RH

welcome to the world of rh albert einstein's three rules of work out of clutter find simplicity from discord find harmony in the middle of difficulty lies opportunity seem especially relevant at this moment we're compounding clutter from tariffs global discord as a result of war and the most dire housing market in decades can make it difficult to separate the signal from the noise It's important to remember necessity is the mother of invention, and our most important innovations were birthed during the most uncertain times. Transforming a nearly bankrupt restoration hardware into RH, the leading luxury home brand in North America, was not a feat for the faint of heart. While the external challenges are somewhat familiar, our internal opportunities are massively different. We're not closing stores and fighting to survive. We're building a never-seen-before brand that's positioned to thrive. Before we get into the details of our strategy, let's start with a few facts that should quiet some of the noise. In 2025, RH achieved revenue growth of 8% and two-year growth of 15%, far outpacing our furniture industry peers by 8 to 30 points. Adjusted EBITDA reached $597 million, or 17.3% of revenues versus $539 million or 16.9% of revenues in 2024. Free cash flow of $252 million versus negative free cash flow of $214 million in 2024, an increase of $466 million year over year. Those results were despite 2025 being our peak investment year with $289 million of adjusted CapEx to support our global expansion, plus an additional $37 million to purchase the Michael Taylor Formations and Denison Lee and Brands to support the launch of our new concept, our H estates. A strong performance considering the unusual circumstances. Let me shift your focus to our strategy and how we expect our growth to accelerate over the next several years. We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far-reaching. We believe our goal to position RH as the arbiter of taste for the home will prove to be both disruptive and lucrative as we continue our quest of building one of the most admired brands in the world. We like to use a simple question to frame our significant opportunity. Who is the home brand to the luxury customer? The LVMH, Hermes, Cartier, or Cuccinelli customer? RH has curated the most compelling collection presented in the most inspiring spaces in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our growing global platform. Our product is both categorically and stylistically dominant, enabling RH to address the largest market of any brand of its kind. We curate across the seven major product categories, furniture, upholstery, outdoor, lighting, linens, rugs, and decor. And we integrate across the three dominant product styles, traditional, contemporary, and modern, which we refer to as RH Estates, RH Interiors, and RH Modern. RH Estates, our newest brand extension, launching this spring, will address the traditional market where the RH brand is currently under-penetrated. 60% of luxury homes feature classic or traditional architecture, which influences the majority of furniture purchasing behavior. RH Estates will feature the introduction of RH bespoke furniture, customizable collections from our recently acquired Michael Taylor, Joseph Duke, Formations, and Denison Lane to the trade brands. RH Estates will also include the introduction of RH Couture Upholstery by Dimitri and Co. Tailor-made sofas, sectionals, and chairs have arguably the highest quality upholstery available anywhere in the world. Designers will be able to order custom-made sizes and finishes, plus specify COM fabrics. RH Bespoke Furniture and RH Couture Upholstery will enable interior design firms to now specify RH for their most discerning clients and custom projects. RH Estates will also include collections from many of the most talented designers and artisans in our industry. Let's take a look at some of their work.

Thank you. Thank you. Thank you. Thank you. Thank you.

RH Estates will premiere at the opening of RH Milan, the gallery on the courts of Venezia. a 70,000 square foot former palace during Salone, the largest design show in the world, with an estimated 500,000 visitors descending on the city that week. The launch of our H estates will include a dedicated source book mailing mid-May, an international advertising campaign, and freestanding estates galleries in Greenwich, Connecticut, and the San Francisco Design District opening early summer, and the West Hollywood Design District opening in 2027. We believe RH Estates will become our largest and highest margin brand extension, driving significant growth over the next several years. Let me shift your attention to our multi-dimensional, physical-first global ecosystem, the world of RH, that goes far beyond a typical multi-channel approach, inspiring customers to dream, design, dine, travel, and live in a world thoughtfully curated by our age creating an emotional connection unlike any other brand in our industry the question we often are asked is why physical first in a digital world let me explain furniture remains the least digitized large retail category with an 80 20 store to online split with luxury furniture estimated to be as high as 95 5. why do stores still dominate Comfort, scale, finish, and quality are hard to judge online. Even when customers purchase on a website, most experience the product in a store. We believe the physical manifestation of a brand will continue to be significantly more valuable than an invisible online one. We also believe most retail stores are archaic windowless boxes that lack any sense of humanity. That's why we don't build retail stores. We create inspiring spaces. Spaces that are a reflection of human design, a study of balance and symmetry that creates harmony. 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. While most have been closing or shrinking the size of their stores, We've been building some of the largest and most immersive spaces in the history of our industry. Let's take a look at our most recent work. Thank you. Thank you. Thank you. We believe our investments in building completely unique, immersive experiences in Paris, Milan and London will set the stage for RH to become a truly global luxury brand. It's important to understand that there are several strategically significant businesses embedded in our galleries, including RH Interior Design, where we become the largest residential interior design firm in the world, with projects from San Francisco to Sydney, Los Angeles to London, Miami to Milan, and Dallas to Dubai. We offer design services including interior architecture, landscape architecture, art and antique curation, and turnkey installations. Another important business embedded in our galleries is RH To The Trade, a specialized team that calls on services and supports interior design firms assisting in the design, curation, delivery, and installation of many of their projects. RH Hospitality operates beautifully integrated restaurants, wine and barista bars in our galleries that generate significant traffic and brand awareness. While our galleries might see several hundred customers per week, our restaurants feed several thousand. With 26 restaurants in operation today and is scheduled to reach 40 by the end of 2027, RH is one of only seven globally owned and operated luxury restaurant brands with 20 or more locations worldwide. We believe our galleries create a unique competitive advantage that will likely never be duplicated in our lifetime, as the cost of construction at the luxury level has doubled post-COVID. To address that challenge, we've developed several immersive new gallery concepts that will enable us to scale in a faster and more capital-efficient manner. The first, the most revolutionary, is what we call an RH Design Compound, currently in development in Naples, Miami, and Walnut Creek. A compound is six to eight independent buildings connected by beautifully landscaped garden courtyards with a sun-filled atrium restaurant anchoring the project. Due to the absence of multiple stories that require steel structures, grand staircases, elevators, complex mechanical systems, and long development timelines, we believe we can build design compounds significantly faster and more capital efficient than our prior design galleries. Another new approach to deploying the RH brand in a faster and more capital efficient manner is what we call a design ecosystem. Currently under construction in Greenwich and Palm Desert, and in the development process in West Hollywood Design District. An ecosystem is a multi-building brand presence on a street, in a neighborhood, design district, or shopping center. Our first ecosystem will be in Greenwich, Connecticut, and includes our gallery at the Stork Post Office, Our new outdoor gallery opened last year and our new RH Estates gallery with an integrated restaurant opening in the former Ralph Lauren building this summer. We've also developed a new single-story gallery ranging from 15 to 20,000 square feet with a dramatic courtyard restaurant targeting secondary markets. We're currently under construction in Los Gatos, California, and are in design development for galleries in Richmond and Milwaukee. We've been extremely pleased with our performance of our first freestanding RH interior design office in Palm Desert, California, and have plans to open a second interior design office in Malibu this fall. In total, we have an opportunity to expand our presence in 27 existing markets and open one of our new design concepts in 48 new markets across North America, representing a $2 billion opportunity. Let me shift your attention to our business model and balance sheet. While we believe it's prudent to plan conservatively this year due to uncertainties around interest rates and inflation, and a planned revenue growth in the 4% to 8% range in 2026. We do expect growth to accelerate to 10% to 12% in 2027 and reach $5.4 to $5.8 billion by 2030. Adjusted EBITDA in the 14% to 16% range for 2026, reaching 25% to 28% by 2030. We expect cash flow of 300 to 400 million in 2026 and 500 to 600 million in 2027, inclusive of 200 to 250 million of asset sales each year. We expect cumulative cash flow of 3 billion by 2030, inclusive of the asset sales, and expect to be debt-free by 2029. While one might look at the current market discord and argue that RH has been in the wrong place at the wrong time, I would argue we've used this period to position our brand to be in the perfect place at the perfect time. Let me explain why. There are two important factors that will meaningfully expand the size of our market over the next 10 years. One is the exponential spending of high and ultra high net worth consumers on the home. Ultra high net worth consumers with a net worth above 20 million own on average 3.7 homes. Billionaires own 10. Ultra high net worth consumers spend 6.4 times more on home furnishings than a consumer with a single primary residence. Two, is the estimated 30 to 38 trillion dollar wealth transfer projected to take place over the next 10 years. which is more than double the past 10 years. Not only does the absolute dollar amount more than double, it's estimated that the dollars transfer from one to an average of seven people. It's possible over the next 10 years, our market will be multiple times larger than the past 10 years. When you combine that with our efforts to elevate and expand our product, globally expand our platform, generate significant revenues and brand awareness with our immersive hospitality venues, I would argue that the RH brand is in the perfect place at the perfect time. And we will emerge from this period of clutter, discord, and difficulty as one of the highest performing and most admired brands in the world.

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 you limit your questions to one and one follow up for today's call. you may requeue 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, Gary. Hey, Jack. First question, I'm going to talk about demand signals from the consumer. This has been a The transitional period for the company, I realize the demand is outpacing a lot of other home furnishing companies, but it's come at a pretty big cost to margin. So expectations around demand improving while we see the margin of the business begin to turn. That's my first question.

Well, Finian, the margin pressures – somewhat disconnected and unrelated from the demand. You know, the margin pressure is really from kind of the investment cadence we have as far as expanding the business, you know, throughout Europe and some of the margin pressure, you know, coming from, you know, the tariffs, you know, from a transition in timing and resourcing. But, you know, you basically have kind of an inflection point of, We're in kind of a peak investment period from a capital and an expense and cost perspective based on the investments we're making, both from a global expansion and North American expansion point of view and from a product point of view with the launch of RH States. I think you have to think about the launch of RH States in Q2 will have significant costs with source book and advertising and launching costs without having, you know, much revenue until we get into the third and fourth quarter. And the states is, you know, remember is basically, you know, running late. You know, our original plan was to have the states in the third and fourth quarter last year. So we have some timing issues, I think, when you think about, you know, the significant investments we're making, both from a capital and expense perspective. And, you know, and we're going through, you know, kind of an unpredictable time. So I think that's why it's important as you're looking at the business, you're looking at the model, you're thinking about, you know, being an investor here. You know, you have to have a longer-term view than a shorter-term view in periods like these. You know, and in many ways, you know, a lot of people are going left and we're going right, you know, as people are pulling back and, you know, trying to manage the margin side of their business. You know, we're investing, you know, in the most significant way we have in our history. And, you know, that's just going to create some timing dislocations from a, you know, from an earnings perspective.

And then my follow-up, you know, you made a couple of executive leadership changes. One, a new president, and two, a second person. And in the release, it talked about potentially helping monetize some of the real estate. So can you talk about both of those hires? You know, what prompted them? And then, you know, what does it speak to about the direction of the business you're heading in?

Well, I think that... It's explained in the press releases. I don't know if there's anything different than that. You know, we mentioned, you know, we're extremely happy to have Dave Stanchak rejoin Team RH. It made a significant impact while he was here, both from a North American transformation point of view and a global transformation point of view, and was involved in really setting up the structure of the real estate for European expansion. And so it's good to have Dave back. And I think Dave is probably the most... experienced real estate executive on a retail point of view, because he's, you know, both, you know, not someone who's just been involved with mall leasing and, you know, which is typical when you think about most retailers. Dave's been involved in real estate investments. He is an investor. He's had his own shopping centers and controls real estate himself. So he comes at it from an investor perspective, a much bigger perspective. And it's a kind of transformational leader as you think about a unique business like ours and the platform we're building, which is unlike anything anybody else is doing or has done at a level of quality and locations and so on and so forth. You know, there's not, you know, not anything that I didn't talk about, I think, in the press release. And then with Veronica's joining RH, we've known Veronica for a long time. You know, we've, you know, been able to observe her and her leadership and her ability to build what we think is, you know, one of the leading manufacturing businesses in North America from a grocery point of view. But, you know, mostly what we, I think, think about here is not just, you know, the upholstery part of our business, but if you think about the best luxury models in the world, whether you're looking at Baton or Hermes or Chanel or others, One of the things that's very unique with their business models is they have a very concentrated core business. 80% of their business is in the leather goods and accessories part of the business. It's very similar to our business from a penetration point of view. 80% of our business is furniture. That's typical if you look at the home furnishings business. So if you're in all categories, that's going to directionally be the mix. depending on how you position those categories. And we think there's an opportunity when you look at our business from a global scale of building a unique platform that's synergistic and appropriate for the unique platform we're building from the selling side. You know, I think we have built in our building the most unique you know, physical selling platform in the world. And I think it deserves and will be, you know, positively impacted by building the most unique manufacturing and sourcing platform in the world. So, you know, eliminating, you know, when you think about the inefficiencies of manufacturing when you don't, when you don't control your distribution, there's quite a bit. So long-term, we think, you know, we can build a unique manufacturing platform. And as I said in the press release, a combination of owned, joint-ventured, and, you know, outsourced, that can be very unique and significantly accretive from a, we think, both a revenue perspective and a cost perspective and a margin perspective. So, yeah, so we're excited. We think Veronica is the best person in the industry we've met. We think she's a unique talent leader. She's an engineer by education and experience and has a big and very big and kind of strategic view of manufacturing and sourcing. It's a new level of talent in the company. We've never had someone of this kind of pedigree and experience and talent, and we think she's going to do some incredible things long term.

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

Good afternoon, Gary, Jack.

Gary, with Milan and London starting to open here in short order, curious if you could give us an update on RH powers, you know, and or just comment on the anticipated revenue contribution from the broader RH international strategy behind the 2020-2030 reference year you laid out in your prepared remarks. Obviously, just looking today for any color to help support or build conviction around those longer-term outlooks you laid out today.

I'm not sure I picked that question up. Correct me, the impact of international as it relates to the 2030 targets, you know, how we think about that growth of that.

Yeah, well, I think what we've articulated, you know, most recently over the last few quarters and, you know, really since I think our start, really that the opening of Paris, Milan, and London, is kind of the brand foundation to build on when you think about European expansion. They're the three most important cities in Europe. We think they're important from a positioning of the brand and a brand awareness point of view. And all three of those are really the, besides, again, RH England, which is out in the countryside, which was important from a, you know, a brand impression and awareness perspective and how to kind of make an entry into the European market. But these really where we have significant investments and, you know, the presentation of the product, the hospitality experience, which we think is going to be, critical long-term to building brand awareness, you know, throughout Europe. And then, you know, one of the keys here is really not just these key stores, because if you, you know, as we assess the business in Europe, and we have since day one, believe that the basic distribution and where the sales will come from will be long-term more important in suburbs and second-home markets than cities. That the cities are really going to be the key to brand awareness and driving the brand and positioning the brand and will do significantly more revenues, we believe, in Paris and Milan and London than we will in other cities. And if we were you know, ranking them, you know, clearly London we believe is going to be the biggest market for us, you know, as it should be. But, you know, our distribution of business is significantly suburbs and second home markets in North America. 90, 92% of our business is in suburbs and second home markets. And second home markets are kind of like a suburb, right? and about 8% of our business is in the cities. And we think that distribution is going to be similar throughout Europe. And if you looked at Apple's real estate strategy, and you looked at their distribution throughout Europe, which we believe was a good kind of model for us to look at as far as a higher-end consumer, and you looked at like Apple's North American kind of distribution versus our North American distribution, their penetration in suburbs, you know, our penetration in suburbs. You know, there's similarities there. You know, we're more highly part penetrated in second-home markets than they are. Most people, you know, have their phone with them. But, you know, one of the keys for, I think, Dave's joining the company, too, is just to, you know, continue that, you know, leadership into Europe and, you know, building out into the suburbs and into the Second Hill markets to cover the business. So, you know, strategically, we're setting up the business in the kind of key markets that you would from a brand and awareness perspective. And not that we don't think that the business is going to have revenues there, we just think the biggest revenues are going to come long term when you think about the longer term plan. as we expand into, you know, the suburbs and markets where, you know, people really buy much more furniture, both indoors and outdoors. Thanks for that. Maybe just a quick follow-up. Obviously, great to hear, Dave, regarding the company. You talked about $250 million of asset sales in each of the next two years. sort of a two-part question. One, can you speak to, you know, sort of the value of the non-core assets or the assets, you know, that you don't plan to operate in the future versus the value of the assets RH is still planning to operate in the future? And then maybe any color on sort of timing for 2036 asset sales as we think through the potential interest expense savings. As far as that mix, I'd say the You know, the majority of the asset sales are, you know, assets that we will be operating that are kind of sale and lease back kind of properties. And then there's some investment properties that we had in Aspen, you know, and a few other things that we've decided not to pursue for, you know, whatever reason. You know, we own a building in Milan, not Milan, excuse me, Madrid. And, you know, we're not going to pursue the development of that. We're fine with the location we have today. And so it's just looking at, you know, taking a look at our balance sheet and, you know, just turning those assets into cash as we said we would be doing. So, you know, we've said we have, you know, about a half a billion dollars of real estate assets that we could monetize. And, you know, we begin, you know, we're going to begin to monetize those. You know, Dave has got tremendous experience on, you know, that end of real estate. So, you know, and he feels very confident in, you know, what we're going to be able to do. And some of these are properties that we had purchased and had developed over the last Two to three years, I guess. You know, you got to think about a lot of our investment horizons are pretty long. You know, from a, when you think about some of the galleries that we've built, you've got, you know, you've got significant time to design and develop and get through the approval process. And then you've got significant time building them. So, you know, you have a relatively long holding time. And I think, you know, post-COVID, you know, all of the construction costs have went up, particularly at the luxury level. And those, you know, those prompted us as we communicated in the video to develop, you know, just other faster, more flexible ways to deploy the brand. And when you think about the design compounds and think about where the first, you know, the first couple are going, in Naples, we're taking what was formerly a Nordstrom's site. In Walnut Creek, we're taking what was formerly a Neiman Marcus site. And then in Miami, we're developing, you know, kind of a parking lot site in a key visible area in Miami that is kind of a Bank of America. But we think about, you know, those opportunities to be significantly faster and more capital efficient. You know, we've built most of our big kind of, I'd say, you know, the higher investment, higher capital side of the business. You know, we've been transforming the real estate here now for 15 years. And so, you know, even on a European and global point of view, I would say that, you know, we have Sydney coming, but that's a different model that's really being built by the developer. You know, it's not going to take much capital from RH. But, you know, we have significant assets we're going to now monetize earning the cash, and then we've got some assets, you know, in Aspen and other things like that that we'll monetize over time. So, yeah, so a lot of that will come off the balance sheet. Jack, do you have anything to add?

No, I think from a timing perspective, Steve, we'll just keep you posted. We're not ready to, you know, commit us to show the cadence of 2026, and we'll just update you, you know, as appropriate. Thank you both.

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

Hey, thanks a lot for taking my question. So, first on the states, can you provide color on how you're thinking about scaling the collection? We know when the books will hit, but how are you thinking about the cadence of the product rollout into the galleries? How are you looking by inventory, et cetera? Just if you could compare and contrast this collection versus the modern and interiors launches that you had. a couple years back.

Sure, sure. So the books will hit kind of mid-May. And we will, gosh, we've got, you know, a handful of stores that will get, you know, the initial product that we'll be able to kind of test and then we, you know, and get some reads on. But we, you know, we feel very confident in this collection. So we've went out with the bigger inventory buys You know, and a lot of it based on, you know, just the data. You know, you've got 60% of luxury homes in America, you know, that have classic and traditional architecture. So it is really the next big trend. So as you think about how the trends cycle through, you know, this trend is, you know, a lot of the product you're going to see cycle through. It's why we've made some of the acquisitions that we made. whether it's the Michael Taylor brand and the famous diamond table and so on and so forth, to really be able to not only have authority, but be able to have intellectual property rights for a lot of the kind of key products that are going to come. And so we just think it's going to be a big building trend. But in the second half, we'll be in how many galleries, do we think? About 30? Yeah. 40 galleries, our top 30, 40 galleries. And the large design galleries will take over the first floor with RH Estates. So, this is a significant launch and a significant bet.

Got it. That's helpful. And then, just a two-parter on margins, if you could just isolate how you're thinking about the impact of tariffs for 2026, both the cadence and magnitude, I don't think you discussed that in the letter this time around. And then separately, you know, if we exclude tariffs and some of the timing, you know, shifts that you discussed earlier on the call, you know, how healthy is sort of your – or how healthy are your product margins as we think about the long-term targets you laid out? You know, how much higher can the product margins go as you do continue to add you know, these new collections that, you know, I think come with much higher margins. So if we just think about the core, you know, where can the business go from a product margin perspective?

Yeah, I think, you know, I mean, we're not giving detailed margin forecasts, but, you know, our margin, our product margins are relatively healthy, you know, except for some, you know, bumps we're going through from a tariff point of view. You know, I think we've, you know, been able to perform reasonably well. You know, if you exclude kind of the weight that we have from, you know, this investment cycle, you know, and the drag from Europe and you kind of take a look at the business and, you know, I think one of the things we're, you know, we're doing As we think about this business, a lot of times with brands, as you go through the history of brands, you've got kind of the levels and the transformations you make to kind of get to where you want to go. And this cycle we're in now, you know, it's a key investment cycle. You know, clearly we've spent a lot of capital. We've made big investments. to kind of position the brand, not only in North America, but position it in Europe for the long term. And once you get past those cycles, you know, we're going to have great leverage. You know, opening galleries like we're opening and restaurants like we're opening are significant costs, especially when you're doing them in a different country. You know, there's just more travel. you know, more expense from, you know, hiring people and building new organizations and so on and so forth. So, you know, from a, I just think it's not just the product margins, it's really just the overall margin structure of the business. Once we go post-peak here on this, you know, investment cycle, both from a capital and from an expense and cost point of view, I think the model of this business is going to look like one of the best models people have ever seen in our industry. So, if not the best model, I think it's going to be the best model anyone's seen. So, you know, we feel confident in that. I mean, you know, we're also just, you know, from a global perspective, you know, navigating through very uncertain times. And we do have a product mix that is going to be somewhat more cyclical and have more of a drag. So when you're really focused on the furniture business versus the home furnishings, the broader furnishings business, accessories business, tabletop business, kitchen businesses, so on and so forth, you're going to have... you know, more weight during times like these. So, you know, that's going to, you know, require you to fight for more business. But, you know, that's throughout our history, we've always fought for the business in times like these. We've always been, you know, more promotional than less promotional in times like these. And we think it's times like these that, you know, that There's a lot of fallout, you know, and there's going to be a lot of competition that's not going to make it through these times. There's been greater fallout in the furniture business, as most people know, over the last few years than, you know, in any time in history. And I think there's going to, as long as the, you know, the housing market remains difficult, there's just going to be a lot less competition, and we're going to be, you know, better positioned than we've ever been for the other side of the cycle. As we build out the assortment, especially in estates, think about the estates expansion over really a five-year horizon from a product point of view. I'd say over the next five years, the estates assortment is going to grow. It's going to build. It's going to become more dominant. The trend is going to – that wave is going to keep building over the next five five to 10 years, right? So, you know, I think about the whole model of the business. And that's why we're very confident in the long term model. You know, I think what confuses people is most public companies, you know, go public, and they kind of manage the business, right? And they have a simple rollout, and they're going to do so many stores a year. And, you know, they, you know, the stores are all the same. And the, you know, the you know, everything's really predictable. And, you know, most of them, you know, go through their rollout cycle of, you know, five to seven to 10 years, however, you know, what amount of time they stay relevant for. And then usually, you know, becomes kind of a dated concept over time. You know, and that's why we like to say that most retail malls are graveyards for short-lived ideas. You know, most retail companies don't even, you know, concepts don't live out, you know, the first term or second term of their leases. So, you know, we're going through one of those investment cycles that will leapfrog this business forward. And you're looking at kind of peak investment cycle and kind of trough kind of economic cycle, right? So, you know, and even with those two, You know, you still get a business here with a kind of a mid-teens EBITDA margin to high-teens EBITDA margin. And once you get past this cycle, there's a lot of leverage in this model. So, yeah.

Max, I'll add on tariffs. So, in Q4... You know, we talked about last year tariffs having an impact of 90 basis points in terms of a drag. And Q4, we had talked about 170. We ended up at 190 in Q4. And the way we characterized that in the last call is that that's ultimately by Q4, you're fully baked into the sort of prior tariff regime. Obviously, things have changed now with the Supreme Court decision. And but, you know, tariffs come out in and out on terms, you know. And so while in the, you know, let's say in the first half, you might have some tailwinds from that relatively lower rate that exists under Section 122 today, you know, who knows what happens in the second half. There's obviously a sprint to replace all those tariffs and potentially more, as Trump first said, under Section 301 in the back half. So we're just, you know, we're playing by ear and being, as you know, we're nimble and we're dynamic. But as far as last year's tariff impact, it was sort of fully baked in a Q4, a bit of an indicator as to how it plays out in the first half. But, you know, obviously, the math will tell you that there's going to be, you know, some relief there as far as that tariff drag is concerned. And so, we'll keep you updated if there's, as things play out. Obviously, we're watching it like you guys are watching.

Got it. Thanks a lot, guys, in best regards.

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

Great. Good afternoon. Thanks for taking my question. I wanted to ask about the cadence of the year from a revenue growth perspective, because the first quarter, obviously calling for revenue to be down, but then the full year, it looks like an acceleration in the back half. Can you just talk through the points of the acceleration? I assume the states is a big piece. How much is international? Any details you could share would be helpful.

Well, yeah, clearly it's international and it states the cycling of, you know, it's staged across the entire platform, international, you know, from, you know, opening cadence and, you know, just what we think, you know, the, you know, the growth in the first couple of years. We really, you know, RH England is kind of our best point of history. We know how that ramps, so we expect, you know, the international stores to, you know, have a ramp to them over the first several years. But when you think about the back half, sure, you've got, you know, openings in North America. You've got openings in Europe. You've got estates, you know, which will, you know, in Q3, Q4, you know, you'll start seeing the revenues drop. flow from demand in Q2. And, you know, you'll see a ramp in the States. You'll have a second mailing of the book. You'll have newness in, you know, both interiors and modern. So, you know, all of those things combined, you know, we believe, you know, it's a big step up in the business in the second half. And we would have, you know, expected more in the, you know, in the back half of last year and the first half of this year because the states would have been part of that cadence.

Okay. Understood. And then the second question I have is just on the margin recovery of the business, right? Because we've been in an investment period for the business for some time, and I think you've used the term leapfrog in terms of margins in the past. For the longer duration investor, when you look at the business, what do you think is the biggest factor holding back margins for improving? Is it just the fact that some of the investments have taken a little bit longer and have been a little bit higher than expected? Has it been the top line, the macro environment? How do we think about some of the unlocks to see that margin improvement on the other side come back stronger?

I think you just outlined it. Yeah, I mean, we've, you know, we're in peak investment cycle and trough economic cycle, especially from a home point of view. So, you know, I mean, not just trough investment cycle, you know, you've had the whole kind of chaotic tariff cycle that's caused, you know, kind of significant disruption on the business. I mean, we've resourced 40% of our assortment, you know, business of our size, you know, resourcing 40% of your core, you know, core assortment, which is really, you know, 40% of the assortment is bigger, it's a larger part of the business, you know. So, you know, it's all of those things together, Steve. So, you know, this is a good time to buy our stock. you know, this is when people create generational wealth, right? This is no different than trough times in a real estate market, trough times in any kind of a, you know, transitional time for an industry or business. And, you know, all businesses in our industry get hit in these times and all businesses that survive to the other side get a lift in this time. I think what's different is You know, we've historically been investors during times like this. You know, it's when we've seen the biggest opportunities. But this time is, I think, different than previous times because we're in a kind of a real peak investment cycle. You know, we're opening Europe. We're, you know, launching new businesses and, you know, and – You know, so, you know, the opportunity to have a leapfrog, you know, if we're more right than wrong, and we don't have to be completely right. We just have to be directionally right here. And so, you know, we say, you know, don't let perfect be the enemy of great. And, you know, we've got a lot of experience here in this company. We've been doing this a long time. And I think we've proven that we've been a lot more right than a lot more wrong. I mean, if you think about the transformation from what was Restoration Hardware before to what is RH today, if you think about the transformation of this brand, you know, over, you know, a 20 plus year period and try to say, you know, name other brands that have made transformations like that, name other brands that are positioned like we are, you know, these These are the times that businesses like ours separate ourselves even farther from the pack. But, you know, you have to make those investments. You have to take that level of risk to be able to do that. You know, so, you know, we're not, you know, kind of a management culture or leadership culture. And, you know, we're constantly – innovating and investing, but this is one of those significant cycles. It just happens to be, you know, during a significant down cycle, especially focused on our industry. And so, you know, but, you know, we're in a better position than we've ever been from a historical point of view to weather the storm. And I think if you just think about what does the next five years look like from an investment point of view? I mean, we're going to come off, if you take the $37 million and the $289 million, you've got kind of a peak kind of investment year historically. And then we come off that peak and we come into the $250 to $260 million, and then that's going to drop to $150 to $170 million a year. So you think about the company growing, the capital investment period coming down, and it's not just the capital, right, you know, the investment, but it's also all the expense that's connected to that capital, you know, all the expense that's connected to bringing up those stores, training the people, building the infrastructure, building the distribution capability in the business, you know, all that stuff. all the marketing and advertising that supports a launch, all the time and energy to kind of build out the assortments, develop all the products at scale, you know, to create a leapfrog. Not, you know, not to kind of slightly outperform, but, you know, it's no different than, you know, you know, a $300 million business that was losing $40 million a year, you know, that was restoration hardware and creating RH that's, you know, a $3.5 billion business. I mean, that, you know, think about what the next cycle looks like. The next cycle is, I think, even more magnified. You know, that we've even used our framework for the model And, you know, the biggest pieces of the model are the pieces we're talking about. You know, if I was on the outside looking at this, I'd say, hey, what is the outlook for capital investments as they go forward? And not just thinking about the capital, but what is the expense, the cost investments that are connected to that capital? How does that change over the next five years? You know, and how does it change over the next couple of years, right, just over the next couple of years, the investment cycle is post-peak and it's going to turn down and accelerate in a downward way, just as revenues are going to accelerate in a positive way, right? And when you have those two things going in different directions, that's when You have inflection points in return on invested capital on, you know, margins, earnings, et cetera, et cetera. So, you know, the framework for the math is pretty simple. I think the strategy, because it's never been seen before, is, you know, can be, you know, suspect and can be, hard to understand. You know, there can be less believers than more believers at certain times. You know, so, look, I don't blame anybody, you know, for kind of saying, hey, this is, you know, looks like an uncertain time to invest, whether it's in our stock or any stock in our category. But especially, you know, you've got to kind of believe in the longer-term bet here. And, you know, we think this is going to be the, you know, one of the best bets that people will make, you know, as referenced by my personal investment here. So that's how we think about it.

Yep. Thanks for all the detail. Best of luck.

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. Gary, you laid out this ambitious and aspirational plan to take advantage of what seems like a very large and growing addressable market. And yet, the market's not really willing to give you the benefit of the doubt. RH has been averse to and does not really look at its business on the same store basis, which is understandable and that's long how you've articulated it. But at this point, that has defaulted to the narrative where RH needs to grow concepts and its physical footprint in order to drive growth. And that comes with a significant cost. And as a result, it may not be able to realize its aspirations, understanding that it's come a long way from its origins, but the market's relying heavily on the recent experience. So why, based on the recent experience, is the default of the market wrong?

I think it's what I just said. You know, you have to think about peak investment period, you know, and what hopefully is that a low point in the trough from a market perspective. Again, I think if you pull out the investment, if you just pull out the European drag of the investment, think of that, we're investing in Europe. The European market is worse than the American market right now. we're investing in a time you likely would like to not invest, but you can't make long-term real estate investments and expect to get them all right. The why is the simple model, Michael, of saying I'm cycling peak investments and I'm cycling hopefully what is And we've got, you know, we've got significant, you know, significant growth opportunities as we've laid out. And, you know, and the costs are going to kind of go away. So, you know, a lot of people thought Amazon wasn't going to make a lot of money until it did. Right? You know, that's, I think it's that simple. I think about, you know, just, yeah, dude, I think that the key is, you know, don't bank this cost structure into your model right now. You're looking at the, you know, a peak cost structure, both from capital and an expense perspective. These galleries that we're opening are the most expensive galleries that we've opened, both from a capital and a cost point of view.

Got you.

Very helpful.

You know, to put it in parlance that, you know, the investment community would think about it is, essentially, this is, you know, the peak of the disruption. There will be significant same brand growth that will lead to, sizable margin expansion, especially as these investments moderate. Now, the counterpoint would be, hey, we're living in a world of high uncertainty between the geopolitical, the technological, and other factors. So, what would be the sensitivity to your outlook for free cash flow in the event that sales and back actors don't materialize like we would expect? and without asking you to show your hand, but it is important to the investment case, what options would you pursue in the event you needed more financial flexibility to execute on your strategy? Thank you very much.

Yeah, I think it's a great question, Michael. You know, look, we got the ability to, pull back investments further, right? When I think about the major strategic investments that, you know, we had to decide to go international, you know, invest into Europe years ago, right? These weren't short-term decisions. These were five, six, seven, eight years ago, right? We, you know, were making some of these decisions and investments, and... You know, those decisions are easy – you know, are not easy to pull back on, right? But we're cycling those. We've got a lot of flexibility when you think about the next wave of investments, whether it's, you know, expanding in North America, whether it's expanding in Europe. You know, you're looking at much smaller – investments, you're looking at much more flexible real estate, you know, many more choices, et cetera, et cetera. And you're just not going to have the same kind of costs. I mean, we're going to, you know, the cost of building some of the new concepts that we've laid out, you know, just the way we're thinking about deploying capital in North America through compounds and ecosystems and secondary market galleries that are in the 15 to 20,000 square foot range. You know, just the real estate risk, the investment risk of those, the financial participation of, you know, developers and landlords is much higher. than when you're investing in major cities internationally. It's just a very different investment cadence. And we just have a lot, yeah, and you don't have the same time horizon, right? So, you know, there's just a lot more flexibility. And, you know, so when I look at, I think, you know, peak investment, peak risk. You know, you're looking at peak investment, peak risk and, you know, who knows from day to day or hour to hour about the geopolitical and, you know, and economic environment. Of course, this is, you know, kind of different times and, you know, there's, you know, major news headlines are made by, you know, tweets and posts today, right, and they happen all day long. I just think that if you're just trying to say, okay, how do I think about the go forward? There's just a lot less risk. There's a lot more risk, I'd say, over the last couple of years than over the next couple of years. I mean, is there further risk to the housing market? There always could be further risks. There always could be, you know, other things. I mean, you know, I mean, could the war escalate? Could China try to take Taiwan? You know, could, yeah, there's a lot of things that can go the wrong way. We can all kind of imagine what those look like. But, you know, it's no different than calculating what the federal funds rate is going to be, right? Like, everybody's been wrong on that, and unfortunately, That's been bad for our business, right? There's supposed to be three cuts to the federal funds rate this year. Now it looks like there's going to be no cuts and there might be hikes. You know, or, you know, does that raise some short-term risk? It does. You know, can we navigate through that? We can. Do we have more upside to downside in the second half from a revenue, you know, demand and revenue point of view? We do. You know, but I kind of say, look, if I was on the outside of this today and I had the information that, you know, the outside world has that we're giving you today, you know, I'd say it's, you know, you're, you know, you can, look, I bought this stock at, what, $2.16 a share? I bought $10 million in the stock. I was wrong. You know, it wasn't the low point. But I don't see, you know, too much more downside risk in the model. You know, most of the work is behind us, building the galleries, getting the people trained, bringing up restaurants internationally. You know, the product side, I think, is a lot less risky. You know, we're not going into some unknown aesthetic or trend. we're betting on, you know, what is kind of the biggest market, the traditional classic market. And it just so happens, if you look at the trend that's going to come through, that is going to be the next trend. So, but yeah, you're quite surprised. We have toggles we can pull, we have assets that we can monetize, you know, and, you know, You know, we're pretty good at navigating through times like this. We've got to, you know, this is my 26th year here. So, you know, I've seen cycles, and this team's seen cycles, and we've navigated through, I would say, somewhat similar times. Yeah, completely similar times.

Got you. Very helpful. Thank you so much, and look forward to another 26. Thank you.

Your next question comes from the line of Brad Thomas with KeyBank Capital Markets. Please go ahead.

Hi, thank you. Gary, first I wanted to follow up a bit more about the RH Estates line. And you, I believe, alluded to working more with designers and decorators in this. And so I was hoping you could talk a bit more if the selling process or how you go to market needs to be different on this line that seems to have so much potential for you.

Well, we do a big business with interior designers today. We have, I think, I outlined in the, you know, my comments that we have, you know, multiple businesses embedded in our dollars. We have a trade team that services interior designers and decorators. You know, that's a meaningful part of our business. We think it will become a bigger part of our business, especially with the launch of RH bespoke furniture and RH couture upholstery, because that's going to open up the ability to have kind of more customizable product, you know, from a size, fabric, finish, and so on and so forth, and that will open up, you know, I think it should open up that market pretty significantly. We have some other strategies to address that market that, you know, that you'll hear more about that, you know, that will kind of support what we're doing, you know, from a marketing point of view. You know, so, yeah, a stake, I think, is when you think, again, you think about kind of, you know, You know, the high-end part of the business that we're going to address with Estates, and that's just kind of the beginning. We'll also address that throughout the entire brand. But let's say, you know, Estates represents the launch of RH bespoke furniture and the launch of RH couture upholstery, kind of, you know, framing those. Think about those across the whole business long term.

If I could ask a follow-up on the 2030 margin targets. Just wondering if there's any high-level framework to think about perhaps how international fits into that and how much mix or leverage of sale from sales factors into that.

Thanks. Yeah. I mean, we have it. Yeah, we have some data now. We kind of know, you know, as we've opened some of these, you know, how they're evolving, how to think about how they might evolve and grow. And, you know, so I think we have very reasonable targets internationally, you know, mixed into this. I don't think there's anything that's, you know, a stretched perspective. So when you look at, you know, you just look at the total composition of kind of the top line accelerating in the out years to 12% growth. I think the way I think about that is you've got about, you know, four to five points from the platform expansion. You've got, you know, three to four points, maybe five points from the product expansion. You've got at some point here, you know, we think there's a couple of points from the housing market coming back. I mean, I don't think we're going to be in a nine or ten-year downturn of the housing market. Let's hope not. But, you know, if it doesn't come back, it's not like we've got a big number out there for the housing market. You know, we've got, you know, kind of a two to three-point hope in, you know, the out years of that plan that we'll see some lift in the housing market. If we see a lift in the housing market, you could see, I mean, based on where it's been, I mean, you could argue there's a 10-point lift from the housing market in the out years. You know, and if that happens, you don't have us growing at 10 to 12. You have us growing at 18 to 22.

Thanks, Gary. Looking forward to getting my estate's book in a few months.

Thanks, Brad.

Your final question comes from the line of Marius Morar with Zalman. Please go ahead.

Thank you. Good afternoon. Just a quick question on the growth outlook for next year. Gary, I think in the video you mentioned that it's a bit conservative. I was just wondering at the low end, do you sort of embed any sort of deterioration in the housing market or maybe an increase in interest rates?

Yeah, I think, you know, we're conservative, you know, throughout the second half. I mean, obviously, you know, we have embedded, you know, the growth from our platform and the new galleries and the galleries that are, you know, cycling. And we've got, you know, growth from estates and some of the, you know, newness and expansion of the assortment in interiors and modern. You know, but do we have the housing market getting worse? I'd say we have embedded in this the current environment right now, which I believe is worse, and mostly from a geopolitical point of view and a perception point of view, you know, of more things can go wrong than maybe can go right. And I think that's how the markets generally risk times like these, when you've got uncertainty and you've got global tensions and war and oil issues and, you know, the the endless amount of things that oil impacts, right? So, yeah, I mean, but, you know, did the housing market get better when interest rates, you know, came down somewhat? Not really. Is the housing market going to get worse if they go back? You know, if we get 25, 50, 75%? basis points and get three hikes, I don't think it gets much worse. You know, I think you've got to think back to history and say, in 1978, we sold, you know, there's 4.06 million homes sold. And that was a low point. And in, you know, 2000 and 2003, four, and five, you had 4.06 million homes sold, you know, on average, you know, 4 to 4.06, so somewhere about 4.03. And that's with 53, I think it's 53% more people, right? So it's hard to believe it gets worse than this. Could it get worse than this for a small period? I mean, none of us have seen a world war in our lifetimes, right? You know, is there risk of World War? I don't think so. I mean, I think cooler heads will prevail, but, you know, this is uncertain times. You know, so I think the, you know, whether the interest rates go up or down, you know, 25 to 75 basis points, I don't think it's going to change much in the housing market. If the, you know, if the interest rates go up 300 or 400 basis points, I think that's different. I think they go down 100 basis points with pricing coming down, which is pricing is coming down across, you know, across the market. I think you're going to see a housing market acceleration. So, you know, I'd say short term, you know, handicap it as even. I think we're seeing pressure right now. Longer term, I think you have to kind of handicap it as a positive. Because we've never seen – we're now in the fourth year of the worst housing market in 40 to 50 years. That hasn't happened in my lifetime. I've never seen two down years. I've seen one and a half down years in my career. I've never seen three down years. And I, you know, surely never seen a fourth down year. I don't think anybody has. So, you know, how long did this stay here? I don't know. You know. call today the new normal and build out from here, at some point, I think how the market comes back. And I think it's more likely to come back than go down. But if the interest rates are moving 50 to 75 basis points to 100 basis points, I don't know if that moves the needle. Plus, on the minus side, you're getting closer to affordability, right? On the upside, yeah, you could have some moderate slowing. I think that the bigger thing is if we have real inflation and interest rates have to rise 300, 400 basis points, that's a problem.

That's helpful. And maybe a quick follow-up. In the first quarter guidance, do you also embed any drag from the back order and special order similar to the drag you had in the fourth quarter?

Yeah, that's something that's going to take probably until the second half to fully resolve itself just because of the complexities of resourcing. So that is just, yeah, there's something that's negative. We fixed that drag in, yeah.

Is that getting worse in the first quarter?

There's some modest impact that's over and above what we felt in Q4. And then so then we'll see the resolution of that in the second half.

Very helpful. Thank you.

It's basically from the amount of resourcing and just the new factories being brought up in different countries being able to ramp up fast enough. And so, you know, that's the biggest hit is coming from tariff-related resourcing of, you know, furniture, outdoor furniture, specifically metal outdoor furniture, lighting is a big one, rugs is a big one, and furniture is a big one. You know, when, if you think about our business, and you've got, you take the furniture part of the business, which is about 80%, and then you take, you know, lighting and rugs, which are the next biggest pieces, those are all being impacted. So, you've got to, you know, the by far biggest part of our business has been all impacted in a bigger way. Resourcing things like bedding, pillows, throws, accessories, picture frames, things like that, which are not, you know, from a percentage point of view, not a very big part of our business, much easier to resource those things, much easier to move picture frames, pillowcases, throws, tabletop, glassware, accessories, things like that, much, much more easier. When you talk about ramping furniture factories, lighting factories, rug factories, moving those categories, it's more complex. Those have been slower to scale and transition. When you think about just the you know, being on the manufacturing side or manufacturing partners, you know, moving from one country to another, building factories, scaling them, and then all of a sudden having tariffs change and going, oh, God, what do I do now? By doing the right thing. You know, think about the rug business, you know, and, you know, we for a while there, you know, I mean, India was a big source of rugs. you get hit with a 50% tariff and you're, you know, sourcing rugs to other countries, you know, there's not that many places, you know, that have, you know, that kind of capacity to move those businesses. You know, so, you know, same thing with lighting. Lighting is very different than any other kind of a, Again, the more accessories, more seasonal parts of the business, you want to resource Christmas ornaments, things like that, very simple. When you're resourcing the core part of our business, much more complex.

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

Thanks. Thank you. Well, thank you, everyone. We know this is an uncertain time in our business. Hopefully, we've shed some light to give you more certainty and more confidence in our outlook and our strategy. We believe this is the most important period in our history. And we've never been more excited about the outlook and what we believe will be the outcome. So we look forward to talking to you soon. Thank you for all the leadership and partnership from our team, from our teams and our partners all around the world. You know, everybody's working hard to kind of get to the next place. And so thank you.

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