RH

Hello and welcome to the RH first quarter fiscal 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. I would now like to turn the conference over to Allison Malkin of ICR Alison, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2026 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I'd 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 our 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 filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, 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 the reconciliation of these non-gap-to-gap measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. And now I'd like to turn the call over to Gary.

Thank you, Alison. Hello, everyone. Let me start with a reading of our letter to our people, partners, and shareholders. First quarter revenues of $800.3 million adjusted EBITDA of 7.1 percent exceeded the high end of our expectations in the first quarter despite back order and special order balances approximately 75 million higher than a year ago primarily due to tariff related resourcing as a result of our better than expected first quarter results we are raising our outlook for fiscal year 2026 and providing the following outlook for the second quarter fiscal year 2026 outlook revenue growth of 4.5 to 8%, adjusted EBITDA margin of 14.2 to 16%, adjusted free cash flow of 300 to 400 million. The above outlook includes an approximate negative 270 basis point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. Second quarter 2026 outlook, revenue growth of 0.5% to 2.5%, adjusted EBITDA margin of 11.5% to 13%. The above outlook includes an approximate negative 380 basis point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. The bridge from here to there. How, many may ask, in an economic environment like the one we are navigating through, do you get from your half one numbers to your half two numbers necessary to make the year. There are three parts that form the proverbial bridge to the other side, supporting the case for our business to accelerate from flat in half one to up 12% in half two, as we've done many times before. We've listed them below. We plan a backlog reduction that's worth 4.5 percentage points in the second half New store growth of 2.5 percentage points and new concept growth of five points for each estate. Building the foundation for a global luxury brand. Similar to structures that stand the test of time, those rewarded with historical recognition and reverence, luxury brands are designed and built in the same fashion on incredibly strong foundations. Both endeavors are considered hard and in many cases impossible. They always require more time and capital and are generally built by unrelenting and unrelatable individuals and teams. You've heard us talk over the years about climbing the luxury mountain, how it's not for the faint of heart. As the higher you climb, the air gets thin and the odds become slim. We believe the work we are about to unveil is akin to those difficult last steps and gasping for those vital breaths. We believe the openings of Arch Paris, Milan, and London Arguably the three most immersive and inspiring brand experiences anywhere in the world will form the foundation necessary to earn the respect and recognition of not only the European and UK customer, but a global one. They communicate a sense of permanence, a brand that has been dedicated to crafting their skills over decades. The last foundational piece are each estate. Mr. Gorbachev, tear down this wall. Ronald Reagan. We believe that there are those with taste and no scale and those with scale and no taste. The global design market has spent the last half century comfortable with that division. It is an industry defined by exclusion versus inclusion. For decades, the highest echelon of home design, the masterfully tailored upholstery of Dimitri & Co, the uncompromising bespoke casework of Joseph Jupe, the classical grandeur of Denison Lean, the meticulous reproductions of formations, the artisanal fixtures of waterworks, and the iconic designs of Michael Taylor, who Architectural Digest named one of the greatest interior designers of all time, has been hidden, trapped behind the metaphorical iron curtain. This curtain is the closed-door, trade-only showroom network. Unless you hold a professional license or hire a gatekeeper, You are forbidden from seeing, experiencing, or purchasing the finest expressions of human craftsmanship. The public is left outside, while some of the very best design and quality remains hidden inside. Nearly 40 years ago, standing at the Brandenburg Gate, a former American president looked out at a divided world and issued a defiant historic decree. Mr. Gorbachev, tear down this wall. Today, we look at the luxury home industry and ask the same. With the launch of RH Estates, we are removing the barriers that have segregated taste from scale. We are amplifying the work of the world's most elite designers, artisans, and manufacturers on our global platform. This is not a compromise of quality. It is a liberation of mastery. By uniting these legendary ateliers and elevating their work in architecturally significant spaces, We are providing access to some of the most beautifully designed, highest quality, classic, contemporary, and modern furniture in the world. Pieces that not only furnish a home, those that define it. But tearing down the walls means more than just opening the doors. It means eliminating the creative limitations that have historically forced designers to choose between our scale and the uncompromising specificity of trade-only showrooms. To empower the design community, we are introducing RH bespoke furniture and RH couture upholstery. With RH bespoke, we are offering a level of customization never seen before at scale. Interior designers and architects can now specify dimensions for dressers, dining tables, sideboards, and cabinets to fit the exact proportions of their architectural canvas. Simultaneously, RH Couture upholstery will redefine the boundaries by integrating custom sizing with COM, customer's own material, into the RH ecosystem. We are giving designers the creative freedom to specify custom sizes and fabrics for sofas, sectionals, chairs, ottomans, and beds. You source the fabric from anywhere in the world, we provide the atelier-level construction and craftsmanship. The scale of taste. Our critics will argue that true luxury cannot be scaled. They are wrong. They fail to understand the ability to scale taste creates higher quality and value for both the customer and the designer. It has the ability, as other innovations have, to create a larger market, enhance the way we live, and elevate humanity. By moving past the antiquated model where each piece is built in isolation, we are building these elite designs in highly disciplined batches. Scale gives us unprecedented leverage, allowing for vastly superior sourcing of raw materials, rigorous quality control, and significant manufacturing and transportation efficiencies. Make no mistake, we are not mechanizing art. The intricate hand carvings and finishes are still executed individually by the world's finest artisans. Because of this human touch, every single piece remains a one-of-a-kind masterpiece in its own right. By integrating the fragmented supply chain and presenting these products on an equally unrivaled inspiring architectural platform, consumers now have the access to a level of design and quality previously only available to a select few. A new covenant with the trade. We recognize the ultimate expression of our products requires the vision of incredible talent. To honor the design community, we are redefining how we partner with professionals. We are introducing an exclusive program for interior designers, architects, and trade members. The program ensures that professionals are compensated for the tremendous value and aesthetic clarity they create for consumers. We want to incentivize the world's best talent to build their canvases using our platform, creating a symbiotic ecosystem where design mastery is both accessible and rewarded at every level. The separation between taste and scale is over. The curtain has fallen. It's time to tear down that wall. Carpe diem, Gary. Operator will now open the call to questions.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We kindly ask that you limit your questions to one and one follow up and return to the queue for any additional. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve Forbes with Guggenheim. Please go ahead.

Good afternoon, Gary Jack. Gary, given the commentary around customization within the share of the letter that you just went through, curious if you can maybe just give us a high-level view on what you think this really means for the brand's reach in addressable TAM. especially once you layer in that new trade program, like how much of the market really gets opened up? I don't know if there's a way to contextualize it for us on how you're thinking about it today.

Well, it really opens up on multiple levels. So one is I mentioned on the video last quarter, you know, the traditional classic market represents about 60%. of the luxury home market. And today we're just vastly under-penetrated in that market. And if you look back, if you looked at an RH source book from 2014, I think we had 704 pages and it was all classic, all traditionally based. And if you look at our business today, because of the evolution and the expansion of modern, then the evolution into contemporary as the trends hit, You know, our brand, like many brands and many of us grew up in the fashion industry, you know, I grew up with the gap. And so, you know, learning to build a specialty brand, you're generally keeping it in a very focused kind of limited point of view. So it'll break through the market. And I think one of the things that I feel to kind of recognize, you know, if you think about the bigger picture of the home industry is that the trends kind of, you know, kind of lift kind of aesthetics during cycles, but they, but the, but the other things don't really stop selling. They just sell kind of less, you know, because the architecture is really the driving force in the market. So, um, you know, as we went back and just kind of studied, you know, our history and said, look, what were the smartest things we've done? What are the things we, or you think we missed? What could we have done better? You know, our view is that we could build, again, as I outlined in the video, build our business around the three major aesthetic kind of pieces, and that's traditional, contemporary, and modern. And, you know, we'll refer to it as estates, interiors, and modern. So, you know, this is, I would say, I don't know, there's maybe a chance that We might've given away over the last 12 years, you know, 10, 12 years, a billion dollars, you know, maybe more, uh, you know, as we assess the market and try to go back and do the math and try to extrapolate things. Uh, so that's, that's one piece. Uh, and then, then I say, you know, every time you do something new, I mean, not a, it's not a hundred percent incremental. There's going to be some level of cannibalization as you expand a market, whether it's you're expanding product, you're expanding physically in penetration. There's going to generally be some level of incrementality, and there's going to be a level of cannibalization. Our view here, this is one of the most incremental things I think we've ever done. Modern was very incremental, but it was a very small market. You know, when we launched RH Modern, you know, the amount of modern architecture in the world, while it was trending and the world was moving in that direction, still it's a fragment of the size of this market. So that's how I think about the first piece. The second piece is looking at it not just from a static point of view, but really a market point of view, a design and quality point of view. Arch Estates is, from our view, the first step up to the top of the luxury mountain, if you use that metaphor. It is the highest level of quality and design that exists in the world, unless you're really buying rare antiques. But if you think about the brands that we've aggregated, over the last five years and what we've learned over that time, you know, and what we're bringing to market with the States, which you guys have only seen just a little teaser. I mean, that's such a little teaser. It's, this is just a, a level of design and quality that is not available to the consumer. You know, we own, these showrooms. And one of our very best ones, there are two of them, the door is not open to the public. There's a doorbell. So even if you're a consumer and you're walking down the street and you want to go in, you ring a doorbell. And you may not be able to get in if you don't have an appointment and if you're not a member of the trade and you don't have an appointment. design and quality, and then you've got the accessibility. Whenever we develop any product, we always do searches on the products. We'll do all kinds of visual searches across all platforms, right, to see who might have something like this. You know, because, you know, the world is looking at different things and seeing different things and understanding different trends and then trying to scale things. And I can tell you, we've never had such a low hit rate versus what we're bringing in the market. Now you can take a negative view and go, well, maybe nobody wants that. That's why you're not seeing it. No, you're not seeing it because nobody, I don't believe anybody else can really sell it because they don't have the platform and they don't have the brand and And they don't have the ability to source it at a value equation that we can. I have, you know, I've been lucky. And this one, this is, I mean, I say lucky, not so lucky. I joke with the team. This is the first trend that I, you know, I'm old enough that I was the customer of, you know, when you think about the next thing that's coming, the age of eclecticism, the California look with Michael Taylor, you know, there's a few different of names they gave it and they all come through somewhat differently but you know the foundational elements of these giant trends that come through this is one of the biggest ones ever this is this one was bigger and longer than modern or any trend we've addressed in my history of our age right but i was the customer i joined our age as as i was moving into my house in belvedere which is the first house i ever lived in in my life you know the only house I built in my life. Uh, and, uh, uh, you know, my, you know, my first wife was a luxury interior designer, you know, and I was her client for a condominium in San Francisco. I had the round Michael Taylor dining table in that house. I had, uh, reproduction of the Coco Chanel sofa. You know, I had a lot of these different kind of products that are trends. Now I probably shouldn't say this, you know, Some of this stuff, I got to be careful because all of my competitors are on these calls and they're going to wait for me to slip up and let them hear or see something. But I lived through this trend. And so at my house in Belvedere, how many things do I have from formations that I bought? Six or seven items from formations that I bought years ago. I have the Michael Taylor Rectile. that rectangle diamond table in my house. So, you know, I bought two of them. I had the round one in the condo, the first job we did together, and the rectangle one. I know how much I paid for those 27, 26, 27 years ago. And I know what they've been selling for recently, you know, because we own those businesses. And again, And the value equation, the quality we're going to bring to the market and the value equation we're going to bring the market has never been seen before. You know, and I don't say that lightly. I usually never, you know, go out on a limb like this, but never been seen before. And you try to do a visual search online. It is not out there unless you want to go in first dibs and buy an antique, which is fine. We can't stop you from buying an antique. I had to read everybody what we have on the back of our catalog, right? Because if anybody tries to come after any of these goods, it's going to be a bad day. Yeah, because we own the intellectual property on the vast majority of what we're bringing to the market. I mean, we could, you know, we have patent pendings on, what would we say, what percent of this book? 80? 65 to 80% of the book, we should go down and we should go back and just actually add it all up. Um, yeah, so there's, there's just so many things we're doing we've never done before. Um, and the way we're addressing the market and, um, the way we're sourcing these goods, I mean that, you know, the, the, the people that are making these goods grew up making these goods, that the manufacturers that are making these, you know, they, they, we're part of this that industry you know making for the highest end showrooms before we met them and started to scale with them uh and they're all so excited to be able to make this quality again you know because they're you know you know the market is so fragmented but um it uh you know so so this this the design and quality you know uh aspect of this is is huge and then the next piece you have is we're going to open the market up to, what do we call them, the super buyers, the furniture. I mean, we have a very big trade business. We provide excellent service to the trade and to high-end interior designers and design firms. Our teams act as a back office. We'll do designs and renderings and presentations for them. We'll support them in any way we can in terms many times in delivery and installation. And, but at the same time, you know, there, there is an aspect of just recognition and compensation that, you know, we haven't done. And the team jokes around, you know, cause every time I go to high point, you know, someone comes up to me and says, you know, like, I love your brand. Oh my God. And, you know, please, please, you know, help us make money, you know, let us make money on your brand. And, you know, we haven't offered and incentivized, uh, the design trades. And I, and I look back and, and I think, you know, when, because I came from a, you know, family situation that, that had interior designer and I had, I have the insight of looking at, you know, just how, um, complex and difficult that was. You know, and it was also, you know, it was, you know, not only was it not transparent, you know, it's just not accessible. You couldn't get to see it, you couldn't buy it, you know. And I just thought, you know, over time, just making high quality goods available would, you know, that the consumers would drive designers to our brand. And I think they have, you know, but at the same time, you know, there's really great interior designers that, you know, they're running a different model. And, you know, even, you know, the mother of my girls, you know, who is here consulting us, what, 10 days ago, two weeks ago, just give us the insight of a, you know, high-end designer. She runs a design firm. And she said, you know, she said, listen, you know, do I buy RH? Of course I buy RH. Do I want to spec that first? No. A lot of times my clients will say, hey, look, okay, do your designs in the primary living room, in the primary bedroom, in the primary dining room, but do RH for the family room and the media room and all the rest of the bedrooms. She was saying like, she was smiling like, okay, I will. And, you know, she said, but I'm thinking to myself, I can't make any money. You know, like they're, you know, interior designers have a markup model, right. And, and a, um, an hourly model, but, you know, they kind of need both to make the business work. And, uh, and I think we've, you know, we've, we've just haven't, we haven't been an open platform. Uh, like that. And I think that, I think we are just overlooking kind of a super customer. I mean, they're, they buy furniture all day long. That's what they do for a living. So it kind of doesn't make sense that we're not doing it when you really look at it critically. Um, but I think it really makes sense here too, you know, the timing of this, because, um, Not only are we going to have this design and quality that is at the very highest level of the market, we're going to also empower the designers and consumers, for that matter, and all of our designers with the ability to customize and the ability to do COM and customer's own material and the ability to do all the things that they need or want to do to do truly custom work at the highest end. And I would say this is just the beginning, right? It's not, and it's not the only thing we'll do. Yeah, if someone asked me the other day, hey, you know, are your prices going to be higher? Well, yeah, they're going to be higher. I mean, the quality is massively, you know, higher, but it's such a tremendous value. And the price should be higher. This is not just, you know, kind of smooth wood with this, right on finish or, you know, a contemporary piece with curved edges. This is hand patinaed, hand carved, you know, hand distressed, so many details to get it right. And every piece is a one of a kind, you know, because of the handwork and how it's made. And, you know, so, you know, but somebody said, oh, well, you know, how do you know you're not going to make a mistake like contemporary? Well, contemporary is, wasn't, didn't have the handwork, didn't have that level of detail, didn't have those things. And we just, you know, we were a bit arrogant at that point in time. So, but because, you know, we're out here with a unique product also, you know, I think that we're offering such an incredible value, you know, but I think that there's also an opportunity because of, how long we've been thinking about this, working on it. I mean, I think it's the most intelligent, deep thinking launch of a brand we've done. You know, we really started investing in this in 2000. You know, so here we are, you know, 2026. We acquired Dimitri and Joseph Jupe in 2000. Huh? 2020. 2020, not 2000. Yeah, thank you. 2020, yeah, thank you. Not that long ago. But it's been a long-term investment. Think about the opening of the high-end design market on this. And there's nothing that we're doing to value engineer the product. I mean, we are making the identical quality. The diamond table is made with the identical molds of Michael Taylor. you know, the tops and everything are the same quality, the finishes, you know, that we're offering. The array of finishes is at a whole different level. You're going to see, when you see this book, it was BNC at Home next week, what were we saying, end of next week, early following week?

Early following week.

Yeah, okay, early following week. We kept tweaking it and tweaking it. We had a lot of last-minute ideas to kind of make it better as we were working on it, but, you know, but it was also, you know, taking us a little longer because it required a different level of thought and discipline and compositions and presentation to do it at the level that it deserves to be presented at. And so the few weeks late to us, it's not the big deal. I know I read a couple of analyst reports going, oh, my God, it's late. I don't know. Was Tesla ever on time? It changed the whole car industry. It's not about like, hey, I'm rushing to mediocrity here. We're trying to make big moves that are industry redefining. And I think this is one of them. I think this is the biggest move we've ever made. It is fundamentally different on so many levels and opens up so many dimensions of a market. But it also opens up the learning that can be applied to modern and to interiors and so on and so forth and thinking about how How big is our market? You know, like when you think about what I just said about, you know, my daughter's mother, and she said, yeah, customers will say, okay, do the primary rooms and then, you know, use RH for these other rooms. Well, what's really interesting about that, our whole focus with this, the initial lens, the key part of the lens was, because we knew that, by the way. So we said, let's win the primary rooms. Let's make sure... we get the primary bedroom. If we get the primary bedroom, we have the assortment to get the other rooms. Let's get the primary dining room. When you see some of the dining tables we have, you go on First Dibs and start at $250,000 with the most expensive dining table and go all the way through it down to the prices we have it at, you won't find anything of our quality or design. We've went through all of it. We know every dining table on First Dibs, you know, at every, you know, competitor at the highest end to, you know, down. We spent a lot of time studying this market. You know, so, you know, the goal is, you know, the dining room, the primary living room, the primary bedroom. But these goods can also eclectically be presented, you know, in a very cool way. You'll see it when it's all presented. It's It looks different than our age today, but it does look like our age today. But I think you'll see a very big move. You know, you're just going to see, like, whoa. I mean, I think the design community is going to go, whoa, I didn't know they had this in them. So I know that's a long ramble, but, you know, like, I'm so excited. If you guys want to talk for the next five hours about a state, you know, you're going to have my attention.

Thanks, Karen. And maybe a very quick follow-up for Jack, given the tariff refund commentary in the queue, maybe just help us or confirm whether or not any refunds are included within the guidance.

No, no further refunds. I mean, the refunds started coming, but there's no, you know, they've been kind of paused. You might be following some of that activity as far as the DOJ and, you know, how those how those are playing on the court. So, but as far as the guidance reflects, does not reflect, the free cash flow specifically does not reflect any further tariff refunds. Thank you both.

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. I wanted to dig in on the 500 basis points of contribution that you were expecting from RH Estates in the back half of the year. That's just under $100 million. What is the basis for that expectation? And you've already alluded to the need to evolve some of the elements of the model or the way you interact with core customers like the trade. Do you think you need to make further changes to your customer acquisition engine beyond the legacy model of just simply mailing out a book and then expecting that the consumer will come, especially in this age where your competitors are going hard after social media and other forms of manners that are reaching the consumer? Thank you.

I don't know. They've been doing that the last three years, and we've outperformed all of them. I think, you know, when you say, you know, we're, we're mailing a book and expecting people to come, we've built the best, the greatest physical platform on the planet earth for our kind of products. Right. So don't overlook the physical platform, you know, and if you, Michael, if you look at that video I did last quarter, I outlined that, you know, furniture is the least digitized business, you know, 80% done in stores is 20% done online. Uh, at the luxury level, it's 95, five. So, you know, this is a business you need to see touch sit in, you know, comfort scale, all those kinds of things. Um, uh, so. I mean, the book is just, you know, it's a small way we, we use it to integrate the whole thing. You know, people look forward to getting our books, uh, you know, it's a physical thing. It's still said we have a digital book too, but we just don't, you know, I'm just not a believer in following the trends of a lot of people that are following other people. We just think it's massively unauthentic to pay some stranger to, you know, some influencer to go talk about our goods and they don't know nothing about us. They know nothing about the product. They're not an expert in that. in the field and uh you know i think i think that's a lot of noise you know maybe it's good for you know building beauty brands to teenagers or you know other stuff like that it doesn't affect what i buy you know and i have a lot of homes uh and so i don't think it affects our customer or we wouldn't be the biggest brand of our kind we wouldn't have outperformed everybody I mean, if you look at this last quarter we have, I mean, you look at us at an over two-year basis or three-year basis, over two-year basis, only West Elm has performed as well as us. On a three-year basis, we're better than everybody. And West Elm just had a great quarter. I think they're doing a great job. But if you look at anybody buying furniture, you know, it's, you know, I tell people when you go out there to bang pots and pans and try to get attention doing inauthentic things, you're just creating noise. You're creating your own noise, you know, and you, you wind up, you know, chasing things and thinking that they're relevant when they're not, you know, and I, you know, we've tried and tested different things and we have a lot of data behind what, you know, what we've done and, and why we're doing what we do. And nobody thought we were smart to build the stores we did and the galleries we did. And those turned out pretty well. And everybody stopped mailing books and we're still mailing books. The only difference like right now in a point in time, you can put our model against anybody. Put it against today's very best customer. Back out our investments in international expansion you know, back out our investment in building estates, you know, which is not like some little introduction, you know, of a, you know, 80 page book, you know, that, you know, that, you know, five or seven years later, you wind up one store. You know, this is, you know, we're making serious investments to build a platform unlike anybody else, you know? And so, yeah, in a down market like this, are we going to, Is our model not going to look as good? Yeah. Yeah. Okay. Yeah. But you're looking at people that aren't even investing. They're not building anything. They're trying to be great cost controllers, you know, so yeah, just wait till the other side, the cycle for us. And, you know, and I think we're going to have a cash generation machine that this industry has never seen.

Understood. My follow-up question is about the margin profile of RH Estates. Is it sufficiently higher than the legacy business in order to fund the investments that you're doing, provide the incentives to the trade community, as well as anything else you might have on the horizon, and still drive the margin expansion that you've embedded in the back half, or do you see other building blocks to arrive at the margin expansion that you're expecting? Thank you very much.

Yeah. It states it's got its margin profile based on the quality and exclusivity and desirability of those goods, right? If you've got a level of design and quality and scarcity, you know, and build desire, you know, who knows what the margins will be. I think we, we, we determine our margins based on a competitive nature. And, you know, if there's others selling something in the market, okay. You know, is there a quality differentiation? How big is it? How different is the design? So on and so forth. Uh, what access do they have to the market? You know, Do they have a big enough platform to, to matter, you know, all kinds of things. Like we're not really doing margin building pay for something like, um, you know, uh, incentive for the trade, the incentive for the trade. It's a simple model. Like we give X and we need an X and we need a list of Y and it's so minor. you know, on a model like ours, because we have such leverage and flow through, you know, I mean, just, you have to think about our model, like, you know, even think, think about estates on a, you know, our whole business has a different model than everybody else just because kind of the price points of our product, right. Versus most people selling furniture. So we have significantly more leverage, you know, just handling goods, shipping goods, delivering goods, so on and so forth. Um, And we have tremendous leverage in our interior design business because, you know, we're selling, you know, high average orders, you know, and, and yes, there's an investment to do that work, but we, you know, we have such leverage on incremental sales. And again, it's, it's a little mass today because, you know, because of the investments we're making, uh, you know, in international and, um, you know, and things like estates and, and so on and so forth. But, uh, uh, Yeah, we've got plenty of margin to cover what we're doing. We'll have plenty of margin growth going forward. Like I said, we're looking at what we believe the cash generation model of this business is gonna look like because we think that's the most important metric. And I think as we move past the peak investment, cycle you know this year and our you know we believe our you know our top line is going to inflect up kind of irrelevant of what the external market does unless it really you know look if we get into a war that massively impacts you know the economy the inflation you know so on and so forth just gonna you know it's gonna put pressure on everyone we're Those things happen, but we don't need a big move in the housing market to grow. We don't even need a move in the housing market. I'm not counting on the guidance we just gave everyone. I'm not counting on the market getting any better. The market could get worse. I'd be surprised if we don't beat those numbers. A 5% incremental move on estates is really conservative.

Thank you very much, and good luck. Thank you.

Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, Gary. Hey, Jack. I want to follow up on two items. First, estates and top-line trajectory, and then my follow-up will be on the balance sheets. So first on estates, can you give us a sense of sequencing how much of the collection is being launched? I assume it'll be continuous. What percentage of items on floors and galleries will be estates? When should we expect that fully ramped? And then should we be seeing the customer deposit line pick up a bit, not just from these back orders, but from estates? And then I'll wait for the follow-up.

How many questions did you just ask her? I'm on track. That was good. I mean, I just saw you in Milan, but I thought you asked me all the questions you might have had. Maybe everybody on the phone should ask you questions about Estates. You're one of the few people that saw it set up in Milan. OK, so the sequencing of the products coming into stores We will be kind of terracing in stores, when do we get to like 60% of the sales 65% was that. end of September so end of September will be in the galleries that represent you know roughly 60 to 65% of business, you know roughly two thirds of the business and then what's the next wave that hits. said pretty much every month and every month and so every month we kind of have so december will be all galleries our our second mailing of estates will be the uh early part of november so and that will be a pretty meaningful expansion of the assortment so you'll you'll see us building this assortment over the next couple of years And then the... Oh, yeah.

Yeah. Should we expect deposits to tick up? I mean, they follow our business. So as revenues grow, demand is driven, customer deposits tick up.

Yeah. So then I'll put the follow-up. It's two parts in the follow-up. Should the deposits already be ticking up as these back orders exist or no, that that was already on deposits? And then... Just thinking about balance sheets, like the business improves and inflects, as you said, Gary, there's a lot of leverage in it. The balance sheet cash flow stuff should resolve itself. But can you remind us, you know, this path to getting debt-free by 29, is there an update? What other steps are you taking to get to that? How much of a priority is it versus just letting the business now, let the estate collection speak for itself and then drive the natural deleverage of the business?

I think we were pretty clear. It's a big priority. And, um, you know, we outlined asset sales of what, two to two 50 a year of the next two years. We just, um, completed a transaction, uh, inside our Aspen real estate, uh, where, you know, we sold some properties to our partner and, you know, sold the property to us. And we now have more independent control of, across a lot of properties that we can monetize more quickly than less quickly. How many properties did we take control of again? Eight? Eight in total. Eight in total. We have 100% control now. So, you know, we don't have to work through, you know, JV and a partnership to kind of monetize things. And, you know, Dave Stanchak is back and Dave knows how to get deals done, you know, buying or selling. And so, you know, and we're, you know, holding... You also have real estate outside of the JV. And, you know, so, you know, there's that and there's, you know, the business performance. There's the spending, you know, inflection down, you know, deflection, I guess you could call it. You know, so there's multi-jack. I don't even want to jump in with anything. But, you know, it's really the, you know, The spending comes down. The sales are going to go up. We'll have asset sales.

And pre-cash flow will build through that time period. So again, I think it's just reiterate what Gary said, which is it remains a priority. The exact timing of being debt-free, I mean, again, it's our target. It's our goal. But I think importantly, just that making progress on that, on those initiatives, that's what we're focused on. Yeah.

And I think we have a history of, you know, being relatively creative with the capital markets. You know, we've had a lot of good timing, you know, before this, you know, four-year downturn of the housing market. So, you know, our buyback wasn't as well-timed as maybe our other buybacks and in our know capital approach to it you know i wish we would have locked it in but we didn't and you know many you know big banks that you guys work for told us oh no you know you don't lock it in you know it's you know interest rates aren't going up oh no there's one little move and then all of a sudden we had the fastest rise of interest rates in history you know of our lifetimes you know so uh you don't always get things these things right but um i mean Yeah. When, when our stock gets to the right levels, would we exercise, you know, vertical options to take down debt and move debt? Like do we have so many ways to work the balance sheet to do things, you know, you, you know, you don't want to do any convertible debt, you know, at this level. Uh, but you know, we don't think our stock is going to be at this level very long. We think it's going to move with our business and as we execute and you know, and, and again, we're, we're kind of on the other side of the cycle. You know, we just, we're in our most prolific spending period of all time. And, you know, unfortunately it was, you know, post COVID and we're building some of the most important things we've ever built. And it all costs, you know, a hell of a lot more than, you know, we would have built a pre COVID. So yeah, unfortunate timing, but nonetheless, all, all kind of short term things to navigate around. I'm in a, once you spend the money, the money's behind you, right? And I look at it and I say, yeah, I mean, there's some people that want to focus on operating margin, and we're going to carry a lot more depreciation, but for investors who want to focus on that line, all right, focus on that line. Maybe some people are going to be a few hundred base points better than us, but we're going to be focused on EBITDA and cash flow. And I think, you know, smartest investor is going to be focused on that line. And, you know, and that's where we're going to be able to create, I think, the best returns in this industry.

Thanks, guys. Product looks great. Good luck. Great. Thanks, Damien.

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

Great. Appreciate it.

Thanks for taking my question. So as a follow-up, as you guys exit the investment cycle following the opening of London and the rollout of states, how should we think about what that margin inflection could look like over the medium term? You've obviously provided a second half outlook, but how should we think about the medium term margin power as you do start to benefit from the investments that you've made over the past few years?

I mean, I think we gave you a longer-term outlook and, you know, we believe that's, you know, the right outlook and the right timeline to refer to the video. Yeah, we've kind of laid all that out. You know, so, you know, we believe there's, again, we think, believe there's meaningful margin expansion as whether or not the housing market gets any better. you know, just because of the cycle and, you know, coming around and the growth that we expect from these investments. And, yeah, I mean, we don't, I mean, we, you know, Europe is, and, you know, the UK is in even worse shape than the US, right? And it's even getting hit more than the US from the war and stuff like that. But, you know, you're talking about, you know, we're not, we didn't exactly open at the most optimal time, you know, and from a housing point of view and from an economic point of view. But the good news is I've never seen an economy that stayed down forever. Now, I used to say I never saw, you know, a housing market that stayed down over, you know, stayed down longer than 18 months in my career. But, you know, now we're going into, yeah, we'll definitely probably, yeah, I don't think it's going to recover this year. So we'll see 48 months. Will it go into a fifth year? It may. It all depends on inflation and interest rates. I think we're going to see a lot of leverage in this model either way. We're just really excited. It's one thing to talk about and conceptualize the states you know, work on it and work on it and work on it and tweak it and tweak it. And then when you see it all comes together and, you know, you go through this accelerated learning at the end of a development, you know, of a new business like this. And, you know, it's just, I don't think any of us have ever worked harder, you know, because we're doing some of the most important galleries and opening the most important markets in the world. And, doing some of our best work from a platform and physical point of view. And we're doing our best work from a product point of view and presentation point of view. But I don't think there's ever been a higher level of excitement here. We have a lot of people here that have been a long time, 10 to 20 years. And man, I don't think I think everybody sees it very clearly, just how unique the product is, just how unique the positioning of the brand is. And so, you know, we're excited to see our efforts and work, you know, pay off and monetize, you know, for our shareholders. And, you know, we're all shareholders here, right? Everybody is. got skin in the game and everybody's got upside, you know, in this effort. So, uh, yeah.

Got it. That's helpful. And then, Gary, as you guys scale and begin to open galleries in the U.S. with the new prototype, how do you think about the unit economics there? Do you think that you can generate similar revenues as the boxes that you've opened, you know, over the past decade? And then should we assume that the new galleries, because they, you know, are going to cost less, should get you higher unit margins as well? Thank you.

We do. Yeah. Yeah. We'll have a you know, I think we're going to have a great return on investment. You know, we laid out for you guys in the video the compound and the logic behind the compound, right? It's kind of disaggregating the, you know, multi-level, three-level gallery and saying, you know, what can you take out? You know, what don't you need? You know, you don't need in a compound, you don't You don't need elevators. You don't need a grand staircase. You don't need eggs of stairwells. You know, I think a lot of people know in all these big buildings, there's two eggs of stairwells that are all concrete, you know, going up. There's a giant grand staircase. There's generally two elevators. There's, you know, all kinds of levels. There's, you know, when you're building a, you know, there's a restaurant on a rooftop, you know, that takes extra steel and bigger foundations to carry the load and takes, you know, complex mechanical systems to operate a building like that. And, you know, we spent several years here dissecting that. We started seeing post-COVID, you know, the cost became meaningfully more, you know, two to two and a half times, two and a half times more in some cases. And so, you know, we, you know, we broke it down and said, hey, how can we have an experience that's no less inspiring and beautiful And we came up with a compound. And I think it's going to be, I think people are going to think it's the newest, greatest physical experience out there. And in some ways, it's going to look to people like we maybe spent more money, right? Because they've never seen anything like it. It's going to look like beautiful gardens you're walking through. But all that area doesn't need to be air conditioned. You've got minimal lighting, garden lighting, stuff like that. Uh, you know, we're aggregating all the bathrooms and toilets in one place. We, you know, like, you know, we're building a lot of these buildings, you know, they have electric and a small pipe with sprinkler, you know, sprinkler heads. And, uh, you know, it's not, it's like, imagine building a house without bedrooms and I was using without bathrooms and kitchens and all the things that are really expensive. And you just aggregate everything in, you know, the center where the restaurant is, um, You know, I think we've, it's there, I think these things are really smart and, uh, I hear it'd be really exciting. So we're excited to, you know, unveil them. And then I think our, you know, secondary market, you know, salaries, I think, you know, we expect everything to be as productive, if not more productive. And, and I would think all the new things we're going to open are going to be more productive because we've got a bigger assortment and we've got estates and we have if you think about you know how we've grown you know we've grown through uh product expansion primarily in the early years because we had no capital and then platform expansion uh when we um presented those goods uh at a physical level and we you know the the kind of lifts that we've talked about historically um so so yeah i think the All of that we're so excited about. We can't talk about going post-peak. From a spending point of view, the things that we're going under construction on, we still have a couple of leftover ones that are some cleanups that are a little bit more than we wanted to spend when we couldn't redesign them. I think the whole model is going to look different. The return on invested capital is going to you know, get back, I think to the levels we were at in our peak. And I think we were what we hit like 75%, you know, turn on invested capital. Yeah. And I think we'll, you know, be at that kind of level and, and, uh, yeah. So yeah, the good news is we've, you know, you know, we're just so much smarter and have so much more experience and, um, And, you know, you'll, that'll all be reflected in the outcome and the economics. And, uh, but yeah, we got a little stuck. We're building in some expensive places and expensive cities that, yeah, we, it's not like we could unwind that those things to go, whoops, you know, let's not build in the most expensive cities in the world, you know, with some of the most complex projects at exactly the most expensive time.

Yeah.

I mean, but the good news is what doesn't kill you makes you stronger. Right. So we're still here.

That's great. Appreciate all the color and certainly look forward to London.

Great. Look forward to seeing you, Max.

Your next question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

Hi. Good evening. I appreciate you taking my question. I'll keep it short. I guess the question I want to ask is just on the guidance and the, you know, you've already discussed this a bit, but the ramp in sales growth is expected the second half of this year. Now, we've talked a lot about estates. I guess the way I want to frame the question is, as you look at the business today, you know, the piece of business today, I mean, how much ramp do you have to have in that existing business in order to achieve, you know, with the components you talked about, these new pieces, to achieve that guidance for the second half of the year?

You know, well, if you really look at that, at the build of the back orders and special orders, right. Our business is, is, is better than kind of reflected in the revenue, right? Like we've got pretty big, you know, pretty big balances. So, you know, there's balances are being created now. You know, but we're not shipping those revenues, you know, or those that we're not shipping that demand yet because of, you know, we still have transitional things and impacts from, you know, major resourcing. And, you know, a lot of our people in all categories are, you know, the people are still catching up. And so, you know, we'll just see that. I mean, you have to kind of look at it and say, OK, what does that look like? Where are we really? What is it building to? And you have to think about that flop that's kind of coming across. And a lot of that, when you think about that, Brian, there's a pretty big number that we don't have to drive demand to hit it. It's we've already driven that demand, right? And you've got a big chunk of business that's going to just flop over to the second half. Does that make sense? Yeah.

No, it makes, yeah, conceptually it makes sense. So I apologize, but have you quantified that piece, we'd like you to use your term, Gary, the piece of business will flop over to the second half? That's already there? Have you quantified that?

Yeah, it's in the little table. Yeah, in the letter. It's the 75 million or four and a half percent.

Okay, that's in the demand now. Okay.

Yeah, that's in the demand now. We're not reporting demand, you know, but, you know, reporting revenues. But, yeah, all that, you know, that's $75 million is, you know, on our books and will ship.

Again, that's back orders and special orders over and above a normal rate. I mean, we always have back orders and special orders in our business. But this is elevated because of unnatural things happening between, you know, or things that are taking more effort, like resourcing, transportation impacts, whatnot. So that piece, that elevated piece over sort of normal, quote, unquote, is what Gary and I are talking about for the second half. That's four and a half hours.

Okay, that's helpful. I appreciate that. Thank you. Yes.

Thank you, Bernd.

Your next question comes from the line of Zach Fatum with Wells Fargo. Please go ahead.

Zach, are you on?

Zach, your line is open.

Hey. Sorry about that. Good afternoon. So first question on the initial response from Milan and your expectations for year one in the market. And now that you have galleries open in both Milan and Paris with London around the corner, any revised thoughts on sales trajectory from the three? And if you think New York is a good benchmark for what those markets could look like?

Yeah, I mean, look, I think they'll all be great markets over time, you know, and we've got to build the brand and, uh, you know, build the customer base, build our design business, you know, continue to build the pipeline. And, you know, I, I think I've used before, you know, what the ramp, you know, the first, you know, you know, the first one was RH England and that's been open the longest and, you know, what that's ramped to, uh, you know, you know, and it's not a great economy for the home business in the UK, but, uh, you know, in a store that's two hours outside of London with not a lot of people around. So, you know, that gives us high hopes. And, you know, we have greater brand awareness in London for two reasons. There's a lot more expats. There's a lot more people that have lived in New York and gone back and forth. There's a lot more people that know the brand. You know, everybody speaks the same language, so on and so forth. So, you know, meaningfully higher brand awareness. And we've been open out in the you know, in the Coswell English countryside now for three years. So, um, uh, you know, and then, you know, kind of just getting started in Paris, uh, you know, and we're, you know, just kind of open in Milan and we like, we see, we like the responses that we're seeing and, uh, and you know, the key for us is build the design books and, you know, get the ramps and, um, you know, so. I think we're going to, you know, as these mature and grow, I think we're going to like the outcome. But I think London, I was just talking to the team about this, you know, London is kind of the accelerator for all of it, right? Because everybody goes to London, it's, you know, it is the financial hub and, you know, just, you know, if you were going to be in one place, you'd be in London. And if you were going to be two, you'd you know, be in London and Paris or London, Milan, you know, they're pretty close, you know, but for, you know, for slightly different reason, you know, Milan is the center of the universe for the, you know, the home design business because of Salone and design week and, um, uh, you know, and the eyeballs you can get, you know, that not just from designers and, you know, from true customers that come that fly in with their architects and their interior designers. And, you know, they're shopping from all the brands at the shows. So, um, you know, I, I think it's, look, I think those, those, these three are the core of the platform. This is, these are the three key things. This is the foundation of building a global brand outside of the United States of America. Right. And, uh, I think I like to say, you know, someone told me once they heard Bernard Arnault was asked the question, how do you build a brand of China? And. Apparently his response is you build great stores in Paris, London, and New York. And so we've just done it backwards and we threw Milan in there because it's so important for our industry. Right. And, uh, um, so yeah, this is, it's really, once we get London going, I think the whole thing is like game on. I think London will create the biggest echo, you know, the biggest You know, it's where we're known the most, it's where we should ramp the fastest, do the most volume. And it, you know, because everybody travels into London for so many different reasons, you've got a huge Middle East, you know, customer there that, you know, lives between London and, you know, in the Middle East and the US for that matter, that I think knows our brand and is going to respond to our brand. And I just think the echo of London is going to amplify Milan and Paris and every other gallery that we've opened.

Thanks for that, Gary. And just a quick one for Jack. I think the opening costs in Q1, you said, would be about 420 basis points if that ended up being the case. And for Q2, you're guiding, I think, 380 basis points for London. Could you just help us out on what which of those costs should we consider transitory and come out in the second half of the year versus costs there that are now in the base and will persist?

Q1 ended up 450, so right there with the 420. You know, we're not guiding specifically the quarters. You know, so you got the year at 270. I guess you can back into some math as to a 450 and a 380 and how they average out to a 270 on the year would be one way approach it and and that delta being you know transitory being you know what you know but it let's call it mid 100s um in the back half and you know the delta between that and you know the numbers for q1 and q2 are the transitory sort of pre-opening driven related to the openings got it thanks for the time got it

Your next question comes from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Oh, great. Good evening. Thanks for squeezing me in. Just one question here. Gary, could you share some context on why now is the right time to pursue a loyalty program that compensates your trade clients? Presumably you've maybe considered this pivot in the past. What makes now the right time to roll this out? And if you could discuss maybe just the overall growth trend in your trade business in recent years relative to the end consumer business, that would be helpful. You know, whether trade has been outperforming consumer and this is the playbook to supercharge it, or has trade been underperforming and this is a way to improve the trend? Thanks so much.

Yeah, for those competitors that report trade, I think we've been overperforming the last three years. So, um, so, uh, you know, we've got a very strong trade business. We have great leadership, uh, great teams, you know, very high quality people there, you know, live and breathe our values that built great organizations. And, um, yeah, this, yeah, it becomes a supercharged. Okay. I'm the guy that we used to have a trade incentive program and I took it out against. you know, a lot of people's, um, debate. And so, uh, but when we were making the move to membership, you know, and I, I just, uh, you know, I, I, you know, I, is it at the right Paul or not? I, I don't know, probably not now that I, you know, reflect on it with, you know, with the wisdom I have today, uh, versus, uh, you know, what I saw and felt in, um, What was that, 2016, right? Yeah, 10 years ago. Yeah, I just don't think I was thinking about it correctly. And why is now the right time is because of Estates. Because Estates opens up the very top of the market for this brand. No other brand has goods at this level of design and quality. No one at the retail level. They may tell you they do. They've probably never been into these businesses that we bought. We've taken what we do really well and amplified those assortments. You're going to see things you've never seen before. Dimensionalized in a way and presented in a way just doesn't exist. Why wouldn't you want to open up best interior designers in the world to to what we're doing today i mean like we're just smarter honestly you know like i look back and if i said today if i if i knew what i know today would i have made the same decision to know i would not have made the same decision so i'm smarter today i know more today more knowledge and and it's funny because i was you know i was married to an interior designer, you know, Kendall and I were together for 11 years. And so, you know, and I knew her business pretty well. It helped me conceptualize what to do at our age, quite frankly, you know, that helped me see the opportunity, but I don't think I really, I don't think I really understood the market and, and correctly. Uh, and it's changed too. You know, that, I mean, there's more and more people that, um, you know, you, you know, you have growth and wealth, right? There's, there's more and more people, uh, that have the, um, financial ability to use interior designers. Yeah. There's more use. People are more exposed to design and quality. More people are, you know, better houses and better design everywhere. So, uh, so anyway, but, um, yeah, we're happy to, uh, the advocates and partners and, you know, open up our platform and, you know, and support them in a greater way. And I think, look, today, it's a big part of our business today. Our trade business is a big part of our business. So it's not a little part, but we think it could be meaningfully bigger. And, you know, when people say, oh, you're going to incentivize them, you know, the lift we have to get is very small on incremental business. I mean, we have massive flow through on this model.

Thanks and best of luck. Thank you.

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

Great. Thank you, everyone, for your time and your questions. you know, for the conversation today. And, you know, I just want to say to, you know, our team, you know, teams across the country, across the world, you know, across our campus here, you know, I think everybody knows what we're working on. Everybody knows what we're aspiring to do. I think this is one of the most important times in the history of our age. And, you know, I couldn't be more proud of the work everyone's doing, you know, and the you know, the organization that's been built here, you know, based on our values and beliefs. And, you know, our work is going to a new level. I think our performance is going to go into a new level. And, you know, it's all because of the team members, you know, who have built this thing over the last 25 years that I've been here. So I just want to thank everyone. You know, everybody's effort is important and contributes to this cause. And I think we're going to feel very proud here

um very soon even prouder than we've ever felt so i can't wait to share it with you thank you ladies and gentlemen this concludes today's call thank you all for joining you may now disconnect