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.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We kindly ask that questions are limited to one and one follow-up for today's call and that you recue for any additional. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, everyone. Thanks for the question. So my first question is the free cash flow is starting to sequentially improve, and you generated a decent amount this quarter. If you generate 250 to 300 for the full year, and presumably even more through 26th, Is real estate monetization still something you would or even need to pursue?

You know, I don't know if we need to pursue it. You know, we're opportunistic. We're not, you know, we're not really real estate owners, right? We're real estate developers, and, you know, we have a sale-leaseback model, and we generally hold real estate for relatively short periods of time, right? We saw an opportunity when we were doing our deals in Aspen that, you know, the local developer there who had acquired really an outstanding portfolio of assets, you know, we had an opportunity to invest in that portfolio at what we thought was a really attractive price. And we had a vision of possibly, you know, in a very small I call Aspen probably the most influential, organized, small luxury town in the world. I don't know if I've ever seen anything like it. In about six square blocks, you have unbelievable retail. You have wealth all around that all comes and shops there, all comes and eats in the restaurants there. and all skis, you know, a couple blocks from there. You know, you just walk to Ajax and so on and so forth. And if I got to know Aspen and was looking at our opportunities, you know, we thought, geez, what could we do here that could, you know, maybe in this, you know, six blocks, six square blocks, eight square blocks, focused little town with Hi, I think what is there 86 billionaires that live there now? I mean, you know, there's really I've never seen anything like it. You know, I mean it. It's more unique than Santa Fe. It's more anything. First of all, it's more more unique than any place I've seen from the aggregation of wealth and influence. And your ability to, you know, we had an ability to build two brand new buildings, right? Which is on on two of the best corners in town. I mean our. Our gallery. You know, on Galena and the Cross Street is the best corner in Aspen. Caddy Corner to Ralph Lauren, Boston Casa Tua, across from Laura Piana, right next door is Brunello's Cucinelli, and every luxury brand marching up the street. And our guest house is East Hyman, where the Cross Street is where they're building Lift One. So a block and a half, two blocks down, they're building the second big gondola right and the amman resorts going in there and and uh everybody's going to be driving by that corner and everybody's going to be walking by and driving by our other corner so these were the the two best i thought buildings you that you could get i mean you know it's just you know our partner calls it forever real estate right it's it's it's never gonna go down uh you know it's always gonna go up uh and so And we had the opportunity to become the landlord for Chanel, the landlord for Gucci, the landlord for Lululemon. What else in our portfolio? Golden Goose. Golden Goose. Corinne Hildebrand. Corinne Hildebrand. We've got restaurants. Yeah, we've got restaurants. We've got San Ambrose. We've got, I can't remember. We've got Catch Steak. You know, we're the landlord. We're the kind of key retail landlord in the, you know, in the core of Aspen. So we thought we could learn about real estate. We could learn the landlord side of it. We can understand how the other people negotiate, what's important to them. And we would just, we'd get smart. And then there was opportunities to do residential, residential, A few other things that we've talked about in the past, you know, do RH residences at the Boomerang Lodge and build our first bathhouse this fall and so on and so forth. And so, you know, we thought this would be a terrific place to build our brand image, you know, and have a global billboard. And then, you know, look, unfortunately, we had the fastest rise of interest rates in the history, I think of the United States. Right. And, uh, and that's not really good for developers, you know, whether you're our partner or you're us, you know, you're going to be developing at a much higher cost capital. And so that kind of slowed us down, uh, and, and also compounded by, you know, our, our partner likes to say that building in Aspen is harder than building in the moon. It's not the most, not the easiest place to develop, let's just say. So, um, So we kind of had to slow things down. But we're very close to getting our mountain house open and very close to getting our guest house open. And those are two of the key trophy properties in our portfolio. You know, we're less interested. We've been a landlord now for a while. We've learned what we needed to learn. You know, is that the place to tie up our capital? No, not really. You know, we've learned a lot. And, you know, is it at the cost of capital today and the cost of construction in Aspen today? You know, does it look as attractive to build there? You know, with a really long-term view. But again, I don't know if it's necessary for us. So we're open. It's not a time you really want to sell right now. I mean, if they keep inflation in check, which is questionable with the tariffs, and they can lower interest rates, cap rates will be more attractive. And there might be some people that have a long-term view and want to make a fair offer on a portfolio like this. But otherwise, we're no rush. We're patient. But if the right opportunity came and somebody who has really had a long-term view and they want to own forever real estate like Aston, it's an incredible asset.

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

Yeah. And we've got other things besides that in the $500 million, right? own RH England, we own RH Detroit, we own a property we're going to develop RH New Jersey. We own a property in Madrid right now, but we love our current gallery. So we think we can monetize that one. We actually have it on the market today. It's an incredible old palace. But we don't really, we don't believe we need two stores in Madrid. We love, we really love what we're doing there. We're going to put a small pool, La Petite RH in there now that we developed this new pool concept that doesn't need a big kitchen that's in Paris, which everybody ought to go to, by the way. If you missed our party, I mean, you should have never missed that party. Like everybody's got to go see Paris because it is not another gallery. It is a leapfrog. Yeah, it is. It is another kind of. Kind of inflection point that. You know that helps us see a whole nother a whole nother opportunity here. Like when you see the world of our age and when you see let the teeth are age and later than our age and you see what we've done hospitality wise when you see what we've done design wise when you see the architecture and the design library for second one, we've done the bibliotech. You know, we did one in R.H. England because there was a big library, you know, that had been there for 400 years. So, you know, we made it a library. But you see the cool when you walk through it. I mean, there's just so much that I think we've done that takes us to another level. I doubt that there's a luxury retailer in that city, you know, at the highest end that doesn't believe We just built the best store in the world. And, you know, and I think everybody should go see it because it's unlike anything you've seen the traffic. When you think about it, it's a third of the size of New York. And it had more traffic than New York every single day that we opened, not New York in its first five days, New York today, the highest volume gallery in the company. Okay. New York today. Um, it's unreal what's happening there that, you know, the people that are coming.

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

Yeah, I think that the business is ready. You know, we're going to be, you know, kind of going post-peak on the investment cycle. You know, one thing we've all had to deal with, and anybody who's building anything of high quality, you know, construction costs post-COVID are up like 100%. For some people I've talked to at the luxury level, they're up 150%. You know, we've been able to develop new concepts. We talked to you about that design ecosystem, the design compound, and other things that, you know, we're taking the bigger multi-store box and breaking it into pieces and, you know, trying to create, you know, significantly better capital efficiency, you know, and putting our creativity to work that way. You know, so you'll see, I think, you know, once Once we get there, you know, it's hard to make a call today, right? Like, you know, we're likely going to get an interest rate cut. We got one last year and everybody thought there was going to be like four or five more. I took my house in Beverly Hills off the market because I thought I was going to get a much better price. I should have took the offer I had back then. The housing market in LA is not great. I don't know what's going to happen. Look, I think the biggest thing for everybody to worry about is don't let the 1970s happen. If you zoom in on the chart of what happened with federal funds rates over that 10-year period, yeah, it was arguably the 10 worst years of the U.S. economy. Now, I remember I was 18 years old and I bought a $125 waterbed, a waterbed world at 28% interest. And I don't know how many years it took me to pay it off. It's $12 a month or something like that. But, you know, I was alive long enough to remember, you know, what the federal funds rate peaked at 21%. You know, we think interest rates are high now, lose control of inflation, and you can have chaos. So what do I worry the most about? Just kill inflation. I'm more motivated about killing inflation than getting an interest rate cut right now. Because we had an interest rate cut and the tariffs create more inflation than anybody thinks. And it's not going to all come at one time in blitz. The inventory is going to flow in over the course of a year. And you're going to have to cycle through inventories. You're going to have new tariffs. God forbid they throw another tariff on furniture. I mean, I think they've got to, like someone, you know, has got to come talk to us, talk to me, call me. I run the biggest luxury home brand in the world. Somebody call me and ask me what I think. Because it's not really us. I worry about, I don't want to win because 50% of our competitors who are really good, hardworking people get wiped out. You know, you lose 15% of the people that are presenting at High Point Market or Las Vegas Market, those markets will shut down. They'll be bankrupt. I really don't think, you know, anybody is thinking about the math. There's no one that's making wood furniture scale, you know, metal furniture scale. If there's another round of Harrison Furniture, I mean, long term, it'll be good for us. It's really bad for a lot of people in High Point. So whoever in High Point or North Carolina is advocating for it has got to have a really narrow myopic view because it makes no sense for the US economy long term. We will blow up people and there will be massive job losses. And I think people need to understand that at all levels of the administration. You know, and I'm But I've been a fan of a lot that's been going on. I think directionally they're doing a lot of right things. But, yeah, I don't know. I run the biggest luxury home brand in the world. No one's talking to me. I've got a point of view. And so I'm making that known now. We're on the cusp of going too far here. That's what I worry about.

Thanks. Good luck.

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

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

Yeah, I don't think there's risk around that extension launching unless unless we get some really silly tariff thing on this investigation. You know, I really hope this investigation includes speaking to industry leaders. And it's not an investigation into, you know, a small little segment of the business. You know, we will sell more upholstered furniture made in America than almost anybody making furniture in North Carolina. Like just our upholstery business. You've got brands that are 130 year old US brands and they don't make wood furniture or metal furniture in America anymore. They don't. So you gotta be really careful. Upholstered furniture, we can make in America. We can do that. We can be competitive because you've got advantages. It's special orders and feed the market and so on and so forth. But there's just not the workforce to make the other stuff. And there's not people there. The next generation doesn't want the jobs. If you talk to people, again, our volume in our factory and what we're going to make is as big as some of the biggest people at the high end. I mean, don't compare us to Ashley or somebody who does $10 billion at the low end. you know, and I think has what, 65% of their business in America, you know, 35% of the business offshore. Um, I'm just saying, you know, the, the high end furniture market, it's not coming back for years and all it's going to mean is people are going to, there's a lot of people are going to close and, you know, a lot of jobs are going to be lost. And I think people have to consider that. Um, So, you know, but when you think about, like, it's the risk of extension launching, no, no risk at all. Things might be more expensive, but they're going to be more expensive for everyone, right? So we have advantages. We buy more than anybody in our market by probably three times at our quality, the next closest person. So we have tremendous, tremendous leverage here. You know, I wouldn't want to be competing with us, but I don't like winning this way. It's not going to be pretty. So, you know, I think, you know, hopefully we're done with furniture tariffs. And, you know, ring the register, you know, in the tariff bank. But let's not completely disrupt an industry. See high point closed. The major furniture stores, you know, furniture stores, clothes, family, long-time businesses, they'll be dead. So that's the most important thing. Inventory reduction, everything else we're doing, fine. And again, you know, if you're thinking, do I buy our stock or not? Buy our stock either way. We will win. You know, we've spent billions building a platform here. Yeah, we have You know, the most dominant, inspiring high-end platform for luxury furniture in the world. We know how to source it. We have leverage buying it. We know how to market it. What if you do, if you're a wholesaler and all your customers go bankrupt? They can't afford it. You know, the customers can't afford it. Like, what do you do then? I think the tariffs dry up You slow down the furniture business, you're going to slow down the tariffs. And that's why I think someone's got to sit down from the industry with the administration and go through the math. This is just simple math. Don't let it be emotional. Let it be intellectual and rational and data-driven. We've got all the math here. And I know a lot of people in the industry that would love to sit down and debate this.

Steve, the framework for inventory reduction, one of the things to think about is just what is our turn? I mean, at the most simple levels, what's our turn rate? Turn's been in the past. Obviously, we've turned the inventory on an external basis, you know, into the high twos, low threes. So, you know, if you even just think about the – you know, Gary's mentioning a letter, the $200 million to $300 million of inventory reduction, you know, where that gets us, you know, hypothetically at the end of the year. You're starting to see a run rate of a turn, you know, into the –

closer to the mid twos so is there room beyond that we do we do believe that would be in 18 and 19 we were running like three three points yeah yeah so we can run a much faster turn you're you're seeing the slower turns we're running today the massive product transformation right you're buying a lot of inventory you're getting you know you're getting a light front right you're getting some wrong um and you know so It's inefficient to do what we just did. You know, that in and of itself is a big investment. But we're on the other side of that. I mean, we do have a whole new concept coming. It's probably the biggest idea and the lowest risk we've ever taken on a brand extension. I mean, it's the biggest, you know, I mean, how quickly did modern go to a billion? Three years? Yeah, I mean, this is probably... You know, this is a $2 billion idea, and it could go really quickly. We think we're going to hit the trend dead on. The product we have in development is like nothing else at the market. It's going to be massively disruptive, exciting, you know, and we work confident enough that we're going to open, you know, three galleries to launch it with. And, you know, we're going to do more if we can. You know, we'll have the Ralph Lauren, the X Ralph Lauren store in Greenwich, Connecticut. We've got an incredible location in West Hollywood, and that we'll be announcing more about soon. And then we've got our original gallery in San Francisco that we own in the design, right in the middle of the design district where we kind of relaunched the whole brand in 2010, right? Yeah. 2009. 2009. And, you know, it's just going to be an incredible gallery for this new concept. But we've been working on this one for about four years. So, you know, we'll be ready to go.

Maybe just to confirm as a quick follow-up. So those three galleries are launching in conjunction or opening in conjunction with the launch of the brand extension in the spring?

Yeah, the one is the ones in Greenwich in San Francisco for sure. The the one in West Hollywood. We've got a, you know, still get our permits and you know, get through, you know. Yeah, just some approvals and things like that and. Hopefully it'll be pretty simple. We're going to. It's going to be a two stage piece where we're going to kind of remodel a location. That we. that we now own. And then phase two of that, once we open with the new concept, we are building a restaurant, a beautiful, it might be the most beautiful restaurant in all of Los Angeles. We're building this incredible courtyard restaurant that we think is going to be tremendous. It's going to add a restaurant in Los Angeles, which we don't have in a major market. um and in in los angeles we're building like an ecosystem right we we have our melrose gallery that we built like 12 years ago that's you know fantastic you know in a great corner beautiful rooftop we've got our modern gallery a couple blocks away from that um we'll have this new concept gallery that's a couple of blocks away from melrose And we're in the process of closing another deal for an outdoor gallery on the same street. So LA will have this really expansive art ecosystem. And I think, you know, our business in LA should go up 40% or more. You know, it's a big, big, big market for us.

That's great to hear. I'll pass it on. Thanks. Thank you.

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

Max Recklenkow Great. Thanks a lot. So, first, just on Europe, it's early, but with improvements in England and the strong start to Paris, can you share what you think about those galleries and actually... We can't hear you quite well.

I don't know if you're close enough to the speaker, but it's hard to hear what you're saying. And speak up, please.

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

Yeah, I'd say one will You know, we'll update you periodically as things evolve here with Paris and, you know, as we get closer to London and Milan. I mean, it's going to be very quick here, right? Because we'll have two more big, really incredible galleries, you know, all with multiple hospitality concepts and so on and so forth. So, I mean, this is, think about this as you know how we would have liked to launch but to get paris and london you know there was other locations we had to take and um you know and had to open you know we faced lawsuits from landlords if we didn't open them so um you know hence why we wanted our first impression to be something you know kind of inspiring and um you know unforgettable that's why we did rh england really for conversation not so much for commerce but you look at the numbers now, you go, hey, looks like you might be pretty good. And, you know, we'll see what happens to that location when we open London. London may actually amplify that location as opposed to cannibalize that location. Don't know. I mean, the greater London market is just a huge market. The UK market is a huge market. So, you know, if Paris is any indication of I mean, we have way bigger brand awareness in London than we do Paris. But in Paris, what we're seeing, Steph, what was it, 50% of the people know the RX brand in Paris?

50%.

Shocking for us. We didn't know that. You know, so lots of people familiar, lots of people waiting for us to come. You know, and we're in a location that you can't miss us. versus, you know, some of the other places. I don't know, you know, we're building a brand in the other ones. And even Madrid, which is a, you know, pretty high populated city that's, you know, pretty hot now, you know, just, you're not, you know, the people aren't used to kind of a retailer even like us. I mean, it's a really funny quick story is Jen Kelly, one of our curators and designers, really great curator, designer, has been with us for years and freelances with us and comes back to work for us. She's kind of, you know, I don't know what she's exactly, her title is now, but she finds the coolest stuff. We're in great Spain. And Jen has a godson, that is finishing up his master's somewhere in New York, and his girlfriend finishing up her master's is from Madrid. They were out in California. I hope it's okay that I tell the story, but the godson says, oh, you've got to meet my godmother. She's actually into interior design. This young lady who's 29 years old, I think, said, oh, my God, you have to come to Madrid. The most amazing home store in the world opened in Madrid, and everybody's talking about it. And Jen goes, really? Well, where is it? She didn't even connect the dots initially, and she gives her the address where it is, and she goes, oh, well, I – worked on that store. That's our brand. That's our age. And the squirrel had no idea who we were, right? So that, I mean, it's not really the brand awareness as much, you know, I think in Madrid, it'll take us longer there, but we're really happy when you look at the economics on the four wall margins, you know, I mean, some of these were not, you know, real big rents like Madrid and, and, uh, uh, Madrid and, and Brussels, uh, You know, the one that economics are a little more challenging is Munich. You know, we had to take that. We didn't, you know, we didn't extend those leases because we weren't sure what the volumes would look like. But I'd say, you know, a lot of them are, we know directionally kind of what we can do. You know, what does it look like in 14,000 square feet? What does it look like in 20,000 square feet? know where might we do hospitality we were going to do a restaurant in madrid on the top floor but it was kind of a smaller store and then we chickened out at the last minute didn't put it in now the team's like clamoring for it you know like our brand awareness is saying like everybody will come you know they love our space you know it's just it was it was an old palace uh about about 14 000 square feet and you know we can put a cool little kind of kind of like the tea, you know, I guess we don't call it like the tea because it's a French kind of thing, but the same menu. It's just a perfectly cool menu. And I think they'll flip out and our team's super excited about it. We're going to put a restaurant in that one. We have the ability to put a restaurant in Brussels long-term. You know, we've got the space there to do that. You know, we may do that. And then we got to, you know, watch how Germany kind of scales here. You know, I think we have the lowest brand awareness in Germany. They take longer. Maybe we just don't have the right location in Munich, don't know. But we've got flexibility there. But I think the four walls, when you kind of project them out, they kind of look like the U.S. You know, so like if Paris, I mean, if Paris does anything directly like we think it's going to do, I mean, it's going to be fantastic. I mean, we've got a little bit more operating costs and stuff like that. We've got to have guards out at the gates and things like that. We've got to walk down 195 feet to get to the front door, and we've got to figure out how all that works, especially when the weather gets tougher. But I think it's now starting to – the dots are starting to connect. We have enough data. We're seeing how things are ramping, and we're just starting – To execute, I mean, what would you give us an execution from, like, the back end, having the right goods and the right fat? Like, there are so many rules and things we have to get around. What fabrics can you use? What foams? What lighting? What this, like, we're kind of bumbling around. You know, like, I'd say give us a C today. What do you guys think? C plus?

C plus.

You may be a C-plus. I mean, you know, it might be a D-plus. I mean, so, you know, our team. Our team's probably a D-plus. Our team's probably a D-plus, but we had a great session, couple of sessions with them the last few times we were there, just had another great session with them. Like, we know what we need to do. We loaded up both planes. We took all our merchants there. We brought in, you know, all the leaders from all the galleries, all our best designers. You know, we listened, we learned, and, you know, Like if we just go from like a B plus, C minus to a B in execution, it's probably worth 25 points. You know, if we go to an A, it's probably worth 50 points. You know, so, and we'll get there. You know, it's just, you know, it's a little hard when, You know, you only have a few small stores and you need to kind of take people's attention off certain things to be able to execute. But now, you know, I mean, the great thing is Paris now creates massive visibility and urgency. You know, that's why we took everybody over there. You know, we were there for eight days, seven days. many nights we were going home when the sun came up, you know, we were working with the teams, everybody's alongside each other, bringing the thing to life. And, uh, it was a great, great experience for bringing our, our, uh, headquartered leaders together with our field leaders and, and building a great team.

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

I'm not sure.

Yeah, the margin expansion, I mean, it's a reflection of what we were doing last year and the position of the product margin and the activity last year, some of the market activity last year. So, yeah, year over year, we saw margin expansion.

Yeah, and we absorbed a hit on tariffs much smaller. I mean, the tariffs really started in Q3 and Q4 and into next year. And again, fingers crossed, there's not another layer coming, but, you know, as Darwin said, you know, the strongest species that survives is the one most adaptable to change. And we've got to be the most adaptable in innovation and invention, I think, in our industry. And so we'll figure it out no matter what happens. you know, there's going to be gross margin headwinds from tariffs coming. You just can't raise prices fast enough and you can't, you know, there's only so much room our manufacturing partners have. You know, you don't want to blow them up, right? So you've got to walk a tightrope. It's very different than China. I think that maybe that's the other thing that maybe it's misunderstood. I mean, China was kind of funded. I think some of China's factories got some help from the government to deal with the tariffs. That's not really happening in Vietnam. It's not happening in Indonesia. They're not China. They're not big, strong, well-developed countries like China. It's going to hurt people. There's going to be challenges there. But Yeah, it is what it is. So, improvise, adapt, and overcome.

Got it. Thanks a lot, guys. Best of luck, and speak soon. Thanks, Max.

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

Good evening. Thank you so much for taking my question. So, Gary, the investment community is very focused on the degree to which there's discounting and promotion. In your messaging, the results in the quarter suggest that you've been able to overcome it with your profitability. But with that being said, is it driving incremental sales? And is the thesis that you will be able to pull back on some of this discounting-oriented messaging as the housing market improves and the natural rate of demand simply increases and offsets what's being done right now?

Well, just start, Michael, with in this world of furniture, at the luxury end, it's all on sale, okay? At the highest end in the top design showrooms, interior designers, architects, yeah, all get 30% or 40% off. So our model of a membership model was a model to kind of smooth that out and be competitive. You know, so this is not like Chanel, Hermes, you know, where they burn the markdowns, you know, or throw them out or whatever they do, right? Because they have such ridiculous margins. This is not fashion. And if people confuse it with fashion, they're going to miss the whole game here. Okay. We're also in the third year of the worst housing market I've seen in my 38 years in this industry. 38 years. I've never seen a third year like this, and I've never seen one like this. So you could decide to not promote. I mean, some people are telling you they're not promoting and they are promoting. So I don't even know how anybody publishes, you know, press on, you know, who they are like, Oh, they're not promoting. Like look at their emails. They're promoting three weeks, you know, and you know, it's disguising it as like not storewide. Okay. Whatever, you know, it's gotta be the highest percentage of their business is being done on promotion. You know, it's just, If you're selling furniture, you get away with, you know, some of the other categories like frames and other stuff like that. And those are bigger, you know, for other people's businesses, if they're a home furnishings kind of driven business, you know, and have a lower furniture mix, you know, we're, you know, we're 80% furniture. We're the highest probably mix of furniture of anybody we can compete with. We eliminated Christmas. We eliminated holidays. You know, we don't sell Halloween plates and, you know, all that, know stuff that renders the furniture less valuable so um but furniture is an industry that at the highest level does not sell at full price it doesn't so people just get over it you don't understand the furniture industry at the luxury level and unless you just want to go bankrupt excuse my language in a market like this You don't want to stand there and be righteous and say, and I'm not promoting. Good luck. Good luck. Go for it. Tell me who's not doing it, Michael.

Who's not promoting? It's hard to name names right now, Gary, but that's a great segue into my second question, which is there is some skepticism around the margin outlook in the back half of the year, you're guiding below what was expected for the third quarter and well above for the fourth quarter. Can you give us more detail on what underlies those margin expectations and build the market's confidence that those are realistic? Thank you very much. Jack, do you want to take that?

Well, Michael, we didn't, we gave a back, like an H2 guidance. We didn't give out any quarterly guidance. So if you're referring to how the analyst community is . But I meant he's saying, what I heard Michael maybe clarify is how it changed versus the prior guidance. Is that what you asked or did I mishear you?

I'm just asking for what drives those or underlies those, Jack. So if you could give us a sense for, What you're expecting, is it that tariffs are going to be a headwind in 3Q, but you'll take price by the time you get to 4Q, as I said, you'll see a significant amount of leverage in the fourth quarter?

I think that's margin. Well, we guided operating. Yeah, Michael, you're talking about operating? Yes, sir. Okay, yeah, look, just as a reminder, we have seasonality in our business as it relates to advertising expense and, you know, the books that get expensed when there's our mailings. So that's one factor that I'd point out. You know, we're not here to point out, you know, pricing actions or timing of those and those kind of offsets. You know, that's all embedded in our guidance, but, you know, we're not as commentary. We're here to make

Okay. Thank you very much and good luck. Thanks, Michael.

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

Great. Good afternoon. Thanks very much for taking my question. I wanted to go over that pricing comment and just kind of understand, Gary, you mentioned about pricing in the industry because of tariffs. What's your assessment of pricing you know, from an industry perspective, does it get worse as we get into the back half of the year in terms of increases because of this tariffs? And do you think the second half is when we see the peak or does that kind of carry it to 2026?

Yeah, you know, look, I listen to everybody's conference calls, right? You know, that's in our industry. And I don't think anybody's really addressed the tariffs with transparency. I think they're all dancing around it and, you know, everyone's waiting for somebody to tell the truth, then maybe we're the first ones telling the truth. I don't think anybody's getting better pricing than we do. I don't think anybody's mitigating more than we are. No one's got the same leverage we do for a single brand. And so I think everybody's got to take price in the second half. I think there's going to be big furniture inflation in the second half everywhere. I don't know how anybody gets around it unless you're some little tiny person making all your stuff in America. I, you know, but then again, they're going to get it because all the parts are coming for, you know, all kinds of pieces and parts are coming from places like fabrics coming out of Asia for a lot of those people. And, you know, You know, like other people that might be saying they're making furniture in America, and hopefully this is what the investigation is about, is people that are having all the wood, you know, made and finished in Asia, and then kind of shipped in a flat pack to America, and they're actually screwing it together, and they're saying assembled in America or something like that. And they think they're going to, you know, not get tariffs. I mean, there might be some, I was trying to think like what triggered this next investigation of the tariffs. The only thing I can think about is something like that, you know, that does go on. And, you know, so there's probably people out there that are, you know, trying to avoid tariffs some way, you know, bringing it in, you know, unassembled or doing something, you know, so it's, you know, parts from, from other places. And maybe that's, you know, we're, You're going to see other new tariffs coming. But I think everybody's got to take pricing. There's just no way. I mean, your margins are going to get killed.

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

They'll have heavy startup costs. Yeah, I mean, it'll all depend where the ramp in Paris goes, which will inform the ramp in London, which should be meaningfully higher than Paris. And Milan, I don't know where Milan actually is going to fall, probably a little less than Paris. But it's bigger, so it might do more. I mean, it is a big market. So we'll see. I mean, we're during Salone, which is the biggest design show in the world. You know, 500,000 people go to Milan for Salone. It is the world of design goes there, you know, for a week. And we're opening on that week. You know, any of these next two parties, you don't want to miss these openings. I'll be there. Thank you. Great events.

Your final question comes from the line of Brian Nodgel with Oppenheimer. Please go ahead.

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

Yeah, look, everything is worth something, right? So, you know, it all depends, you know, where the housing market goes, you know, what offsets you're going to have, how much. Like our new concept is going to be worse. I think this is the biggest new thing we've ever done. I think it's going to be bigger than modern. Significantly, you know, it deals with the biggest part of the market. You know, we've got, you know, we've got new galleries and things happening. We've got big galleries happening in London and Milan. I mean, we've got outdoor galleries coming and new concept galleries coming and we've got condoms coming. I mean, there's just, A lot that we've invested into, you know, time and capital to set the company up for the next 10 years. You know, that's how we think about this next move. If, if we, if we do really well. And, you know, I mean, it's like, I can tell you Paris, you know, we're getting a lot of inbounds on, Hey, you know, do you want to open an Abu Dhabi? Do you want to open it to buy? Can we partner with you? Can we. license your brand, can we do this, that? When you see something like Paris that you've never seen anywhere in the world by anybody at any level, there are buyers of that, meaning whether it's developers, whether it's someone that wants to run the brand for us there. Maybe in the Middle East, we do a low capital kind of deal. We take some percentage off the top and we sell the rights for a big chunk of money. you know, for the next 20 years, or we run it ourselves and we want the sales growth and, you know, so on and so forth. And we're willing to put in the cap, you know, we are creating optionality. The key is breakthrough, breakthrough and become one of the most admired brands in the world in this next period by doing what we're doing in Europe. And it creates all kinds of options. When we go to Asia, what are we going to do? Like we've had people try to get us to come to the middle East for 12, 15 years, come to Asia for the last 10 years. Uh, you know, it's like we wanted to do it in the right order. And, uh, You know, somewhere along the line, I heard someone say that, you know, Bernard Arnault was asked, how do you build a brand in China? And his answer was, you build great stores in Paris, London, and New York. So we did a little backwards, right? Because we come from America. So we said, the first thing we had to do is build the bridge to Europe. And we built RH New York. And we got a lot of visibility there and a lot of European clients, you know, coming over and they know us. And You know, we wanted to do Paris and London next, but to get Paris and London, we had to open things in a different order. But now that Paris and London are coming and then Milan's coming, we're going to know a lot more. I mean, I think the brand heat is going to exponentially build. You know, I think the quality of work that we're doing, I mean, I really, if you want to, I said this when we first built, you know, like I think it was Atlanta or something. I said, put down your spreadsheets. and go to Atlanta. If you want to know us, go and see us, right? We all have six senses, but our sight is our dominant sense and it drives 80% of our behavior, our perception, and our education. If you really want to go know where RH is going, get on a plane and go see Paris and then give us a call. Or just fly right back to the Center of Innovation and you'll really, you know, come see what we're doing. Because what we're about to do next is the greatest work in the history of this company, and it might be some of the greatest work in the history of any part of the retail industry. I'm not trying to boast. You know, at the end of the day, it's not what we say or think, as Jane Austen would say. It's what we do that defines us. So go see the work. That's what's going to define us. You'll understand it. I mean, Max, you're still probably still on. Steve, you were there. You know, a few other people were there. Good. And then I think everybody was there is like. Holy cow. I had no idea what was coming. And when you see the world of our age and you know what we did there to communicate to the world who we are, to see our body of work around the world and all of our places presented in this incredible sexy salon style with the bar, you can order food, you can take client meetings there and people walking through the R.H. New York, R.H., you know, Boston, R.H. Chicago, you know, all the great work we've done everywhere, you know, presented beautifully. And, you know, beautiful velvet-draped walls with picture lighting. And then you've got these giant, you know, French artisans with, I don't know how big the TDs are, like six feet. You know, giant TDs and beautiful giant gold frames with videos that you can watch. You can watch them, you know, they... The making of RH Boston, the making of RH New York. You can watch videos on the designers, on the artisans. You know, it's a physical and digital immersion into the brand. It's so cool. I mean, I think it's worrying. People are going to go, what is this? And no one would be there. The night of the party, it was packed in that room. We had our first diner at our first two restaurants. And that's kind of a semi-third. To have a bar, we have to serve food there. So we've got a menu. Then the first meal we serve is in the world of our age. And everybody seeing it is like, oh, my God. Especially people who don't know us. Like, we have no idea. You know, it's just. We have a body of work that no one else has in the world from an architecture, interior design, landscape architecture point of view. It gives us great credibility in our interior design business, which is now, you know, morphing into an interior architecture business and a landscape architecture business, right, in our bespoke part of that business, which is one of the fastest growing parts of the business is, you know, doing these, you know, super high-end premium complete redis. And we had already, you know, before we even got to Paris, we had done an incredible, complete metamorphosis of a, you know, apartment in Paris for a U.S. customer. You know, transformed it completely, complete new interior architecture, fireplaces, everything. So, you know, that's the other thing to really understand what we're doing in interior design. Like, we are the biggest interior design, residential interior design platform in the world today. And we're investing in it in a meaningful way. Like in Paris, it is a freestanding building on our property that we built. So our interior design has its own building, its own entry, and it's packed. It might be the best interior design office anywhere in the world. And it, you know, it says to people that we want on the team, like we're prepared to invest to get the best people in the world. We're not just the retailer. We're something that hasn't been done before. And when it all comes together, I think it's going to make a lot of sense.

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

Percy's a little wacky. Yeah. We also did the membership thing. Yeah. And, you know.

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

I appreciate it. Thank you.

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

Well, thank you everyone for your interest. You know, it is interesting times in our industry, but even more interesting times, you know, for our company. And I just want to congratulate everybody throughout our organization. Even though you might not be in Paris or you weren't in Paris, Uh, everybody had a hand in it. Everybody has worked hard to put this company in a position to open what we believe is, is the most exciting, immersive retail experience at any level in the world today. And we couldn't be more proud. I told the team, I said, if only for a moment, we, we kind of broke through and poked our head up at the top of the luxury mountain. Now it's up to us to just plant a flag up there, right? And there's a lot more work to do. But they know the people at the top. I think they now know, you know, the potential that we have, the work that we've demonstrated that we can do. And I think... We've earned their respect and they expect us to come. So we've got a lot of work to do, you know, to really plant that flag and to build one of the most admired brands in the world. But the momentum we have, you know, kind of the ceiling we broke through, you know, it peaked up and, you know, it was a proud moment for this company. And, you know, I want to just thank everybody on every level. for just the effort that everybody's putting through in these three difficult years that we've had. The clouds will break, as Warren Buffett said, and the sun will come out again. And when it does, we'll be there. So thank you, everyone, for your interest. Thank you, Team RH, for your leadership and your hard work and for living and breathing our values. Our time has come. Thank you.

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