RH

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH2Q25 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 that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Alison Malkin, ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2025 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer. that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results of different materials. Please refer to our FCC 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. 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 would like to turn the call over to Gary.

Thank you, Alison. Good afternoon, everyone. I'll start with our letter, and then we'll open the call to questions. To our people, partners, and shareholders, RH continued to generate industry-leading growth in the second quarter As revenue increased 8.4% and demand increased 13.7%, despite the polarizing impact of tariff uncertainty and the worst housing market in almost 50 years. On a two-year basis, revenues increased 12% and demand increased 21%, resulting in significant share gains and strategic separation. As a reminder, we expect the approximate 5.4 point variance between demand and revenues due to terrorist disruptions will shift from the second quarter and be realized as revenues over the second half of 2025. Adjusted operating margin of 15.1% and adjusted EBITDA of 20.6% Both increased 340 basis points versus last year, inclusive of an approximately 170 basis point drag from investments to support our long-term European expansion. Net income increased 79%, and we generated 81 million of free cash flow in the quarter. We continue to be pleased with the second-year demand trends at RH England, with gallery demand up 76% in the second quarter and online demand up 34%. Current demand trends indicate the gallery is expected to reach approximately 37 to 39 million of demand in 2025, its second full fiscal year, with online demand reaching approximately 8 million. To put those results in perspective, if an RH gallery in the English countryside with an estimated population of 100,000 in a 10-mile radius two hours outside of London can generate 46 million of total demand in its second full fiscal year, What can a gallery in the center of Mayfair, the most exclusive shopping district in London, with a population of 9.7 million do in its second full fiscal year? We believe exponentially more. While many questioned the decision to open our first R.H. Gallery in such a remote location, believing it would fail, what they failed to understand is the value of doing something extraordinary that breaks through the clutter and creates a conversation. We've learned during our journey at RH that when we've done extraordinary and remarkable work, we've always figured out a way to monetize it. And we've also learned that it's hard to monetize ordinary and unremarkable. The most important news regarding our European expansion was the September 5th opening of RH Paris, our most innovative and immersive brand experience to date. Located on the Champs-Élysées, just off the Avenue Montaigne, RH Paris stands at the epicenter of fashion and luxury. Pass through the majestic gold leaf gate down a crushed limestone path to a secret garden where ivy-covered walls and sculpted trees frame the 18-foot cast medallion doors marking the entrance. Juxtaposing the entry is a freestanding RH interior design studio. The two-story glass structure is home to what has become one of the largest residential interior design firms in the world. with projects on every major continent. A contemporary inlaid brass and white onyx mosaic frames a three-dimensional image of Leonardo da Vinci's Vitruvian Man and the RH design ethos. The image and ethos not only mirror the entrance to RH Paris, but are also reflected in every building we inhabit and every house we turn into a home. Step through the threshold and enter the architecture and design bibliotech. Discover rare books from the foundational masters Da Vinci, Palladio, Wandel, and Haussmann. Commanding the center of the bibliotech is one of the first modern printing circa 1521 of De Architectura, the 10 books on architecture by first century BC architect Marcus Vitruvius. His description of a man outstretched within a circle in a square inspired Da Vinci's famous drawing, The Vitruvian Man, some 1500 years after his death. The gallery, spanning seven levels, is connected by a soaring atrium of floating glass medallion stairs and a glass elevator that magically appears, then disappears from an invisible shaft atop the rooftop garden. A cast-bronze caryatid circa 1870 by renowned French sculptor Louis-Philippe Chabot, whose work is on display at the Louvre, braces the center of the atrium. Beyond their structural role, caryatids symbolize strength, grace and ingenuity, a harmony between art and engineering. We place this specific heritage in the center of the Grand Atrium as a symbol of not only our desire to connect and create harmony between the architecture, art, history, and hospitality offerings of our Paris, but also our desire to create harmony between our age and the people of Paris. On the lower level, grounded first floors, immerse yourself in artistic installations of furniture, antiques, artifacts, and art in a gallery setting. Each level features full floor exhibits by a singular artist and carefully curated pieces, not only chosen to furnish your home, but also define it. Sign under a spectacular curved glass and steel structure inspired by the Grand Palais while enjoying a curated menu of American and Mediterranean classics, at Les Jardins RH, located on the second floor terrace. Marvel at the stone mastery as every surface from the bar to the bathrooms is clad in rare white onyx slabs. On the third floor, discover the world of RH bar and lounge, a physical and digital immersion into the places and spaces that define the RH brand while enjoying light bites and a craft cocktail by legendary bartender Colin Field. Step into a jewel box of champagne lacquered walls with a sparkling ceiling of over 7,000 individually hand-blown glass polyhedrons at Le Petit RH. With 360-degree views, including the Eiffel Tower, Grand Palais, and the Louvre, the Le Petit rooftop is one of the most spectacular dining destinations in all of Paris, featuring a creative menu of caviar specialties, small plates, signature salads, and seafood tawers. While RH Paris may not sound like a retail store, it's not meant to be. It's an authentic expression of the RH vision and design ethos. It is a global destination designed to manifest dreams, generate desire, and inspire an elevated and elegant way to live. I was asked by a journalist prior to opening, you're introducing multiple hospitality concepts at RH Paris. Have you considered the Parisians have very strong opinions? about their hospitality? I thought for a moment, and my answer was this. Parisians have very strong opinions about a lot more than their hospitality. Parisians have strong opinions about art, architecture, antiques, people, politics, fashion design, food and wine. Paris is a place you come to do your very best work. It is where you have the most to gain and the most to lose. In Paris, the measure is eternity. This we know and have built accordingly. I'm also pleased to report that RH Paris is off to a very strong start. Traffic in the gallery has exceeded RH New York day by day, and the design pipeline in the first six days is greater than the design pipeline of our first five European galleries combined in their first six days. I didn't know what to put for this next headline, so I just kept it simple. Tariffs, tariffs, and the possibility for more tariffs. Just when you might have thought the tariff conversation was complete, the announcement of a new furniture investigation and the possibility for additional furniture tariffs on top of existing furniture tariffs and incremental steel and aluminum tariffs were introduced with the goal of returning furniture manufacturing back to America. We believe most in our industry hope that this investigation surfaces the difficulty of that task, as current manufacturing for high-quality wood or metal furniture does not exist at scale in America. It would require years of investments in building the facilities and workforce that most in this industry cannot afford to make. Not to mention the significant inflation that we believe will start to become evident in the second half of this year and accelerate into 2026 and beyond. While strong brands like ours will benefit from the likely dislocation and consolidation more tariffs will have on our industry, many smaller companies will have difficulty surviving these levels of tariffs. Additionally, more tariffs on furniture could also result in U.S. manufacturers moving production from the U.S. the country's closer to their international clients, avoiding freight costs and the likelihood of counter tariffs. Our hope is that the investigation will seek out the perspective of a cross section of leaders in our industry as we drive towards the best outcome for our country. As previously communicated, We've continued to shift sourcing out of China and expect receipts to decrease from 16% in Q1 to 2% in Q4, with a meaningful portion of the tariff absorbed by our vendor partners. Additionally, we are aggressively responding to the recent 50% tariffs imposed on India, which impacts 7% of our business. Almost entirely hand-knotted rugs. While the hand-knotted rug category is highly specialized, and not manufactured in America, I think, for 100 years. We have begun the process of identifying a pair of different countries. We have also resourced a significant portion of our upholstered furniture to our own North Carolina factory, where we have been manufacturing for 10 years and plan to continue doing so. We are now projecting that 52% of our upholstered furniture will be produced in the United States, 21% in Italy, and approximately 12% in Mexico by the end of fiscal 2025. We also expect the percentage made in the United States will continue to increase throughout 2026. While there remains uncertainty until tariff investigations are complete, we have proven we are well positioned to compete favorably in any market condition. Outlook. Due to the dislocation and continued uncertainty related to tariffs, we believe it is prudent to revise our guidance for fiscal 2025 due to the following factors. While we continue negotiations with our manufacturing partners, our updated outlook reflects a $30 million cost of incremental tariffs net of mitigation in the second half. As communicated, due to the uncertainty related to tariffs, we delayed the launch of the new brand extension that was planned for the second half of 2025 to the spring of 2026. We've also delayed the introduction of our fall interior source book by eight weeks as we awaited tariff announcements needed to finalize pricing. Last year, 100% of the fall interior source books were in-home by the first week of August. This year, the Fall Interior Sourcebook will be 100% in-home by the last week of September, with only 28% in-home as of the end of last week. We now expect approximately $40 million in revenues to shift out of Q3 and into Q4 and Q126 because of that shift. Our outlook does not include any new tariffs as a result of the recently announced furniture investigation. Fiscal year 2025 outlook. Revenue growth of 9% to 11%. Adjusted operating margin of 13% to 14%. Adjusted EBITDA margin of 19% to 20%. Free cash flow of 250 to 300 million. The above outlook includes an approximately negative 200 basis point operating margin impact from investments and startup costs to support our international expansion and a 90 basis point impact from tariffs net mitigations. Third quarter 2025, revenue growth of eight to 10%, adjusted operating margin of 12 to 13%, adjusted EBITDA margin of 18 to 19%. The above outlook includes an approximately negative 270 base point operating impact, operating margin impact from investments and startup costs this quarter in that international expansion and the opening of RH Paris and a 120-point basis point impact from Paris net mitigations. Platform Elevation and Expansion Plans for 2025. We continue to open the most inspiring and immersive physical experiences in our industry and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry, and perfect proportions. Spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality. Spaces with garden courtyards, rooftop restaurants, wine and barista bars. Spaces that activate all of the senses and spaces that cannot be replicated online. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform elevation and expansion plans for the remainder of 2025 include the opening of four additional design galleries in Manhasset, San Diego, Detroit, and Palm Desert. As previously communicated, we anticipate an inflection in our business across Europe as we begin to open in the important brand building markets of Paris in 2025, plus London and Milan in the spring of 2026, all with dramatic brand building hospitality experiences. We believe post-opening, we will begin to have the scale to support the necessary advertising investments to accelerate our growth in Europe. If the early reads coming out of RH Paris are an indication of what's to come, RH Europe and the Middle East should enable us to double the size of RH over the next five to seven years. Looking forward, we plan to accelerate our expansion strategy to include the opening of seven to nine new galleries per year plus two to three design studios, outdoor galleries, or new concept galleries per year that increase our current presence in under-penetrated markets and open new markets to the RH brand. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. Warren Buffett. While we expect a higher risk business environment due to the uncertainty caused by tariffs, market volatility, inflation risk, and an increasing level of global discord, we believe it's important to separate the signal from the noise. The fact is we've been operating in the worst housing market in almost 50 years for three straight years. For context, in 1978, there were 4.09 million existing homes sold when the US had a population of 223 million. Contrast that to 2024, where 4.06 million existing homes sold with a population of 340 million, 50% more people and less homes sold. And it illuminates just how depressed the housing market has been this past year to three years. Despite that fact, we are performing at a level most would expect in a robust housing market. We believe it's a result of investing with a very narrow focus and a long-term view, or what we like to call an inch wide and a mile deep. Elevating and expanding our platform by creating the most desired products presenting in the most inspiring spaces in the world, with bespoke interior design services and beautiful restaurants that generate energy, engagement, and tremendous awareness of the RH brands. While our business has been strong, it has been so due to action versus inaction, innovating versus duplicating, investing versus divesting, and aggressively taking market share during this downturn. So we're positioned to create long-term strategic separation on the other side of it. We are investing in the most iconic global locations in retail that will likely never be duplicated in our lifetimes. We are building a global hospitality company with multiple concepts across multiple continents. We are creating a global bespoke interior design business that completes million-dollar-plus full-home installations. We are building a global contract and hospitality business where our products are featured in some of the finest hotels and residential projects in the world. And we are creating the most desirable and distinguished brand in our industry, all while forecasting an EBITDA margin of approximately 20%. Imagine what our margins and cash flow might look like in a robust housing market as we begin to cycle and leverage those investments. While we begin the year with meaningful debt, almost entirely due to our stock repurchases of $2.2 billion, we also began the year with incredible business momentum and meaningful assets. The assets include real estate that we believe has an estimated equity value of approximately $500 million that we plan to monetize opportunistically as marketing conditions warrant. and excess inventory of $300 million of costs that we plan to turn into cash over the next 12 to 18 months as we optimize our assortments post our product transformation. We are forecasting to generate $250 to $300 million of cash flow in 2025, and our plans call for significant and growing cash flow from operations over the next several years if we cycle this aggressive investment period. We estimate that our adjusted capital expenditures will decrease to a range of 200 to 250 million in 2026 and 150 to 200 million in 2027 and beyond. We remain confident in our ability to make the necessary investments to continue our leading industry leading growth while significantly reducing debt and lowering interest expense. As Warren Buffett wrote in his 2016 letter to Berkshire Hathaway shareholders, Every decade or so, dark clouds will fill the economic skies and it will briefly rain gold. When downpours of that sort occur, it's imperative that we rush out stores carrying washtubs, not teaspoons. Our debt is reflective of a washtub bet on ourselves. We repurchased 60% of our outstanding shares that greatly benefited our long-term shareholders post the publishing of Mr. Buffett's letter in 2016 and 17, and repurchased 30% of our outstanding shares during this housing downturn in 2022 and 2023. While the sky in our sector has been darkened by inflation, interest rates, tariffs, and global politics, those clouds will soon pass, and it will not only be clear skies, but also clear that it was a good time to be a shareholder of RH. Carpe diem. Operator will now open the call to questions.