Rh (RH) Q2 2027 Earnings Call Transcript

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. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Alison Malkin of ICR. Alison, 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 issue today. These four 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 issue today, for a more detailed description of the risk factors that may affect our results. Please also note that these four looking statements reflect our opinions only as of the date of 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.

Good afternoon, everyone. We're coming live from New York City today. We got in last night for the opening of our first RHS Stage Gallery in Greenwich, Connecticut. So I know I saw some of you there last night. Those who haven't seen it, I would encourage everyone to get there. Our newest, latest, greatest work. So let me start with the letter to our people, partners, and shareholders. GapNet 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 have 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, is inclusive of a free cash flow and a $42 million distribution from our Aspen Joint Ventures, excluding tariff refunds of $69.2 million. We recognize the tariff benefit of $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 due to the significant and sustained spike in oil prices as a result of the continued conflict in the Middle East. The remaining $19 million of tarot proceeds will benefit earnings, and it's included in our updated adjusted EBITDA margin outlook for fiscal 2026. Updated fiscal year 2026 outlook. Revenue growth of 5.5 to 7 percent. Adjusted EBITDA margin of 15 percent to 16.2 percent. 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 expansions. Third quarter 2026 outlook. Revenue growth of 5 to 6 percent, 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 above 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, RHS State's 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 at the dominant trends from the 1980s through 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 Halbert, Daniel Cuevas, and Barbara Wesley, designers who together launched Formations, one of the most admired and respected design firms to the trade luxury furniture showrooms in the United States recognized and respected globally. The three later acquired Dennison Lean 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 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 six years of Michael Taylor Designs, Formations, Denison Lee, Joseph Ju, and Dimitri, plus our decades-long relationship with many of the world's distinguished antique collectors, such as Ed Hardy of San Francisco, Ludovic Messenger, who set the Tone and Trends at the world-famous Paris Flea Market, and Rebecca Hill of London and Eugene, who now leaves product curation for RH upholstery, plus designers such as Janushka Hempel, the inventor of Blake's, 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 London, RH London, plus the many designers, artisans, and manufacturers who are all part of 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 the 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, and in-stocks will be at an adequate level to meet and fill demand, hence the fourth-order acceleration in our outlook. You can expect this to continue to rapidly expand the assortment over the next five years, and we predict it will represent 50% of our offering at that time. We also believe our estate will be margin accretive on multiple levels. One, we believe the quality, design, and exclusivity of the offering will command higher margins. And two, the average price point is currently 45% higher than our existing assortment, thus 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 R.H. Estates collection is currently protected by trade dress or have design patents pending due to the acquisitions of Michael Taylor, Formations, Denison, Lean, and Dimitri, as well as pieces developed with internal and external designers. You will note on the back of the source book, 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 manner. But it's worth it. Over the entrance of our 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 Oxidol 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 four years of the worst housing market in four 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 half one of this year to 250 basis points in have two 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 three global flagships in Paris, Milan, and London over a 10-month period from September 2025 to July 2026. On June 27th, we opened what I believe is our most innovative and extraordinary brand experience yet, RH London, the Gallery of 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 Mayfair. I'm happy to report the design pipeline reached almost 7 million in the first eight 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 million-dollar 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. Our 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 three global flagships and several multi-story galleries with rooftop restaurants where construction costs doubled post-COVID. We have one 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 26 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 three most innovative global flagships that will likely ever 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 four 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. We kindly ask that you limit yourself to one question and return to the queue for any additional. If you would like to ask a question, please press star one to raise your hand and to withdraw your question, press star one again. We ask that you pick up your handset when asking a question for optimum sound quality and if muted locally, please unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Stephen Zaccone with Citigroup. Your line is currently opening. Please go ahead.

Great, good afternoon. Thanks so much for taking my question. 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? And then 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 for our opening last night um let's uh i'll kind of try to take the questions backwards uh uh why is 45 reasonable uh and why is this different well the one that the product's completely different um so start there uh if you think about that kind of pricing miscues we've made with contemporary um you know that was more of a simple modern aesthetic and a contemporary aesthetic uh uh that was a product that was simpler to make and I don't think there's anything like RH states 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 foreign website that tried to pick up some of our pictures and pop them on a you know no name no name uh kind of location so uh it has to do with a lot with the exclusivity and the quality uh and the desirability of the product uh these products uh were being sold for two to three times our retails uh you know i i don't know anybody selling this level of quality these kind of finishes if you look at the estate's book and what we did with the product you know you open and you see you know the picture the pictures of the photos are very close but tight shots showing that level of detailing and carvings and the hardware details the finish details you see two full pages of finishes up close the size of you know real life finishes i know it'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 you know long lead times and special order finishes and or you know where you might have to wait so four to six months or longer you know my first wife is a high-end interior designer and It's why I understand this industry. I was a client on two projects and then I was a business partner for 11 years and saw the inefficiencies in the industry. That really framed the opportunity, I think, for our age. We see it today as that experience. So, you know, when you've got, when you're only one with the level of design and quality in a marketplace, you know, 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. If they love design, 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. So they'll walk up to it in a gallery, in a store. They'll zoom in on a website, look closer at a page, if it's a source book or catalog, and they'll make a perception about quality. 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 it's not a one-dimensional price discussion discussion error is always a design quality value discussions we don't care about the price of anything if we don't love the design right neither does customer so I think you've got to start with a where where can you know one you know if you're a consumer what do you think about the design you know how do you think about the quality you know walk up to it touch it open a drawer with the details look at the hardware the finishes um and um and then look at the price you know and i think that's the hierarchy everybody should look at any product with uh so you know for this design this quality we believe this is a tremendous value and we you know i should probably read it maybe the next call i'll read some of the letters we're getting about our interstates uh because they're incredible you know we have people that weren't they've never bought from us we're never a customer um and all of a sudden they've stumbled into a stage they got the book or they you know walked into an rh and uh and now we've got a a large design job we just recently had someone in uh in orange london who uh their interior designer was going to augment you know a million plus design job with probably about 50 to 80 000 of of RH and a broader client in RH London, and now we're doing 95% of a $1.1 million design job. So I think this is, I think you asked me about incrementality or what was it? Really the management said, new customers, yeah. Our people in the galleries will tell you it's almost entirely a new customer. I think that makes sense. Like I said, I think we've turned the company over the last eight years or so to modern, to contemporary, to one-dimensional, but we're quick learners here. And, you know, as we mature and understand the industry and the consumer even more, I think if you watch the earnings video, I think I did two quarters ago, I tried to outline how we think about our age and the opportunity and how we see kind of three major kind of design vernaculars. There's kind of traditional classic, which we call estates, contemporary, which we call interiors, and modern, which we call modern. We kind of think about ourselves now as kind of a juggler, if you will. There's three balls, and then there's always one ball in the air. And that ball that's in the air is generally the ball that's the major trend. And for anywhere in our industry, a short trend might be 7 to 10 years. The major trends are more 15 to 25 or 30 years. And people have asked me before, where did the trends come from? And I think I've said it on Conference Golf, that the trends come from the dead. Generations pass away. Their belongings 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 then informs the high-end reproduction market, and then it kind of trickles down. You know, and and so the next trends I outline, I talk about him pretty fulsomely in the letter to try to help people see why we're so excited about the states, because it's it's a, you know, like almost a magnifying opportunity. So, one, we're not addressing the traditional classic market today very well at all, I'd say hardly at all. I think we're dominant in contemporary and 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 were getting 10 you know with a few older collections so you know the math would tell you this this could could and should be half our business or more than half our business and the data you know all the data we look at you know once we start digging and think about it and we've been working on this now got on seven years yeah it's been conceptualizing this opportunity and you know we're getting smarter and smarter and seeing a bigger and bigger market and it and we think this is you know as incremental or more incremental than when we did RH modern yeah 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 that 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 RH Modern was highly incremental. One of the most incremental things we've done, and very quickly went from zero to a billion dollars. And we think this is, as incremental, might be more incremental. and we were in Greenwich last night for our home party and you know but I mean I don't know how like we would it take some back roads we're coming to the airport and you know you go through the neighborhoods and you realize like you could drive around here for hours and might not see modern home yes and some of the homes might have been remodeled you know some contemporized interiors and And that, you know, my play, but when you really look at the bones of the houses and look at the exterior of the houses, my sense is the market of Greenwich, Connecticut, West Court, New Canaan, you know, that whole area. I kind of believe it's like 90-10, 85-15, somewhere like that. And I and by the way, we have I'm going to talk about our store. i'll let our competitors know this one like we do like 47 million in greenwich right um we we have what 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 dollars in Greenwich, Kinetic, is 14,000 feet of interior selling space. What could a stage do? You know, we have, I think, 12,000 feet of interior selling in the new, you know, the former Ralph Lauren building, which is a perfect building for a stage, by the way. Thank you, Ralph. You know, so we didn't have to build that one. And so it's highly capital efficient for those of you who are going to ask me that question. um so so this is this is a big deal you know it's a big deal we've been working on this for a long time uh we've never made so many acquisitions to set ourselves up you know for a business uh you know michael like if you saw my the projects that i did um early on whether it's my condo in san francisco or the home i still have in velveteer that has michael taylor signing a diamond table in the kitchen um i let the team reproduce the 17th 17th century antique monastery table i have in the dining room um that uh um it's almost identical i mean somebody could switch my daughter saw it in our center of innovation and 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 yeah 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 you know you said 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 two extensions extends i think to 14 15 feet you know can seat up to 16 people because it's uh i think almost 50 inches wide you can sit two people at the end so it's really great if you're you know if you entertain and you know give a big family and i don't think anybody addresses that business very well you know those are the kind of businesses that we're addressing with the states we said you know initial goal 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 to 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 first dibs you know when you looked at signing tables like they go up to about 250 and 300 thousand dollars that table would probably get somewhere between 100 to 200 thousand if it was on first dibs today so we we've got that we'll start we would finally land we were going back and forth so that was 14,995 and that's for the 12th of one the 11 foot one and it's an incredible value I mean it's I think a lot of people again it's are we talking about a hiring customer of course we are should that scare anybody no we've moved this brand up over 27 years right the reason the way we built this brand is we went through selling knickknacks and tchotchkes and had an average order value of $125 and an average order value from around $10,000. And that's with our order split. We split a lot of design orders. We deliver them to 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 say we fit 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 alone in the market for a while here. I mean, I challenge anybody, take the RH States book, go scan the internet, tell me who's going to compete with us. And then look at the second drop, which is really kind of like the first drop, you know, because it's going to, it's basically the same book with about 30% more items in it and product in it. uh but it's we're just going to an increased number of customers so we're not nailing the same people we're just broadening you know broadening the contacts um which will which will significantly lift the business uh and uh when we do that you know we're going to do that in concert with the product uh 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 right you know really mid November we'll have galleries transition that are somewhere between 75 and 85 percent 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 is it less 15 to 20 percent of you know 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 as the finishes are so intricate in the detail and the qualities I think important to see and data would say that you know But look, 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 is 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 finish color scale and all the things you know but you don't want to get wrong like this it's one thing if you're an internet shopper today you know you order five things and you return three or you know some people order 10 things and they keep one or you know send all 10 back you really can't do that with the furniture business. He'll bankrupt people. And most people charge for restocking fees. We haven't yet. We're going to probably change that because we do think some people take advantage of ordering stuff and then just go, oh, we'll just, this is what we'll keep. Let's go and send that. But it's very expensive to make mistakes in the furniture when you're buying furniture.

Okay. Thanks for all about 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 the UK versus continental Europe, are we at the point where the UK can be much larger from a revenue perspective and that's really helping from a profitability perspective. Thanks very much.

Yeah, one of the biggest things is just the cost to open in Europe, right? We, you know, the number of people that we have to have fly from America, put up in America, you know, for months, you know, you're training the three global flagships were the first hospitality experiences. Yeah, in Orange England we did, but you know, there's not a very high volume hospitality experience that's out in the countryside. and these were real complex hospitality experience 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 that and so when you're opening restaurants and hospitality it's longer training it's you know more complex more people and, you know, just the support that, you know, you're needed from America. You know, we had a lot of people on the road for a long time, you know, making sure we're opening these right. You know, you don't get a second chance to make a first impression. And, you know, we're not the most popular people or continent right now, right? you know so you want to open correctly you want to be respectful you know a lot of things that are important but assumptions wise Steve again it's you know obviously the drag of the opening classic Gary just mentioned yeah build up the revenue we have no more so you know that those are the building blocks and

they're just kind of self-evident but just just point them out okay thanks for all that detail best of luck thank you as a reminder we kindly ask to limit yourself to one question and return to the queue for any additional follow-ups your next question comes from the line of simeon gutman with morgan stanley your line is open please go ahead hi guys hi everyone um 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 stacks 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?

Assuming it's listed right there. So you have it in front of you, the press release. If you look at it, inclusive of backlogged reduction is at 6.5 points, RH Estates at 8 points, and New Galleries at 4 points.

And that was Q4, obviously you have Q3 there as well, so you see the order over quarter.

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

Yeah, I mean, that's what we do, right? That's how we built this company is expanding product and mailing books and setting products in 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, you know, round, we doubled down and you know we were able to move business 15 to 20 points right so you know this could be conservative i mean if you look at our history like if you think about modern health modern move the business when you think about again when we you know accelerated product transformation in contemporary i mean we moved you know what did you know the prior two and a a half years. 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. Your line is open. Please go ahead.

Hey, Gary and team. So Gary, maybe just following up on RH Estates as all of us try to gauge your conviction here and the 8% net revenue growth contribution in the fourth quarter can you confirm whether that's based on source book only demand uh you know and or maybe just comment on how much footage you're you're dedicating to the collection in the fall and and would love to just hear how weekly demand scaling you know at the collection level is telling you where that eight percent can go over a relatively short period of versus that 50% you sort of five-year target we have data right right now you

know with these states with the state's building just in the mail and just you know on the website with you know long lead times and you know not in stock so you know we we know what you know when if something has a four-week wait a six week wait an eight-week wait wait if that's something's running backwards of XYZ there's math around with all of that that we can forecast demand right based based on what we're seeing then there's you know so there's in stocks there's wait times then there's 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 get to do this a long time yeah you know the list factor for putting something on the Yeah, 50 to 100 percent, you know, and it can go as high as 100. So, you know, 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 two-floor galleries. Yeah, so when we do a flip and we're bringing newness onto the main floor, uh one not everything that's on the main floor leaves what what we do is we look at 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 um your bed and hopefully again this is you know why we don't put it on the floor right away we we generally like to look at things for three to six months um here because we believe it's so incremental and and we have data of classic things we've sold and and still sell um things that we we 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 for since 2008 You know, 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 usually stay within the stylist point of view and I think we've thought about the furniture business you know like most of us here started in apparel you know and so you know you know Armani looks like Armani Ralph Lauren looks like Ralph Lauren you know yeah it's got their point of view American Eagle's got theirs or Albuquerque whoever you're looking at right and Chanel's got their point of view. You know, Mae's got a point of view. So most of us come from that. And you know, 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 the kind of seven major product categories and the three major aesthetics. And we think that if we do that really well, We can have, you know, we can be relevant to all the customers at that level in the market across, you know, all the architectural vernaculars and major stylistic points of view. 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 you know it's an art digest and did a tour of her new cabin and you know Kendall Jenner like great for a brand right she had the cloud and you know this is that and two people to her home then and you know I don't know maybe it's just cuz it's me and I'm like I don't like flower sofas and stuff like that but you know it's so you do have to kind of keep your brand a little disciplined you know so we're gonna let everybody else have grammar sheet or things like that and I don't know what some of the other weird trends we're seeing right now that we're not you know like we don't have to own everything you know and I mean to this day people think that you know we're gonna go bankrupt because we don't sell enough color yeah it's those are the same people that you know haven't really looked at that many homes like you just you know going Zillow or Redson go look at a hundred homes instead find out how many have a red sofa 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 you want to be in the flower grandma sheet you know printed sofa business go for it like i'm happy for you you guys not going to see us in those things so fun uh but you know i think the you know when think about just the you know revenue for states and it's it's you're gonna see that the big ramp happened when the goods get in the galleries the end stocks you know start to peak and we expand the circulation meaningfully right so yeah we have a lot of customers lined up right now just waiting when 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 95-5. People want to see the goods.

Thank you. I'll pass it on.

Your next question comes from the line of Max Ruklenko with TD Cowan. Your line is open. Please go ahead.

Hey, guys. Thanks a lot. So first question, when we think about the 4Q 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 of questions, 4Q is obviously just a jumping off point for when age 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 do you like the pizza or any of the pasta's last night? Do I? Because I saw you in the restaurant. How do you think that demand relates?

I mean, clearly, Max, demand is an excess of the revenue growth as this business is building and ramping. And, you know, you're leading us to the same conclusion. If it's evident that in Q1 that that continues, especially with the investment, you know, presentation of product in the gallons. 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 transitions we do, but today we don't. And so, you know, this is a growing business. In stocks as we present the product, et cetera, are some level higher than this.

Two looks, Max, maybe, well, we're just leaning into H1 2027. how does that clearly there's a stepping stone for elevated growth yeah I would say you know there's I mean a good five 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 Orange Modern right I mean we weren't known for modern we didn't have that aesthetic and no one was coming to us you know they're going to find it to reach or go somewhere else I mean 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 that haven't worked from modern point view we're all walking around iPhones, you know, 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 L.A., you had different places, you know, Miami, Florida, places like that, you know, but you probably didn't have too much mid-century modern, you know Boston, New York, Philadelphia, you know places like probably down in Greenwich maybe there's a collector or two you know but and then you saw a lot of places being remodeled all the you know a big boom in LA that's why we opened the first R.E. Modern, I guess the first and the only pre-standing R.E. Modern We were building the big gallery.

There was one in Dallas briefly, remember?

Oh yeah, we had Dallas for a little while. So, yeah, 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, you know, 4,000 or 5,000 square foot outdoor gallery. It was 47 the right number. Yeah, 46. 46 something. So close, yeah. um yeah and like i don't know like could we do another i mean could we comp up 50 or 70 in a market like that i 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 that stage and i think the people buying estates are you know they're looking for something like that and then right now that something like that doesn't exist there's a lot of classic traditional like really you know not good-looking furniture out there it's not like there's not there's a lot I mean you go look at a lot of the classic furniture stores that you know have looked the same for 40 years something and there's a lot of them out there you know so the market share i mean the people doing business i mean go to high point near north carolina something a lot go to the furniture market in nebraska you know the big berkshire hathaway thing i can do like 700 gotta be 85 so it's there you know i think and i think in a lot of ways we'll create a new high-end market you know for the aesthetic the way we're going to build it out and um you know and and the whole point of view and the aesthetic point of view will evolve and change what we will shape part of it we're going earlier than we normally go on a trend you know so i should like to let the weight break and you know see who's writing it and how we can exploit it um i think because the platform we have because we've you know this is i mean good and bad for me right i lived through this trend i was consumer so first trend i actually participated in consumer that's really good news i've got a i mean yes i have the michael taylor taylor diamond tables i have a lot of the things and stuff you know so i've got a point of reference you know that's good and bad too by the way you know because it's never the trends never come through exactly the same they always you know it's shaped you know by designers you know 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 but we're you know we're going to evolve it we're going to be inspired by other people they're going to be inspired by us you know other small furniture you know businesses that are run by you know highly aesthetic people will do some really great things and you know and then you know the market will evolve and we'll you know we'll hopefully get a very good share of this you know evolving new trend and you know and be a permanent player in plastic tradition 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? yeah like we think um you know what happened we're building our multi-level design galleries with a restaurant and roof anywhere from you know a lower cost market i think we hit a low of like 27 million you know in charlotte yeah yeah yeah you know so some of the lower cost 27 to 30 a more expensive market to build might have cost us 35 and you know the cost of those you know went to 40 to 60 you know I mean with this all the all the inflation costs that happening construction especially better quality higher-ranked construction so that you know necessity is the mother of invention right we you know we were already pregnant with a lot of you know real estate we had to build we were committed you know under construction or too far down down the pipelines or change course but you know we've invented new concept we said look if you say what's really good about one of our multi-level galleries with the restaurant and you know that that whole breed there's there's a really a lot of good things about it what are the bad things about it multiple floors require grand staircases they require elevators generally two they require two sets of exit stairs those are not cheap to build you know so you've got multiple stairways that by the way do zero dollars per square foot you know there's no transactions happening in the elevators or the stairway those are the grand stairwells um there's a lot of square footage and then when you take that and start you know compounding floors then you put a furniture on the roof and all of a sudden you've got a whole different coating you know you need different footings and foundations and steel gets upsized and you know with all the inflation steel that was a big problem for us and you know those 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 get cranes and everything all around and if you're trying to plaster the whole building multiple floors so if you think about a compound we disaggregated one of those big galleries and we said okay what can what can we get rid of and you know you know there's some fortunate real estate opportunities because of um you know i think sacks went bankrupt first right and then sacks came out of bankruptcy and then Nordstrom's went bankrupt and then Saks bought Nordstrom's.

You mean Neiman's?

Neiman's, yeah, Neiman's went back too.

So, you know, different opportunities were coming up for real estate.

We think more will come up, you know, high-end tabs. Also, to think about what's happening with transportation and driverless cars, you know, 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, very soon, right? And it's already happening now. The zoning laws are changing. So, you know, we said, how could we be opportunistic with, which we think is the, you know, reduction of real estate, like, you know, SACS and, if they didn't come out of there.

SACS did, yeah. Yeah, they did.

Oh, they did, okay. Yeah, 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. We took one of them were taking just a parking lot space in Alpentura, and then Naples was a north room that closed. And so they're relatively big paths. And what we did is we said, hey, what if we build this really interesting and divine this really interesting? And we said, well, what if we 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, you know, it's beautifully landscaped. And so we have a fraction of the square footage under roof. When you really look at all, we have individual buildings that don't have to have connected mechanical systems. so much less complex you know we mostly the buildings are four to five thousand fifty five hundred square feet I think we have one two three four five six and a seven connected seven you know independent structures in Naples and you know and they and they're designed in a way that it's it's designed for outdoor furniture outdoor and designed the rooms are designed you know very efficient ways we actually get more product per square foot but I think it's going to feel just as elegant and grand you know we don'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 that does that affect most of mine even in I think it's all wood no steel yeah 100% wood some of these we believe we can prefab build the walls and just tilt them up you know plaster the outsides um we designed them so they only have a couple of kind of windows because about we could you know manufacture the windows and do a lot of things so you know they're kind of cost us um we were hoping the price was going to be half and it's half you know so um and we get more product density and I think there 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 this depending where you are in the US you know in Florida you're gonna have palm trees and banana palms all kinds of tropical foliage and stuff and California you'll have all the trees and other things and they're gonna be cool they're gonna be very interesting and and I think the restaurants are gonna 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 you know Dave you just got back from Naples right like walk 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 good about it for the landlords you know they'll take more risk on these and I think participate more financially because we're building all these smaller buildings so you know they're always worried like oh what if something goes wrong with our age I'm stuck with this three-story building with the 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've built you a little village you know you can put eight retailers in here. Beautiful. We all connected. It's just an extension of you know your shopping experience. So I think we have a good selling point and I think we're gonna you know 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 or 24,000 square feet with you know beautiful courtyard restaurants in the middle. We have our new Italian concept that we just opened in Greenwich. Cucina Angelina, it's named in honor of my Italian mother. Now some of you are going to ask if my mom was an Italian cook and she wasn't. As in me and I can't honor, right? She did like to eat and but my uncle Gino was equipment available so I so I also talk about him if you see the menu and stuff like that but in some of these compounds we're doing really fine you see big pizza oven and you know we think we have the best pizzas in America like if any of us here like you know really wanted to take a flyer you know 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 you know any of those Papa John's or anything against our pizzas like they're so good we have this pizza expert that works for us in europe uh mateo who's he's perfected the crust is did you you had you had pizza last night max max no i did not no you eat last night i saw you or you just you're just you're 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 a capital spending go down returns go up and I think you're very quickly see our return on invested capital kind of return to where it was, you know, at our peak.

That's great. I appreciate all the caller. Good luck to the entire team in the second half. Speak soon. Thank you.

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

Great. Thanks, guys. Good evening. 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 a stage right a stage is it's going to be incremental to the assortment so we're not really clearing out states 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 um you know rotate through that um but the states isn't going to cause it's not going to cause uh markets 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 um you know people are i mean down to the you know by week how many you know how promotional how many you know skews does our age have versus pottery barn versus our house versus this you that like I mean everybody you know when you're in the home business like this and you get a down housing market you know four million homes four straight years unless you want to lose market share you you know you've got to be competitive so it's been somewhat of a promotional environment you know margins are holding up fines you know and I mean if you just take our model and extract you know 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 yeah I don't know like right up there with anybody's right so yeah we're happy to you know we're in a cycle through here the stage is going to be incremental you know like a like it think of a stage like a new category you know it's like when you've got a new aesthetic like that it's really like a new cat like a new business almost but we get you know we get to sell it on our platform so it becomes very incremental and and it's very leverageable I mean this is it things like this are the biggest drivers of profitability right they're like yeah we we spent some capital here yeah we bought some businesses you know things like that to to build this but you don't have to do that one time and you know built a three-standing estate store here we bought we bought formations we also bought the formations real estate formations in Denison Lane and we're going to transform that property to an RHS space gallery in the design district on West Hollywood on Melrose Avenue. So you know on Melrose Avenue we will have the RH Interior Gallery, we'll have the RH Space Gallery and then we three doors down from the Arch of State's footprint which is at 195 feet of frontage right on Melrose and our current gallery is 145 feet and then we took another smaller location for RH outdoor so a freestanding RH outdoor and then on Beverly Boulevard a couple blocks away we have a RH modern freestanding so the question is do we need to keep modern and modern consolidate into the you know the kind core build building that's had some modern and contemporary you know we may keep the whole footprint we may consolidate some of it but I think you'll see you know you'll see us test I think we've talked about in the past about RH ecosystems where one of the capital efficient ways to deploy the brand especially if we've got a presence like in Greenwich we don't want to leave the historic post office part of the best location in Greenwich and we were able to get the second best location in Greenwich the Ralph Lauren building and so we call that an ecosystem so we'll have you know the historic post office will have our contemporary and our modern states will be in the former Ralph Lauren building and then we've got a five thousandth worth of Outdoor is a very important business to us, so a lot of the key markets, we might have a pre-standing 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, or you know, we'd never find a big, being up to location, I'm running a job, we'd have to go kind of off the beaten track, and I don't know if we want to there. so we call that an ecosystem we've got an ecosystem in Palm Desert we're doing one at West Hollywood as I just described and so just a much more capital efficient way to continue to deploy the brand and dimensionalize it.

Alright, thanks Gary, good luck Thank you Your next question comes from the line of Christina Fernandez with Telsey Advisory Group Your line is opening, please go ahead Great, thanks for taking my question.

I wanted to see if you can expand more into the trends you're seeing in Europe. It looks like London's up to a very good start. Are you seeing, you know, 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, and you're asking at a funny time, right?

In August, it's not usually the best month.

Everybody's on vacation, so people are just getting back, especially in Milan. We fire cannon down the streets in most cities in Italy. But same thing with Paris. I mean, everybody in Europe is on vacation in August. everybody starts getting back in September and you know business you know will ramp yeah yeah 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 one's culturally somewhat different and shopping behavior is different I mean obviously the languages are different I think that surprised us a bit just how unique they are so yeah you know how do we market how do we you know build awareness how do you build the business with the trade we have a lot of learnings that we're flying early tomorrow morning to Paris and so we'll be in Paris and Saturday and then Saturday evening we fly to London you know we'll be in London Saturday evening and Sunday. 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 done. I'm no different than you know building businesses and kind of new markets. These are these are very different, right? I mean London, London had a running head start for multiple reasons one the country speaks English is primary two it has the most expats and we have the most customers over there so we ship the London's the number one place we don't ship to other countries but customers can buy from us and we help them get their goods containerized right as they take take control of the shipping. But London, we have the most, you know, shipping to. And then we've had RH England open for three years, right? And, you know, RH England kind of ramped up by demand. So, you know, see an awareness that's been built up there over three years. Yes, that's why we expected London. You know, we wanted 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 aging to kind of get you know get positioned in the marketplace uh so uh you know but don't like we're happy we're learning um you know about the business and um lots and lots of opportunity and the key is you can't be an absentee and a leadership team like you can't leave everybody on an island in these individual you know geographics so if we're ever going to be on the east coast likely we're going to hop over to europe and then we're going to go to europe at least if at least four times a year just to go to europe you know spend you know half half a week or a solid week and really spend time with their teams you know going to say instead of company the smartest people in the company there's people closest to the customer and those of us that have gotten promoted 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 the second learn and then you can effectively leave so uh so we're in listening and learning mode and you know i'm trying to be better leaders of our business uh but we have to do a lot of listening you know let's spend a lot of time and you know our people you know they've been very helpful we've learned a lot so um you know we've got to get into stocks we've got to deal with different if you do different raw material issues and different lineability issues you know upholstery lighting things like that a little bit more complicated for us and so we're you know we're working through our supply chains to be more responsive and compete better but you know I like the direction we're going you know and I think I think we're gonna get better and better and better and you know this drags are going to go away and so uh and London's yeah very exciting I mean like we were you know we had our fingers crossed on that one's been fun I mean what what should this be what could it be and I mean to see the the first eight week grant there it was really exciting for us and we've got a great team we've got a great leader you know building a great design team there and I've never seen customers like that I was in the gallery quite a bit at the opening, and I'd never seen a level of cushion like that. These are really important, big projects. So I would say it wouldn't surprise me in two years, maybe by year three, that London is not the number one, you know, unless we open the Middle East, you know, sometime time before then because the more we're learning about the middle east yeah a lot of people believe that will be our number one gallery you don't divide your next question comes from the line of marius moore with zelman your line is open please go ahead good evening um i'm just curious

gary you mentioned that most of the states 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 just 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 than contemporary or is there something else well yes there's a lot of levels to it so in cases where we bought the brands that you know brands have IP and you know that's pretty strong that we think is good but a lot of the businesses we bought more you know we dimensionalize our assortments and so they have used our design teams to conventionalize things and so on and so forth so they're uh those become original rh designs and so we you know filed for design patents on almost everything and um you know i'm pretty big in our industry i think if you get a letter from us that we're patent pending on a design my people screw up and we've been influenced by something 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, and we don't, it doesn't happen to us often, but I, you know, I tell people, like, let's not waste our time. Like, we don't want to spend time with that. But we think, you know, the work we've done with the states is very defendable. We have, you know, I don't think the government invested this much into design patents. and so you know we'll see maybe no one's ever invested in protecting you know intellectual property in this industry that well I mean I look go try to knock off a Giacometti table there's a reason we haven't they they will take your ass to court so unless you want to go spend millions of dollars fighting over it like we don't have any Giacometti influenced coffee tables even though I'd like to I think they sell great so you know a lot of it is is I just don't think yeah the furniture 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 me here ryan and yeah yeah he's gonna help get us all teed up and uh not to play defense to play offense um so that's why we're you know we're moving like that and people want to get sued by our age thank you your next question comes from the line of brian nagel

with oppenheimer your line is open please go ahead mckenzie on behalf of brian nagel you mentioned Tariff refunds will have 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 see that fuel costs persist 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 think everybody's mitigating where you can mitigate today. It broke one on that. Okay, so you're at 109, like, 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, there's, there's a reason why the administration said that the war, you know, was ending and we're going to have a deal in a day or two, 38 times. There was an urgency to end this war and end this conflict because it's likely not good for the election. You know, now it might be too late. You know, so now the administration, what I saw offered voters $5,000 to every American. You know, votes for the president of the administration. That's interesting. 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. 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 gonna go to year five so I like the game we're playing I think we're playing offense we're gonna 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 gonna be costs you know so Walmart Walmart had two billion dollar tariff refund and it's all going to increase cost and some lower prices Home depot like 700 something million all going to increased costs yeah there's massive increased cost nobody's got a magic wand like nobody's gonna get that much better price than somebody else you know if you if you have leverage you'll use your leverage and yeah but you can't make your you know your partners go bankrupt right or you have no partners so it's gonna we're gonna be in a higher cost world for probably at least the next 6 to 12 months I mean less I mean even if tomorrow they end the war I you know there's too much too much inflation in the pipeline I mean all the raw materials are going up everywhere on everything everything is impacted by oil and so you know that's why yeah I mean You're seeing crazy things, right? We're trying to minimize currencies, buying back things. It's a crazy time.

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

Great. Good evening, and thanks for taking my question. 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.

You're a really good question. Yeah, 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's 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 to come and do things. We're going to be a lot more open on multiple levels with the trade. And I think the trade's very happy that we're doing bespoke and couture, right? That we're doing COM, we're doing bespoke furniture, you know, custom sizes that can specify. So that's a big deal. And I even met a gentleman in his family last night that talked about 30 minutes, and we've done three homes for him. and and they were building a big new contemporary home and he didn't think that we were going to be able to do it and then he said like I thought it was great that you guys just launched this bespoke thing because now you're gonna get the fourth home. I thought that was great. He said big home and so and they're huge fans talking to the family and last night I was like let me just right there i mean you know you don't want to lose customers like that that you know building their fourth home and might not have been able to do it with us so um yeah so we're again we're learning you know we've got to stay uh close to our trade teams and our leaders and you know there's more we can do and um uh you know but but i think 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 is like a back office not just you know supporting them with products but supporting them with designs supporting them with installation you know when A 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 logistical ease of working with us, getting a home design, getting it all delivered at one time getting it installed you know um we we have a lot of resources supporting that part of our business and i think you know as far as someone who also you know it's a 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. I 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.

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