag in, yes.

Is it getting worse in the first quarter?

There's some modest impact that that's over and above what we felt in Q4. And then so then we'll see the resolution of that in the second half.

It's basically from the amount of resourcing and just the new factories being brought up in different countries, being able to ramp up fast enough. And so that's the biggest hit is coming from tariff-related resourcing of furniture, outdoor furniture, specifically metal outdoor furniture. Lighting is a big one. Rugs is a big one, and furniture is a big one. If you think about our business and you've got -- you take the furniture part of the business includes about 80%. And then you take lighting and rugs, which are the next biggest pieces, those are all being impacted. But you've got to by far, this part of our business has been all impacted in a bigger way, resourcing things like lighting, telos, rose, accessories, picture frames, things like that, which are not from a percentage point of view, not a very big part of our business, much easier to resource those things, much easier to move picture frames, hello cases, throes, tabletop, blastware, accessories, things like that much, much more easier.

When you talk about ramping furniture factories, lighting factories, rug factories, moving those categories just more complex. And so those have been just slower to scale and transition. And when you think about just the being on the manufacturing side or manufacturing partners moving from one country to another, building factories, scaling them. And then all of a sudden, having tariffs change and going, "Oh, God, what do I do now? By doing the right thing, I mean, think about the rug business. And we -- for a while there, I mean, India was a big source of drugs, and you get hit with the 50% tariff and you're sourcing runs to other countries. There's not that many places that have that kind of capacity to move those businesses.

So same thing with lighting. Lighting is very different than any other kind of an item. Again, the more accessories, more seasonal parts of the business, you want to resource Christmas ornaments, things like that, very simple. When you're resourcing the core part of our business, much more complex.

That concludes our question-and-answer session. I will now turn the call back over to Gary Friedman for closing remarks.

Thank you. Well, thank you, everyone. We know this is a an uncertain time in our business. Hopefully, we've shed some light to give you more certainty and more confidence in our outlook and our strategy. We believe this is the most important period in our history, and we've never been more excited about the outlook and what we believe will be the outcome. So we look forward to talking to you soon. Thank you for all the leadership and partnership from our teams and our partners all around the world. Everybody is working hard to kind of get to the next place. And so thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Albert Einstein's 3 rules of work. Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty lies opportunity. Seem especially relevant at this moment. Where compounding clutter from tariffs, global discord as a result of war and the most dire housing market in decades can make it difficult to separate the signal from the noise.

It's important to remember, necessity is the mother of invention, and our most important innovations were birthed during the most uncertain times. Transforming a nearly bankrupt Restoration Hardware into RH, the leading luxury home brand in North America was not a feat for the faint of heart. While the external challenges are somewhat familiar, our internal opportunities are massively different. We're not closing stores and fighting to survive. We're building a never seen before brand that's positioned to thrive. Before we get into the details of our strategy, let's start with a few facts that should quiet some of the noise.

In 2025, RH achieved revenue growth of 8% and 2-year growth of 15%, far outpacing our furniture industry peers by 8 to 30 points. Adjusted EBITDA reached $597 million or 17.3% of revenues versus $539 million or 16.9% of revenues in 2024. Free cash flow of $252 million versus negative free cash flow of $214 million in 2024, an increase of $466 million year-over-year. Those results were despite 2025 being our peak investment year with $289 million of adjusted CapEx to support our global expansion, plus an additional $37 million to purchase the Michael Taylor, Formations and Dennis & Lean brands to support the launch of our new concept, RH Estates. A strong performance considering the unusual circumstances.

Let me shift your focus to our strategy and how we expect our growth to accelerate over the next several years. We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far-reaching. We believe our goal to position RH as the arbiter of taste for the home will prove to be both disruptive and lucrative as we continue our quest of building one of the most admired brands in the world. We like to use a simple question to frame our significant opportunity. Who is the home brand for the luxury customer? The LVMH, Hermes, Cartier or Cucinelli customer? RH has curated the most compelling collection presented in the most inspiring spaces in the world.

Our brand attracts the leading designers, artisans and manufacturers scaling and rendering their work more valuable across our growing global platform. Our product is both categorically and stylistically dominant, enabling RH to address the largest market of any brand of its kind. We curate across the 7 major product categories: furniture, upholstery, outdoor, lighting, linens, rugs and decor. And we integrate across the 3 dominant product styles, traditional, contemporary and modern, which we refer to as RH Estates, RH Interiors and RH Modern.

RH Estates, our newest brand extension launching this spring will address the traditional market where the RH brand is currently underpenetrated. 60% of luxury homes feature classic or traditional architecture, which influences the majority of furniture purchasing behavior. RH Estates will feature the introduction of RH Bespoke Furniture, customizable collections from our recently acquired Michael Taylor, Joseph Jeup, Formations and Dennis & Leen to the Trade brands. RH Estates will also include the introduction of RH Couture Upholstery by Dmitriy & Co. Tailor-made sofas, sectionals and chairs of arguably the highest quality of upholstery available anywhere in the world. Designers will be able to order custom-made sizes and finishes plus specify COM fabrics. RH Bespoke Furniture and RH Couture Upholstery will enable interior design firms to now specify RH for the most discerning clients and custom projects. RH Estates will also include collections from many of the most talented designers and artisans in our industry.

Let's take a look at some of their work. RH Estates will premiere at the opening of RH Milan, the Gallery on the Corzo Venezia, a 70,000 square foot former palace during Salone, the largest design show in the world with an estimated 500,000 visitors descending on the city that week. The launch of RH Estates will include a dedicated source book mailing mid-May and the international advertising campaign and freestanding estates galleries in Greenwich, Connecticut and the San Francisco Design District opening early summer and the West Hollywood Design District opening in 2027. We believe RH Estates will become our largest and highest margin brand extension, driving significant growth over the next several years.

Let me shift your attention to our multidimensional physical-first global ecosystem, The World of RH, that goes far beyond a typical multichannel approach, inspiring customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in our industry. The question we often are asked is why physical first in a digital world? Let me explain. Furniture remains the least digitized large retail category with an 80-20 store to online split with luxury furniture estimated to be as high as 95-5. Why do stores still dominate? Comfort, scale, finish and quality are hard to judge online. Even when customers purchase on a website, most experience the product in a store.

We believe the physical manifestation of a brand will continue to be significantly more valuable than an invisible online one. We also believe most retail stores are archaic windowless boxes that lack any sense of humanity. That's why we don't build retail stores. We create inspiring spaces, spaces that are a reflection of human design, a study of balance and symmetry that creates harmony, 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. While most have been closing or shrinking the size of their stores, we've been building some of the largest and most immersive spaces in the history of our industry. Let's take a look at our most recent work.

We believe our investments in building completely unique immersive experiences in Paris, Milan and London will set the stage for RH to become a truly global luxury brand. It's important to understand that there are several strategically significant businesses embedded in our galleries, including RH Interior Design, where we become the largest residential interior design firm in the world with projects from San Francisco to Sydney, Los Angeles to London, Miami to Milan and Dallas to Dubai. We offer design services, including interior architecture, landscape architecture, art and antique curation and turnkey installations.

Another important business embedded in our galleries is RH to the Trade, a specialized team that calls on, services and supports interior design firms assisting in the design, curation, delivery and installation of many of their projects. RH Hospitality operates beautifully integrated restaurants, wine and barista bars in our galleries that generate significant traffic and brand awareness. While our galleries might see several hundred customers per week, our restaurants feed several thousand. With 26 restaurants in operation today and a schedule to reach 40 by the end of 2027, RH is one of only 7 globally owned and operated luxury restaurant brands with 20 or more locations worldwide. We believe our galleries create a unique competitive advantage that will likely never be duplicated in our lifetime as the cost of construction at the luxury level has doubled post-COVID.

To address that challenge, we've developed several immersive new gallery concepts that will enable us to scale in a faster and more capital-efficient manner. The first and most revolutionary is what we call an RH Design compound currently in development in Naples, Miami and Walnut Creek. A compound is 6 to 8 independent buildings connected by beautifully landscaped garden courtyards with a sun-filled atrium restaurant anchoring the project. Due to the absence of multiple stories that require steel structures, grand staircases, elevators, complex mechanical systems and long development time lines, we believe we can build design compounds significantly faster and more capital efficient than our prior design galleries.

Another new approach to deploying the RH brand in a faster and more capital-efficient manner is what we call a design ecosystem. Currently under construction in Greenwich and Palm Desert and in the development process in West Hollywood Design District. An ecosystem is a multi-building brand presence on a street, in a neighborhood, design district or shopping center.

Our first ecosystem will be in Greenwich, Connecticut and includes our gallery at the historic post office, our new outdoor gallery opened last year and our new RH Estates gallery with an integrated restaurant opening in the former Ralph Lauren building this summer. We've also developed a new single-story gallery ranging from 15,000 to 20,000 square feet with a dramatic courtyard restaurant targeting secondary markets. We're currently under construction in Los Gatos, California and are in design development for galleries in Richmond and Milwaukee. We have been extremely pleased with our performance of our first freestanding RH Interior design office in Palm Desert, California, and have plans to open a second interior design office in Malibu this fall. In total, we have an opportunity to expand our presence in 27 existing markets and open one of our new design concepts in 48 new markets across North America, representing a $2 billion opportunity.

Let me shift your attention to our business model and balance sheet. While we believe it's prudent to plan conservatively this year due to uncertainties around interest rates and inflation, and have planned revenue growth in the 4% to 8% range in 2026. We do expect growth to accelerate to 10% to 12% in 2027 and reach $5.4 billion to $5.8 billion by 2030. Adjusted EBITDA in the 14% to 16% range for 2026, reaching 25% to 28% by 2030. We expect cash flow of $300 million to $400 million in 2026 and $500 million to $600 million in 2027, inclusive of $200 million to $250 million of asset sales each year. We expect cumulative cash flow of $3 billion by 2030, inclusive of the asset sales and expect to be debt-free by 2029.

While one might look at the current market discord and argue that RH has been in the wrong place at the wrong time. I would argue we've used this period to position our brand to be in the perfect place at the perfect time. Let me explain why. There are 2 important factors that will meaningfully expand the size of our market over the next 10 years. One is the exponential spending of high and ultra-high net worth consumers on the home. Ultra-high net worth consumers with a net worth above 20 million own on average 3.7 homes, billionaires own 10. Ultra-high net worth consumers spend 6.4x more on home furnishings than a consumer with a single primary residence. Two, is the estimated $30 trillion to $38 trillion wealth transfer projected to take place over the next 10 years, which is more than double the past 10 years.

Not only does the absolute dollar amount more than double, it's estimated that the dollars transfer from 1 to an average of 7 people. It's possible over the next 10 years, our market will be multiple times larger than the past 10 years. When you combine that with our efforts to elevate and expand our product, globally expand our platform, generate significant revenues and brand awareness with our immersive hospitality venues, I would argue that the RH brand is in the perfect place at the perfect time, and we will emerge from this period of clutter discord and difficulty as one of the highest performing and most admired brands in the world.

Good day, everyone, and welcome to the RH Third Quarter 2025 Earnings Call. As a reminder, this call is being recorded. I would now like to hand the call over to Ms. Allison Malkin. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter fiscal 2025 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. 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 to these forward-looking statements in light of new information or future events.

Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release.

A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I will now turn the call over to Gary.

Great. Thank you, Allison. Good evening to those of you on the East Coast, and good afternoon on the West Coast. To our people, partners and shareholders, we continue to generate industry-leading growth with revenue increasing 9% in the third quarter and up 18% on a 2-year basis, demonstrating the disruptive nature of our brand despite the worst housing market in almost 50 years in the polarizing impact of tariffs.

Adjusted operating margin of 11.6% was below the 12.5% midpoint of our guidance due to higher-than-forecasted tariff expense on prior period special order and back order sales delivered in the quarter and higher-than-expected tariffs opening expenses. Adjusted EBITDA was 17.6%, and we generated $83 million of free cash flow in Q3.

Year-to-date free cash flow reached $198 million, and we are on track to achieve our outlook range of $250 million to $300 million for the year. Net debt at the end of the quarter was $2.427 billion down $85 million from Q2. We ended Q3 with real estate assets that we believe have an estimated equity value of approximately $500 million and that we plan to monetize opportunistically as market conditions warrant.

Additionally, we are making progress on our goal of reducing excess inventory estimated at $300 million with inventory down 11% versus last year and down $82 million versus the second quarter. While a meaningful portion of our market share gains are coming from the fragmented to the trade design showrooms, regional high-end furniture stores and local independent boutiques. We are also gaining share from the better furniture-based national brands, as you can see from the table below.

I would point out that our share gains on a 2-year basis range from a low of 12 points to a high of 28 points. We find it fascinating that the market chooses to reward companies that set remarkably low expectations and slightly beat them versus setting high expectations as we do and at times miss them, while still meaningfully outperforming our industry.

Let me turn to our outlook. We are providing the following updated financial outlook, reflecting our year-to-date performance and our current trends. For the fourth quarter, revenue growth of 7% to 8%, adjusted operating margin of 12.5% to 13.5%, adjusted EBITDA margin of 18.7% to 19.6%. The above outlook includes an approximate negative 200 basis point operating margin impact from investments and start-up costs to support our international expansion and 170 basis point impact from tariff, net of mitigations.

Fiscal year 2025. Our current outlook now is revenue growth of 9% to 9.2% adjusted operating margin of 11.6% to 11.9%, adjusted EBITDA margin of 17.6% to 18%, and free cash flow of $250 million to $300 million. The above outlook includes an approximately negative 210 basis point operating margin impact from investments to start-up cost to support our international expansion and a 90 basis point impact from tariffs net of mitigation.

In the short run, the market is a voting machine. But in the long run, it is a wane machines, Benjamin Graham. We are a company that has planned the long game. Historically innovating and investing during certain times. We also believe post this high investment cycle in historically low housing market, the wane machine as it has done over a 25-year history will accurately reward us with the truly unique high-performance brand we are building.

On the other hand, there is no denying what an unusual time it is in our industry. And we also believe it's not a time to underestimate risk. We're in the third year, the worst housing market in almost 50 years. In 1978, there were 4.09 million existing homes sold in the U.S. when the U.S. had a population of 223 million people.

We are on track to average 4.07 million existing homes sold over the 3 years from 2023 to 2025 with a population of $341 million, or 53% higher than 1978. This is a market we've never seen before. Not a time to underestimate risk, tariffs are disrupting supply chains and driving higher prices. There have been 16 different tariff announcements over the past 10 months that have resulted in significant resourcing product delays out of stocks and driven multiple rounds of price negotiations and increases.

Despite the chaos, we continue to demonstrate our ability to gain meaningful market share, while aggressively investing in strategies that we believe will create long-term strategic separation. While not a time to underestimate risk, also not a time to run from it. It's important to separate the signal from the noise.

And remember, necessity is the mother of invention. Our most important innovations were birth during the most challenging and uncertain times. Our strategic separation is a result of innovating and investing during these uncertain times, and this time is no different. Launching the most prolific product transformation in our -- in history of our industry and believe the launch of our new concept in the spring of next year will reaccelerate our growth and create another step change in our business.

We're building an iconic global selling platform that will likely never be duplicated in our lifetimes. Construction costs post COVID have doubled across the industry, making it very difficult to emulate our immersive platform. At the same time, we have created new equally immersive physical experiences that are massively more capital efficient than we plan to unveil on our next call -- on our call next quarter.

We just opened what might be the most beautiful and talked about retail experience in the world and arguably the most important city in the world, especially if your vision is to build a global luxury brand. You know which one I'm talking about. RH Paris, you have to see it to believe it.

Developing a global -- we are developing a global hospitality business that generates significant brand awareness, traffic and cash flow. We have built a powerful restaurant company that is seamlessly integrated into our core business that will generate operating income that represents, on average, 65% of the aggregate galleries rent, they resided.

The RH Ocean Grill at RH Newport Beach is our first 20 million-plus restaurant, that we believe will reach the mid-20s in the second full year and its cash flow next year might cover the rent for the entire 90,000 square foot gallery. We're establishing a global interior design firm that is moving the brand beyond presenting and selling products to conceptualizing and selling spaces.

We opened our first freestanding RH interior design office in Palm Desert, California, with no product except for 2 small sitting areas in front of our designers' offices. There's 4 offices in the building and a workspace with clients. It's a real freestanding customer-facing design firm, which really don't exist in the world, if you think about it. It's like finding a dentist, you move to a new area and you buy a new home, you need a dentist, what do you do?

You Google it, you ask a friend, like where do you find an interior designer? I mean you can go online, I don't know how that's going to really help. But if you think about it, the world of interior design is not a customer-facing business. And we opened our first freestanding interior designer Tom Desert with no product. It's a real freestanding customer-facing design firm and is generating $1 million a month in design business in 3,000 square feet with rent of $200,000 a year.

You can do the math. All of which is resulting in building a brand with no peer, while generating industry-leading growth with high teens adjusted EBITDA margin. Imagine what our performance will look like in a robust housing market as we cycle and leverage these investments. Never underestimate the power of the few good people, who don't know what can't be done, especially these people. Karbinal. Operator, we'll now open the call to questions.

[Operator Instructions] Our first question comes from Steven Forbes from Guggenheim Securities.

Gary, Jack. Gary, you obviously mentioned RH Paris, but curious if you can maybe give us some color on how the demand book is building, noting it's early. And the reason I asked is just curious if you can maybe help inform us how RH Paris has influenced your pro forma expectations ahead of RH Bond and RH One?

Sure,k well, our RH One, it's really quite different. While we did open our first gallery with hospitality, it was really. We're 2 hours out of London at RH England. There's not a lot of traffic out there as the known how our business has developed, we kind of talked about it last quarter.

But many of the other galleries, as I've spoken about -- we didn't open in particularly the way we believe we should open to acquire the RH Paris and RH London, which we think are one-of-a-kind locations. We had to take a kind of a portfolio of galleries and opened some of those before we wanted to see. That's where we opened London I've already in excuse me, to open something that kind of set a tone.

I think people know in Europe, Americans aren't really known for building luxury brands were not really looked upon by the Europeans that having great taste or style. And all the -- really all the luxury brands are from Paris or Italy, the U.K. has a couple, and you can argue that we have a couple -- I argue that Ralph Lauren, a luxury brand, a very small part of Ralph Lauren business is luxury, the biggest part of the business is more of a department store-based higher-end business and not luxury and a giant outlet business.

And that's not to say anything bad about Ralph Lauren. It's an incredible company, an incredible brand. It's just not a real focused luxury brand. You can argue to this -- the only 1 we really had fewer luxury brands in many ways was Tiffany and now the French on it, right? So the road we're on the path on, it's a tricky one. It's a treating 1 to travel. We use the metaphor planning the legal Eric's point the phrase, if you get higher and higher in the mountain, it's where the air gets in and the odds get slim.

No one's really made this time. And from -- especially from the level we started at 25 years ago. And so we're -- the next few moves we're making are really important moves. I heard several years ago that someone asked probably the famous guy in the luxury world, and I didn't hear him say this, so I'm not going to say who said it, but you can imagine there's only a couple of people have built really the best luxury platforms in the world.

But I heard this -- someone asked the question, how do you build a luxury brand in China and the response was you build great stores in Paris, London and New York. And I heard that years ago, and I've always thought about that as I thought about RH -- and how do we unveil this brand. We built RH New York, and we opened it in 2018. And we said that was our bridge to Europe.

So we did it a little backwards. And as we think about it for our business, it's really probably tariff London, Milan and New York. Because Milan is really the 1 of the time capitals of the world, not only for for design, but also for fashion. But it's where the biggest design show in the world is Salomao where 500,000 people go once a year. and it's also the time we're going to open RH Milan.

But Paris, we pushed ourselves to another level and it's not a particularly large gallery, but it's very unique, and I can describe that in the last call. And if you haven't seen it, we had a video -- the video is -- a video on the website or no. Yes, video, we're also making kind of a documentary video like we have some of our other electronic buildings, and you'll see that come out probably in the next couple of weeks.

But admire -- we're bragging about it, but it might be 1 of the most beautiful and aspirational and firing retail stores that was ever created. And it's a lot of natural things that we loved about it, 1, it's seen only building on the San Jose that doesn't have an entrance on San Jose. You can't enter the building. You entered through 22-foot gold lease gate.

Can you go down steps to the front door. And we built a freestanding interior design office there. We're able to get a building improved and there's so many elements of it, where we built the first world of RH, which is a immersive experience that the previous life all the places and spaces that we've built the around the world and we think it's an important part of communicating who we are connecting with consumers.

We -- while we only totally, I think, in probably have about 150, 155 seats. So it's really like a normal restaurant, but it's really 2 because it's in 2 smaller spaces, 1 fun of tariffs that's lasered in restaurant and we invented some very new dishes there that we're going to be rolling out in the U.S. because they're so good and also [indiscernible], which is on the top floor and the rooftop -- and the rooftop so happy we figured out how to work with fosters and partners that they when we saw the building we went 5 stair latter thing to get on the roof side.

We can't live we see the if tower and the Grand Pele, loses and everything we've got like, is there anyone use the rooftop and there's no way to get to the rooftop -- as you said, you have to build an elevator, but you'll never get an elevator prove block people's views of the eiffel tower and poster and partners, why we don't want to work with the best people is they said, well, maybe we can design a rooftop define an elevator that hatch opens in the roof and the glass elevator pops up and then it disappears.

And I said, well, you ever done that before they said no, but like we'd love to do things that haven't been done before. But it's like once you see the rooftop, you couldn't then see it. When you're up there, you're saying, we got to figure out how to activate this -- and what's interesting is about 40 seats, I think, on the rooftop and Unfortunately, right now, the rooftop is closed because weather in part gets pretty grim in the winters, and we can't evacuate the roof if it starts to rain and pour not enough seats to relocate everybody at the level below -- but the rooftop, when it was opened, the first few months, we were open, it is the highest grossing part of the restaurant operation in the 2 restaurants.

We're doing more there per seat than anywhere else. So just, again, learning about creating incredible spaces that has made us kind of rethink some of the work in Milan and some of the work in London added some tweaks there. And then we found out that we're building this world of RH and we have a space with the building tariffs fact and we thought like I don't if we put a bar in here.

And like try to make it a lounge and so we put a bar in there, then we feel like we found out you could -- you're going to have a bar in Paris unless you have food and you couldn't just have nuts and snacks. So we had to have like a small menu, so we had a small menu. And the day we opened, we served our first meal in a play it in our mind with an even a restaurant. And on opening night on place that is packed.

And now we actually had to kind of retrofit it and put real tables in there, if they were big enough and now we're certainly most of the menu. Yes. Yes. And it's a great offset as we've lost the seats on the roof. But there's just been so many lessons and so much we're learning about the customer and who knows us and who doesn't know, if and how truly international, the business in paris is, I mean, we've said the list in front of me right now, like of all the design jobs we have in Majorca and Morocco and like you name it, like the Middle East and we're like the design jobs that the team working on.

It's like truly a global store and the clientele is incredible. But so many people don't know us. And the team is walking people up to the world of RH and walking people through and people, I think they're kind of shocked by our body of work because many still don't know us.

And so just the thought of how important that world of RH is and what a tool that is for our teams to kind of not just try to explain who we are, try to pull it up on the website, but walk people into a really immersive experience that brings our spaces and places for life and speaks to our our authority and architecture and interior design and landscape architecture as all of our buildings are representatives of those kind of core competencies.

And we've put -- at the last minute, we decided the entry with a small little entry, we tend to think it was communicated enough about our truth. And so we I don't know we had 4 weeks together 6 weeks ago, we decided to build an architecture and design library like in Artic, England and now you can't see it, it's so incredible. You walk in, you look through the main doors and if you've seen pictures of the gallery, you've seen the Vitruvian man and the design ethos, you have to interact with I think most people stop and read it and take pictures in front of it.

And then left to right, we have these fountains beautiful fountains. And the fountain, we came up with the line so my wife team of lines, I thought I wrote a really great letter to Paris and she read it and she said, "Give me a day" and I said, what do you mean like you don't like at. Yes. Got them secure and then she wrote that last night, last line, if you -- if any of you got the invite to our party, we use the letters and invite with music and so on and so forth and use it for the opening of our video.

And it says, in Paris, the measure is eternity this we know and have built accordingly. And you walk into that entry and you can't help but read that as you go left and right around the design ethos. And then you go to this immersive architecture and design library Yes, there's no product. You don't see it just like doesn't look at your furniture store at all to anybody, right?

You actually see we now own 2 copies at the [ artoTectura ]. The 10 books on architecture where the first modern printing were in 1521 and we've got 1 in French. And we have 3 iconic French architects, the Lauren Housman and we see the third and then we've got trivia da Vinci and radio displayed with bus than historic books, and so on and so forth.

And it's something you've never seen anywhere, like I never even worse, but we built our first winning England because there was a library there, and we came up with the idea, and we traded something, I think, really meaningful. And I remember telling the team, the night before we opened, we were in architecture in design library and said this might be the most important work we did here and because it really communicates our truth and why we do this and what we believe in.

And so now we went back and we've now -- you're going to walk into the entry of Milan, which kind of looks like a lobby of a beautiful, but we didn't know to do a couple of touches and a couple of chandeliers. And it didn't really -- like you might have like interact with the person go, "Oh, excuse me, by -- is this a condominium building. Is this -- because it does look like store if you walk in and you immediately look through this kind of lose into a backyard and you have to kind of go up and left and right.

It doesn't have the brand staircase except for that goes down underground. We did our first underground restaurant. Like everybody is going to go, "Oh, we have a rooftop restaurant this way so that some we have a restaurant that's under wrap." That's got to skylight in the middle of the park. But we're putting architecture design library now in the entry and all of a sudden, you're going to kind of go, wait, who are these people?

Like look at trivia and da Vinci and Paladion, [indiscernible] other day and all the Italian iconic architects shape the way that most of the world was designed and built very early on. That's going to come to life there. We're going to have a world of RH in Milan on it. In a place -- in a space that we probably wouldn't have done anything and I like -- I don't know, add but the team reconcepted is this incredible lounge.

And I think it's going to be electronic place that will help people understand who we are and what we believe in. And also, these are great spaces that we can rent out and do events that bring the right people into our galleries and we're trying to test the event business because we've got these incredible spaces. And I've said no for I don't know how many years now, 15, 20 my line is always our galleries are our homes, and we don't rent our homes.

They've turned down Austarparties and Ram parties like the top artists and everything. And I thought -- we finally did an event we did go to a lot of warriors games, and I'm friends with Joe Lake and Nicole Lake up and Peter Gober, the audits and warriors and they posted the NBA All Star and they wanted to use RH Francisco to do the the owner party, the opening party for the NBA All Star weekend, and we did it -- and we just got tremendous response and had all the right people there, and they don't think like that maybe we should, for the right to track the right panel, like our -- we have such incredible spaces.

So we -- and tariffs so far, like right away, Chanel wanted to take the world of RH, to hold the dinner and we've been contacting now about like can so and so do their fashion show here and take over your galleries for the evening. And so I think we're learning about this idea of like we're doing these iconic spaces and ability to actually -- we have these unique architectural masterpieces and the ability to bring the right people because we have the right place.

And I think it's even more important things like everything is moving online, like I think people are dying for experiences. They're dying for authentic connections not only with people, but with places and with history and with beauty and with food and I mean how many nights can you order or short I mean I led the services when I get on time and I want to get some delivered I don't know, about anybody else on the phone, but I'd much rather go somewhere in see people and feel like it somewhere and connected.

And I think that's why people still congregate and aggregate. And they're not going to movie theaters so much anymore because that experience is not as unique and differentiated. And maybe we don't want to be in a place where something's topping behind you and so on and so forth. So that 1 I get. But I just think the places that we're building people like to see, and they like to be there.

There's not a lot of places that are public like ours that you can get a meal in and experience to we're learning in Paris. We're having all these people coming from all the world seeing it, and we're thinking about it like, gosh, we have to have more people in more languages. We need to ramp the design team faster. Our design team in Paris kind of get overwhelmed. We had no idea that we'd have the traffic we had with the tariffs.

Like there's just so many people that came in and we were just overwhelmed I mean and even finding out how early you have to hire people because we go along 10 years. They can't just give a 2-week notice and how we work for you. We kind of got behind in hiring for the restaurants and like we were behind way to fly people from America to kind of help run the restaurant and cover the shifts and the see French and that was important. There's just so many things we're learning, especially bringing hospitality into the high-volume space.

So -- but it's just a little about the build I did my own little math, and I was trying to understand the isolate the hospitality business because the hotel business lost 25% of its fees after the first couple of months and expect that to be a little off and it's only a tiny bit off with all the seats we launched and the highest productive seats.

So -- but we're thinking that we might be able to attend that rooftop and actually do events there and maybe make in just as many people, if not more, because the only keep 4 people max there. But with the -- just about the staffing of that design -- we're learning a ton. And we're way ahead of -- we've done -- team sent some incredible recaps and learnings, and we're going to be so much more prepared and so much more efficient -- but the builds are really interesting.

So the math I was looking at I kind of looked at the first 8 weeks because -- well, September was a 5-week month, we didn't -- we lost -- it did help in the first week in on a 5, which is kind of a day and then the next week started -- but -- and I'm trying to isolate just our business, when we open hold in a market like this, right, you're not shipping to anyone here. You've got no revenues happening and it's interesting what we're learning all around, but this 1 with high volume, high traffic, high traffic iconic locations, international people coming from all over the place.

And the first 8 weeks. Well, I think for the first 8 weeks and I kind of got the 4 weeks of September, we were open in the 4 weeks of October. And then I within the next really almost 6 weeks. I had to estimate the last 3 days just to kind of tendon have the business. But when you look at the demand on the core business, and we haven't seen ramps like this.

The 6 weeks, the average per week is 62% higher than the first 8 weeks. In the first 8 weeks actually had more traffic as we -- I think, it's still like the fall, and there was a lot of people in tariff and you had a lot of people coming in, and we still have very good traffic -- but you can tell the team starting to kind of get their feet underneath them. We started -- people are starting to kind of figure out who we are and I trust them. I buy furniture from them.

And we have some people that know us because we're looking at America or the travel internationally and they know it's from America. But I didn't expect like the ramp on the core goods that as we open with good traffic. But I wouldn't have thought 60% to 63% ramp those weeks. So the other week.

So when you start to think about that and how that might build, I think it's going to take a while to kind of really understand it. And we got to get our arms around the design opportunity. There's -- I mean, when you look at all the places we're doing worth, and you think, "Oh, man, our designers are going to have to fly here, fly there, and our customers pay for that.

We've been flying people from America to all the major cities in the world, so many of the major cities. We've had customers flying our people to Sydney, Australia to Melbourne to Shanghai all over Italy. I mean, I can't almost every country, but yes, Middle East, yes, we did the prince of Qatar, right, 4 homes on its compound and like a $3 million job or something like, but we're doing jobs like hundreds of thousands into the millions, like we just got same as building in New York.

I can't talk about it disclosure doing a $3 million design project in 1 of the most famous mansions in New York City and than another $1.8 million project for so I can't talk about very famous -- and just -- and that's why I think I made the point about the design firm -- and so this -- how much that we're learning about Europe and so much we're learning about just the potential of our brand is it's evolving. So long rambling answer, but you started with that -- with a question I could talk about Paris for a long time.

Thank you, Gary. I'll actually pass it on.

Next question comes from Max Rakhlenko from TD Cowen.

Great. So Gary, this is the first time that you guys have taken the pretty outsized price in a while. Can you just talk about how the customer responded in 3Q? And the elasticity that you're seeing from the higher price points, what are the learnings? And how are you thinking about the right price points for the brand ahead? And depending on where tariffs go, can we actually see RH continue to take prices further?

And Max, can I just ask a clarifying, like you're saying you observed Q3 was the first time we raised prices for a while. Is that what you're saying?

Not necessarily the first quarter, but you have taken prices just given where tariffs have gone. So just curious what the elasticity looks like, how the customer is responding.

We're learning -- we've taken a lot of price increases this year. We've had a lot of movement in tariffs and character set at 1 level and they went up they're moving around and it takes -- I mean, everybody from manufacturers to product designers and everybody who's involved in the development process.

And it's, yes. First time we're all trying to navigate this through the thing. So I don't know, if maybe it's going to stop moving for a while. But for whether we. Yes, we're kind of frozen and -- but I think so far, as long as it's fair to everyone. I think that there I think that there's some businesses that might be kind of violating the rules.

I think that there is some people that are coming in businesses in other countries that are opening up in the U.S. and they might be making the goods, so they know they might not be bringing them in at the right price, they're trying to yes, I mean there's a lot of things going on, like especially where there's marketplaces and again, you might have manufactured bringing in goods and they're figuring out how to get around tariffs.

We hope that any of those kind of things get -- if we're going to all have tariffs I just make it fair. Don't let some foreign manufacturers come in here and those are the people, who are trying to stop and there's actually loopholes. They're kind of getting product in here, and I think in next to not being and that might be an advantage for certain people for a certain amount of time. But I think that stuff's getting to the administration and hopefully, it will become a fair playing field for everybody.

And then if it is, it is. And the market will kind of conform to the reality. I mean the customer is going to have to conform. It's things cost mark, that's what happens. We've had inflation forever in this country. Many times, much worse than this. So I think we just think about, hey, just make it a fair game.

Don't let manufacturers come in and open a U.S. entity and their price is really $1,000 for something, don't let them bring it in for $100 and pay almost no tariff because they're shipping it to themselves. Yes. So..

Got it. Yes. No, that's helpful. And then Gary, just any more color on the new collection that you're looking to roll out next year? Just how are you thinking about the timing -- and just what could it look like as we think about some of the building blocks for next year?

Yes. We just got back to the trip we work exclusively on that. And I don't think we've ever been more excited about anything. That we've worked on. I mean it's -- and I think we're working harder as we had to just because we want it to, like it's like it's -- I think Eric, Lisa, anybody who's put us on the trip would that has any perspective of the big moves that we've made over the years, this is going to be the biggest incremental move we've ever made.

And I think it's going to be like a 10-year thing. But it's not only is it a part of our assortment that we're way underpenetrated in it's -- if you look at the architecture that it's targeting and the home is targeting it's targeting the biggest architectural block in aesthetic block, especially at the high end. Yes. I mean some of our data says 60% of homes, $5 million and above represent this kind of architecture.

And it's where we used to be strong and when the launch of modern and contemporary and really the modern book is the modern book and modern is modern, interiors kind of became contemporary and that's why I consolidate it all together. And then the kind of the major look, that saying too much is -- and where we kind of built a company on more classic, it's -- it's not only big. It's the next trend.

So -- and what we're doing is our best work and our partners best work. I mean, everybody is excited about it, especially after this last trip. And so our target is to launch it at Salone in Milan, the biggest design show in the world, and we have probably the biggest opening parties that anybody's had in Salone have the worlds come see it and talk about it and and try to get it into as many galleries and can as quickly as we can. It's what our interior designers and teams are getting the asked most about what they're most excited about we don't really represent it very well.

So -- and the work we're doing is I think is incredible work. And then I think we can't wait a back on a plane and go to do some more at like we just -- it can be so big. So I think it's -- I kind of look at it and I say worth a few billion dollars over the next several years. I know it's 5 years or 10 years, but it's -- it could be the biggest part of the brand.

It should be, especially with the trend that's going to be powering it over the next -- and that trend should go 15 to 20 years, when you look at cycles. And this is the first time we're going to actually kind of lead a cycle. We usually say like don't go too early on the way you like a surfer, you get a false negative, the wave will go underneath you. Wait until the wave breaks. Let us see people ride that wave, learn from it and then go on the wave.

But this 1 is actually the first cycle life. It was a consumer that bought my first half -- my wife is a high material designer and what you actually -- we did a meters material designer. It's the first place I ever bought that small coin Francisco. And obviously, consumers for that look in my house in Belvedere first half I built and we did that house that was a look so -- so I kind of know this one.

I actually was like, wow, old enough to look through the cycle here. But that's good on the bad thing, right? But -- why are we tie -- we didn't even announce that yet. No. Yes. I got to get off stage -- it came out business.

Okay. Yes. So if you guys know we bought Michael Taylor. Michael Taylor designs that was Michael Taylor, the godfather of the California looks in most famous interior designers at this time in the '80s and did the Abertis, famous diamond tablet in the lobby of the Darksilesa.

We -- and I have the mining table in my Belvieu house. It's I've had the Michael Tailored dining shares and the snacks that really very iconic pieces. So we bought the Michael Taylor brand. We own all the IP, and you'll see a freshly thing coming given the competition a little headset a better shut up.

Why didn't do anything in the earnings calls. So I'm just going to kind of do this thing and I thought like, no, wait, in the world today, I reboosted, we bought another company besides that. And so we we're well on our way. It's going to be a big deal.

Next, we'll take a question from Michael Lasser, UBS.

Gary, you wrote in the letter that the way you offer your guidance is you have very high ambitions and at times, you may fall short of that would you make sense to slow the pace of all the initiatives? And aim for a little bit more predictability in light of this very dynamic environment in that case, profitability might come a little higher as a result?

Or is your theory at this point, we're going to drive top line growth at all costs and the profitability will eventually come?

I guess, if I thought that I would have wrote that, right That's what I wrote. I just think that we all see some funny thing. A lot of people said in each other career, "Hey, a public company and you got to report further the earnings, and it the things small and I said I think that's a choice. I actually like the discipline of being a public company.

I actually like that we have to report earnings once a quarter, we report numbers and makes us stop and think and assess and prioritize and so on and so forth. And I like that we have quarterly board meetings. And I like that we have to go through that process and to fill things down and simplify and assess everything. So I don't mind it.

The thing I've learned and I've observed, I think so many people -- they get so focused like a quarterly results that becomes their whole mission as a CEO or a leadership team is like, how do we make the quarter and they do a lot of stupid things to make a quarter that aren't -- we're in building or business model building or anything.

And I just -- I think it's not a smart way to build something great. And 1 of our Board members grew up in Silicon Valley and she's early faceful team member and everything. And Shelly said, like we're we're like a Silicon Valley start-up at we're a semi mature public company. And -- and I think that's a good thing to be. It creates energy. It attracts great people. Great people don't want to come in and just like, "Oh, how are we going to make the next quarter, let's lower our expectations, let's make sure we make it.

That's like a downward spiral a lot of times. I mean we want to do something great. We want to do the best in the world at what we do. And that's not for the sand. It's not for everyone, but we don't need everyone to buy the stock. And we don't our strategy is really simple here. From a business point of view, it's -- we do what we love with people that we love for people that love what we do.

We're in a few focus groups don't do stuff like that. We is a very personal business to us. And probably reflected the same way shareholders. We have some people who have been with us forever and some people are out of stock and then, okay, they let us sometimes from if you don't love it. It's a free world, but I don't know, like I sometimes like in good markets, we're meeting quarters and making quarters in a market like this, this is the time to make moves and take market share and create real strategic separation on the upside of it, ready for the turn.

And I don't think anybody is going to be more ready than we are. Like look out when the estimate you think were previous -- you look at our 2-year numbers like yes, just a handful of -- it's not that many publicly reported people, but if you look at furniture based retailers and a lot of those people even on the list, they sell a lot of accessories and other things, there's not too many that are just focused on furniture that are even -- that every they've been in a store and we say, like, put this company there, well even in California who would we think a competitor like they don't sell anything like that, they're not at our price point or anything.

But we took kind of national public players and have at least probably 50% furniture, we're 80% furniture. And so we're going to be more cyclical because of the furniture content, but furniture is best part of the business. And should we lower our ambitions like no, I don't think so. I mean -- more stable? I don't know, like -- are we not stay. Like -- higher teens EBITDA.

My question was on the invite was more the -- it was more about the pace of initiatives and slowing down to eventually speed up. And you're not going to love my follow-up question in light of that, so I apologize in advance, but...

Like I like you, Michael, you have good questions. It makes me think.

My second question is, in light of the guidance that for the fourth quarter call for a slowdown in the top line as well as some absorption of the tariff. Is this a signal that you're running into limitations on being able to manage the tariffs with price and we should consider that as we factor our models for next year, not only did that put a little bit of a drag on the top line, but also we should consider that you may have to absorb some more tariffs into next year.

And -- do you want to take that, Jack?

I'm thinking, Michael. The tariff piece, I don't -- we didn't materially change the impact from a basis point perspective. Obviously, that's just representative of cost alone. The other piece that's not calculated on that is the price increase.

Gary called out in the letter, 1 of the Q3 items was just the tariffs on the back order and special order goods. Some of that was timing, right, because we experienced an increase and expect -- have expected to increase in tariffs. We do our mitigation efforts, we do our resourcing efforts, but it can currently also change prices, but you're never perfect. You have some delays in the effectiveness of those, but you're now going to call your customers back and say, "Oh, by the way, the thing you just bought we're going to be importing it at a 20% tariff. So can you give us more money.

So as we read that needle and get all that dialed in, that was some of the things that surprised us in Q3, and it will flow a little bit in Q4, but I don't know that we're ready to say that make a statement like you're describing. It's a dynamic situation. Not to mention looking at competitors, what your competitors do. We don't lose sight of that.

So as far as what 2026 looks like, obviously, we're a little early for that. I understand the question and the desire to know. We'll talk about that at the end of March. But I think we're proud of how we've been navigating the tariff situation with mitigation, with resourcing, with vendor partnerships with price increases, everything -- everything that you would expect us to do so.

Yes. I mean plus we probably had the most difficult situation from -- based on where we were sourcing from and what we did and -- we read it wrong. We thought the President was going to like moving goods to Vietnam. And Vietnam is a smart place for us to move goods into and I'll end Vietnam with 47% or 46% tariff and we're like was possibly to move it to Vietnam, and it was a lot of work and a lot of effort.

We were just getting ramped up and then okay, now where we're going to put it. And then China is going from 1 tariff to another. And there's other places we're moving goods to and moving into the U.S. and that's a bit chaotic right now, like, I don't know, I again, I kind of look at it all in context, and I'd say -- everything that we're investing in. We're building a restaurant company.

I don't know name somebody is ever done restaurants of our quality integrated into our retail experience, especially a furniture store, not you'll say, well, I hear something sell meat balls or some, right? And -- but -- and actually, we're generating cash, we're paying 65%. It's an offset 65% of the rent of the buildings on average. Some are higher, some are lower.

And -- we -- I think we're 1 of 7 global luxury hospitality companies that own and operate their own business. As people go like, who's your chef? What telly companies, runs your restaurants? We run them, where are the the chefs. And we obviously have culinary leaders and chefs and we all get together and collaborate, but the reflection of what we love and what we do, and we're getting good at it. We're getting better and better. And like I have an interesting point for case what is our average ticket was $38.

$38 in '19.

In 2019. Yes. So I mean, here's interesting. In fact, we just had our 10-year anniversary in October being in the restaurant business. We opened in Chicago and that restaurant did get the partner that we did it with is a great guy, still a good friend and super successful you really want to do something, some full time, they're doing this.

And we just realized most of the chefs driven businesses that are doing hospitality for other people. I kind of a license to name thing. They're not there -- I mean we had a deal with Brendan and he was -- we had half his time to wow, but then he -- if he had so many other opportunities, and we realize this is turning into a real thing for us, we need to make it core competency.

So we've invested now in many years. And it's like -- but that restaurant in Chicago, hat we opened 5 million its first year. I mean, the estimate was going to do about $1 million for here in Page 5. It does 9 million or 10 million case.

Yes. And just shy of $10 million.

Just shy of $10 million. And we opened a second restaurant, second gallery and a suburb not too far from that, that's doing $11 million. So you think of it being cannibalized more. And and we're -- our team is growing and maturing and collaborating and we're getting better and better. And -- but if someone would have said 10 years ago that, hey, how many people want to wake up in the morning go to a furniture store for dinner or for lunch, I don't think anybody would have -- so think about that one, like I don't know, should we not have done it because you could have said like, Gary, that was like really hard.

Why didn't you do that? We'll do hard things and we do things that are unique and differentiated. And I think because we were more ambitious than others, we think more deeply than others and we're not just managers of something. Managers arrange and organize the status quo. We're leaders and leaders are leading people somewhere they've never been doing things they've never done.

And leaders have to be comfortable making others uncomfortable. That's what leaders do because -- and starting with the leaders, the leaders could be somewhat comfortable, so I'm an analyst, sorry if I'm making you uncomfortable. -- just what I do. And that's how I know I'm leading that you know you're on the right path.

But if you can build things that other people haven't built, and if you can lead, you can create a lot of value, and we believe we're going to create a lot of value, like -- maybe not at this moment, like we look really risky, I guess, because we have debt. But we've said we're comfortable with paying down the debt. There's lots of things we can do.

Hey, we've done more 0 convertible notes than anybody in history, I think. We did 4. I think anybody said it 4. I mean yes, who would dent too. And -- at some point, we might tap the convert market. At some point, we may refinance some of the debt at some point, like, who knows, we've got a lot of real estate, and we think we can monetize that over time and our inventory has been high. We're turning inventory into cash and but we're -- I'm pretty comfortable, if I tell I lived on the edge of bankruptcy in my first 10 years. This is nothing.

next question comes from Simeon Gutman from Morgan Stanley.

Gary, maybe 1 question, maybe let's talk furniture. Can you talk about the backdrop? I know it's been a tough overall market. Can you just talk about how the quarter -- how the customer changed the demand for furniture how your current lines are resonating? And then barring anything in the backdrop getting worse, can we assume that free cash flow stays positive from here on out?

I don't know, if this is the time to assume anything will be a certain way, right? We just we just had China and Russia fly bombers over Japan. It's like below, as anybody expecting that -- and then -- we rallied bombers with pan or fiber jets or whatever like who knows what's going to happen in this world right now. I mean there's a lot of discord and there's a lot of noise.

And so I mean we expect free cash flow to remain positive. But again, did we expect at any time early in the year that we were going to have all the tariff announcements, such an unpredictable cater way and half to delay our interiors book by 8 weeks, we think we were going to launch states this year. Yes, we did. And I said the name, okay. Sorry about that.

But we -- it's a really unusual time. And we're not trying to be flat or up 3% right now. Like if we're trying to be flat or up 3%, would we be more predictable, we might I know would that be really good for the long term? I don't think so. I love what we're doing right now. I love the moves we're making right now. I think nobody even get it -- I think people are going to be shocked.

I think competition is going to now what? I love our strategy in Europe. But is it more expensive than we thought, Yes, it is. Like we've built these things during and post COVID, and there way more expensive and put pressure on short-term cash flow and sure. But wait to see what we invented -- and again, necessity is the mother of invention, put us into a corner, make things tough for us, we'll event our way out of it.

We've designed, I think, some of the most exciting retail concepts coming like new versions of RH that I think are mind blowing and the cost takes much. And we have other ones that are equally creative that will take probably less than half the time and cost less. And we've got design ecosystems. We have design compounds. We have a interior design office, we just got a lot of things, and that's -- and they're all make the kind of fast.

And so we're -- I think we're pretty responsive strategically. We just don't like to get stuck in the weeds and not see the bigger picture. And -- but we're really excited about where we are with super positive, but can you say things are going to be super profitable in what we've just seen in the last 6 to 12 months, I'd say it's going to be predictably unpredictable.

Just what we've all had to navigate deal with. And I mean, there are still changes like who knows or to be a whole new round of tariffs. I mean the spring report could say, hey, this is illegal. And then I have said it's going to be -- if you read the news, it's going to be -- these things happen nice you can talk to those things happen. This change like well -- we'll improvise adapt and overcome. That's what we do.

Simeon, on the free cash flow, just like you talked about the $300 million of inventory coming down, so that this year is kind of a $200 million figure we talked about. So there's still that element to come. There's -- we talked about reduction in capital spending last call a little bit here.

So just -- there's building blocks to maintain positive cash flow going forward. But obviously, there's a lot of unknowns and a lot of uncertainty. So we'll be talking a lot about that and try to drive that result as well.

Up next, we'll take a question from Jonathan Matszewski from Jefferies.

I appreciate the color on market share, Gary, and it's easy for us to track the public players you outlined in the table, but it's less easy for us to assess the health of the fragmented design showrooms, those regional high-end stores, some of the local independent boutiques. Curious if you could give us a sense of what you're seeing from a dislocation standpoint with the majority of your share gains coming from those channels?

Yes. I mean, harder for any of us can measure, but yes, I mean, the feedback we get from some of the people that we've acquired and people that we know that I believe we've been the biggest disruptive force at the high end of the business over the last 10 years. Not more. And so especially with what we've done with the new galleries and with the assortment and moving up market and taking the quality up and its level of design up and -- so I think you could -- I mean, we used to track how many independent high-end boutiques that were, right?

There used to be 32 between Sausalito and Santa Rosa, County in Hillsberg and stuff and Napa. And we always said that they all exist because RH had a 6,000 square-foot gallery and Cortaderaand most of those boutiques were, I don't know, 3,000 to 15,000 square feet, call the majority of them kind of close to the size we are.

And yes, it was an obvious the assortment. If you didn't get our book you didn't know how big our assortment was if you didn't go to our website, you didn't know. And we always said like when we have the assortment in physical marketplace, there will be a lot less. And you make me want to go do the latest math.

I mean we know that it went from like 32 to about 18 or 20 over X number of years and do the math again. But I mean I think we went from $300 million to $3.5 billion in -- some of it is hospitality and we contract business, and we have Wireworks like that we believe most of the share came from the higher end and came from like it came to the showrooms and they came from the independents, and they came from the regional furniture stores and they came from the Ethan Allen of the world or people like that, and I pick on Ethan Allen or anything.

But I mean, Ethan Allen that RH earlier days, they were like $1.2 billion or something. And then we looked up to them. And I think they -- I don't know, if they do today $500 million or $600 million or $700 million. Yes. So there's always going to be this shifting dynamics. They're sometimes hard to measure. But we like how our business has been performing from a market share point of view, and there's enough data to say we're 1 of the leading share gainers right now at a certain size, it's actually furniture based, right?

Again, there's other people that have a big tabletop business. So they have big accessories business. So they're in seasonal businesses like Halloween and Easter in this and Christmas. And we're not in any of those businesses anymore. So you got to compare us to the right kind of people. And so we don't have some of those other businesses that might make us a little less cyclical. There some of the businesses, I think we exited too far.

We ought probably have some more home accessories or some layer designers would like to have more things to complete a home. And so we're considering those things we used to have a book called the curiosity and we may relaunch that at some point. And you might see us I don't know. I wouldn't even rule out would we be in the tabletop business, but just in our own way.

And I don't think I want to be in to chase the holiday businesses, but it doesn't mean we can't have beautiful candles that are like our branded stuff. We -- and we can't have like our or made blanket or things like that and that are really high end and aspirational would be great guess and things you really want in your home to identify identified your status and where you are in life.

So we think we build the brand correctly. There's going to be other opportunities like that. But yes, hard -- it's that fragmented, right? It's like not easy to exactly know.

That does conclude our question-and-answer session. I'll hand the conference back over to Mr. Gary Friedman for any additional or closing remarks.

Great. Thank you, operator. Thank you, everyone, for your interest. I want to thank our teams that bring our brand to life each and every day through our gallons or hospitality or distribution centers or every aspect of the company, everybody in every location around the world and everybody who's -- all of our partners around the world that work so hard to bring these beautiful products to life.

We appreciate everyone and your efforts and your collaboration, and we wish everyone -- it's a wonderful holiday and we look forward to talking to you the next year. Thank you.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH 2Q '25 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Allison Malkin, ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2025 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 state about the outlook of our business and other matters driven in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our 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 suggests 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.

And now I would like to turn the call over to Gary.

Thank you, Alex, and good afternoon, everyone. I'll start with our letter and then we'll open the call to questions. To our people, partners and shareholders, RH continued to generate industry-leading growth in the second quarter as revenue increased 8.4% and demand increased 13.7% despite the full rising impact of tariff uncertainty and the worst housing market in almost 50 years. On a 2-year basis, revenues increased 12% and demand increased 21%, resulting in significant share gains in strategic separation. As a reminder, we expect the approximate 5.4-point variance between demand and revenues due to tariff disruptions will shift from the second quarter and be realized as revenues over the second half of 2025.

Adjusted operating margin of 15.1% and adjusted EBITDA of 20.6% both increased 340 basis points versus last year, inclusive of an approximately 170 basis point drag from investments to support our long-term European expansion.

Net income increased 79% and we generated $81 million of free cash flow in the quarter. We continue to be pleased with the second year demand trends at RH England, with gallery demand up 76% in the second quarter and online demand of 34%. Current demand trends indicate that gallery is expected to reach approximately $37 million to $39 million of demand in 2025, its second full fiscal year with online demand reaching approximately $8 million.

To put those results in perspective, if an RH Gallery in the English countryside with an estimated population of 100,000 in a 10-mile radius, 2 hours outside of London, can generate $46 million of total demand in its second full fiscal year, what can a gallery in the center of Mayfair, the most exclusive shopping district in London, with a population of 9.7 million do in its second full fiscal year, we believe exponentially more.

While many questioned the decision to open our first RH Gallery in such a remote location, believing it would fail, what they fail to understand is the value of doing something extraordinary that breaks through the clutter and creates the conversation. 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.

The most important news regarding our European expansion was the September 5 opening of RH Paris, our most innovative and immersive brand experience to date. Located on the Champs-Élysées, just off the Avenue Montaigne, RH Paris stands at the epicenter of fashion and luxury. Passthrough the Majestic Goldleaf Gate down a crush limestone path to a secret garden where ivy-covered walls and sculpted trees framed the 18-foot cast medallion doors marking the entrance. Juxtaposing the entry is a freestanding RH Interior Design Studio. The 2-storey glass structure is home to what has become one of the largest residential interior design firms in the world with projects on every major continent.

A contemporary inlaid brass and white onyx mosaic frames a 3-dimensional image of Leonardo Da Vinci, the Vitruvian Man and the RH Designs. The imagine ethos not only mirror the entrance storage Paris, but are also reflected in every building we inhabit and every house we turn into a home. Step through the threshold and entered the architecture and design bibliothèque discover rare books from the foundational Masters, DaVinci, Palladio Wandel and Hausman. Commanding the center of the bibliothèque is one of the first modern printing, circa 1521 of De Architectura, the 10 books on architecture by First Century BC architect, Marcus Vitruvius. His description of a man outstretched within a circling swear inspired da Vinci famous drone with Vitruvian Man, some 1,500 years after his death.

The gallery, spanning 7 levels is connected by a shoring atrium of floating glass medallion stairs and a glass elevator that magically appears then disappears from an invisible shaft atop the rooftop garden. A cast bronze Caryatid, circa 1870 by renowned Franch sculptor, Louis-Félix Chabaud whose work is on display at the loop prices the center of the atrium. Beyond their structural role, Caryatid symbolize strength, race and ingenuity, a harmony between art and engineering. We placed this specific Caryatid in the center of the grand atrium as a symbol is not only our desire to connect and create harmony between the architecture, art, history and hospitality offerings of RH Paris. It's also our desire to create hardening between RH and the people of Paris.

On the lower level, ground and first floors, immerse yourself in artistic installations of furniture, antiques, artifacts and art in a gallery setting. Each level features full-floor exhibits by a singular artist and carefully curated pieces, not only chosen to furnish your home, but also define it. Dine under a spectacular curve glass and steel structure inspired by the Grand Palais while enjoying a curated menu of American and Mediterranean classics at Le Jardin RH, located on the second floor tariffs. Marvel at the Stone Mastery is every surface from the bar to the bathroom is cloud and rare white onyx slabs.

On the third floor, discover the world of RH Bar & Lounge, a physical and digital immersion into the places and spaces that define the RH brand while enjoying light sights and a craft cocktail by legendary bartender Colin field. Stepping to a jewel box of champagne-lacquered walls with a sparkling ceiling of over 7,000 individually hand-blown glass polyhedron at list with 360-degree views, including the Eiffel Tower, Grand Palais and the Louvre, the Le Petit rooftop is one of the most spectacular dining destinations in all of Paris, featuring a creative menu of caviar specialties, small plates, signature salads and seafood towers.

While RH Paris may not sound like a retail store, it's not meant to be. It's an authentic expression of the RH Vision and design ethos. It is a global destination designed to manifest streams, generate desire and aspire and elevated and elegant way to list. I was asked by a journalist prior to opening. You're introducing multiple hospitality concepts at RH Paris, have you considered that Parisians have very strong opinions about their hospitality? I thought for a moment, and my answer was this, Parisians have very strong opinions about a lot more than their hospitality. Parisians have strong convenience about architecture and peaks, people, polish, fashion design, food and wine. Paris is a place you come to do your very best work. It is where you have the most to gain and the most to lose. In Paris, the measure is eternity, which we know and have built accordingly.

I'm also pleased to report that RH Paris is off to a very strong start. Traffic in the gallery has exceeded RH New York day by day. and the design pipeline in the first 6 days is greater than the design pipeline of our first 5 European galleries combined in their first 6 days.

I didn't know what to put for this next headline, so I just kept it simple. Tariffs, tariffs and the possibility for more tariffs. Just when you might have thought that tariff conversation was complete, the announcement of a new furniture investigation and the possibility for additional furniture tariffs on top of existing furniture tariffs and incremental steel and aluminum tariffs were introduced with the goal of returning furniture manufacturing back to America. We believe most in our industry hope that this investigation surfaces the difficulty of that task as current manufacturing for high-quality wood or metal furniture does not exist at scale in America. It would require years of investments in building the facilities and workforce that most in this industry cannot afford to make. Not to mention the significant inflation that we believe will start to become evident in the second half of this year and accelerate into 2026 and beyond.

While strong brands like ours will benefit from the likely dislocation and consolidation more tariffs will have on our industry, many smaller companies will have difficulty surviving these levels of tariffs. Additionally, more tariffs on furniture could also result in U.S. manufacturers moving production from the U.S., the countries closer to their international clients, avoiding freight costs and the likelihood of counter tariffs. Our hope is that the investigation will seek out the perspective of a cross-section of leaders in our industry as we drive towards the best outcome for our country.

As previously communicated, we've 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. Additionally, we are aggressively responding to the recent 50% tariffs imposed on India, which impacts 7% of our business, almost entirely handmade rugs. While the handmade rugs category is highly specialized and not manufactured in America, I think, for 100 years. We have begun the process of identifying the apart of the countries.

We have also resourced a significant portion of our upholstered furniture to our own North Carolina factory, where we have been manufacturing for 10 years and plan to continue doing so. We are now projecting that 52% of our upholstered furniture will be produced in the United States, 21% in Italy and approximately 12% in Mexico by the end of fiscal 2025. We also expect the percentage made in the United States will continue to increase throughout 2026. While there remains uncertainty until tariff investigations are complete, we have proven we are well positioned to compete favorably in any market condition.

Outlook. Due to the dislocation and continued uncertainty related to tariffs, we believe it is prudent to revise our guidance for fiscal 2025 due to the following factors: while we continue negotiations with our manufacturing partners, our updated outlook reflects a $30 million cost of incremental tariffs, net of mitigation in the second half. As communicated, due to the uncertainty related to tariffs, we delayed the launch of the new brand extension that was planned for the second half of 2025 to the spring of 2026. We've also delayed the introduction of our Fall Interior Source Book by 8 weeks as we have waited tariff announcements needed to finalize pricing. Last year, 100% of the Fall Interior Source books were in home by the first week of August. This year, the Fall Interiors Source book will be 100% in home by the last week of September, with only 28% in home as of the end of last week. We now expect approximately $40 million in revenues to shift out of Q3 and into Q4 and Q1 '26 because of that shift. Our outlook does not include any new tariffs as a result of the recently announced furniture investigation.

Fiscal year 2025 outlook. Revenue growth of 9% to 11%. Adjusted operating margin of 13% to 14%, adjusted EBITDA margin of 19% to 20%. Free cash flow of $250 million to $300 million. The above outlook includes an approximately negative 200 basis point operating margin impact from investments and start-up costs to support our international expansion and a 90 basis point impact from tariffs net of mitigations.

Third quarter 2025. Revenue growth of 8% to 10%, adjusted operating margin of 12% to 13%, adjusted EBITDA margin of 18% to 19%. The above outlook includes an approximately negative 270 basis point operating impact -- operating margin impact from investments to start across this quarter in international expansion and the opening of RH Paris, and a 120 basis point impact from tariffs, net of mitigations.

Platform expansion -- 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 balanced symmetry in perfect proportions. Spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality, faces with Garden Portguards, rooftop restaurants, wine and barista bars, spaces that activate all of the senses and spaces that cannot be replicated online.

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 the remainder of 2025 include the opening of 4 additional design galleries in Manhasset, San Diego, Detroit and Palm Desert. As previously communicated, we anticipate an inflection in our business across Europe as we begin to open in the important brand building markets of Paris in 2025 plus London and Milan in the spring of 2026, all with dramatic brand-building hospitality experiences. We believe post opening, we will begin to have the scale to support the necessary advertising investments to accelerate our growth in Europe. The early reads coming out of RH Paris are an indication of what's to come, RHEurope and the Middle East should enable us to double the size of RH over the next 5 to 7 years.

Looking forward, we plan to accelerate our expansion strategy to include the opening of 7 to 9 new galleries per year, plus 2 to 3 design studios, outdoor galleries, or new concept galleries per year that increased our current credit in underpenetrated markets and opened new markets to the RH brand. "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 due to the uncertainty caused by tariffs, market volatility, inflation risk and an increasing level of global discard, we believe it's important to separate the signal from the noise. The fact is we've been operating in the worst housing market in almost 50 years for 3 straight years. For context, in 1978, there were 4.09 million existing homes sold when the U.S. had a population of 223 million. Contrast that to 2024 were 4.06 million existing homes sold with a population of 340 million, 50% more people and less homes sold. And it illuminates just how depressed the housing market has been this past year to 3 years.

Despite that fact, we are performing at a level most would expect in a robust housing market. We believe that the 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 presenting 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 our business has been strong, it has been so due to action versus in action, innovating versus duplicated, investing versus divesting and aggressively taking market share during this downturn, so we are 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 duplicated in our lifetimes. We are building a global hospitality company with multiple concepts across multiple continents. We are creating a global bespoke interior design business that completes million-dollar plus full home installations. We are building a global contract and hospitality business where our products were featured in some of the finest hotels and residential projects in the world, and we are creating the most desirable and distinguished brand in our industry, all while forecasting an EBITDA margin of approximately 20%. Imagine what our margins and cash flow might look like in a robust housing market as we begin to cycle and leverage those investments.

While we began the year with meaningful debt, almost entirely due to our stock repurchases of $2.2 billion, 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 million that we plan to monetize opportunistically as market conditions warrant and excess inventory of $300 million of cost that we plan to turn into cash over the next 12 to 18 months as we optimize our assortments post our product transformation.

We are forecasting to generate $250 million to $300 million of cash flow in 2025 and our plans call for significant and growing cash flow from operations over the next several years if we cycle this aggressive investment period. We estimate that our adjusted capital expenditures will decrease to a range of $200 million to $250 million in 2026 and $150 million to $200 million 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 Buffet wrote in its 2016 letter to Berkshire Hathaway shareholders, "Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When downpours of that sort occur. It's imperative that we rush outdoors carrying washtubs and not teaspoons." Our debt is reflective of a washtub on ourselves. We repurchased 60% of our outstanding shares that greatly benefited our long-term shareholders post the publishing of Mr. Buffett's letter in 2016 and '17, and repurchased 30% of our outstanding shares during this housing downturn in 2022 and 2023.

While the sky in our sector has been darkened by inflation, interest rates, tariffs and global politics, those clouds will soon pass, and it will not only be clear skies, but also clear that it was a good time to be a shareholder of RH, Carpe diem.

Operator, we'll now open the call to questions.

[Operator Instructions] Your first question comes from the line of Simeon Gutman with Morgan Stanley.

Thanks for the question. So my first question is the free cash flow is starting to sequentially improve, and you generated a decent amount this quarter. If you generate $250 million to $300 million for the full year and presumably even more through is real estate monetization still something you would or even need to pursue?

I don't know if we need to pursue it. we're opportunistic. We're not really real estate owners, right? We're real estate developers, and we have a sale-leaseback model and we generally hold real estate for relatively short periods of time. We saw an opportunity when we were doing our deals in Aspen that the local developer there who would acquired really an outstanding portfolio of assets. We had an opportunity to invest in that portfolio at a what we thought was a really attractive price. And we had a vision of possibly in a very small -- I call Aspen probably be the most influential organized small luxury town in the world. I don't know if I've ever seen anything like in about 6 square blocks, you have unbelievable retail you have wealth all around that all comes in shop there, all comes into each in the restaurants there. And all [indiscernible] a couple of blocks from there. Just walk to [indiscernible] so forth. .

And as I got to know Aspen and I was looking at our opportunities, we thought, geez, what could we do here that could -- maybe in this 6 block, [indiscernible] focused little town with, I say what is, the 86 billion that live there now. I mean there's really -- I've never seen anything like it. I mean, it's more unique than Sante Fe. It's more anything course of all. It's more an I've seen from the aggregation of wealth and influence and your ability to -- we had an ability to build 2 brand-new buildings, right, which is on 2 of the best corners in town. I mean our galleries on Galena and the Cross Street is the best corner in Aspen. [indiscernible] to rare, brought some Casita across from Mariana, right next storage, [indiscernible] and every luxury brand marching up the to the street. And our guest house is an East time where the cross-treat is where they're building lift 1.

So 1.5, 2 blocks down they're building the second big conduit, right, and the [ Aman Resorts ] going in there. And everybody is going to be driving by that corner and everybody going to be walking by and driving by our other corner. So these were the 2 best I thought buildings that you could get. It's just -- as our partner calls forever real estate, right? It's never going to go down. It's always going to go up. And so -- and we have the opportunity to become the landlord for Chanel, the landlord for Gucci, the landlord, lululemon, what else in our portfolio [indiscernible]. Yes, we've got rest week on San Ambrose.

We've got I can't remember, we got that stake. We're the landlord -- we're kind of key retail landlord in the core of assets -- so we thought we could learn about real estate. We could learn the landlord side of it. We can understand how the other people negotiate, what's important to them. and we would just -- we get smart and then there was opportunities to do residential. A few other things that we've talked about in the past, few RH Residences at the boomerang lodge and build our first bathhouses and spa and so on and so forth. And so we thought this would be a terrific place to build our brand image and have a global billboard.

And then look, unfortunately, we had the fastest rise of interest rates in the base, right? And -- and that's not really good for developers, whether you're our partner or your us, you're going to be developing at a much higher cost of capital. And so that kind of slowed us down and also compounded by our partner likes to say that building an Aspen is harder than building on the moon. So it's not some -- not the easiest place to develop, let's just say. So we kind of have to slow things down and -- but we're very close to getting our mountain house open and very close to getting our guest house open, and those are 2 of the key trophy properties in our portfolio. we're less interested. We've been a landlord now for a while. We've learned what we needed to learn. If that's the place to tie up our capital. No, not really.

We've learned a lot. And is it at the cost of capital today and the cost of construction of Aspen today? Is it -- does it look as attractive to build their with a really long-term view. But again, I don't know if necessary for us. So we're open. It's not a timing we really want to sell right now. I mean if they inflation in check, which is questionable with the tariffs, and they can lower interest rates, cap rates will be more attractive, and there might be some people that want to make -- that have a long-term view and want to make a fair offer on a portfolio like this. But otherwise, we're in no rush. Yes, we're patient. But if the right opportunity came in somebody who has really had a long-term view and they want to own for every real estate like Aspen. It's an incredible asset. So...

And Simeon, I'd just add, when we communicate the value of the real estate, I think you asked if we need to do it. Our intention was never to communicate a need or a plan. It was, as Gary said, opportunistic. -- it's an opportunity to make sure that folks understand the value of that real estate on our balance sheet, especially as it relates to the debt that we have.

And we've got other things besides that in the $500 million, right? We own RH England. We own RH Detroit. We own a property, we're going to develop areas RH New Jersey. We own a property in Madrid right now, but we love our current gallery. So we think we can monetize that one. We have actually have in the market today. It's an incredible old palace. But we don't really -- we don't believe we need 2 stores in Madrid. We love -- we really love what we're doing there. We're going to put a small pool at RH in there now that we developed this new pool concept that doesn't need a big kitchen that can pair us which everybody ought to go to, by the way.

If you missed our parties, I mean you should have never missed that part. Like everybody's got to go see Paris because it is not another gallery. It is a leap frog. It is another kind of inflection point that helps us see a whole other opportunity here. Like when you see the world of RH, and when you see pattern, you see what we've done in hospitality wide. So when you see what we've done design-wise when you see the architecture and design library. For second one we've done the bibliotheque. We did in RH England because there was a big LIBOR that have been there for 400 years. So we made it a larger market segment you see that the cool when he walked through and I mean, it's just so much that I think we've done that takes us to another level.

I doubt that there's a luxury retailer in that city at the highest end that doesn't believe we just built the best store in the world. And I think everybody should go see it. because it's unlike anything you've seen. The traffic -- when you think about it, it's -- I don't know 1/3 of the size of New York -- and it had more traffic in New York every single day that we opened, not New York in its first 5 days in New York today, the highest volume gallery in the company. Okay, New York today. it's unreal -- what's happening there the people that are coming. So anyway.

If I can ask a follow-up. And by the way, I'll be there next week, so for the Aspen party. My follow-up, it's maybe paraphrasing something you said, Gary, you said the clouds could be clearing soon. And you've gotten through a lot of things over the last couple of years between rates and housing. And now embedded in your financials is investment with Europe, you have all this newness and you're growing the revenue and you're generating cash now. So it feels like you're knocking on the door of that period. You mentioned soon. I don't know if you were giving a financial forecast or a weather forecast, but it's soon. So what's wrong with that logic that the business is on the cusp of this growth period that you've been engineering for the last several years?

Yes. I think that the business is ready. We're going to be kind of going post peak on the investment cycle. One thing we've all had to deal with and anybody who's building anything of high quality, construction costs post COVID are up like 100%. For some people I've talked to at the luxury level, they're up 150%. We've been able to develop new concepts. We talked to you about that define ecosystem, designed compound and other things that we're taking the bigger multi-store box and breaking it into pieces and even trying to create significantly better capital efficiency and putting our creativity to work that way.

So you'll see it. I think once -- once we get there, it's hard to make a call today, right? Like we're likely going to get an interest rate cut. We got 1 last year and everybody thought there was going to be like 4 or 5 more I use my house in Beverly Hills off the market because I thought I was going to get a much better price. I should have took the offer I add back in the housing market in L.A. is not great. And so I don't know what's going to happen.

Look, I think the biggest thing for everybody to worry about is don't let the 1970s happen. If you zoom in on the chart of what happened with federal funds rate over that 10-year period, yes, it was arguably the 10 worse years in the U.S. economy. Now I remember I was 18 years old when I bought a $125 waterbed at Waterbed World at 28% interest. And I don't know how many years it kept me to pay it off $12 a month or something like that. But [indiscernible] long enough to remember what erase peaked at 21%. We say interest rates are high now, lose controlled inflation, and you can have payoffs.

So what do I worry the most about? Just kill inflation. I'm more motivated about killing inflation than getting an interest rate cut right now. As we had an interest rate cut and the tariffs create more inflation than anybody thinks. And it's not going to all come at one time in blip. The inventory is going to flow in over the course of the year. And you're going to have to cycle through inventories. You're going to have new tariffs. God forbid, they through another tariff on furniture. I mean I think they've got it, but someone has got to come talk to us, talk to me, call me. I run the biggest luxury home brand in the world, somebody call me and ask me what I think. Because it's not really us. I worry about -- I don't want to win because 50% of our competitors who are really good, hard-working people get wiped out. You lose 15% of the people that are presenting at High Point market or Las Vegas market, those markets will shut down. They'll be bankrupt.

I really don't think anybody is thinking about the math. There's no one that's making wood furniture scale, metal furniture scale. If there is another round of tariffs and furniture. I mean, long term, it will be good for us -- it's really bad for a lot of people in High Point. So whoever in High Point or North Carolina is advocating for it is got to have a really narrow myopic view because this makes no sense for the U.S. economy long term. We will blow up people, and there will be massive job losses. And I think people need to understand that at all levels of the administration. And I've been a fan of a lot that's been going on. I think directionally, they're doing a lot of right things. But yes, I don't know, I run the biggest luxury home brand in the world. No one's talking to me. I've got a point of view, and so I'm making that known now. We're in the cuts are going too far there. That's what I worry about.

Your next question comes from the line of Steve Forbes with Guggenheim.

Gary, maybe shifting the focus to inventory, sort of a 2-part question here. The first, given the change in the average tariff rate and the sort of excess inventory that you guys are winding down. Any help on sort of coaching or framing how much room there is or for a continued reduction in net inventory on the balance sheet. And then the second point is there is given everything you just said, how much visibility is there into the planned launch of the new brand extension in spring? Or is there still some risk around that extension launching?

Yes. I don't think there's risk around that extension launching. -- unless we get some really silly tariffs in on this investigation. I mean I really hope this investigation includes seating to industry leaders. And it's not an investigation into a small little segment of the business. we will sell more upholstered furniture made in America than almost anybody making furniture in North Carolina. Like, yes, our upholstery business, you've got brands that are a -- it's 130-year-old U.S. brands, and they don't make wood furniture or metal furniture in America anymore. They don't. So you've got to be really careful. Upholster furniture, we can make in America. We can do that. We can be competitive because you've got advantages, it's special orders and feed the market and so on and so forth. But there's just not the workforce to make the other stuff. And there's not people there. The next generation doesn't want the jobs. If you talk to people.

Again, our volume in our factory and what we're going to make is as big as some of the biggest people at the high end. I mean they'll compare us to actually or somebody that's $10 billion at the low end. And I think as, what, 65% of their business in America, 35% of the business offshore. I'm just saying the high-end furniture market, it's not coming back for years. And all that's going to mean is people are going to -- there's a lot of people who are going to close and a lot of jobs are going to be lost. And I think people have to consider that.

So -- but when you think about like -- it's the risk of extension on no risk at all. Things might be more expensive, but they're going to be more expensive for everyone, right? So we have advantages -- we buy more than anybody in our market by probably 3x at our quality, the next closest person. So we have no, tremendous leverage here. I wouldn't want to be competing with us, but I don't like winning this way. It's not going to be pretty.

So I think, hopefully, we're done with furniture tariffs. And ring the register in the tariff bank, but let's not completely disrupt an industry, see High Point closed, the major furniture store -- furniture storage closed, family, long-time businesses, they'll be dead. So that's the most important thing. Inventory reduction, everything else we're doing fine.

And again, if you're thinking, do I buy our stock or not? Buy our stock either way. We will win. We've spent $1 billion is building a platform here. Yes. We have most dominant inspiring high-end platform for luxury furniture in the world. We know how to source it. We have leverage buying it. We know how to market it. What do you do if you're a wholesaler and all your customers go bankrupt. They can't afford it. The customers can't afford it. Like what do you do then? I think the tariffs dry up. You slow down the furniture business, you're going to slow down the tariffs. And that's why I think someone's got to sit down from the industry with the administration and go through the math. This is just simple math. Don't let it be emotional. Let it be intellectual and rational and data-driven. We've got all the math here. And I don't know a lot of people in the industry that would love to sit down and debate this.

Steve, the framework for inventory reduction yes, one of the things to think about is just what is our -- I mean at the most simple level, what's our turn rate turns have been in the past? Obviously, we've turned the inventory on an external basis into the high 2s, low 3s. So do you even just think about the -- Gary mentioning a letter the $200 million to $300 million of inventory reduction where that gets us. Hypothetically, at the end of the year, you're starting to see a run rate of a turn into the closer to the mid-2s. So is there room beyond that. We do believe that.

In '18 and '19, we were running like 3%, 3.2%.

Yes, yes.

So we can run a much faster turn. You're seeing the slow returns we're running today is the massive product transformation, right? You're buying a lot of inventory. You're getting light rock right, you're getting some wrong. And so it's inefficient to do what we just did. That in and of itself is a big investment. But we're on the other side of that. I mean we do have a whole new concept coming. It's probably the biggest idea and the lowest risk we've ever taken on a brand extension.

I think it's the biggest -- I mean, practically did modern go to $1 billion per year? Yes. I mean this is probably -- this is a $2 billion idea, and it could go really quickly. We think we're going to hit the trend that on -- the product we have in development is like nothing else at the market. It's going to be massively disruptive, exciting. -- and we were confident enough that we're going to open 3 galleries to launch it with. And we're going to do more if we can. We'll have the Ralph Lauren store in Breda, Connecticut. We've got an incredible location in West Hollywood, and that we'll be announcing more about soon. And then we've got our original gallery in San Francisco that we own in the design right middle of the Design District, where we kind of relaunched the whole brand. Well, 2010, right?

2009.

Yes, 2009. And it is going to be an incredible gallery to this new concept. But we've been working on this one for about 4 years. So we'll be ready to go.

And maybe just to confirm as a quick follow-up. So those 3 galleries are launching in conjunction or opening in conjunction with the launch of the brand extension in this ring.

Yes. The ones in Greenwich in San Francisco, for sure. The one in West Hollywood, we've got to still get our permits and get through system approvals and things like that. And hopefully, it will be pretty simple. We're going to -- it's going to be a 2-stage piece where we're going to kind of remodel a location that we now own. And then Phase 2 of that once we open with the new concept. We are building a restaurant beautiful -- it might be the most beautiful restaurant in all of Los Angeles. We're building an incredible courtyard restaurant that we think is going to be tremendous. It's going to add a restaurant in Los Angeles, which we don't have in a major market.

And in Los Angeles, we're building like an ecosystem, right? We have our Melrose gallery that we built like 12 years ago that's fantastic in a great corner, beautiful rooftops. We've got a moderate gallery, a couple of blocks away from that. we'll have this new concept galleries that's a couple of blocks away to Melrose, and we're in the process of closing another deal for an outdoor gallery on the same street. So L.A. will have this really expansive or ecosystem. And I think our business in L.A. should go up 40% or more. it's a big, big, big market for us.

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

Great. So first, just on Europe. It's early, but with improvements in England and the strong sector Paris, can you share what you think those gallery can actually...

We can't hear you quite well. I don't know if you're close enough to the feature, but it's hard to hear what you're saying.

Apologies, but Europe starting to scale England, that galleries improving and Paris, obviously off to a strong start. How should we think about the revenues per market or per gallery over the medium term? And then with that, how are you thinking about the 4-wall economics in Europe compared to U.S. galleries as we just think about that 200 basis point headwind easing over the medium term?

Yes, I'd say, one, we'll update you periodically as things evolve here with Paris and as we get closer to London and Milan, I mean, it's going to be very quick here, right? Because we'll have 2 more big really incredible galleries. All with multiple hospitality concepts and so on and so forth. So I mean, this is -- think about this as how we would have liked to launch, but to get Paris and London, there was other locations we had to take. And had to open. We faced lawsuits from landlords if we didn't open them.

So hence why we wanted our first impression to be something kind of inspiring and unforgettable. That's why we did RH England really for conversation, not so much for commerce, but if you look at the numbers now, you go, "Hey, it looks like it might be pretty good. And we'll see what happens to that location when we opened London lending may actually amplify that location as opposed to cannibalize allocation. Don't know. I mean the Greater London market, it's just a huge market. The U.K. market is a huge market. And so Paris is any indication of -- I mean, we have a way bigger brand awareness in London than we do Paris. But in Paris, what we're seeing -- Stefan, is it 50% of the people know the RH brand in Paris?

50%.

Shocking for us. We didn't know that. So lots of people familiar, lots of people waiting for us to come. And we're in a location that you can't miss us versus some of the other places. I don't know, we're building a brand in the other ones. And even Madrid, which is pretty high populated city, that's pretty hot now, just not -- people aren't used to kind of a retailer even like us. I mean it's a really funny quick story is [indiscernible] one of our curators and designers really great curator designer and has been with us for years and freelances with us, thing comes back to work for us.

If you kind of -- I don't know what she's exactly her title is now, but she finds the cool stuff hinges and Jen as a godson that is finishing up his masters in somewhere in New York and his girlfriend finishing up her Masters, is from Madrid. And so they were out in California. And godson said -- that I tell the story, but the godson said, "Oh, you've got to meet my godmother. She's actually into interior design." And this young lady, 29 years old, I think, said, "Oh my God, you have to come to Madrid, the most amazing home store in the world open in Madrid and everybody is talking about it."

And Jen said, "Really well, where is it?" She didn't even connect the dot initially, and she gives her the address where it is since she goes, "Oh, well, I worked on that store. That's our brand. That's RH." And his girl had no idea that we work, right? So I mean, it's not really the brand awareness as much. I think in Madrid will take us longer there, but we're really happy.

When you look at the economics on the 4-wall margins, I mean, some of these were not real big rents like Madrid and Madrid and Brussels. The one that economics are a little more challenging in Munich. We had to take that. We didn't we didn't extend those leases because we're sure what the volumes would look like. But I'd say a lot of them -- we know directionally kind of what we can do, what does it look like in 14,000 square feet. What does it look like 20,000 square feet, where might we do hospitality. We were going to do a restaurant in Madrid on the top floor, but it was kind of a smaller store. And then we chicken out plan put it in.

Now the team like clamoring for it, like our brand awareness to soundly everybody will come. They love our space. It was an old place. about 14,000 square feet, and we can put a cool little kind of kind of lay the teeth, I guess, don't a French kind of thing. But the same menu is perfectly cemented -- and I think they'll flip out and our team is super excited about it. So we're going to put a restaurant on that one. We have the ability to put a restaurant in Brussels long term. We've got the space there to do that. We may do that. And then we've got watch how Germany kind of scales here. As I said, we have the lowest brand awareness in Germany. They take longer. Maybe we just don't have the right location in units, I don't know. But we've got flexibility there. But I think the 4 walls when you kind of project them out, they kind of look like the U.S.

So like if Paris -- I mean, Paris says anything directionally like we think it's going to do. I mean it's going to be fantastic. I mean we had a little bit more operating costs and something like that. We got to have guards out of the gates and things like that. You've got to walk down 195 feet to get to the front door and you got to figure out how all that works and especially in the weather gets tougher. But -- but I think it's now starting to -- the dots are starting connect.

We have enough data. We're seeing how things are ramping. And we're starting to execute. I mean what would you give us an execution from like the back end, having the right goods in the right fab. Like there are so many rules and things we had to get around what fabrics are and you use what phones, what lighting, what it's like we're kind of bundling around. Like I'd say, give it a C today. What do you guys think?

C plus.

Maybe a C plus. It might be D plus. I mean so...

[indiscernible] D plus.

D plus. But we had a great session, a couple of sessions with them the last few times there just had another great session with them. like they -- we know what we need to do. We loaded up both plans. We took all our merchants there. We brought in all the leaders from all the galleries, all our best designers. We listened, we learned and -- if we just go from like a B plus, C minus to be in execution, it's probably worth 25 points. If we go to an A, it's probably 50 points. So -- and we'll get there. It's just -- it's a little hard when you only have a few small stores and you need to kind of take people's attention off certain things to be able to execute.

But now I mean, the great thing is Paris now creates massive visibility and urgency. And that's when we took everybody over there. We were there for 8 days, 7 days, many nights we were going home when the sun came up. We were working with the teams. Everybody is alongside each other, bringing this thing to life and it was a great, great experience for bringing our headquartered leaders together with our field leaders and building a great team.

Got it. That's super helpful. And then in the 10-Q, you discussed how the primary driver of the gross margin increase was due to increased margins in the core brand -- just any more color on what drove that? And then is the takeaway that we should consider is that promotions should continue to normalize ahead and the tariffs are just the major headwind? Or how should we take the learnings as we think about the rest of the year?

Yes, the margin expansion, I mean, it's a reflection of what we were doing last year and the position of the product margin and the activity last year as some of the markdown activity last year. So year-over-year, we saw margin expansion.

Yes. And we absorbed a hit on tariffs. It's much smaller. I mean if the tariffs really start getting in Q3 and Q4 and into next year. And again, fingers posters not another layer coming, but Sari said, not the strongest as thesis that survives the 1 most adaptable to change. And we got to be the most adaptable in innovation and invention, I think, in our industry.

And so we'll figure out no matter what happens. But there's going to be gross margin headwinds from tariffs coming. You just can't raise prices fast enough and you can't -- there's only some which room our manufacturing partners have. You don't want to blow them up right? So you've got to walk a tie. It's very different than China. I think that -- maybe that's the other thing that maybe is misunderstood. I mean China was kind of funded. I think Sam of China's factories got some help from the government to deal with the tariffs. That's not really happening in Vietnam. It's not happening in Indonesia. It's -- they're not China. They're not big, strong, well-developed countries like China. So that's -- it's going to hurt people. Like there's just -- there's going to be challenges there. But it is what it is. So it provides the depth and overcome.

Your next question comes from the line of Michael Lasser with UBS.

So Gary, the investment community is very focused on the degree to which there's discounting and promotions in your messaging, the results in the quarter suggest that you've been able to overcome it with your profitability. But with that being said, is it driving incremental sales? And is the thesis that you will be able to pull back on some of this discounting oriented messaging as the housing market improves and the natural rate of demand simply increases and offset we're seeing done right now?

Well, here to start, Michael, with -- in this world of furniture, at the luxury end, it's all in sale, okay? At the highest end in the top design showrooms, interior designers, architects, all get 30% or 40% off. So our model has a membership model with a model to kind of smooth that out and be competitive. So this is not like Chanel, Hermes, where they burn the markdowns or throw them out or whatever they do, right, because they have such ridiculous margins. This is not fashion. And if people confuse it with fashion, they're going to miss the whole game, okay?

We're also in the third year of the worst housing market I've seen in my 38 years in this industry. 38 years, I've never seen a third year like this, and I've never seen 1 like this. So you could decide to not promote. I mean, some people are telling you they're not promoting and they are promoting. So I don't even know how anybody publishes press when you know who they are, like, "Oh, they're not promoting," like look at their emails, they're promoting 3 weeks. And it's disguising. It is like not storewide. Okay, whatever. It's got to be the highest percentage of their business is being done on promotion. It's just -- if you're selling furniture, you get away with some of the other categories like frames and other stuff like that.

And those are bigger -- for other people's businesses, if they're a home furnishings kind of driven business, and have a lower furniture mix, we're 80% furniture. The highest probably mix of furniture of anybody you can see with. We eliminated Christmas. We eliminated holidays. We don't sell Halloween plays and all that stuff that renders the furniture less value. But furniture is an industry that at the highest level, does not sell at full price. It doesn't. So people just get over it. You don't understand the furniture industry at the luxury level. And unless you just want to f****** go bankrupt, excuse my language, in a market like this, stand there and be right us and saying, I'm not promoting, good luck. Good luck. Go for it. Tell me us not doing it, Michael. Who's not promoting?

It's hard to name names right now, Gary. But it's a great segue into my second question, which is there is some skepticism around the margin outlook in the back half of the year. You're guiding below what was expected for the third quarter and well above for the fourth quarter. Can you give us more detail on what underlies those margin expectations and build the market confidence that those are realistic?

Jack, do you want to take that?

Well, Michael, we did -- we gave back -- like at H2 guidance, we didn't give out quarterly guidance. So if you're referring to how the analyst community is the business but I met saying what I heard Michael, maybe to clarify is how it changed versus the prior guidance. Is that what you asked or did I mishear?

I'm just asking for what drives those or underlie those check. So if you could give us a sense for what you're expecting? Is it that tariffs are going to be a headwind in 3Q, but you think price by the time you get to has said you'll see a significant amount of leverage in the fourth quarter?

I think...

Yes, Michael, you're talking about operating income.

Yes, sir.

Okay. Yes. Look, just as a reminder, we have seasonality in our business as it relates to advertising expense and the books that get expensed when there's our [indiscernible]. So that's one factor that I'd point out. I don't -- we're not here to point out pricing actions or timing of those and those kind of offsets. That's all embedded in our guidance. But we're not commentary where you're making. .

Your next question comes from the line of Steven Zaccone with Citi.

I wanted to go up with that pricing comment and just kind of understand, Gary, you mentioned about pricing in the industry because of tariffs. What's your assessment of pricing from an industry perspective, does it get worse as we get into the back half of the year in terms of increases because of these tariffs? And do you think the second half is when we see the peak? Or is that kind of carry it to 2026?

Yes. Look, I listen to everybody's conference calls, right, that's in our industry. And I don't think anybody has really addressed the tariffs with transparency. I think they're all dancing around it. And is waiting for somebody to tell the truth and maybe where the first one is telling the truth. I don't think anybody is getting better pricing than we do. I don't think anybody is mitigating more than we are. No one's got the same leverage as we do for a single brand. And so I think everybody has got to take price in the second half.

I think there's going to be big furniture inflation in the second half everywhere. I don't know how anybody gets around it, unless you're some little tiny person making all your stuff in America.

But then again, they're going to get hit because all the parts are coming for -- all kinds of the pieces and parts are coming from places, like fabrics coming out of Asia for a lot of those people. And like other people that might be saying they're making furniture in America, and hopefully, this is what the investigation is about is people that are having all the wood made and finished in Asia and then kind of shifted in a flat pack to America and they're actually screwing it together, and they're saying assembled in America or something like that?

And they think they're going to not get tariffed. I mean there might be some -- I was trying to think like what triggered this next investigation of the tariffs. And the only thing I can think about is something like that. That does go on. And so there's probably people out there that are trying to avoid tariffs some way, bringing it in unassembled or doing something. So it's parts from other places. And maybe that's where you're going to see the new tariffs coming. But I think everybody's got to take pricing. There's just no way. I mean your margins are going to get killed.

Yes, understood. Then a follow-up on the international margin question that Max had. So if we think about the 200 basis points drag this year, -- does that ease next year? Or should we be thinking London, opening in Milan are still going to have some pretty heavy start-up costs?

No one has heavy start-up costs. Yes. I mean we -- it will all depend where the ramp in Paris goes, which will inform the ramp in London, which should be meaningfully higher than Paris. And Milan, I don't know where Milan actually is going to fall probably little less in Paris, but it's bigger. So it might do more. I mean, it is a big market. So we'll see. I mean, [indiscernible] which is the biggest design show in the world. 500,000 people go to Milan for [indiscernible]. It is the world of design goes there for a week. And we're opening on that week. Any of these next 2 parties, you don't want to miss.

Your final question comes from the line of Brian Nagel with Oppenheimer.

Thanks for slipping me in here. So a couple of questions. First, I want to make sure I understand the dynamic correctly. So if you look at an inventory growth perspective, it seems like you're managing inventory is much better here. We've seen growth moderate significantly in the second quarter. And then I guess that dynamic would help to drive cash. But again, I just want to make sure I've seen that correctly. But the question I have is as you think about managed inventories better, does that potentially become a headwind to sales if your inventories are spider through the back half of the year or whatever?

Yes. Look, there's -- everything is worth something, right? So it all depends where the housing market goes, what offsets you're going to have, how much like our new concept is going to be worse. I think this is the biggest new thing we've ever done. I think it's going to be bigger than moderate significantly. It deals with the biggest part of the market. Yes, we've got new galleries and things happening. We've got big galleries happening in London and Milan I mean we got outdoor galleries coming in at new concept galleries coming and you got compounds coming. I mean there's just a lot that we've invested into, time and capital to set the company up for the next 10 years. That's how we think about this next move.

If we do really well -- and I mean like I can tell you, tariff. We're getting a lot of inbounds on, hey, do you want to open it up to date, do you want to open it to buy. Can we partner license your brand? Can we do this or not? When you see something like Paris that you've never seen anywhere in the world by anybody at any level, there are buyers of that, meaning whether it's developers, whether it's someone that wants that run the brand for us there. And maybe in the Middle East, we do a low capital kind of deal. And we take some percentage off the top and we sell the rights for a big chunk of money for the next 20 years, or we run it ourselves, and we want the sales growth and so on and so forth. And we're willing to put in the cap we are creating optionality.

The key is breakthrough, breakthrough and become one of the most admired brands in the world in this next period by doing what we're doing in Europe. And it creates all kinds of options. When we go to Asia, what are we going to do? Like we've had people trying to get us to come to the Middle East for 12, 15 years, come to Asia for the last 10 years. It's like we wanted to do it in the right order.

And yes, somewhere along the line, I heard someone say that [indiscernible] was asked, how do you build a brand in China? And his answer was, you build great stores in Paris, London and New York. So we did a little backwards, right, because we come from Americas. So we said the first thing we had to do is build the bridge to Europe, and we built RH New York. And we got a lot of visibility there and a lot of European clients coming over and they know us. And we wanted to do Paris and London next. But to get Paris and London, we had open things in a different order.

But now that Paris and London are coming and then Milan is coming, we're going to know a lot more. I mean I think the brand heat is going to exponentially build. I think the quality of work that we're doing. I mean I really -- if you want to -- I said this when we first built like I think it was a lane or something. I said put down your spreadsheet and go to Atlanta. If you want to know us, go and see us, right? We all have 6 senses, but our sight is our dominant sense, and it drives 80% of our behavior, our perception and our education. If you really want to go know where RH is going, get on a plane and go see Paris and then give us a call, or just fly right back to the Center of Innovation. And really kind of see what we're doing.

Because what we're about to do next is the greatest work in the history of this company, and it might be some of the greatest work in the history of any part of the retail industry. not trying to boast. At the end of the day, it's not what we say or think is Jane Axon say, "It's what we do that defines us." So go see the work. That's what's going to define us. you'll understand it. I mean at [indiscernible]. Steve, you were there, a few other people where they're good. I mean I think everybody was there is like holy cow, I had no idea what was coming.

When you see the world of RH and what we did there to communicate to the world who we are to see our body of work around the world and all of our places presented in this incredible sexy salon style with a bar, you can order food, you can take client meetings there and people walking through. It's New York or Boston or Chicago all the great work we've done everywhere presented beautifully and beautiful elders walls with picture lighting and then you've got these giant French [indiscernible] with, I don't know how big the TDs are like giant TDs and beautiful giant gold frames, with videos that you watch what the making of RH Boston, the making of RH New York, you can watch videos on the designers on the artisans. It's a physical and digital conversion into the brand. It's so full.

I mean our biggest worry people are going to go, what is this, and no one would be there. But a night party, it was pack. -- room. We had our first diner adverse 2 restaurants, and that's kind of a semi third to have a bar, we have to serve food there. So we've got a menu then the first meal we serve is in the world of ore. And everybody you've seen it is like, oh my God, like essentially people don't know us like we had no idea -- it's just we have the volume work that no one else has in the world from an architecture, interior design and landscape architecture point of view. It gives us great credibility in our interior design business. which is now morphing into an interior architecture business and a landscape architecture business, right, in our bespoke part of that business, which is one of the fastest-growing parts of the business is doing these super high-end premium, complete REITs. And we had already -- before we even got to Paris, we had done an incredible complete metamorphosis of apartment in Paris for a U.S. customer, transformed it completely complete new interior architecture, fiber places, everything.

So that's the other thing to really understand what we're doing in tier design. Like we are the biggest interior design residential interior design platform in the world today, and we're investing in it in a meaningful way, right? In Paris, it is a freestanding building on our property that we've built. So our Anterior design has its own building its own entry and tax it might be the best interior design office anywhere in the world. And it sends to people that we want on the team like we're prepared to invest to get the best people in the world. We're not just a retailer, we're something that hasn't been done before. And when it all comes together, I think it's going to make a lot of sense.

Great. I maybe ask just a quick follow-up. And I think maybe for Jack. But just with regard to tariffs. So should we expect that RH is in mitigation efforts, particularly price increases as a tariff fit? Or you were able to, in some instances, start adjusting prices before the actual tariff is hitting you?

We also did the membership thing.

I think it's a bit of both to be honest. I mean, it's obviously -- we want to be very judicious about price increases. And as Gary talked about, on the 1 hand, you're protecting margin, but on the other hand, you can't you want to also be thoughtful about the revenue of the business and the impact of that. So I we're very strategic and thoughtful and we've been doing this ever since we had to deal with the 2018 tariffs or 2017 -- or 2018 tariffs in initial ones in China. So we'll keep doing -- keep writing our playbook. .

That concludes our question-and-answer session. I will now turn the call back over to Gary Friedman for closing remarks.

Great. Well, thank you, everyone, for your interest. It is interesting times in our industry, but even more interesting times for our company. And I just want to congratulate everybody's proud organization. Even though you might not be in Paris or you weren't in Paris, everybody had a hand at it. Everybody has worked hard to put this company in a position to open what we believe is the most exciting immersive retail experience at any level in the world today. And we couldn't be more proud.

I told the team, I said, it's only for a moment. We kind of broke through and post our head up at the top of the luxury mountain. Now except West to just plant a flag up there, right? And there's a lot more work to do. But they know the people at the top I think they now know the potential that we have, the work that we've demonstrated that we can do. And I think we've earned the respect and they expect this to come. So we've got a lot of work to do to really plant that flag and to build one of the most admired brands in the world. But the momentum we have, kind of the ceiling we broke through, it peaked up. And it was a proud moment for this company.

And I want to just thank everybody on every level for the -- just the effort that everybody is putting through in these 3 difficult years that we've had. Yes, the clouds will break as Warren Buffet said and the sun will come out again and when it does, we'll be there. So thank you, everyone, for your interest. Thank you, RH for your leadership and your hard work and for living and breathing our values. Our time has come. So thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.