Hello and welcome to the RH First Quarter Fiscal 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. 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, our business, and other matters referenced in our press release issued 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 adjusts our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and the 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 percent, adjusted EBITDA margin of 14.2 to 16 percent, adjusted free cash flow of $300 to $400 million. The above outlook includes an approximate negative 270 basis point adjusted EBITDA margin impact from pre-opening and startup 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 pre-opening and startup 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 one numbers to your half two numbers necessary to make the year. There are three parts that form the proverbial bridge to the other side, supporting the case for our business to accelerate from flat in half one to up 12% in half two, 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 five points for our estates building the foundation for a global luxury brand similar to structures that stand the test of time those rewarded with historical recognition and reverence 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 three 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 UK 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 are each 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 Dimitri & Co., the uncompromising bespoke casework of Joseph Jupe, the classical grandeur of Dennis and Lean, the meticulous reproductions of formations, the artisanal fixtures of waterworks, and the iconic designs of Michael Taylor, who 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 of 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 wall 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 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 fail to understand the ability to scale pace 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 in 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 canvases 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 will now open the call to questions.

At this time, if you would like to ask a question, press star, sending number 1 on your telephone keypad. To withdraw your question, simply press star 1 again. We kindly ask that you limit your questions to one and one follow-up and return to the queue for any additional. We will pause for just a moment to compile the Q&A roster. If your first question comes from the line of Steve Forbes with Guggenheim, please go ahead.

Good afternoon, Gary Jack. Gary, given the commentary around customization within the share of the 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 and addressable TAM, especially once you layer in that new trade program? 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, you know, the traditional classic market represents about 60% of the luxury home market. And today we're just vastly under-penetrated 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 trends hit, you know, our brand, like many brands, and, you know, many of us grew up in the fashion industry. You know, I grew up the gap. And so, you know, learning to build a specialty brand, you're generally keeping it in a very focused kind of limited point of view. So it'll break through the market. And I think one of the things that I feel to kind of recognize, you know, if you think about the bigger picture of the home industry, is that the trends kind of, you know, kind of lift kind of aesthetics during cycles. But the other things don't really stop selling. They just sell kind of less, you know, because the architecture is really the driving force in the market. So, you know, as we went back and just kind of studied, you know, our history and said, look, we're the smartest things we've done. What are the things we think we missed? What could we have done better? You know, our view is that we could build, as I outlined in the video, build our business around the three major aesthetic kind of pieces. And that's traditional, contemporary, and modern. And, you know, we'll refer to it as estates, interiors, and modern. So, you know, this is, I would say, I don't know, there's maybe a chance that we might have given away over the last 12 years, you know, 10, 12 years, a billion dollars, you know, maybe more. uh you know as we assess the market and try to go back and just do the math and try to extrapolate things uh so that's that's one piece uh and then then i say you know every time you do something new i mean not a it's not a hundred percent incremental you know there's going to be some level of cannibalization as you expand you know a market whether it's you're expanding product you're expanding physically, you know, in penetration, you know, 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. You know, modern was very incremental, but it was a very small market, you know, when we launched RH modern, you know, 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 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 a static point of view, but really a market point of view, a design and quality point of view. Arch Estates is, from our view, the first step up to the top of the luxury mountain if you use that metaphor uh it is the highest level of quality and design that exists you know in the world unless you're really buying rare antiques you know but but if you think about the brands with it that we've aggregated over the last five years uh and what we've learned over that time uh you know and what we're bringing to market with the states which you guys have only seen just a little teaser i mean that's such a little teaser um it's this is just a a level of design and quality that is not available to the consumer um you know we own these showrooms you know and and you know one of our very best ones are two of them um the door is not open to the public there's a doorbell um you know so even if you're a consumer and you're walking down the street and you want to go in you ring a doorbell and you may not be able to get in if you don't have an appointment and if you're not you know you're not a member the trade and you don't have an appointment. So the design and quality, and then you've got the accessibility. Whenever we develop any product, we always do searches on the products. We'll do all kinds of visual searches across all platforms to see who might have something like this uh you know because you know the world is looking at different things and seeing different things and understanding different trends and then trying to scale things and i can tell you we've never had such a low hit rate of versus what we're bringing in the market now you you can take a negative view and go well maybe nobody wants that that's why you're not seeing it no 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, you know, I've been lucky on this one. This is, I mean, I say lucky, not so lucky. I joke with the team. This is the first trend that I, you know, I'm old enough that I was the customer of, you know, when you think about the next thing that's coming, the age of eclecticism, the California look with Michael Taylor. You know, there's a few different kind of names that they gave it. And they all come through somewhat differently, but, you know, the foundational elements of these giant trends that come through, this is one of the biggest ones ever. This one was bigger and longer than modern or any trend we've addressed in my history of our age, right? But I was the customer. I joined our age as I was moving into my house in Belvedere, which is the first house I ever lived in in my life, you know, the only house I built in my life, and, you know, my first wife was a luxury interior designer, you know, and I was her client for a condominium in San Francisco. i had the round michael taylor dining table in that house i had the reproduction of the coco chanel sofa you know i had a lot of these different kind of products that are trends now i probably shouldn't say this you know some of this stuff i gotta be careful because all of my competitors are on these calls and they're you know gonna wait for me to slip up and let them Let them hear or see something. But, you know, I lived through this trend. And so, you know, at my house in Belvedere, how many things do I have from formations that I bought? Six or seven items from formations that I bought years ago. I have the Michael Taylor rectangle diamond table in my house. So, you know, I bought two of them. The round one in the condo, the first first job we did together in the rectangle one. I know how much I paid for those twenty seven, twenty six, twenty seven years ago. And. And I know what they've been selling for recently, you know, because we 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 the market has never been seen before. before you know and i don't say that lightly i usually never you know go out on a limb like this but never been seen before and you you try to do a visual search online it is not out there unless you want to go in first dibs and buy an antique which is fine we can't stop you from 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, it'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 have patent pendings on, what would we say? What percent of this book? 80? 65 to 80 percent of the book. We should go down and we should go back and just actually add it all up. So there's just so many things we're doing we've never done before um and the way we're addressing the market and um the way we're sourcing these goods i mean that you know the the people that are making these goods grew up making these goods the the manufacturers that are making these you know they they were part of this that industry you know making for the highest end showrooms before we met them and started to scale with them uh and they're all so excited to be able to make this quality again you know because they're you know the market is so fragmented but um it uh you know so so this this the design and quality you know uh aspect of this is is huge and then the next piece you have is we're you know we're going to open the market up to um what do we call them the supervisors, the furniture. I mean, we have a very big trade business. We provide excellent service to the trade and to high-end interior designers and design You know, our teams act as a back office. We'll do designs and renderings and presentations for them. You know, we'll support them in any way we can, many times in delivery and installation. uh and uh but at the same time you know there there is an aspect of just recognition and compensation that you know we haven't done and the team jokes around you know because every time i go to high point you know someone comes up to me and says you know like i love your brand oh my god and you know please please you know help us make money you know let us make money on your brand And, you know, we haven't offered and incentivized the design trade. And I look back and I think, you know, because I came from a, you know, family situation that had interior designer and I had the insight of looking at, you know, just how complex and difficult that was. you know and and it was also you know it was it was you know not only was it not transparent you know just not accessible you couldn't get and see it you couldn't buy it you know uh and i i just thought you know over time just making high quality goods available would you know that that the consumers would drive designers to our brand and and i think they have you know but at the same time you know there's really great interior designers that uh you know they're running a different model and um you know even you know the mother of my girls uh you know who is here consulting us what 10 days ago two weeks ago just give us the insight of a you know high end designer she runs a design firm uh and she said you know she said listen you know do i buy of course I buy RH. Do I want to expect that first? No. You know, a lot of times, you know, my clients will say, hey, look, okay, do your designs, you know, in the primary living room, in 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, she was finally like, okay i will and you know she said but i'm thinking to myself i can't make any money you know like they're you know interior designers have a markup model right and and a um an hourly model but you know they kind of need both to make the business work and uh and i think we've you know we've we've just haven't we haven't been an open platform uh like that and i think that I think we are just overlooking kind of a super customer. I mean, 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, you know, the timing of this, Because 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 a COM and customer's 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 – and it's not the only thing we'll do. If someone asked me the other day, hey, are your prices going to be higher? Well, yeah, they're going to be higher. I mean, the quality is massively, you know, higher, but it's such a tremendous value. But the price should be higher. This is not just, you know, kind of smooth wood with a sprayed-on finish or, you know, a contemporary piece with curved edges. This is hand patinaed, hand carved, you know, hand distressed, so many details to get it right. And every piece is a one of a kind, you know, because of the handwork and how it's made. And, you know, so, you know, but somebody said, oh, well, you know, how do you know you're not going to make a mistake like contemporary? Well, contemporary wasn't, didn't have the handwork, didn't have that level of detail, didn't have those things. And when we just, you know, we were a bit arrogant at that point in time. So, but because, you know, we're out here with a unique product also, you know, I think that we're offering such an incredible value, you know, 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. You know, we really started investing in this in 2000. You know, so here we are, you know, in 2026. We acquired Dimitri and Joseph Jupe in 2000. Huh? 2020, not 2000. Yeah, thank you. 2020. Yeah, thank you. Not that long ago. But, you know, it's been a long-term investment. So this, you know, on so many levels, you know, think about the opening of the high-end design market on this. And, you know, there's nothing that we're doing to value engineer the product. I mean, you know, we are making the identical quality. You know, the diamond table is made with the identical molds of Michael Taylor. you know that you know the tops and everything are the same quality that finishes you know that we're offering um the array of finishes is that at a whole different level you're going to see when you see this book uh it begins to get home next week what are we saying and the next week early falling week yeah okay early falling week um we kept tweaking it and tweaking it and we had a lot of last minute ideas to kind of make it better as we were working on it but you know but But it was also, you know, taking us a little longer because it required, you know, a different little level of thought and discipline and, you know, compositions and presentation to do it at the level that it deserves to be presented at. And so, you know, a few weeks late to us, you know, it's not the big deal. You know, I know I read a couple of analyst reports ago, oh, my God, it's late. Like, I don't know, like, was Tesla ever on time? You know, it changed the whole car industry. You know, it's not about like, hey, I'm rushing to mediocrity here. You know, we're trying to make big moves that are that are industry redefining. And I think this is one of them. I think this is the biggest move we've ever made. It is fundamentally, you know, different on so many levels and opens up so many dimensions of a 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? You know, like when you think about what I just said about, you know, my daughter's mother and she said, yeah, customers will say, okay, do the primary rooms and then, you know, use RH for these other rooms. Well, what's really interesting about that, our whole focus with the 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 can go on first dibs and start at $250,000 with the expensive 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, you know, or design. You know, we've went through all of it. You know, we know every dining table on first dibs, you know, at every, you know, competitor at the highest ends to, you know, down. we spent a lot of time studying this market. You know, so, you know, the goal is, you know, the dining room, the primary living room, the primary bedroom, but these goods can also eclectically be presented in a very cool way. The thing you'll see it when it's all presented, it looks different than our age today, but it does look like our age today. But I think you'll see a very big move. You know, you're just going to see, like, whoa. I mean, I think the design community is going to go, whoa. I didn't know they had this in them. So I know that's a long ramble, but, you know, like, I'm so excited. If you guys want to talk for the next five hours about a state, you know, you're going to have my attention.

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

No, no further refunds. I mean, the refunds started coming, but there's no, you know, they've been kind of paused. You might be following some of that activity as far as the DOJ and the, and, and, you know, how those, how those are playing on the courts. So, but as far as the guidance reflects, does not reflect, the free cash flow specifically does not reflect any further tariff refunds. Thank you both.

Your next question comes from the line of Michael Lasser with UBS, please go ahead.

Good evening. Thank you so much for taking my question. 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, but just under $100 million. What is the basis for that expectation? And you've already alluded to the 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 are reaching the consumer? Thank you.

I don't know, they've been doing that the last three years, and we've outperformed all of them. So, you know, I think, you know, when you say, you know, we're mailing a book and expecting people to come, we've built the best, the greatest physical platform on the planet Earth for our kind of products, right? Right. So don't overlook the physical platform, you know, and Michael, if you look at that video I did last quarter, I outlined that, you know, furniture is the least digitized business. You know, 80 percent done in stores is 20 percent done online at the luxury level. It's ninety five five. So, you know, this is a business you need to see, touch, sit in, you know, comfort scale. all those kinds of things. Um, uh, so, I mean, the book is just, you know, it's a small way we, we use it to integrate the whole thing. You know, people look forward to getting our books. Uh, you know, it's a, it's a physical thing. It's still said we have a digital book too, but we just don't, you know, 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, you know, 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, you know, I think that's a lot of noise. You know, maybe it's good for, you know, building beauty brands to teenagers or, you know, other stuff like that, it doesn't affect what I buy, you know, 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, you know, I mean, I mean, if you look at this last quarter we have, I mean, you look at us at over a two-year basis or three-year basis over two-year basis only West Elm has performed as well as us on a three-year basis we're better than everybody you know and you know and West Elm just had you know great porter and I think they're doing a great job and uh you know but you know if you look at anybody buying furniture you know it's you know 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, you know, and you wind up, you know, chasing things and thinking that they're relevant when they're not, you know. And, you know, we've tried and tested different things, and we have a lot of data behind what, you know, what we've done and, you know, why we're doing what we do. And, you know, nobody thought we were smart to build the stores we did and the galleries we did, and those turned out pretty well. And, you know, everybody stopped mailing books, and we're still mailing books. The only difference, like right now, in a point in time, you know, you can put our model against anybody, you know, put it against today's very best customer. Back out our investments in international expansion, you know, back out our investment in building estates, you know, which is not like some little introduction, you know, of a, you know, 80 page book, you know, that, you know, that, you know, five or seven years later, you wind up one store, uh, you know, this is, you know, we're making serious investments, uh, to build a platform unlike anybody else, you know, and so, yeah, in a down market like this? Is our model not going to look as good?

Yeah.

Yeah. 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 just wait to the other side, the 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 estate. Is it sufficiently higher than the legacy business in order to fund 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've vetted in the back half, or do you see other building blocks to arrive at the margin expansion that you're expecting? Thank you very much.

Yeah, Estates has got its margin profile based on the quality and exclusivity and desirability of those goods, right? If, you know, if you've got a level of design and quality and scarcity, you know, and build desire, you know, who knows what the margins will be. I think we determine our margins based on a competitive nature. And, you know, if there's others selling something in the market, okay, you know, 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? You know, do they have a big enough platform to matter? You know, all kinds of things. Like, we're not really doing margin building to pay for something like, you know, incentive for the trade. The incentive for the trade, it's a simple model. Like we give X and we need an X, we need a list of Y. And it's so minor, you know, on a model like ours, because we have such leverage and flow through, you know, I mean, just you have to think about our model, like, you know, even think, think about estates on a, you know, our whole business has a different model than everything else, just because kind of the price points of our product, right. Versus most people selling furniture. So we have significantly more leverage, you know, just handling goods, shipping goods, delivering goods, so on and so forth. And we have tremendous leverage in our interior design business because, you know, we're selling, you know, high average orders, you know, and yes, there's an investment to do that work. But we, you know, we have such leverage on incremental sales. And, again, it's a little mass today because, you know, because of the investments we're making, you know, in international and, you know, in things like estates and so on and so forth. But, yeah, you know, we've got plenty of margin to cover what we're doing. We'll have plenty of margin growth going forward. um you know like you said we're you know we're we're looking at our you know what we believe you know 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 you know this year and our you know we believe our you know our top line is going to inflect up kind of irrelevant of what the external market does unless it really, you know, look, if we get into a war that massively impacts, you know, the economy, the inflation, you know, so on and so forth, that's going to, you know, it's going to put pressure on everyone where, you know, 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 everyone. I'm not counting on the market getting any better. The market could get worse, and I'd be surprised if don't beat those numbers. So a 5% incremental move on estates is really conservative.

Thank you very much and good luck. Thank you.

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

Hi, Gary. Hey, Jack. I want to follow up on two 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'll 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?

I'm on track. That was good. I mean, I just saw you in Milan. I thought you asked me all the questions you might have had. Maybe everybody on the phone should ask you questions about estates. You're one of the few people that saw it. You know, set up in Milan, but, okay, so the sequencing of the products coming in stores, we will be kind of terracing 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, you know, roughly 60 to 65% of business, you know, roughly two-thirds of the business. And then what's the next wave that hits?

Pretty much every month.

Every month. So, every month we kind of have – so, December will be all galleries. Our second mailing of estates will be the 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 the customer, oh yeah.

So, should we expect deposits to tick up? I mean, they follow our business. So, as revenues grow and demand is driven, customer deposits tick up.

So then I'll put the follow-up. It's two parts in the follow-up. Should the deposits already be ticking up as these back orders exist or no, that that was already on deposits? And then just thinking about balance sheets, like the business improves and inflects. 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, you know, this path to getting debt-free by 29, 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 estate's collection speak for itself and then drive the natural de-leverage of the business?

I think we were pretty clear. It's a big priority. And, you know, we outlined asset sales of, what, $2.250 a year over the next two years. We just completed a transaction inside our Aspen real estate where, you know, we sold some properties to our partner and, you know, sold the property to us. And we now have more independent control across, you know, a lot of properties that we can monetize more quickly than less quickly. How many properties did we take control of again? Eight in total. Eight in total. We have 100% control now. So, you know, we don't have to work through, you know, JV and a partnership to kind of monetize things. And, you know, Dave Stanchak is back and Dave knows how to get deals done, you know, buying or selling. And so, you know, and we're, you know, holding, also have real estate outside of the JV. And, you know, so, you know, there's that and there's, you know, the business performance. There's the spending, you know, inflection down, you know, deflection, I guess you could call it. there. You know, so there's multi-jack, I don't even want to jump in with anything, but, you know, it's really the, you know, the spending comes down, the sales are going to go up, that we'll have asset sales.

And pre-cash will build, yeah, through that time period. So again, I think it's just reiterate what Gary said, which is it remains a priority. You know, the exact timing of, of, you know, being debt-free, I mean, again, it's, it's, it's our, it's our target, it's our goal. And, but, um, I think importantly, just that, that making progress on that, on this, on those initiatives, uh, that's what we're focused on.

Yeah. And I think, look, we have a history of, of, you know, being relatively creative with the capital markets. Um, you know, we've had a lot of good timing, you know, before this, you know, four-year downturn of the housing market. So, you know, our buyback wasn't as well-timed as maybe our other buybacks. And in our, you know, capital approach to it, you know, I wish we would have locked it in, but we didn't. And, you know, many, you know, big banks that you guys work for told us, oh, no, you know, you don't lock it in. You know, interest rates aren't going up. Oh, no, there's one little move. And all of a sudden, we had the fastest rise of interest rates in the history of our lifetimes. You know, so you don't always get these things right. But, I mean, you know, when our stock gets to the right levels, would we exercise, you know, convertible options to take down debt and move debt? Like, we have so many ways to work the balance sheet to do things. You know, you don't want to do any convertible debt, you know, at this level. But, you know, we don't think our stock is going to be at this level very long. And we think it's going to move, you know, with our business and as we execute. And, you know, and again, we're kind of on the other side of the cycle. You know, we just we're in our most prolific spending period of all time. And, you know, unfortunately, it was, you know, post-COVID and we're building some of the most important things we've ever built. And it all costs, you know, a hell of a lot more than, you know, we would have built it pre-COVID. So, yeah, unfortunate timing, but nonetheless, all kind of short-term things to navigate around. I mean, it, you know, once you spend the money, the money's behind you, right? And, you know, I look at it and I say, yeah, I mean, there's some people that want to focus on operating margin, you know, And we're going to carry a lot more depreciation, but, you know, for investors who want to focus on that line, all right, you know, focus on that line. Maybe some people are going to be a few hundred base points better than us, but we're going to be focused on EBITDA and cash flow. And I think, you know, smartest investors are going to be focused on that line. And, you know, and that's where we're going to be able to create, I think, the best returns in this industry.

Thanks, guys. Product looks great. Good luck. Great. Thanks, Camille.

Your next question comes from the line of Max Brocklinko with TD Cohen. Please go ahead.

Great. Thanks a lot. Appreciate it.

Thanks for taking my question. 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 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, you know, we believe that's, you know, the right outlook and the right- Refer to the video. Timeline, refer to the video. We've kind of laid all that out, you know, so- You know, we believe there's, again, we believe there's meaningful margin expansion as whether or not the housing market gets any better, you know, just because of the cycle and, you know, coming around and the growth that we expect from these investments. And, yeah, I mean, we don't, I mean, we, you know, Europe is, and, you know, the UK is in even worse shape than the U.S., right? And, you know, it's even getting hit more than the U.S. from the war and stuff like that. But, you know, you're talking about, you know, we're not, we didn't exactly open at the most optimal time, you know, 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 a housing market that stayed down longer than 18 months in my career. But, you know, now we're going into, you know, we'll definitely probably, you know, I don't think it's going to recover this year. you know, so we'll see 48 months, you know, will it go into a fifth year? It may, you know, all depends on inflation and interest rates. So, you know, but, but we, you know, we, we've, I think we're going to see a lot of leverage in this model one, you know, either way. I mean, we're, we're just really excited. We can, it's one thing to talk about and conceptualize the states and, you know, work on it and work on it and work on it and tweak it and tweak it. And then when you see it all come together and, you know, you go through this accelerated learning at the end of a development, you know, of a new business like this. And, you know, I don't think any of us have ever worked harder, you know, because we're doing some of the most important galleries and opening the most important markets in the world and doing some of our best work from a platform and physical point of view. And we're doing our best work from a product point of view and presentation point of view. And so, but I don't think there's ever been a higher level of excitement here for, we have a lot of people here that have been a long time, 10 to 20 years. And, man, like, I don't think, I think everybody sees it very clearly just how unique the product is, just how unique the positioning of the brand is. um and so uh you know we're excited to you know see our efforts and work um you know pay off and monetize you know for you know for our shareholders and we're you know we're all shareholders here right everybody's got skin in the game and everybody's got upside you know in this effort so uh you know got it that's helpful and then gary as you guys scale and

begin to open galleries in the U.S. with the new prototype. 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 get you higher unit margins as well? Thank you.

We do. Yeah. Yeah. We'll have a, you know, I think we're going to have a great return on investment. You know, we laid out for you guys in the video the compound and the logic behind the compound, right? It's kind of, you know, disaggregating the, you know, multi-level, three-level gallery and saying, you know, what can you take out? You know, what don't you need? You know, 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, you know, I think a lot of people know in all these big buildings, there's two exit stairwells that are all concrete, you know, going up, there's a giant grand staircase, there's generally two elevators, there's, you know, all kinds of levels. There's, you know, when you're building a, you know, there's a restaurant on a rooftop, you know, that takes extra steel and bigger foundations to carry the load and takes, you know, complex mechanical systems to operate a building like that. And, you know, we spent several years here dissecting that. We started seeing post-COVID, you know, the cost became meaningfully more, you know, two to two and a half times, you know, two and a half times more in some cases. And so, you know, we, you know, 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, greatest physical experience out there. And it doesn't, 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's going to look like beautiful gardens you're walking through and, you know, but all that area doesn't need to be our condition. And, you know, you've got minimal lighting, garden lighting, the stuff like that. You know, you know, we're aggregating all the bathrooms and toilets in one place. We, you know, like, you know, we're building a lot of these buildings, you know, they have electric and a small pipe with sprinkler, you know, sprinkler heads. And, you know, 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. You know, I think we've it's there. I think these things are really smart and I am here to be really exciting. So we're excited to unveil them. And then I think our, you know, secondary market galleries. I think, you know, 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, you know, how we've grown, you know, 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, you know, the kind of lifts that we've talked about historically. So, yeah, I think all of that we're so excited about. Like when we can talk about going post-peak, you know, from a spending point of view, the things that we're going under construction on, we still have a couple of you know leftover ones that are you know some cleanups that are a little bit more than you know than we wanted to spend just you know we couldn't redesign them but uh yeah i think the whole model is going to look different and the return on invested capital is you know gonna you know get back i think to the levels we were at in our peak and i think we were what we hit like 75 percent you know to turn on invested capital yeah and i think we'll you know be at that kind of level. And, and yeah, so yeah, the good news is we've, you know, you know, we're just so much smarter and have so much more experience and, and, you know, you'll, that'll all be reflected in the outcome and the economics. And, but, you know, we got a little stuck. We're building in some expensive places and expensive cities that, you know, we, it's not like we could unwind that those things go whoops you know let's not build in the most expensive cities in the world you know with some of the most complex projects at exactly the most expensive time you know i mean but the good news is what doesn't kill you makes you stronger right so we're still here ah that's great appreciate all the color and certainly look forward to london great look forward to seeing you max your next question comes from the line of Brian Nagel with Oppenheimer.

Please go ahead.

Hi, good evening. I appreciate you taking my question. I'll keep it short. I guess the question I want to ask is just on the guidance, and the, you know, you've already discussed this a bit, but the ramp in sales growth is expected the second half of this year. Now, we've talked a lot about the states. I guess the way I want to frame the question is, as you look at the business today, you know, the piece of business today, I mean, how much ramp do you have to have in that existing business in order to achieve, you know, with the components you talked about, these new pieces, to achieve that guidance for the second half of the year?

You know, well, if you really look at the build of the back orders and special orders, right, our business is better than kind of reflected in the revenue, right? Like we've got pretty big, you know, pretty big balances. So, you know, those balances are being created now, you know, but we're not shipping those revenues, you know, those that we're not shipping that demand yet because of, you know, we still have transitional things and impacts from, you know, major resourcing. And, you know, a lot of our people in all categories are, you know, the people are still catching up. And so, you know, 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 know, and you have to think about that flop that's kind of coming across. And, you know, a lot of that, you know, when you think about that, Brian, you know, 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, it makes sense. it makes sense. So I apologize, but have you quantified that piece to use your term, Gary? The piece of business will flop over to the second half that's already there. Have you quantified that?

That's in the little table. Yeah, in the letter. It's the 75 million or four and a half percent.

Okay, so that's in the demand now. Okay.

Yeah, that's in the demand now. We're not reporting demand, but we're reporting revenues.

But yeah, all that you know that's 75 million and is you know on our books and will ship again that's back orders and special orders over and above a normal right i mean over yeah always have backward discussion orders our business but this is so this is elevated because of unnatural things to happening between you know or things that are taking more effort like resourcing transportation impacts whatnot so that that piece that elevated piece over sort of normal quote unquote quote, is what Gary and I are talking about for the second half. That's four and a half minutes.

Okay, that's helpful. I appreciate that.

Yeah, thank you, Brent.

Your next question comes from the line of Zach Spadum with Wells Fargo. Please go ahead.

Zach, are you on?

Zach, your line is open.

Hey, sorry about that. Good afternoon. So first question on the initial response from Milan and your expectations for year one 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 three? And if you think New York is a good benchmark for what those markets could look like?

Yeah, I mean, look, I think they'll all be great markets over time, you know, and we've got to build the brand. and, you know, build the customer base, build our design business, you know, continue to build the pipeline. And, you know, I, I think I used before, you know, with the ramp, you know, the first, you know, you know, the first one was RH England and that's been open the longest. And, you know, what that's ramped to, you know, and it's not a great economy for the home business in the UK, but, you know, in a store that's two hours outside of London with not a lot of people around. So, you know, it gives us high hopes. And, you know, we have greater brand awareness in London for two 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. You know, everybody speaks the same language, so on and so forth. So, you know, meaningfully higher brand awareness. And we've been open out in the, you know, in the Coswell, the English countryside, you know, for three years. So, you know, and then, you know, kind of just getting started in Paris, you know, and we're, you know, just kind of open in Milan. And we like what we see. We like the responses that we're seeing. And, you know, the key for us is build the design books and, you know, get the ramps. And, you know, so I think we're going to, you know, 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, you know, London is kind of the accelerator for all of it, right? Because everybody goes to London, it's, you know, it is the financial and hub and, you know, just, you know, if you were going to be in one place, you'd be in London. And if you were going to be two, you'd, you know, be in London and Paris or London and Milan, you know, they're pretty close, you know, but for, you know, for slightly different reason, you know, Milan is the center of the universe for the, you know, the home design business because of Salone and Design Week. And, you know, and the eyeballs you can get, you know, that not just from designers and, you know, from true customers that come that fly in with their architects and their interior designers. And, you know, they're shopping from all the brands at the shows. So, you know, I think it's, look, I think those, these three are the core of the platform. These are the three key things. This is the foundation of building a global brand outside of the United States of America, right? And I think I'd say, you know, someone told me once they heard Bernard Arnault was asked the question, how do you build a brand in China? And apparently his response is, 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. Yeah, this is really once we get London going, I think the whole thing is like game on. I think London will create the biggest echo. You know, the biggest, you know, it's where we're known the most. It's where we should ramp the fastest, do the most volume. And, you know, because everybody travels into London for so many different reasons, you've got a huge Middle East, you know, customer there that, you know, lives between London and, you know, in the Middle East and the U.S. for that matter that I think knows our brand and is 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.

Thanks for that, Gary. And just a quick one for Jack. I think the opening cost 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 and come out in the second half of the year versus costs there that are that are now in the base and will persist q1 ended up 450 so right right there with the 420 um you know we're not guiding specifically the quarters um you know so you got the year at 270 um i guess you can back into some math as to a 450 and a 380 and how they average out to a 270 on the year be one way to approach it, and that delta being, you know, transitory, being, you know, what, you know, but let's call it mid-100s in the back half, and, you know, the delta between that and, you know, the numbers for Q1 and Q2 are the transitory sort of pre-opening driven related to the openings.

Got it. Thanks for the time. Got it.

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

Oh, great. Good evening. Thanks for squeezing me in. Just one question here. Gary, could you share some context on why now is the right time to pursue a 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, you know, 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? Thanks so much.

Yeah, for those competitors that report trade, I think we've been overperforming the last three years. So we've got a very strong trade business. We have great leadership, great teams, very high quality people that live and breathe our values, that have built great organizations. And it becomes a supercharge. Look, I'm the guy that we used to have a trade incentive program, I mean, I took it out against, you know, a lot of people's debate, but when we were making the move to membership, you know, and I just, you know, is it the right call or not? I don't know, probably not now that I, you know, reflect on it with, you know, the wisdom I have today versus, you know, what I felt in, what was that, 2016, right? Yeah, 10 years ago. Yeah, 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've probably never been into these businesses that we bought. So, you know, and so we, you know, and we've, you know, 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, you know, dimensionalized in a way and presented in a way just doesn't exist. so uh and what why wouldn't you want to open up the best interior designers in the world to to what we're doing today i mean like we're just smarter honestly you know like i look back and if i said today if i if i knew what i know today would i have made the same decision to know i would not have made the same decision so i'm smarter today i know more today i have more knowledge and and it's funny because i was you know i was married to an interior designer you know kendall and i were together for 11 years and so you know and i knew her business pretty well it helped me conceptualize what to do at our age quite frankly you know that that helped me see the opportunity but i don't think i really i don't think i really understood the market and and correctly. Uh, and it's changed too, you know, that, I mean, there's more and more people that, um, you know, you, you know, you have growth and wealth, right. There's, there's more and more people, uh, that have the, um, financial ability to use interior designers. Yeah. There's more use. People are more exposed to design and quality. More people are, you know, better houses and better design everywhere. And so, so anyway, but yeah, we're happy to be advocates and partners and, you know, open up our platform and, you know, 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, you know, when people say, oh, you're going to incentivize them, you know, the lift we have to get is very small on incremental business. I mean, we have massive flow through on this model.

Thanks, and best of luck. Thank you.

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

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