RH

everyone and welcome to the rh third quarter 2025 earnings call as a reminder this call is being recorded i would now like to hand the call over to ms allison malkin please go ahead ma'am thank you good afternoon everyone thank you for joining us for our third quarter fiscal 2025 earnings call joining me today are gary friedman chairman and chief executive officer and jack preston chief financial officer Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filing 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 forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results to these forward-looking statements in light of new information for 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 also available on the Investor Relations section of our website at ir.rh.com. With that, I will now turn the call over to Gary.

Great. Thank you, Allison. Good evening to those of you on the East Coast, and good afternoon on the West Coast. To our people, partners, and shareholders, we continue to generate industry-leading growth with revenue increasing 9% in third quarter, and up 18% on a two-year basis, demonstrating the disruptive nature of our brand, despite the worst housing market in almost 50 years and the polarizing impact of tariffs. Adjusted operating margin of 11.6%, with below the 12.5% midpoint of our guidance due to higher than forecasted tariff expense on prior period special order and backorder sales delivered in the quarter, and higher than expected tariffs opening expenses. Adjusted EBITDA was 17.6%, and we generated 83 million of free cash flow in Q3. Year-to-date free cash flow reached 198 million, and we are on track to achieve our outlook range of 250 to 300 million for the year. Net debt at the end of the quarter was 2.427 billion, down 85 million from Q2. We ended Q3 with real estate assets that we believe have an estimated equity value of approximately 500 million and that we plan to monetize opportunistically as market conditions warrant. Additionally, we are making progress on our goal of reducing excess inventory estimated at 300 million with inventory down 11% versus last year and down 82 million versus the second quarter. While a meaningful portion of our market share gains are coming from the fragmented to the trade design showrooms, regional high-end furniture stores, and local independent boutiques, we are also gaining share from the better furniture-based national brands, as you can see from the table below. I would point out that our share gains on a two-year basis range from a low of 12 points to a high of 28 points. We find it fascinating that the market chooses to reward companies that set remarkably low expectations, and slightly beat them versus setting high expectations as we do and at times miss them while still meaningfully outperforming our industry. Let me turn to our outlook. We are providing the following updated financial outlooks reflecting our year-to-date performance and our current trends. For the fourth quarter, revenue growth of 7% to 8%, adjusted operating margin of 12.5% to 13.5%, adjusted EBITDA margin of 18.7 to 19.6%. The above outlook includes an approximate negative 200 basis point operating margin impact from investments and startup costs to support our international expansion, and 170 basis point impact from Tareq's net of mitigations. Fiscal year 2025. Our current outlook now is revenue growth of 9% to 9.2%, adjusted operating margin of 11.6 to 11.9%, adjusted EBITDA margin of 17.6 to 18%, and free cash flow of 250 to 300 million. The above outlook includes an approximately negative 210 point basis point operating margin impact from investments to start-up costs to support our international expansion, and a 90 basis point impact from CARES net of mitigations. In the short run, The market is a voting machine, but in the long run, it is a weighing machine. Benjamin Graham. We are a company that is playing the long game, historically innovating and investing during uncertain times. We also believe post this high investment cycle and historically low housing market, the weighing machine, as it has done over our 25-year history, will accurately reward us with a truly unique, high-performance brand we are building. On the other hand, there is no denying what an unusual time it is in our industry. And we also believe it's not a time to underestimate risk. We're in the third year of the worst housing market in almost 50 years. In 1978, there were 4.09 million existing homes sold in the U.S. when the U.S. had a population of 223 million people. We were on track to average 4.7 07 million existing homes sold over the three years from 2023 to 2025 with a population of 341 million or 53% higher than 1978. This is a market we've never seen before. Not a time to underestimate risk. Tariffs are disrupting supply chains and driving higher prices. There have been 16 different tariff announcements over the past 10 months. that have resulted in significant resourcing, product delays, out of stocks, and driven multiple rounds of price negotiations and increases. Despite the chaos, we continue to demonstrate our ability to gain meaningful market share while aggressively investing in strategies that we believe will create long-term strategic separation. While not a time to underestimate risk, also not a time to run from it. It's important to separate the signal from the noise, and remember, necessity is the mother of invention. Our most important innovations were birthed during the most challenging and uncertain times. Our strategic separation is a result of innovating and investing during those uncertain times, and this time is no different. Launching the most prolific product transformation in history of our industry and believe the launch of our new concept in the spring of next year will reaccelerate our growth and create another step change in our business. We're building an iconic global selling platform that will likely never be duplicated in our lifetimes. Construction costs post-COVID have doubled across the industry, making it very difficult to emulate our immersive platform. At the same time, we've created new, equally immersive physical experiences that are massively more capital efficient that we plan to unveil on our call next quarter. We just opened what might be the most beautiful and talked-about retail experience in the world and arguably the most important city in the world, especially if your vision is to build a global luxury brand. You know which one I'm talking about. R.H. Paris, you have to see it to believe it. Developing a global hospitality business that generates significant brand awareness, traffic, and cash flow. We have built a powerful restaurant company that is seamlessly integrated into our core business and will generate operating income that represents, on average, 65% of the average gallery's rent they reside in. The RH Ocean Grill at RH Newport Beach is our first 20 million plus restaurant that we believe will reach the mid-20s in its second full year, and its cash flow next year might cover the rent for the entire 90,000 square foot gallery. We're establishing a global interior design firm that is moving the brand beyond presenting and selling products to conceptualizing and selling spaces. We opened our first freestanding RH interior design office in Palm Desert, California, with no product except for two small sitting areas in front of our designer's offices. There's four offices in the building and a workspace with clients. It's a real freestanding, customer-facing design firm. which really don't exist in the world, if you think about it. It's like finding a dentist. You know, you move to a new area, you buy a new home, you need a dentist. What do you do? You Google it? You ask a friend? Like, where do you find an interior designer? I mean, you can go online. You know, I don't know how that's going to really help. But if you think about it, the world of interior design is not a customer-facing business. And, you know, we opened our first freestanding chair design office in Palm Desert with no product. You know, it's a real freestanding customer-facing design firm, and it's generating a million dollars a month in design business in 3,000 square feet with rent of $200,000 a year. You can do the math. All of which is resulting in building a brand with no fear while generating industry-leading growth with high teams adjusted EBITDA margins. Imagine what our performance will look like in a robust housing market as we cycle and leverage these investments. Never underestimate the power of the few good people who don't know what can't be done, especially these people. Carpe diem. Operator will now open the call to questions.

Thank you. And everyone, if you have a question today, please press star 1 on your telephone keypad. We do ask that you limit yourself to one question and one follow-up. Our first question comes from Stephen Forbes from Guggenheim Securities.