RH

Hello everyone. Thank you for joining us and welcome to the RH second quarter fiscal 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Alison Malkin of ICR. Alison, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second 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 would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These four 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 four 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 a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. And now I'd like to turn the call over to Gary.

Good afternoon, everyone. We're coming live from New York City today. We got in last night. for the opening of our first RHS Stage Gallery in Greenwich, Connecticut. So I know I saw some of you there last night, and those who haven't seen it, I would encourage everyone to get there. Our newest, latest, greatest work. So let me start with the letter to our people, partners, and shareholders. GapNet revenues of $922.2 million exceeded the high end of our guidance, increasing 2.6% versus last year, and accelerating 4.2 points over the first quarter as our momentum begins to build from the significant growth strategies we had recently put into motion. Normalized adjusted EBITDA margin of 13.4% also exceeded the high end of our guidance for adjusted EBITDA margin. And we generated 72.3 million of cash in the quarter, inclusive of a free cash flow and a $42 million distribution from our Aspen joint ventures excluding tariff refunds of $69.2 million. We recognize the tariff benefit of $55.1 million in the second quarter and expect to recognize an additional $13.9 million tariff benefit in the second half of the year, which we plan to use to offset $50 million of unplanned cost increases across our supply chain with a significant and sustained spike in oil prices as a result of the continued conflict in the Middle East. The remaining 19 million of tariff proceeds will benefit earnings, and it's included in our updated adjusted EBITDA margin outlook for fiscal 2026. Updated fiscal year 2026 outlook. Revenue growth of 5.5% to 7%. Adjusted EBITDA margin of 15% to 16.2%. Free cash flow, asset sales, and distribution of equity method investments of $300 million to $400 million. The above outlook includes an approximate negative 340 basis point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansions. Third quarter 2026 outlook. Revenue growth of five to six percent, inclusive of backlog reduction of 2.5 points, RH estates of two points, new galleries and other one point. adjusted EBITDA margin of 12.5 to 13.5 percent the above outlook includes an approximate negative 310 basis point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion fourth quarter 2026 outlook revenue growth of 16.1 to 21.2 percent inclusive of backlog reductions of 6.5 points RH Estates growth of eight points, new galleries and other of four points, adjusted EBITDA margin of 19.7% to 22.9%. The above outlook includes an approximately negative 190 basis points of adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. Expanding the brand and doubling the TAM We believe the introduction of RH Estates, our latest brand extension, introduced with a 268-page sourcebook that arrived in homes late June through mid-July, has the potential to double the total addressable market of the RH brand. Over 60% of luxury homes across North America have traditional or classic architecture, with a higher concentration in Europe. A home's architectural vernacular is generally the driving factor influencing stylistic direction for both interior designers and consumers. Additionally, we believe traditional and classic furniture will anchor the next major style trend across the industry over the next 20 plus years at the dominant trends from the 1980s through 2010, such as eclecticism based on classic design and antiques highlighted with contemporary modern pieces and the California look pioneered by Michael Taylor, who Architectural Digest called one of the 20 greatest designers of all time, and who twisted eclecticism towards a more rustic yet refined point of view, blurring the lines between indoors and outdoors. Michael Taylor's California look was amplified and refined by Richard Hallberg, Daniel Cuevas, and Barbara Wesley, designers who together launched Formations, one of the most admired and respected design firms to the trade luxury The three later acquired Denison Lean, giving them authority in authentic classical European furniture and antiques, blending them masterfully and creating a stylistic vocabulary that was layered and looked to have been collected over time. Their flagship showrooms on Melrose Avenue in West Hollywood Design District have been the first stop for many of the best interior designers and collectors from around the world. Our acquisitions over the past six years of Michael Taylor Designs, Formations, Denison Lean, Joseph Ju, and Dimitri, plus our decades-long relationship with many of the world's distinguished antique collectors, such as Ed Hardy of San Francisco, Ludovic Messinger, who set the tone and trends at the world-famous Paris Flea Market, and Rebecca Hill of London and Muging, who now leads product curation for RH Upholstery, plus designers such as Anushka Hemphill, the inventor of Blake's, the first and most famous boutique hotel in the world, who also designed the World of RH Bar and Lounge and the Perch Restaurant at RH London, plus the many designers, artisans, and manufacturers who are all part of the intricate and inspiring RH ecosystem of design have come together to lead, form, and ride this next wave with the launch of RH Estates. This is a collective effort with a level of talent, experience, and scale unseen before in our industry. While we launched our H-Escape estates with the conservative initial mailing, our plan is to aggressively expand the assortment and circulation in November, where we will have estates on the main floor of our galleries that represent 80% of our business. And in-stocks will be at an adequate level to meet and fill demand, hence the fourth quarter acceleration in our output. You can expect this to continue to rapidly expand the assortment over the next five years, and we predict it will represent 50% of our offering at that time. We also believe our two states will be margin accretive on multiple levels. One, we believe the quality, design, and exclusivity of the offering will command higher margins. And two, the average price point is currently 45% higher than our existing assortment. thus creating cost leverage and margin accretion throughout our operating model. It's also important to note that we will aggressively protect the exclusivity of our products and the integrity of our brand. Almost the entirety of the Arch Estates collection is currently protected by trade dress or have design patents pending due to the acquisitions of Michael Taylor, Formations, Denison Lean, and Dimitri as well as pieces developed with internal and external designers. You will note on the back of the source book it reads, RH vigorously protects and pursues appropriate legal remedies against unauthorized copying, imitation, or misuse worldwide of its product designs, photographs, and collection names through intellectual property rights, including design patents, unregistered design rights, trade dress, trademarks, copyrights, and pending applications. Extraordinary takes more time, costs more money, involves more people, doing more things in a more complicated manner, but it's worth it. Over the entrance of RH Center of Innovation, it reads, RH, the home of the extraordinary, the remarkable, and the amazing. I'm sure there are people who visit or come in for an interview and think the above is some corporate nonsense. I'm here to tell you it's not. It's logic, experience, and I would argue common sense. What we've learned on our 26 year journey of transforming restoration hardware, a nearly bankrupt company with a $20 million market cap and a box of oxidol laundry detergent on the cover of its catalog into RH, the leading luxury home brand in the world with almost 4 billion in annual revenues, is that we always figured out how to monetize extraordinary and remarkable work. And we found it very hard to monetize ordinary and unremarkable. and yes, it has taken more time, cost more money, involved more people, doing more things in a more complicated manner. And yes, it has always been worth it. And this time will be no different. If you're a long-term shareholder and owner like I am, thank you for belief and patience. While we've been running through the mud for the past four years of the worst housing market in four decades, We've also made some amazing investments, done remarkable work, and expect extraordinary results over the next several quarters and years. Let me take you through a few of them. RH International. We expect the drag from international to decrease from 450 basis points in half one of this year to 250 basis points in half two, or 340 basis points for the year. We further expect the drag from international to decrease from 340 basis points in 2026 to 150 basis points in 2027 as we cycle the significant investments of opening our three global flagships in Paris, Milan, and London over a 10-month period from September 2025 to July 2026. On June 27th, we opened what I believe is our most innovative and extraordinary brand experience yet, RH London, the gallery in Mayfair. If you want to see our very best work and maybe the best work in the world of retail, it's at 7 Burlington Gardens in the heart of NACA. I'm happy to report the design pipeline reached almost 7 million in the first eight weeks, rivaling the design pipelines of RH Newport and RH New York. It will take several months to turn these high caliber complex design jobs, some in the million dollar range, into demand and revenue. but the response to RH London has been nothing short of spectacular. As I mentioned on our last call, I believe RH London will be the amplifier of the RH brand recognition across Europe and the Middle East. Our record investment cycle is now post peak, which will result in lower capital spending and higher returns on invested capital. We expect adjusted capital expenditure We have cycled through our real estate pipeline. that included three global flagships and several multi-story galleries with rooftop restaurants where construction costs doubled post-COVID. We have one multi-story gallery left to complete in Houston in 2027. Our new real estate strategy includes RH Compounds, a multi-building shopping experience with connecting garden courtyards and a central scheduled to open at the end of 26 or the beginning of 2027. And another RH compound that should be under construction soon in Aventura, Florida opening in 2027. Both projects are projected to have a payback in the 12 to 18 month range with return on capital metrics we were accustomed to prior to the pandemic. Additionally, as previously mentioned, we have developed a single story RH design gallery with integrated restaurants with similar expected 12 to 18 months payback ranges. And we are confident that our multiple DOTA markets retail strategies of RH compounds, RH ecosystems, RH design galleries with a single story, and RH interior design offices will significantly increase our return on invested capital and decrease construction timelines. Our long-term success and strategic separation is the result of innovating and investing during uncertain times, and this time is no different. Launching RH Estates, the most compelling collection in the history of our industry that has the potential to expand the brand and double the tan. Opening three most innovative global flagships that will likely never be duplicated in our lifetimes. Developing a global hospitality brand with restaurants that drive significant traffic Brand Awareness and generate on average 65% of the aggregate galleries rent they reside in. Building the world's largest residential interior design firm that is moving our brand beyond presenting and selling products, conceptualizing and selling spaces. All during the darkest days and most prolonged housing downturn in four decades is not for the faint of heart. Never underestimate the power of a team of people who don't know what can't be done. especially these people. Onward Team RH. Carpe diem, Gary. Operator will now open the call to questions.