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.

Good afternoon, Gary Jack. Gary, you obviously mentioned RH Paris, but curious if you can maybe give us some color on how the demand book is building, noting it's early. And the reason I ask is just curious if you can maybe help inform us how RH Paris has influenced your performance expectations ahead of RH Blonde and RH Splendid.

Sure. Well, you know, RH Paris is, One, it's really quite different. When we did open our first gallery with hospitality, it was really, you know, we're two hours out of London at Irish England. You know, there's not a lot of traffic out there. It's known how our business has developed. We kind of talked about it last quarter. But, you know, many of the other galleries that I've spoken about, We didn't open in particularly the way we believed we should open. You know, to acquire the, you know, the RH Paris and RH London, which we think are one-of-a-kind locations, you know, we had to take a kind of a portfolio of galleries and open some of those before we wanted to. That's where we opened London. Excuse me, to, you know, to open something that kind of set a tone You know, I think people know in Europe, you know, Americans aren't really known for building luxury brands. We're not really looked upon by the Europeans as having great taste or style. And, you know, all the, really all the luxury brands are, you know, from Paris or Italy. The UK has a couple, and you can argue that we have a couple, you know, argue that, Ralph Lauren's a luxury brand. A very small part of Ralph Lauren's business is luxury. The biggest part of the business is more of a department store-based higher-end business and not luxury and a giant outlet business. And that's not to say anything bad about Ralph Lauren. It's an incredible company, incredible brand. It's just not a real focused luxury brand. And ours is at a The only one we really had to your luxury brand in many ways was Tiffany, and now the French own it. The road we're on, the path we're on, it's a tricky one to travel. We use the metaphor of climbing the luxury mountain and Gary coined the phrase, you know, if you get higher and higher on the mountain, it's where the air gets thin and the odds get slim. You know, no one's really made this climb, you know, especially from the level we started at 25 years ago. And so, you know, the next few moves we're making are really important moves. You know, I heard several years ago that someone asked – probably the most famous guy in the luxury world, and I didn't hear him say this, so I'm not going to say who said it, but you can imagine, you know, there's only a couple people who built really the best luxury platforms in the world. But I heard someone ask the question, how do you build a luxury brand in China? And the response was, you build great stores in Paris, London, and New York. And I heard that years ago, and I've always thought about that as I thought about our ancient history And, you know, how do we unveil this brand? And, you know, we built RH New York, and we opened it in 2018. And we said that was our bridge to Europe. So we did it a little backwards. And as we think about it for our business, it's really Paris, London, Milan, and New York. Because Milan is really the, you know, one of the giant capitals of the world, not only here for business, for design, but also for fashion. But it's where the biggest design show in the world is Salone, where 500,000 people go once a year. And it's also the time we're going to open RH Milan. But Paris, we pushed ourselves to another level. And it's not a particularly large gallery, but it's very unique. And I can describe down the last call and But if you haven't seen it, we've had a video. Is the video on the website or no? Yeah, it's a video. We're also making kind of a documentary video. Like, we have some of our other iconic buildings, and you'll see that come out probably in a couple of weeks. But, you know, I don't want to sound like, you know, we're bragging about it, but it might be one of the most beautiful and aspirational and inspiring retail stores that was ever created. And it gives a lot of natural things that we loved about it. One, it's the only building on the Champs-Elysees that doesn't have an entrance on the Champs-Elysees. You can't enter the building. You enter through these, you know, 22-foot gold leaf gates. Yeah, 195 steps to the front door. And, you know, we built a freestanding interior design office there. We were able to get a building approved. And there's, you know, so many elements of it. You know, it's where we built the first world of RH, which is a, you know, it's an immersive experience that – It brings to life all the places and spaces that we've built around the world. And, you know, we think it's an important part of communicating who we are and connecting with consumers. You know, while we only totally, I think, in the hospitality, have about 150, 155 seats, so it's really like a normal restaurant, but it's really two because it's in two smaller spaces. One's on a terrace. It's a lavered-in restaurant. You know, and we invented some very new dishes there that we're going to be rolling out in the U.S. because they're so good, and also lipid tea, which is on the top floor on the rooftop. And the rooftop, and we're so happy we figured out how to, you know, work with fosters and partners, and they... you know, we saw the building, we, you know, what a five-stair ladder thing to get on the rooftop. We couldn't believe we could see the Eiffel Tower and the Grand Palais and the Louvre and, you know, and everything like that. Like, because Ernie wouldn't use his rooftop and there was no way to get to the rooftop. Right, you know, you said you'd have to build an elevator, but you'll never get an elevator approved because it'll block people's views of the Eiffel Tower and fostering partners. Why you, you know, want to work with the best people is, they said, well, maybe we can design a rooftop that's I was designing an elevator that, you know, a hatch opens and the roof and the glass elevator pops up and then it disappears. And I said, well, have you ever done that before? They said, no, but, like, we love to do things that haven't been done before. But, you know, it's like once you see the rooftop, you know, you couldn't unsee it. Once you're up there, you're saying, well, we've got to figure out how to activate this thing. And what's interesting, we have 40 seats, I think, on the rooftop. And unfortunately, right now, the rooftop's closed because weather in Paris gets pretty grim in the winters. And, you know, we can't evacuate the roof if it starts to rain and pours. There's not enough seats to relocate everybody to the level below. But the rooftop, when it was open, you know, the first few months we were open, it is the highest grossing part of the restaurant operation in the two restaurants. We're doing more there per seat than anywhere else. So, you know, just, again, learning about creating incredible spaces that has made us kind of rethink some of the work in Milan and some of the work in London and find some tweaks there. And then we found out that You know, we were building this world of our age, and we had this, you know, space for the building to reflect, and we thought, like, I don't know, what if we put a bar in here? And, you know, it was like try to make it a lounge, and so we put a bar in there, and then we found out you couldn't have a bar in Paris unless you had food, and you couldn't just have nuts and snacks, so you had to have, like, a small menu, so we had a small menu. The day we opened, we served our first meal, in a place that, in our mind, wasn't even a restaurant. And on opening night, you know, it was a place that was packed. And now, you know, we actually had to kind of retrofit it and put real tables in there that were big enough. And now we're serving most of the menu. Yeah. And it's a great offset as we've lost, you know, the seats on the roof. But there's just been so many lessons and, you know, so much we're learning about the the customer, and who knows us and who doesn't know us, and how truly international the business in Paris is. I mean, I've got a list in front of me right now of all the design jobs we have in, you know, Mallorca and Morocco and, like, you name it, like, the Middle East, and we're, like, the design jobs with the team in Portugal. It's, like, truly a global store, and the clientele is incredible. Yeah. But so many people don't know us. And, yes, the teams walking people up to the world of RH and walking people through, and people, I think, are kind of shocked by our body of work because, you know, many still don't know us. And so just, you know, just the thought of, you know, how important that world of RH is and what a tool that is for our teams to kind of not just try to explain who we are, try to pull it up on the website, but walk people into a really immersive world experience that brings our spaces and places to life and speaks to our authority and architecture and interior design and landscape architecture. All of our buildings are representative of those core competencies. At the last minute, we decided the entry was a small little entry. We didn't think it was communicating enough about our truth. And so we, I don't know, we had four weeks to go, six weeks to go, decided to build an architecture and design library in Arditch, England. And now you can't unsee it. It's so incredible. You walk in, you look through the main doors, and if you've seen pictures of the gallery, you've seen the Vitruvian man and the artist's design ethos. You have to interact with it. I think most people stop and read it and take pictures in front of it. And then left and right, we have these fountains, beautiful fountains. And, you know, above the fountain, we, you know, we came up with this line that my wife came up with the line. I thought I wrote a really great letter to Paris, and she read it, and she said, give me a day. And I said, what do you mean? She's like, you don't like it? I said, no. Got insecure. And then she wrote that last night, the last line, if you, you know, if any of you got the invite to our party, you know, use the letters. you know, an invite with music and so on and so forth and music for the opening of our video. And it says, in Paris, the measure is eternity. This we know and have built accordingly. And you walk into that entry and you can't help but read that as you go left and right around the divine ethos. And then you go to this, you know, this immersive, architecture and design library, yet there's no product. You don't see a, you know, it just like doesn't look like a furniture store at all to anybody, right? You actually, you know, see, yeah, we now have two copies of De Architectura, you know, the 10 books on architecture where the, you know, first modern printings were in 1521, and we've got one in French, and we have, you know, three iconic French architects, Delorme, Haussmann, and Lucille III. And then we've got Petrubius, da Vinci, and Palladio, you know, displayed with busts and historic books and so on and so forth. And it's something you've never seen anywhere. Like, you know, I've never even really seen one. But we built our first one in Arch England, because there was a library there, and we came up with the idea, and we created something, I think, really meaningful. And I remember telling the team, you know, the night before we opened, you know, we were in the Architectural Design Library, and I said, this might be the most important work we did here. And, you know, because it really communicates our truth and why we do this and what we believe in. And, you know, so now we've went back and we've now, you're walking to the entry of Milan, which kind of looks like a lobby of the building. Yeah, it looks beautiful, but we didn't know what to do with a couple of couches and a couple of chandeliers. And I didn't really, like, you might have, like, interacted with the first person and go, oh, excuse me, but, you know, is this a condominium building? Is this, you know, because it doesn't look like a store. If you walk in and you immediately look through this kind of loggia into a backyard and, You know, you have to kind of go up and left, left and right. It doesn't have a grand staircase except for that goes down underground. We did our first underground restaurant. Like, everybody's going to go, oh, well, we have a rooftop restaurant like this. You know, we have a restaurant that's underground that's got a, you know, skylight in the middle of the park. But we're putting, you know, an architecture and design library now in the entry, and all of a sudden, you're going to kind of go, wait, who are these people? Like, look at this, Vitruvius and Da Vinci and, you know, Palladio and Scamosi and Alberti and, you know, all the Italian iconic architects that, you know, shaped the way that the world was designed and built, you know, very early on. You know, so that's going to come to life there. We're going to have a world of our age in Milan in a place, in a space that we probably wouldn't have done anything with. It's kind of like a, I don't know, an attic, you know, but the team re-concepted it as this incredible lounge. And I think it's going to be an iconic place that will help people understand who we are and what we believe in. And also, these are great spaces that we can rent out and do events in that bring the right people into our galleries. And, you know, we're trying to test the event business because we've got these incredible spaces and You know, I've said no for, I don't know how many years now, 15, 20. My line is always, you know, our galleries are our homes and we don't rent our homes. You know, I've turned down Oscar parties and Rams parties, you know, like the top artists and everything. And I thought, we finally did an event. We did, you know, I go to a lot of Warriors games and I'm friends with Joe Lakoff and Nicole Lakoff, you know, and Peter Gruber, you know, the owners of the Warriors, and, you know, they hosted the NBA All-Stars, and they wanted to use R.H. San Francisco to do the owners, you know, the owners party, the opening party for the NBA All-Star weekend, and we did it, and we got tremendous, you know, response, and all the right people there, you know, made us think like, huh, but maybe we should, you know, for the right you know, to attract the right clientele. Like, you know, we have such incredible spaces. So, you know, and Paris so far, like, right away, Chanel wanted to take the world of our age, you know, to hold a dinner. And we've been contacted now about, like, can so-and-so do their fashion show here, you know, and take over your gallery for the evening. And so I think, you know, we're learning about, you know, this idea of, like, we're doing these iconic spaces and the ability to actually – We have these unique, you know, unique architectural masterpieces and the ability to bring the right people, you know, because we have the right place. You know, and I think it's even more important. If you think, like, everything's moving online, like, I think people are dying for experiences. They're dying for authentic connections, not only with people but with places, you know, and with history and with beauty and with food and, you know, like, I mean, how many nights can you order DoorDash or Grubhub? I mean, I love the services. When I had no time and I, you know, wanted to have something delivered, I don't know about anybody else on the phone, but I'd much rather go somewhere and, you know, see people and feel like I'm somewhere and connected, you know. And I think, you know, that's why people still, you know, congregate and aggregate. And they're not going to movie theaters so much anymore because, you know, that experience is you know, that's not as unique and differentiated. And, you know, maybe we don't want to be in a place where someone's coughing behind you and so on and so forth. So that one I get. But I just think the places that we're building, people like to see and they like to be there. You know, there's not a lot of places that are public like ours that you can get a meal in and experience stuff. You know, what we're learning in Paris, you know, we're having all these people coming from all over the world, you know, saying it, and we're thinking about it, like, gosh, we have to have more people who are fluent in more languages. We need to ramp the design teams faster. Our design team in Paris kind of got overwhelmed. In fact, we had no idea that we'd have the traffic we got into Paris. Like, it was just so many people that came in, and we were just overwhelmed. I mean, and... You know, even, you know, finding out how early you have to hire people because people have long, you know, tenures. They can't just, you know, give a two-week notice and come to work for you. You know, we kind of got behind in hiring for the restaurants. And, like, we were behind. We had to fly people from America to kind of help, you know, run the restaurant and cover the shifts. And, you know, they didn't speak French. And, you know, that was important. You know, there's just so many things we're learning, you know, especially – bringing hospitality into the high volume space. So, but there's just a little about the build. You know, I did my own little math and I was trying to understand, you know, try to isolate the hospitality business because the hospitality business lost, you know, 25% of its seats after the first couple months. And so you expect that to be a little off and it's only a tiny bit off, you know, with all the seats we lost and the highest productive seats. So, but we're thinking that, gosh, we might be able to tent that rooftop and actually do events there and maybe make free and, you know, just as many people, if not more. You know, because we only see 44 people max there. But the, you know, just about the staffing, about design, we're learning, learning a ton, and, you know, we're way ahead of, we've done, you know, the team's done some incredible recaps and, you know, learnings, and, you know, we're going to be so much more prepared and so much more efficient. But the builds are really interesting. So, you know, the math I was looking at, you know, I kind of looked at the first eight weeks because, well, September was a five-week month. We didn't, you know, it didn't open the first week, it opened on the fifth, which is, You know, kind of a day, and then the next week started. And I kind of try to isolate our business. When you open hold in a market like this, right, you're not shipping to anyone here. You've got no revenues happening. And it's interesting what we're learning all around. But this one with, you know, high volume, high traffic, you know, Iconic location, international people coming from all over the place. And the first eight weeks, well, I just did the first eight weeks, and so I kind of got the four weeks of September, the four weeks that we were open, and the four weeks of October. And then I looked at it in the next really, well, almost six weeks. I had to estimate the last three days. just to kind of – because we haven't had the business. But when you look at the demand on the core business, and we haven't seen ramps like this. The six weeks, the average per week is 62% higher than the first eight weeks. And the first eight weeks actually had more traffic because we – I think, you know, it was still the – you know, like the fall, and there was a lot of people in Paris, and, you know, we had a lot of people coming in. We still have very good traffic. But, you know, you can tell the team's starting to kind of get their feet underneath them. We, you know, started – people are starting to kind of figure out who we are and, you know, kind of trust them, kind of buy furniture from them. And, you know, we have some people that know us because we're – either living in America or they travel internationally and they know it's from America. But I didn't expect, like, the ramp on the core goods that, since we opened with such a traffic, but I wouldn't have thought, you know, it would be a 60, 52, 63% ramp those weeks or the other weeks. So when you start to think about that and how that might build, you know, you know, I think it's going to take a while to kind of really understand it. You know, we've got to get our arms around the divine opportunity. I mean, when we look at all the places we're doing work, and you think, oh, man, our designers are going to have to fly here or fly there, and, you know, and our customers pay for that. Like, we've been flying people from America to, you know, all the major cities in the world, so many of the major cities. You know, we've had, you know, customers flying our people to, to Sydney, Australia, to Melbourne, to Shanghai, to, you know, all over Italy. I mean, I can't think. It's almost every country, you know. Middle East. Yeah, Middle East, you know. Yeah, we did, you know, for the Prince of Qatar, right, four homes on its compound, you know, and like a $3 million job or something. Like if we're working with jobs like hundreds of thousands into the millions, like we just got – And a famous building in New York, I can't talk about it, you know, it's exclusive, but we're doing a $3 million design project in one of the most famous mansions in New York City and done another $1.8 million project for someone I can't talk about, you know, very famous. And, you know, just – and that's why I think I made the point about, you know, design firm. And so, you know, this – You know, there's so much that we're learning about Europe and so much we're learning about, you know, just the potential of our brand has just evolved. So, you know, long, rambling answer that you started with that, you know, with a question. I could talk about Paris for a long time.

Thank you, Gary. I'll actually pass it on. Thanks so much.

The next question comes from Max Raklenko from TD Cowan.

Great. Hi, everyone. So, Gary, this is the first time that you guys have taken the pretty outsized price in a while. Can you just talk about how the customer responded in 3Q and the elasticity that you're seeing from the higher price points? What are the learnings, and how are you thinking about the right price points for the brand ahead? And depending on where tariffs go, can we actually see RH continue to take prices further?

Max, can I just ask, clarifying this draft, like you're saying you observed Q3 was the first time we raised prices for a while. Is that what you're saying?

Not necessarily the first quarter, but you have taken prices just given where tariffs have gone. So just curious what the elasticity looks like, you know, how the customer is responding.

Yeah, we're learning. We've taken a lot of price increases this year. We've had a lot of know movement in tariffs and characters set at one level and they went up and they're they're moving around and you know take some white i mean everybody you know from manufacturers to you know product designers and everybody who's involved in you know the development process and um you know it's you know first time we're all trying to navigate this through the same so uh I don't know if maybe it's going to stop moving for a while, but, you know, for a while that we're kind of frozen. But I think, you know, so far, as long as it's fair to everyone, you know, I think that there's some businesses that might be kind of violating the rules. You know, I think that there's some, you know, like people that are coming in, businesses in other countries that are, you know, opening up in the U.S. and they might be making the goods so they know, you know, they might not be, you know, bringing them in at the right price. You know, they're trying to, yeah, I mean, there's a lot of things going on, like especially where there's marketplaces and, you know, you might have manufacturers bringing in goods and they're figuring out, how to get around tariffs, you know, and we hope that any of those kind of things, you know, get the, if we're going to have tariffs, let's just make it fair. You know, don't let some foreign manufacturer come in here and, you know, those are the people you're trying to stop, and there's actually loopholes, you know, they're kind of getting product in here, and I think, you know, next to nothing. And that might be an advantage for certain people for a certain amount of time, but, you know, I think that stuff's getting to the administration, and, you know, You know, hopefully it'll become a fair playing field for everybody. And then if it is, you know, it is. You know, and, you know, the market, you know, will kind of conform to the reality. You know, I mean, the customer is going to have to conform. You know, things cost more. That's what happens. You know, we've had inflation forever, you know, in this country. You know, many times much worse than this. So, you know, I think we just think about, hey, just make it a fair game. You know, don't let manufacturers come in and open a U.S. entity and, you know, if their price is really $1,000 for something, don't let them bring it in for $100 and pay almost no tariff because they're, you know, shipping it to themselves.

So, got it. Yeah. No, that's helpful. And then, Gary, just any more color on the new collection that you're looking to roll out next year? Just how are you thinking about the timing and just what could it look like as we think about some of the building blocks for next year?

Yeah, we just got back from the trip that, you know, we worked exclusively on that. And I don't think we've ever been more excited about anything that we've worked on. And I don't think we've worked any harder, not because we had to, just because we wanted to. Like, it's like, I think, you know, Ari, Lisa, anybody who's put this on the trip would, you know, if it has any perspective of the big moves that we've made over the years, I think this is going to be the biggest incremental move we've ever made. And I think it's going to be like a, you know, a 10-year thing. You know, it's not only is it a part of our assortment that we're way under-penetrated in, it's if you look at the architecture that it's targeting and the homes it's targeting, it's targeting the biggest architectural block, you know, an aesthetic block, especially at the high end. You know, I mean, some of our data says, you know, 60% of homes, 5 million and above represent this kind of architecture. it's where we used to be strong. And, you know, when the launch of modern and contemporary and really the, you know, the modern book, you know, the modern book and modern's modern, interiors kind of became contemporary. And that's why I consolidated it all together. And then, you know, the kind of, you know, the major look, you know, without saying too much, you know, is that, And where we kind of built, you know, built the company on is more classic. It's not only big, it's the next trend. So, and what we're doing is it's our best work and our partner's best work. And, I mean, everybody is excited about it, especially after this last trip. And so, our target is to launch it at Bologna. In Milan, the biggest design show in the world, you know, when we have probably the biggest opening party that anybody's had in Salone and, you know, and have the world come see it and talk about it and, you know, try to get it into as many galleries as we can as quickly as we can. It's what our interior designers and teams, you know, are giving the app the most about. It's what they're most excited about. You know, we don't really represent it. very well. So, and the work we're doing is, I think, just incredible work. And I think we can't wait to jump back on a plane and, you know, go do some work with it. Like, we just, it can be so big. So, I think it's, I kind of look at it and I say, it's worth a few billion dollars over the next several years, you know, I don't know, five years or ten years, you know, but it's, it could be the biggest part of the brand. It should be. Especially with the trend that's going to be powering it over the next, and that trend should go 15 to 20 years. You know, when you look at cycles. And this is the first time we're going to actually kind of lead a cycle. Like, you know, we usually, I used to say, like, don't go too early on the wave. You know, you're like a surfer. You'll get a false negative. The wave will go underneath you. Wait until the wave breaks. Let a few people ride that, you know, wave, learn from it, and then go own the wave. But this one, you know, it's actually the first cycle. I actually was a consumer. You know, I bought my first house. You know, my wife was a high-end material designer, which actually first we did on Netter. She was a material designer. It's the first place I ever bought a, you know, small project in San Francisco. And, you know, I was the consumer for this look. And I have some Belvedere, the first house I built, you know, and we did that house and That was the look. So, you know, so I kind of noticed why. I actually was like, wow, I'm old enough to look through the cycle here. Like, that's a good and a bad thing, right? But, you know, why do we think we announced? Like, we didn't even announce that stuff yet. Yeah. Yeah, I got to get off stage. It came out in the business. It came out. It came out in the business. Because you were interviewed. Oh, okay. Yeah. So, as you guys know, we bought Michael Taylor, you know, Michael Taylor Designs. You know, Michael Taylor was the godfather of the California look and, you know, one of the most famous interior designers at this time in the 80s. And he did the Auberge du Soleil, his famous diamond table within the lobby of the Auberge du Soleil. So, we – and I have the diamond table in my Belvedere house. You know, it's – you know, I've had the Michael Taylor dining chairs and, you know, the snaps. They really – very cool, iconic pieces. So, we bought the Michael Taylor brand. We own all the IPs, and, you know, you'll see a fresh, whole new thing coming. I'm giving the competition a little heads up. I better shut up. Why do you do anything in Ernie's college? I'm just going to kind of do this thing, and I thought, like, no way. You know, in the world of AI, everybody's going to start copying. But, you know, we bought another company besides that, and so we, you know, We're well on our way. It's going to be a big deal. Awesome.

Thanks a lot, guys. Best of luck.

Up next, we'll take a question from Michael Lasser, UBS.

Good evening. Thank you so much for taking my question. Gary, you wrote in the letter that the way you offer your guidance is you have very high ambitions, and at times, you may fall short of that. Would it make sense to say, slow the pace of all the initiatives and aim for a little bit more predictability in light of this very dynamic environment. And in that case, profitability might come a little higher as a result, or is your theory at this point, we're going to drive top line growth at all costs and the profitability will eventually come?

I guess if I thought that, I would have wrote that, right? I don't think that's what I wrote. You know, I just think that, you know, Wall Street's a funny thing. A lot of people said to me throughout my career, hey, you know, I hate being a public company and, you know, you got to report quarterly earnings and it gets you to think small. And I said, I don't know. You know, I think that's a choice. I actually like the discipline of being a public company. I actually like that we have to, you know, report earnings once a quarter, you know, report numbers and, you know, make us stop and think and assess and prioritize and so on and so forth. And I like that we have, you know, quarterly board meetings and I like that we, you know, have to, you know, go through that process and just fill things down and simplify and, you know, assess everything. You know, so, you know, so I don't mind it. The thing I've learned and I've observed, I think so many people, you know, they get so focused, you know, like on quarterly results that, you know, that becomes their whole mission as a CEO, you know, or a leadership team is like, how do we make the quarter? And they do a lot of stupid things. to make a quarter that aren't brand building or, you know, business model building or anything, you know. And I just, you know, I just think it's not a smart way to build something great, you know. And, you know, one of our board members, you know, grew up in Silicon Valley and she's, you know, really, you know, Facebook, you know, team member and everything. And, you know, she always says, like, we're like a Silicon Valley startup, you know, like we're, you know, semi-mature public company. And I think that's a good thing to be. You know, it creates energy. It attracts great people. You know, great people don't want to come in and just like, oh, how are we going to make the next quarter? Oh, let's lower our expectations. Let's make sure we make it. You know, that's like a downward spiral a lot of times. I mean, we, you know, we want to do something great. We want to do the best in the world at what we do. And, you know, that's not for the faint of heart. It's not for everyone. You know, but we don't need everyone to buy the stock. And, you know, we don't, you know, our strategy is really simple here. From a business point of view, I'd say we do what we love with people that we love for people that love what we do. We don't do focus groups. We don't do stuff like that. This is very personal business to us. And it's probably reflected the same way as shareholders. Some people have been with us forever, and some people are out of stock, and that's okay. They love us sometimes. Some people don't love us. It's a free world. I don't know, like I, you know, sometimes, you know, like in good markets, you know, we're eating quarters and making quarters. In a market like this, this is the time to, you know, make moves and take market share and, you know, create real strategic separation on the other side of it, ready for the turn. And I don't think anybody's going to be more ready than we are. I didn't, like, look out when the healthy market comes back. You think we're going to, you look at our two-year numbers, you know, like, you know, just the handful, again, it's not that many publicly reported people, but, you know, if you look at furniture-based retailers and, you know, a lot of those people, you know, even on the list, they sell a lot of accessories and other things. You know, there's not too many that are just focused on furniture that are even, you know, that I, every, you know, store, like, they'll put this company there. We'll, Are they even in California? Like, why would we think of them, you know, as a competitor? Like, you know, they don't sell anything like us. You know, they're not at our price point or anything. But, you know, we, you know, we took, you know, kind of national, you know, public players and, you know, have a, you know, at least, like, 50% furniture. We're 80% furniture. And so, we're going to be more successful because of the furniture content, but furniture is the biggest part of the business. So, you know, should we lower our ambition? Like, no, I don't think so. I mean... My question was not on... Will we be more stable? I don't know. Like, are we not stable? I don't know. Like, I mean, we're going to make five teams even though.

Yeah. My question wasn't on the ambitions. It was more the... It was more about the pace of initiatives and slowing down to eventually speed up. And you're not going to love my follow-up question in light of that, so I apologize in advance, but... I like you, Michael.

You have good questions. It makes me think. Thank you.

My second question is, in light of the guidance, that call for the fourth quarter that's called for a slowdown in the top line as well as some absorption of the tariffs. Is this a signal that you're running into limitations on being able to manage the tariffs with price and we should consider that as we factor our models for next year not only that put a little bit of a drag on the top line, but also we should consider that we may have to absorb some more tariffs in the next year. Thank you. I'm thinking, Michael.

You know, the tariff piece, I don't, you know, we didn't materially change the impact from a basis point perspective. Obviously, that's just representative cost alone. You know, the other piece that's not calculated on that is the price increase. You know, Gary called out in the letter one of the key three items was just the tariffs on the back order and special order goods.

And some of that was timing, right, because we experienced an increase and expected, you know, have expected an increase in tariffs. We do our mitigation efforts. We do our resourcing efforts. But we, you know, concurrently also change prices. But you're never perfect. You know, you have some delays in the effectiveness of those.

But, you know, you're never going to call your customers back and say, oh, by the way, the thing you just bought, we're going to be importing it at a 20% tariff, so can you give us more money? So, you know, as we thread that needle and get all that, you know, dialed in, that was some of the things that surprised us in Q3, and it will flow a little bit into Q4. But, you know, I don't know that we're ready to – to say that, you know, make a statement like you're describing. You know, it's a dynamic situation.

Not to mention looking at competitors. What do competitors do? You know, we don't lose sight of that. So, you know, as far as what 2026 looks like, you know, obviously, we're a little early for that.

I understand the question and the desire to know. We'll talk about that at the end of March. But I think, you know, I think we're proud of how we've been navigating the tariff situation, you know, with price, you know, with mitigation, with resourcing, with vendor partnerships, with price increases, everything that you would expect us to do, so.

Yeah, I mean, plus we probably had the most, you know, difficult situation from based on, you know, where we were resourcing from and what we did, and, you know, we, you know, We read it wrong. We thought, you know, the president was going to like, you know, moving goods to Vietnam. And Vietnam is, you know, a smart place for us to, you know, move goods into. And all of a sudden, Vietnam got hit with a 47% tariff or 46% tariff. And we're like, what? That was costly to move it to Vietnam. And it was, you know, a lot of work and a lot of, you know, effort. We're just getting ramped up and then, you know, okay, now where are we going to put it? And then, you know, China's going from one territory to another and, you know, and, you know, there's other places we're moving goods to and moving it to the U.S. And, you know, it's a bit chaotic right now. Like, I don't know. Again, I kind of look at it all in context and I say everything that we're investing in, you know, we're building a restaurant company. You know, I don't know, name somebody who's ever done restaurants of our quality integrated into a retail experience, especially a furniture store. Now, you'll say, well, you know, I hear something about meatballs or something, right? And, you know, and actually, you know, we're generating cash. We're paying 65% of the rent of the buildings there. On average, you know, some are higher, some are lower. And, you know, we – I think we're one of, what is – one of seven global luxury hospitality companies that own and operate their own business. A lot of people go, like, who's your chef? You know, what hospitality company runs your restaurants? We run them. We're the – the chefs and you know we have stevens obviously we have culinary leaders and chefs and we all get together and collaborate but they're yeah they're a reflection of you know what we love and what we do and we're getting good at it we're getting better and better uh and like i have an interesting point for a case when what was our our average ticket was 38 38 in 19 In 2019? Yeah. So, I mean, here's the interesting fact. We just had our 10-year anniversary in October being in the restaurant business. We opened, you know, in Chicago, and that restaurant did get, you know, the partner that we did it with is a great guy, still a good friend, and, you know, and super successful. It's You know, you really want to do something, you know, someone's full-time and they're doing this and, you know, we just realized most of the chefs, you know, driven businesses that are doing hospitality for other people, it's, you know, kind of a license to name thing. They're not there. I mean, we had a deal with Brendan and he was, you know, we had half his time for a while, but then he, you know, he had so many other opportunities and we realized, you know, this is, You know, turning it into a real thing for us, we need to make it a core competency. So we've invested now many years, and, you know, it's like, but that restaurant in Chicago that we opened, I think it's $5 million its first year. I mean, the estimate was going to do about a million bucks its first year, and it did $5 million. It does. Nine or ten million now. Just shy of ten. Just shy of ten million. And we opened a second restaurant, a second gallery, you know, in a suburb not too far from that that's doing 11 million. You know, so you'd think it would have been cannibalized more. And, you know, and we're, yeah, our team is growing and maturing and, you know, collaborating and we're getting better and better and You know, but if someone would have said 10 years ago that, hey, how many people want to wake up in the morning and go to a furniture store for dinner, you know, or for lunch? Like, I don't think anybody would have. You know, so think about that one. Like, I don't know, should we not have done it? Because you could have said, like, Gary, that was, like, really hard. Why didn't you do that? Well, we do hard things, you know, and we do things that are unique and differentiated and, you know, I think because we, you know, we're more ambitious than others, we think more deeply than others, and we're not just managers of something. You know, managers arrange and organize the status quo. We're leaders. And, you know, leaders are leading people somewhere they've never been, doing things they've never done. You know, and leaders have to be comfortable making others uncomfortable. You know, because that's what leaders do. Because, you know, and starting with the leader, the leader's going to be somewhat uncomfortable. So, you know, I'm Sorry if I'm making you uncomfortable. You know, it's just what I do. That's how I know I'm leading. That's how you know you're on the right path. But, you know, if you can build things that other people haven't built and if you can lead, you can create a lot of value. And we believe we're going to create a lot of value. Like, maybe not at this moment. You know, like, we look really risky, I guess, because we have debt. But we said we're comfortable with paying down the debt. There's lots of things we can do. Heck, we've done more zero convertible notes than anybody in history, I think. We did four. I don't think anybody's done four. Yahoo had done two. At some point, we might tap the convert market. At some point, we may refinance some of the debt. At some point, who knows? We've got a lot of real estate, and we think We can monetize that over time, and, you know, our inventory has been high. We're, you know, turning inventory into cash, and, you know, but I'm pretty comfortable. Like, hell, I lived on the edge of bankruptcy my first 10 years. This is nothing.

Thank you for all the insight, and I wish you all a very happy holiday season. Thank you.

Great. Happy holidays to you, Michael.

The next question comes from Simeon Gutman from Morgan Stanley.

Hey, Gary. Hey, Jack. Maybe one question. Maybe let's talk furniture. Can you talk about the backdrop? I know it's been a tough overall market. Can you just talk about how the quarter, you know, how the customer changed, the demand for furniture, how your current lines are resonating? And then barring anything in the backdrop getting worse, can we assume that free cash flow stays positive from here on out? Thank you.

You know, I don't know if this is the time to assume anything will, you know, be a certain way, right? We just had China and Russia fly bombers over Japan. You know, like, hello, is anybody expecting that? You know, and, you know, then we rallied bombers with Japan or fighter jets or whatever. Like, who knows what's going to happen in this world right now? And there's a lot of noise. And, you know, so, I mean, we expect free cash flow to remain positive. But, you know, did we expect at any time early in the year that we were going to have all the tariff announcements, you know, in such an unpredictable, chaotic way? Didn't have to delay our interiors by eight weeks. Did we think we were going to launch estates this year? Yeah, we did. And I said the name of that. Sorry about that. But, you know, it's a really unusual time. And, you know, we're not trying to be flat or up three right now. Like, if we're trying to be flatter up three, wouldn't we be more predictable? We might. I don't know. Would that be really good for the long term? I don't think so. I love what we're doing right now. I love the moves we're making right now. I think nobody's even going to – I think people are going to be shocked. I think competition's going to go, oh, now what? I love, you know, our strategy in Europe, but – Is it more expensive than we thought? Yeah, it is. Like, you know, we built these things during and post-COVID, and they're way more expensive. And, you know, put pressure on short-term, you know, cash flow and, yeah, sure. But wait until you see what we invented. And, you know, again, necessity is the mother of invention. Put us into a corner, make things tough for us, we'll invent our way out of it. We've designed, I think, some of the most exciting, retail concepts coming you know like new versions of rh that i think are mind-blowing and they cost half as much and we have other ones that are equally creative that will take probably less than half the time and cost less you know and uh you know we've got design ecosystems we have design compounds we have you know uh interior design office. We've just got a lot of things, and they're all major. I think we're pretty responsive strategically. We just don't like to get stuck in the weeds and not see the bigger picture. We're really excited about where we are. We're super positive, but can you say things are going to be super predictable in what we've just seen in the last six to 12 months, I'd say it's going to be predictably unpredictable, just what we've all had to navigate and deal with. I mean, there's still changes. Like, you know, who knows? There could be a whole new round of tariffs. You know, Supreme Court could say, hey, this is illegal. And then all of a sudden it's going to be, you know, you read the news, it's going to be these things happen, those things happen, those things happen. This changes that. Like, we'll, you know, we'll improvise, adapt, and overcome. That's what we do.

Send me in on the free cash logistics, you know, like you talked about the $300 million of inventory coming down. So that this year is kind of a $200 million figure we talked about.

Yeah. There's still that element to come. We talked about reduction in capital spending, you know, last call, a little bit here.

So just there's building blocks to maintain positive cash flow going forward, but obviously, you know, there's a lot of unknowns and a lot of uncertainty. So we'll be talking a lot about that and try to drive that result as well.

Thank you. Lifelines. Up next, we'll take a question from Jonathan Maniszewski from Jefferies.

Oh, great. Good evening, and thanks for the time. I appreciate the color on market share, Gary, and it's easy for us to track the public players you outlined in the table, but less easy for us to assess, you know, the health of the fragmented design showrooms, you know, those regional high-end stores, some of the local independent boutiques. I'm curious if you can give us a sense of what you're seeing from a dislocation standpoint with the majority of your share gains coming from, you know, those channels. Thanks so much.

Yeah, you know, harder for any of us to measure, but yes. I mean, the feedback we get from, you know, some of the people that we've acquired and, you know, people that we know that, you know, believe we've been the biggest disruptive force at the high end of the business over the last, you know, 10 years, not more. And so, especially with what we've done, you know, with the new galleries and with the assortment and moving up market and taking the, you know, the quality up and the level of design up and, you know, so, you know, I think you could, I mean, we used to track how many independent high-end boutiques there were, right? There used to be 32 between, you know, Sausalito and Santa Rosa, you know, County Healdsburg and Napa. And we always said, you know, that they all exist because, you know, RH had a 6,000 square foot gallery in Corte Madera. And, you know, most of those boutiques were, I don't know, 3,000 to 15,000 square feet, you know. called the majority of them kind of close to the size we are. And, you know, it wasn't obvious, the assortment. You know, if you didn't get our book, you know, you didn't know how big our assortment was. If you didn't go to our website, you know, you didn't know. And we always said, like, when we have the assortment in physical marketplace, there will be a lot less. And, you know, you're making me want to go do the latest math. I mean, we know... You know, it went from like 32 to about 18 or 20, you know, over X number of years. And we should go do the math again. You know, but I think, you know, we've went from 300 million to 3.5 billion. And some of it's hospitality and, you know, contract business and we own waterworks. But, yeah. You know, we believe most of the share came from the higher end and came from, like, it came from the showrooms, and they came from the independents, and they came from the regional furniture stores, and they came from, you know, the Ethan Allens of the world or people like that. I'm not going to stick on Ethan Allen or anything, but, I mean, Ethan Allen, when I was at our age, earlier days, there were, like, 1.2 billion or something. And, you know, we looked up to them, and I think they, I don't know if they do today, 500 or 600 million or 700 million. You know, so, you know, there's always going to be those shifting dynamics. You know, they're sometimes hard to measure. But, you know, we like how our business has been performing from a market share point of view, and there's enough data to say, You know, we're one of the leading share gainers right now, you know, at a certain size. You know, especially furniture-based, right? Again, you know, there's other people that have a big tabletop business, or they have big accessories business, or they're in seasonal businesses like Halloween and Easter and this and Christmas, and we're not in any of those businesses anymore. You know, so you got to compare us to the right kind of people. And, you know, so we don't have some of those other businesses that might make us a little less difficult. You know, there's some of the businesses I think we exited too far. You know, we probably have some more home accessories or, you know, some layer, you know, designers, you know, would like to have more things to complete a home. And so, you know, we're considering those things. We used to have a book called The Objects of Curiosity, and we may relaunch that at some point. And you might see us I don't know, I wouldn't even rule out would we be in the tabletop business, but just in our own way, you know, and I don't think I want to be able to chase the holiday businesses, you know, but it doesn't mean we can't have, you know, beautiful candles and that are, you know, that are like our branded stuff, you know, we can't have like our maze blanket or things like that, you know, and that are really high end and aspirational and You know, it can be great gifts and, you know, things you really want in your home to identify, you know, that identify your status and where you are in life. So, we think if we build the brand correctly, you know, there's going to be other opportunities like that. But, you know, but I, yeah. You know, hard to, it's that fragmented, right? It's like not easy to exactly know.

helpful. Thank you, Gary.

And that does conclude our question and answer session. I'll hand the conference back over to Mr. Gary Friedman for any additional or closing remarks.

Great. Thank you, operator. Thank you, everyone, for your interest. I want to thank our teams, you know, that bring our brand to life each and every day, you know, throughout our galleries, our hospitality, our distribution centers, our You know, every aspect of the company, you know, everybody in, you know, every location around the world and everybody who's all of our partners around the world that, you know, work so hard to, you know, bring these beautiful products to life. You know, we appreciate everyone and your efforts and your collaboration. And we wish everyone a wonderful holiday. And we look forward to talking to you in the next year. Thank you.

Once again everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.