Earnings call transcript: RH misses Q2 2025 forecasts, stock gains in aftermarket

RH, a leading luxury home furnishings company, reported its earnings for the second quarter of 2025, revealing a mixed performance. The company missed both its EPS and revenue forecasts, with EPS at $2.93 against a forecast of $3.18 and revenue at $899.2 million compared to the expected $906.58 million. Despite these misses, the stock gained 1.77% in aftermarket trading, closing at $232.99, as investors reacted to strategic growth plans and future guidance. According to InvestingPro analysis, RH currently trades near its Fair Value, with a Financial Health Score of 1.82, indicating fair overall condition.

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Key Takeaways

• RH’s Q2 revenue increased by 8.4% year-over-year.
• The company missed EPS and revenue forecasts, with a negative EPS surprise of 7.86%.
• Net income surged by 79%, showcasing strong profitability.
• The stock gained 1.77% in aftermarket trading, reflecting investor optimism.
• RH plans significant expansion in Europe and new gallery openings.

Company Performance

RH demonstrated robust year-over-year growth in Q2 2025, with revenue increasing by 8.4% and net income soaring by 79%. This performance comes despite a challenging housing market, which the company described as the worst in nearly 50 years. The company continues to position itself as a leader in luxury home furnishings, with significant market share gains and an expanding presence in Europe. InvestingPro data shows the company maintains a substantial debt burden with total debt of $3.94 billion and a debt-to-capital ratio of 48%, while generating a gross profit margin of 44.5%.

Financial Highlights

• Revenue: $899.2 million, up 8.4% year-over-year.
• Earnings per share: $2.93, missing the forecast of $3.18.
• Adjusted operating margin: 15.1%, up 340 basis points.
• Adjusted EBITDA: 20.6%, up 340 basis points.
• Free cash flow: $81 million.

Earnings vs. Forecast

RH’s Q2 performance fell short of market expectations, with a negative EPS surprise of 7.86% and a revenue shortfall of 0.81%. This marks a deviation from the company’s historical trend of meeting or exceeding forecasts, raising questions about the impact of external market conditions.

Market Reaction

Despite missing forecasts, RH’s stock rose by 1.77% in aftermarket trading. This increase suggests that investors are focusing on the company’s strategic initiatives and future growth potential, rather than the immediate earnings miss. The stock remains below its 52-week high of $457.26, indicating room for recovery. InvestingPro data reveals the stock’s beta of 2.16, indicating higher volatility than the market, with analyst price targets ranging from $179 to $436.

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Outlook & Guidance

RH provided an optimistic outlook for fiscal 2025, projecting revenue growth of 9% to 11% and an adjusted operating margin of 13% to 14%. The company plans to expand its European presence, aiming to double its size in 5 to 7 years. However, it anticipates $30 million in tariff-related costs in the second half of 2025.

Executive Commentary

Gary Friedman, RH’s CEO, emphasized the company’s strategic direction, stating, "We are creating the most desirable and distinguished brand in our industry." He also highlighted the significance of RH Paris, saying, "Paris is a place you come to do your very best work."

Risks and Challenges

• Supply chain adjustments, particularly the shift away from China.
• Tariff impacts, with expected costs of $30 million in H2 2025.
• Ongoing challenges in the housing market.
• Potential delays in product launches, such as the fall interior source book.

Q&A

During the earnings call, analysts inquired about RH’s real estate monetization plans, tariff challenges, and inventory management strategies. The company addressed these concerns, highlighting its strong performance in key markets like Paris and its proactive approach to managing external pressures.

Full transcript - RH (RH) Q2 2026:

Tiffany, Conference Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH 2Q25 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 that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Allison Malkin, ICR. Please go ahead.

Allison Malkin, Investor Relations, ICR: Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2025 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the Federal Securities Law, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC 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 measure 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. I would like to turn the call over to Gary.

Gary Friedman, Chairman and Chief Executive Officer, RH: Thank you, Allison. Good afternoon, everyone. I’ll start with our letter, and then we’ll open the call up with all the questions. To our people, partners, and shareholders, RH continued to generate industry-leading growth in the second quarter, as revenue increased 8.4% and demand increased 13.7%, despite the polarizing impact of tariff uncertainty and the worst housing market in almost 50 years. On a two-year basis, revenues increased 12% and demand increased 21%, resulting in significant share gains and strategic separation. As a reminder, we expect the approximate 5.4-point variance between demand and revenues due to tariff disruptions will shift from the second quarter and be realized as revenues over the second half of 2025. Adjusted operating margin of 15.1% and adjusted EBITDA of 20.6% both increased 340 basis points versus last year, inclusive of an approximately 170 basis point drag from investments to support our long-term European expansion.

Net income increased 79%, and we generated $81 million of free cash flow in the quarter. We continue to be pleased with the second-year demand trends at RH England, with gallery demand up 76% in the second quarter and online demand up 34%. Current demand trends indicate the gallery is expected to reach approximately $37 million to $39 million of demand in 2025, its second full fiscal year, with online demand reaching approximately $8 million. To put those results in perspective, if an RH gallery in the English countryside, with an estimated population of 100,000 in a 10-mile radius, two hours outside of London, can generate $46 million of total demand in its second full fiscal year, what can a gallery in the center of Mayfair, the most exclusive shopping district in London, with a population of 9.7 million do in its second full fiscal year? We believe exponentially more.

While many question the decision to open our first RH gallery in such a remote location, believing it would fail, what they failed to understand is the value of doing something extraordinary that breaks through the clutter and creates a conversation. We’ve learned during our journey at RH that when we’ve done extraordinary and remarkable work, we’ve always figured out a way to monetize it. We’ve also learned that it’s hard to monetize ordinary and unremarkable. The most important news regarding our European expansion was the September 5th opening of RH Paris, our most innovative and immersive brand experience to date. Located on the Champs-Élysées, just off the Avenue Montaigne, RH Paris stands at the epicenter of fashion and luxury.

Pass through the majestic gold leaf gates and a crushed limestone path to a secret garden where ivy-covered walls and sculpted trees frame the 18-foot cast medallion doors marking the entrance. Juxtaposing the entry is a free-standing RH Interior Design Studio. The two-story glass structure is home to what has become one of the largest residential interior design firms in the world, with projects on every major continent. A contemporary inlaid brass and white onyx mosaic frames a three-dimensional image of Leonardo da Vinci’s Vitruvian Man and the RH design ethos. The image and ethos not only mirror the entrance to RH Paris, but are also reflected in every building we inhabit and every house we turn into a home. Step through the threshold and enter the architecture and design bibliotheque. Discover rare books from the foundational masters Da Vinci, Palladio, Wandell, and Haussmann.

Commanding the center of the bibliotheque is one of the first modern printings circa 1521 of De Architectura, the 10 books on architecture by first-century BC architect Marcus Vitruvius. His description of a man outstretched within a circle in a square inspired Da Vinci’s famous drawing The Vitruvian Man, some 1,500 years after his death. The gallery, spanning seven levels, is connected by a soaring atrium of floating glass medallion stairs and a glass elevator that magically appears then disappears from an invisible shaft atop the rooftop garden. A cast bronze chariot set, circa 1870 by renowned French sculptor Louis-Philippe Chabod, whose work is on display at the Louvre, graces the center of the atrium. Beyond their structural role, chariot sets symbolize strength, grace, and ingenuity, a harmony between art and engineering.

We place this specific chariot set in the center of the grand atrium as a symbol of not only our desire to connect and create harmony between the architecture, art, history, and hospitality offerings of RH Paris, but also our desire to create harmony between RH and the people of Paris. On the lower level, ground and first floors, immerse yourself in artistic installations of furniture, antiques, artifacts, and art in a gallery setting. Each level features full-floor exhibits by a singular artist and carefully curated pieces not only chosen to furnish your home, but also define it. Shine under a spectacular curved glass and steel structure inspired by the Grand Palais while enjoying a curated menu of American and Mediterranean classics at Les Jardins, RH, located on the second-floor terrace.

Marvel at the stone mastery as every surface, from the bar to the bathrooms, is clad in rare white onyx slabs. On the third floor, discover the world of RH Bar and Lounge, a physical and digital immersion into the places and spaces that define the RH brand while enjoying light bites and a craft cocktail by legendary bartender Colin Field. Step into a jewel box of champagne lacquered walls with a sparkling feeling of over 7,000 individually hand-blown glass polyhedrons at Le Petit RH. With 360-degree views, including the Eiffel Tower, Grand Palais, and the Louvre, the Le Petit rooftop is one of the most spectacular dining destinations in all of Paris, featuring a creative menu of caviar specialties, small plates, signature salads, and seafood towers. While RH Paris may not sound like a retail store, it’s not meant to be.

It’s an authentic expression of the RH vision and design ethos. It is a global destination designed to manifest dreams, generate desire, and inspire an elevated and elegant way to live. I was asked by a journalist prior to opening, "You’re introducing multiple hospitality concepts at RH Paris. Have you considered that Parisians have very strong opinions about their hospitality?" I thought for a moment, and my answer was this. Parisians have very strong opinions about a lot more than their hospitality. Parisians have strong opinions about art, architecture, antiques, people, politics, fashion, design, food, and wine. Paris is a place you come to do your very best work. It is where you have the most to gain and the most to lose. In Paris, the measure is eternity. This we know, and have built accordingly.

I’m also pleased to report that RH Paris is off to a very strong start. Traffic in the gallery has exceeded RH New York by day by day, and the design pipeline in the first six days is greater than the design pipeline of our first five European galleries combined in their first six days. I didn’t know what to put for this next headline, so I just kept it simple. Tariffs, tariffs, and the possibility for more tariffs. Just when you might have thought the tariff conversation was complete, the announcement of a new furniture investigation and the possibility for additional furniture tariffs on top of existing furniture tariffs and incremental steel and aluminum tariffs were introduced with the goal of returning furniture manufacturing back to America.

We believe most in our industry hope that this investigation surfaces the difficulty of that task, as current manufacturing for high-quality wood or metal furniture does not exist at scale in America. It would require years of investments in building the facilities and workforce that most in this industry cannot afford to make. Not to mention the significant inflation that we believe will start to become evident in the second half of this year and accelerate into 2026 and beyond. While strong brands like ours will benefit from the likely dislocation and consolidation more tariffs will have on our industry, many smaller companies will have difficulty surviving these levels of tariffs. Additionally, more tariffs on furniture could also result in U.S. manufacturers moving production from the U.S. to countries closer to their international clients, avoiding freight costs and the likelihood of counter tariffs.

Our hope is that the investigation will seek out the perspective of a cross-section of leaders in our industry as we drive towards the best outcome for our country. As previously communicated, we’ve continued to shift sourcing out of China and expect receipts to decrease from 16% in Q1 to 2% in Q4, with a meaningful portion of the tariff absorbed by our vendor partners. Additionally, we are aggressively responding to the recent 50% tariffs imposed on India, which impacts 7% of our business. Almost entirely hand-knotted rugs. While the hand-knotted rugs category is highly specialized and not manufactured in America, I think for a hundred years, we have begun the process of identifying alternative countries. We have also resourced a significant portion of our upholstered furniture to our own North Carolina factory, where we have been manufacturing for 10 years and plan to continue doing so.

We are now projecting that 52% of our upholstered furniture will be produced in the United States, 21% in Italy, and approximately 12% in Mexico by the end of fiscal 2025. We also expect the percentage made in the United States will continue to increase throughout 2026. While there remains uncertainty until tariff investigations are complete, we have proven we are well positioned to compete favorably in any market condition. Outlook. Due to the dislocation and continued uncertainty related to tariffs, we believe it is prudent to revise our guidance for fiscal 2025 due to the following factors. While we continue negotiations with our manufacturing partners, our updated outlook reflects a $30 million cost of incremental tariffs net of mitigation in the second half.

As communicated, due to the uncertainty related to tariffs, we delayed the launch of the new brand extension that was planned for the second half of 2025 to the spring of 2026. We’ve also delayed the introduction of our fall interior source book by eight weeks as we awaited tariff announcements needed to finalize pricing. Last year, 100% of the fall interior source books were in-home by the first week of August. This year, the fall interior source book will be 100% in-home by the last week of September, with only 28% in-home as of the end of last week. We now expect approximately $40 million in revenues to shift out of Q3 and into Q4 and Q1 2026 because of that shift. Our outlook does not include any new tariffs as a result of the recently announced furniture investigation. Fiscal year 2025 outlook.

Revenue growth of 9% to 11%, adjusted operating margin of 13% to 14%, adjusted EBITDA margin of 19% to 20%, free cash flow of $250 million to $300 million. The above outlook includes an approximately negative 200 basis point operating margin impact from investments and startup costs to support our international expansion and a 90 basis point impact from tariffs net of mitigations. Third quarter 2025. Revenue growth of 8% to 10%, adjusted operating margin of 12% to 13%, adjusted EBITDA margin of 18% to 19%. The above outlook includes an approximately negative 270 basis point operating margin impact from investments and startup costs to support our international expansion and the opening of RH Paris, and a 120 basis point impact from tariffs net of mitigations. Platform expansion, elevation, and expansion plans for 2025.

We continue to open the most inspiring and immersive physical experiences in our industry, and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry, and perfect proportions. 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. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform elevation and expansion plans for the remainder of 2025 include the opening of four additional design galleries in Manhasset, San Diego, Detroit, and Palm Desert.

As previously communicated, we anticipate an inflection in our business across Europe as we begin to open in the important brand-building markets of Paris in 2025, plus London and Milan in the spring of 2026, all with dramatic brand-building hospitality experiences. We believe post-opening, we will begin to have the scale to support the necessary advertising investments to accelerate our growth in Europe. If the early reads coming out of RH Paris are an indication of what’s to come, RH Europe and the Middle East should enable us to double the size of RH over the next five to seven years.

Looking forward, we plan to accelerate our expansion strategy to include the opening of seven to nine new galleries per year, plus two to three design studios, outdoor galleries, or new concept galleries per year that increase our current presence in underpenetrated markets and open new markets to the RH brand. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. Warren Buffett. While we expect a higher risk business environment due to the uncertainty caused by tariffs, market volatility, inflation risk, and an increasing level of global discord, we believe it’s important to separate the signal from the noise. The fact is, we’ve been operating in the worst housing market in almost 50 years. For three straight years. For context, in 1978, there were 4.09 million existing homes sold when the U.S. had a population of 223 million.

Contrast that to 2024, where 4.06 million existing homes sold with a population of 340 million. 50% more people and less homes sold. It illuminates just how depressed the housing market has been this past year to three years. Despite that fact, we are performing at the level most would expect in a robust housing market. We believe it’s a result of investing with a very narrow focus and a long-term view, or what we like to call an inch wide and a mile deep. Elevating and expanding our platform by creating the most desired products, presenting in the most inspiring spaces in the world, with bespoke interior design services and beautiful restaurants that generate energy, engagement, and tremendous awareness of the RH brand.

While our business has been strong, it has been so due to action versus inaction, innovating versus duplicating, investing versus divesting, and aggressively taking market share during this downturn, we are positioned to create long-term strategic separation on the other side of it. We are investing in the most iconic global locations in retail that will likely never be duplicated in our lifetimes. We are building a global hospitality company with multiple concepts across multiple continents. We are creating a global bespoke interior design business that completes million-dollar plus full home installations. We are building a global contract and hospitality business where our products are featured in some of the finest hotels and residential projects in the world. We are creating the most desirable and distinguished brand in our industry, all while forecasting an EBITDA margin of approximately 20%.

Imagine what our margins and cash flow might look like in a robust housing market as we begin to cycle and leverage those investments. While we begin the year with meaningful debt, almost entirely due to our stock repurchases of $2.2 billion, we also began the year with incredible business momentum and meaningful assets. The assets include real estate that we believe has an estimated equity value of approximately $500 million that we plan to monetize opportunistically as market conditions warrant. An excess inventory of $300 million in cost that we plan to turn into cash over the next 12 to 18 months as we optimize our assortments post our product transformation. We are forecasting to generate $250 to $300 million in cash flow in 2025. Our plans call for significant and growing cash flow from operations over the next several years as we cycle this aggressive investment period.

We estimate that our adjusted capital expenditures will decrease to a range of $200 to $250 million in 2026 and $150 to $200 million in 2027 and beyond. We remain confident in our ability to make the necessary investments to continue our industry-leading growth while significantly reducing debt and lowering interest expense. As Warren Buffett wrote in his 2016 letter to Berkshire Hathaway shareholders, every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When downfalls of that sort occur, it’s imperative that we rush out doors carrying wash tubs, not cheesecloths. Our debt is reflective of a wash tub bet on ourselves. We repurchased 60% of our outstanding shares that greatly benefited our long-term shareholders post the publishing of Mr. Buffett’s letter in 2016 and 2017, and repurchased 30% of our outstanding shares during this housing downturn in 2022 and 2023.

While the sky in our sector has been darkened by inflation, interest rates, tariffs, and global politics, those clouds will soon pass, and it will not only be clear skies, but also clear that it was a good time to be a shareholder of RH. Carpe diem. Operator will now open a call to questions.

Tiffany, Conference Operator: 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 questions are limited to one and one follow-up for today’s call and that you re-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 Simeon Ari Gutman with Morgan Stanley. Please go ahead.

Gary Friedman, Chairman and Chief Executive Officer, RH: Hey everyone, thanks for the question. My first question is, the free cash flow is starting to sequentially improve, and you generated a decent amount this quarter. If you generate $250 to $300 million for the full year, and presumably even more through 2026, is real estate monetization still something you would or even need to pursue? You know.

Jack Preston, Chief Financial Officer, RH: I don’t know if we need to pursue it. You know, we’re opportunistic. We’re not, you know, we’re not really real estate owners, right? We’re real estate developers, and you know, we have a sale leaseback model, and we generally hold real estate for relatively short periods of time. We saw an opportunity when we were, you know, doing our deals in Aspen that, you know, the local developer there who had acquired really an outstanding portfolio of assets, you know, we had an opportunity to invest in that portfolio at a, what we thought was a really attractive price. We had a vision of possibly, you know, in a very small, I call Aspen probably the most influential, organized, small luxury town in the world. I don’t know if I’ve ever seen anything like it.

Like in about six square blocks, you have unbelievable retail, you know, you have wealth all around, you know, that all comes and shops there, all comes and eats in the restaurants there, and all skies, you know, a couple blocks from there. You just walk to Ajax and so on and so forth. As I got to know Aspen and was looking at our opportunities, you know, we thought, geez, what could we do here that could, you know, maybe in this, you know, six blocks, six square blocks, eight square blocks, focused little town with a high, I think, what is there, 86 billionaires that live there now? I mean, you know, there’s really, I’ve never seen anything like it. I mean, it’s more unique than Santa Fe. It’s more unique than Courchevel. It’s more unique than any place I’ve seen from the aggregation of wealth and influence.

Your ability to, you know, we had an ability to build two brand new buildings, right? Which is on two of the best corners in town. I mean, our gallery, you know, on Galena and the cross street is the best corner in Aspen. Catty corner to Ralph Lauren, across from Casa Tua, across from Marpiano, right next door is Brunello Cucinelli and every luxury brand marching up the street. Our guest house is, you know, on East Hyman, where the cross street is, where they’re building Lift One. A block and a half, two blocks down, they’re building the second big gondola, right? The Aman Resort’s going in there. Everybody’s going to be driving by that corner, and everybody’s going to be walking by and driving by our other corner. These were the two best, I thought, buildings that you could get.

It’s just, you know, as our partner calls it, forever real estate, right? It’s never going to go down. It’s always going to go up. We had the opportunity to become the landlord for Chanel, the landlord for Gucci, the landlord for Lululemon. What else in our portfolio?

Gary Friedman, Chairman and Chief Executive Officer, RH: Golden Goose.

Jack Preston, Chief Financial Officer, RH: Golden Goose.

Gary Friedman, Chairman and Chief Executive Officer, RH: Greenhill the brand.

Jack Preston, Chief Financial Officer, RH: Greenhill the brand. We’ve got.

Gary Friedman, Chairman and Chief Executive Officer, RH: Restaurants.

Jack Preston, Chief Financial Officer, RH: Yeah, we’ve got restaurants, we’ve got Sant Ambroeus, we’ve got, I can’t remember, we’ve got Catch Steak. We’re the landlord, we’re the kind of key retail landlord in the core of Aspen. We thought we could learn about real estate, we could learn the landlord side of it, we can understand how the other people negotiate, what’s important to them. We would just get smart, and then there were opportunities to do residential, a few other things that we’ve talked about in the past, do RH Residences at the Boomerang Lodge and build our first bathhouse and spa, and so on and so forth. We thought this would be a terrific place to build our brand image and have a global billboard. Unfortunately, we had the fastest rise of interest rates in the history, I think, of the United States, right?

That’s not really good for developers, whether you’re our partner or you’re us, you’re going to be developing at a much higher cost of capital. That kind of slowed us down. Also compounded by, our partner likes to say that building in Aspen is harder than building on the moon. It’s not the easiest place to develop, let’s just say. We kind of had to slow things down, but we’re very close to getting our mountain house opened and very close to getting our guest house opened. Those are two of the key trophy properties in our portfolio. We’re less interested. We’ve been a landlord now for a while. We’ve learned what we needed to learn. Is that the place to tie up our capital? No, not really. We’ve learned a lot.

Is it that the cost of capital today and the cost of construction in Aspen today, does it look as attractive to build there with a really long-term view? Again, I don’t know if it’s necessary for us. We’re open. It’s not a time we really want to sell right now. I mean, if they keep inflation in check, which is questionable with the tariffs, and they can lower interest rates, cap rates will be more attractive. There might be some people that want to make, that have a long-term view and want to make a fair offer on a portfolio like this. Otherwise, we’re in no rush. We’re patient. If the right opportunity came and somebody who really had a long-term view and they want to own forever real estate like Aspen, it’s an incredible asset.

Gary Friedman, Chairman and Chief Executive Officer, RH: Simeon, I just add, you know, when we communicate the value of the real estate, I think you asked if we need to do it. Our intention was never to communicate a need or a plan. It was, as Gary said, opportunistic. It’s an opportunity to make sure that folks understand the value of that real estate on our balance sheet, especially as it relates to the debt that we have.

Jack Preston, Chief Financial Officer, RH: Yeah. We’ve had other things besides that in the $500 million, right? We own RH England. We own RH Detroit. We own a property we’re going to develop, you know, RH New Jersey. We own a property in Madrid right now, but we love our current gallery. We think we can monetize that one. We actually have it on the market today. It’s an incredible old palace. We don’t believe we need two stores in Madrid. We really love what we’re doing there. We’re going to put a small cool La Petite RH in there now that we developed this new cool concept that doesn’t need a big kitchen that’s in Paris, which everybody ought to go to, by the way. If you missed our party, Simeon, you should have never missed that party. Everybody’s got to go see Paris because it is not another gallery. It is a leapfrog.

It is another kind of inflection point that helps us see a whole other opportunity here. Like when you see the world of RH and when you see La Petite RH and Les Jardins RH and you see what we’ve done hospitality-wise and you see what we’ve done design-wise and you see the architecture and the design library. For our second one we’ve done, the bibliotheque, you know, we did one in RH England because there was a big library, you know, that had been there for 400 years. We made it a library. Architecture design, but you see the cool one you walk through. It’s just so much that I think we’ve done that takes us to another level. I doubt that there’s a luxury retailer in that city, at the highest end, that doesn’t believe we just built the best store in the world.

I think everybody should go see it because it’s unlike anything you’ve seen. The traffic, when you think about it, it’s, I don’t know, a third of the size of New York. It’s had more traffic than New York every single day that we opened. Not New York in its first five days, New York today, the highest volume gallery in the company. Okay, New York today. It’s unreal what’s happening there. It’s that, you know, the people that are coming. Anyway.

Gary Friedman, Chairman and Chief Executive Officer, RH: If I can ask a follow-up, and by the way, I’ll be there next week for the after party.

Jack Preston, Chief Financial Officer, RH: All right.

Gary Friedman, Chairman and Chief Executive Officer, RH: My follow-up, it’s maybe paraphrasing something you said, Gary. You said the clouds could be clearing soon. You know, you’ve gotten through a lot of things over the last couple of years between rates and housing. Now embedded in your financials is investment with Europe. You have all this newness, and you’re growing the revenue, and you’re generating cash now. It feels like you’re knocking on the door of that period. You mentioned soon. I don’t know if you were giving a financial forecast or a weather forecast, but it’s soon. What’s wrong with that? What’s wrong with that logic that the business is on the cusp of this growth period that you’ve been engineering for the last several years?

Jack Preston, Chief Financial Officer, RH: Yeah, I think that the business is ready. We’re going to be kind of going post-peak on the investment cycle. One thing we’ve all had to deal with, and anybody who’s building anything of high quality, construction costs post-COVID are up like 100%. For some people I’ve talked to at the luxury level, they’re up 150%. We’ve been able to develop new concepts. We talked to you about that. It’s design ecosystem, it’s design compound, and other things that we’re taking the bigger multi-store box and breaking it into pieces and trying to create a significantly better capital efficiency, and putting our creativity to work that way. You’ll see if you, I think, once we get there, it’s hard to make a call today, right? We’re likely going to get an interest rate cut.

We got one last year, and everybody thought there was going to be like four or five more. I took my house in Beverly Hills off the market because I thought I was going to get a much better price. I should have took the offer I had back then because the housing market in LA is not great. I don’t know what’s going to happen. Look, I think the biggest thing for everybody to worry about is don’t let the 1970s happen. If you zoom in on the chart of what happened with federal funds rate over that 10-year period, it was arguably the 10 worst years in the U.S. economy. I remember I was 18 years old and I bought a $125 waterbed, a waterbed world at 28% interest. I don’t know how many years it took me to pay it off.

I think it was $12 a month or something like that. I was alive long enough to remember what the federal funds rate peaked at 21%. We think interest rates are high now, lose control of inflation, and you can have chaos. What do I worry the most about? Just kill inflation. I’m more motivated about killing inflation than getting an interest rate cut right now. We had an interest rate cut, and the tariffs create more inflation than anybody thinks. It’s not going to all come at one time and blip. The inventory is going to flow in over the course of a year, and you’re going to have to cycle through inventories. You’re going to have new tariffs. God forbid they throw another tariff on furniture. I mean, I think they’ve got to, like, someone has got to come talk to us. Talk to me. Call me.

I run the biggest luxury home brand in the world. Somebody call me and ask me what I think. Because it’s not really us. I worry about, I don’t want to win because 50% of our competitors, who are really good, hardworking people, get wiped out. You lose 15% of the people that are presenting at High Point Market or Las Vegas Market. Those markets will shut down. They’ll be bankrupt. I really don’t think anybody is thinking about the math. There’s no one that’s making wood furniture of scale, metal furniture of scale. If there’s another round of tariffs on furniture, long term, it’ll be good for us. It’s really bad for a lot of people in High Point. Whoever in High Point or North Carolina is advocating for it has got to have a really narrow, myopic view. It makes no sense for the U.S. economy long term.

We will blow up people, and there will be massive job losses. I think people need to understand that at all levels of the administration. I’ve been a fan of a lot that’s been going on. I think directionally, they’re doing a lot of right things, but I don’t know. I run the biggest luxury home brand in the world. No one’s talking to me. I’ve got a point of view, and I’m making that known now. We’re on the cusp of going too far here. That’s what I worry about.

Gary Friedman, Chairman and Chief Executive Officer, RH: Thanks. Good luck.

Tiffany, Conference Operator: Your next question comes from the line of Steven Paul Forbes with Guggenheim Securities LLC. Please go ahead.

Gary Friedman, Chairman and Chief Executive Officer, RH: Good evening, Gary, Jack. Gary, maybe shifting the focus to inventory, sort of a two-part question here. The first, given the change in the average tariff rate and, you know, this sort of excess inventory that you guys are winding down, any help on coaching or framing how much room there is for a continued reduction in net inventory on the balance sheet? The second point is, given everything you just said, how much visibility is there into the planned launch of the new brand extension in spring? Or is there still some risk around that extension launching?

Jack Preston, Chief Financial Officer, RH: Yeah, I don’t think there’s risk around that extension launching unless we get some really silly tariff thing on this investigation. I really hope this investigation includes speaking to industry leaders, and it’s not an investigation into a small little segment of the business. We will sell more upholstered furniture made in America than almost anybody making furniture in North Carolina, like just our upholstery business. You’ve got brands that are 130-year-old U.S. brands, and they don’t make wood furniture or metal furniture in America anymore. They don’t. You’ve got to be really careful. Upholstered furniture, we can make in America. We can do that. We can be competitive because you’ve got advantages. It’s special orders and it’s feeding the market and so on and so forth. There’s just not the workforce to make the other stuff, and there’s not people there. The next generation doesn’t want the jobs.

If you talk to people, again, our volume in our factory and what we’re going to make is as big as some of the biggest people at the high end. Don’t compare us to Ashley or someone who does $10 billion at the low end, and I think has, what, 65% of their business in America, 35% of their business offshore. I’m just saying the high-end furniture market, it’s not coming back for years. All it’s going to mean is people are going to, there’s a lot of people who are going to close, and a lot of jobs are going to be lost. I think people have to consider that. When you think about the risk of extension launching, no, no risk at all. Things might be more expensive, but they’re going to be more expensive for everyone, right? We have the advantages.

We buy more than anybody in our market by probably three times at our quality, the next closest person. We have tremendous, tremendous leverage here. I wouldn’t want to be competing with us, but I don’t like winning this way. It’s not going to be pretty. I think, hopefully we’re done with furniture tariffs and ring the register in the tariff banks. Let’s not completely disrupt an industry, see High Point close, see major furniture stores close, family, long-time businesses, they’ll be dead. That’s the most important thing. Inventory reduction, everything else we’re doing fine. If you’re thinking, do I buy our stock or not? Buy our stock either way. We will win. We’ve spent billions building a platform here. We have the most dominant, inspiring, high-end platform for luxury furniture in the world. We know how to source it. We have leverage buying it.

We know how to market it. What if you do, if you’re a wholesaler and all your customers go bankrupt? They can’t afford it. The customers can’t afford it. What do you do then? I don’t, I think the tariffs dry up. You slow down the furniture business, you’re going to slow down the tariffs. That’s why I think someone’s got to sit down from the industry with the administration and go through the math. This is just simple math. Don’t let it be emotional. Let it be intellectual and rational and data-driven. We’ve got all the math here. I know a lot of people in the industry that would love to sit down and debate this.

Gary Friedman, Chairman and Chief Executive Officer, RH: Steve, the framework for inventory reduction, one of the things to think about is just what is our turn. I mean, at the most simple levels, what’s our turn rate? Turn’s been in the past. Obviously, we’ve turned the inventory on an external basis into the high twos, low threes. If you even just think about Gary mentioning a letter of the $200 million to $300 million of inventory reduction, where that gets us, hypothetically at the end of the year, you’re starting to see a run rate of a turn closer to the mid-twos. Is there room beyond that? We do believe that.

Jack Preston, Chief Financial Officer, RH: In 2018 and 2019, we were running like three, 3.2 twos. Yeah. Yeah. We can run a much faster turn. You’re seeing the slower turns we’re running today is the massive product transformation, right? You’re buying a lot of inventory. You’re getting, you know, you’re getting a lot wrong, right? You’re getting some wrong. It’s inefficient to do what we just did. That ended up selling is a big investment. We’re on the other side of that. We do have a whole new concept coming. It’s probably the biggest idea and the lowest risk we’ve ever taken on a brand extension. I think it’s the biggest, you know, I mean, I hope PepsiCo did modern go to a billion for years. This is probably, you know, this is a $2 billion idea. It could go really quickly. We think we’re going to hit the trend dead on.

The product we have in development is like nothing else at the market. It’s going to be massively disruptive, exciting. We work confident enough that we’re going to open, you know, three galleries to launch it with. We’re going to do more if we can. We’ll have the Ralph Lauren store in Greenwich, Connecticut. We’ve got an incredible location in West Hollywood, and we’ll be announcing more about that soon. We’ve got our original gallery in San Francisco that we own in the design, right in the middle of the design district where we kind of relaunched the whole brand in 2010, right? Yeah. Nine, 2009. It’s just going to be an incredible gallery for this new concept. We’ve been working on this one for about four years. We’ll be ready to go.

Gary Friedman, Chairman and Chief Executive Officer, RH: Maybe just to confirm as a quick follow-up, those three galleries are launching or opening in conjunction with the launch of the brand extension in the spring?

Jack Preston, Chief Financial Officer, RH: Yeah, the ones in Greenwich and San Francisco for sure. The one in West Hollywood, we’ve got to still get our permits and get through just some approvals and things like that. Hopefully, it’ll be pretty simple. It’s going to be a two-stage piece where we’re going to kind of remodel a location that we now own. Phase two of that, once we open with the new concept, we are building a restaurant, a beautiful, it might be the most beautiful restaurant in all of Los Angeles. We’re building this incredible courtyard restaurant that we think is going to be tremendous. It’s going to add a restaurant in Los Angeles, which we don’t have in a major market. In Los Angeles, we’re building like an ecosystem, right? We have our Melrose gallery that we built like 12 years ago that’s fantastic, in a great corner, beautiful rooftop.

We’ve got our modern gallery a couple blocks away from that. We’ll have this new concept gallery that’s a couple of blocks away from Melrose. We’re in the process of closing another deal for an outdoor gallery on the same street. LA will have this really expansive RH ecosystem. I think our business in LA should go up 40% or more. It’s a big, big, big market for us.

Gary Friedman, Chairman and Chief Executive Officer, RH: That’s great to hear. I’ll pass it on. Thanks.

Jack Preston, Chief Financial Officer, RH: Thank you.

Tiffany, Conference Operator: Your next question comes from the line of Maksim Rakhlenko with TD Cowen. Please go ahead.

Gary Friedman, Chairman and Chief Executive Officer, RH: Great, thanks a lot. First, just on Europe, it’s early, but with improvements in England and the strong start to Paris, can you share what you think those galleries can actually do?

Jack Preston, Chief Financial Officer, RH: I can’t hear you quite well. I don’t know if you’re close enough to the speaker, but it’s hard to hear what you’re saying.

Gary Friedman, Chairman and Chief Executive Officer, RH: Speak up, please.

Jack Preston, Chief Financial Officer, RH: Apologies, but Europe is starting to scale. England, that gallery is improving, and Paris obviously off to a strong start. Now, how should we think about the revenues per market or per gallery over the medium term? With that, how are you thinking about the four-wall economics in Europe compared to U.S. galleries as we just think about that 200 basis point headwind easing over the medium term? I’d say, one will, you know, we’ll update periodically as things evolve here with Paris and, you know, as we get closer to London and Milan. I mean, it’s going to be very quick here, right? We’ll have two more big, big, really incredible galleries, all with multiple hospitality concepts and so on and so forth.

Think about this as how we would have liked to launch, but to get Paris and London, there were other locations we had to take and had to open. We faced lawsuits from landlords if we didn’t open them. Hence why we wanted our first impression to be something kind of inspiring and unforgettable. That’s why we did RH England, really for conversation, not so much for commerce, but you look at the numbers now, you go, hey, looks like it might be pretty good. We’ll see what happens to that location when we open London. London may actually amplify that location, as opposed to cannibalize that location. Don’t know. The greater London market is just a huge market. The UK market is a huge market. Paris is any indication of, I mean, we have way bigger brand awareness in London than we do Paris.

In Paris, what we’re seeing, Steph, what was it? 50% of the people know the RH brand in Paris? 50%. Shocking for us. We didn’t know that. Lots of people familiar, lots of people waiting for us to come, and we’re in a location that you can’t miss us, versus some of the other places. I don’t know, we’re building a brand in the other ones. Even Madrid, which is a pretty high populated city that’s pretty hot now, just, you know, not, you know, the people aren’t used to kind of a retailer even like us. I mean, it’s a really funny quick story. Jen Kelly, one of our curators and designers, really great curator and designer, has been with us for years and freelances with us and comes back to work for us.

She’s kind of, you know, I don’t know what she’s exactly, her title is now, but she finds the coolest stuff in various things. Jen has a godson that is finishing up his master’s in, you know, somewhere in New York, and his girlfriend finishing up her master’s is from Madrid. They were out in California. The godson is, I hope Jen’s okay that I tell the story, but the godson says, oh, you’ve got to meet my godmother. She’s actually into interior design. This young lady, who’s 29 years old, I think, said, oh my God, you have to come to Madrid. The most amazing home store in the world opened in Madrid and everybody’s talking about it. Jen goes, really? Where is it? She didn’t even connect the dot initially. She gives her the address where it is. She goes, oh, I worked on that store.

That’s our brand. That’s RH. This girl had no idea who we were, right? There’s not really the brand awareness as much, I think, in Madrid. It’ll take us longer there, but we’re really happy. When you look at the economics on the four-wall margins, some of these were not real big rents like Madrid and Brussels. The one that economics are a little more challenging is Munich. We had to take that. We didn’t extend those leases because we weren’t sure what the volumes would look like. I’d say a lot of them, or we know directionally kind of what we can do. What does it look like in 14,000 square feet? What does it look like in 20,000 square feet? Where might we do hospitality? We were going to do a restaurant in Madrid on the top floor, but it was kind of a smaller store.

We chickened out at the last minute and didn’t put it in. Now the team’s clamoring for it, like our brand awareness is saying everybody will come, they love our space. It’s just, it was an old palace, about 14,000 square feet. We can put a cool little kind of laissez-faire, you know, I guess we don’t call it laissez-faire because it’s a French kind of thing, but the same menu, it’s a perfectly cool menu. I think they’ll flip out. Our team’s super excited about it. We’re going to put a restaurant in that one. We have the ability to put a restaurant in Brussels long term. We know we’ve got the space there to do that. We may do that. We have to watch how Germany scales here. I’d say we have the lowest brand awareness in Germany, and they take longer.

Maybe we just don’t have the right location in Munich. I don’t know, but we’ve got flexibility there. I think the four walls, when you project them out, they look like the U.S. If Paris does anything directly like we think it’s going to do, it’s going to be fantastic. We’ve got a little bit more operating costs and stuff like that. We’ve got to have guards out of the gates and things like that. You’ve got to walk down 195 feet to get to the front door, and we’ve got to figure out how all that works, especially when the weather gets tougher. I think it’s now starting to, the dots are starting to connect. We have enough data. We’re seeing how things are ramping, and we’re just learning, we’re just starting to execute.

What would you give us on execution from the back end, having the right goods and the right fat? There are so many rules and things we had to get around. What fabrics can you use? What foam? What lighting? We’re kind of bumbling around. I’d say, give us a C today. What do you guys think? C plus? Yeah, maybe a C plus. It might be a D plus. Our team’s probably saying D plus, but we had a great session, a couple of sessions with them the last few times we were there, just had another great session with them. We know what we need to do. We loaded up both planes. We took all our merchants there. We brought in all the leaders from all the galleries, all our best designers. We listened, we learned.

If we just go from a D plus C minus to a B in execution, it’s probably worth 25 points. If we go to an A, it’s probably worth 50 points. We’ll get there. It’s a little hard when you only have a few small stores and you need to take people’s attention off certain things to be able to execute. The great thing is Paris now creates massive visibility and urgency. That’s why we took everybody over there. We were there for eight days, seven days, many nights. We were going home when the sun came up. We were working with the teams, everybody’s alongside each other, bringing this thing to life. It was a great, great experience for bringing our headquarter leaders together with our field leaders and building a great team.

Gary Friedman, Chairman and Chief Executive Officer, RH: Got it. That’s super helpful. In the 10Q, you discussed how the primary driver of the gross margin increase was due to increased margins in the core brand. Any more color on what drove that? Is the takeaway that we should consider that promotions should continue to normalize ahead and that tariffs are just the major headwind? How should we take the learnings as we think about the rest of the year?

Jack Preston, Chief Financial Officer, RH: Yeah, the margin expansion, I mean, it’s a reflection of what we were doing last year and the position of the product margin and the activity last year as some of the markdown activity last year. The year over year, we saw margin expansion. Yeah. We absorbed a hit on tariffs, much smaller. I mean, the tariffs really start hitting in Q3 and Q4 and into next year. Fingers crossed, there’s not another layer coming, but, you know, as Darwin said, we’re not the strongest of species that survives. It’s the one most adaptable to change. We got to be the most adaptable in innovation and invention, I think, in our industry. We’ll figure it out no matter what happens. There’s going to be gross margin headwinds from tariffs coming. You just can’t raise prices fast enough. You can’t, you know, there’s only so much room our manufacturing partners have.

You don’t want to blow them up, right? You got to walk the tightrope. It’s very different than China. I think that maybe that’s the other thing that maybe is misunderstood. I mean, China was kind of funded, I think some of China’s factories got some help from the government to deal with the tariffs. That’s not really happening in Vietnam. It’s not happening in Indonesia. They’re not China. They’re not, I think, strong, well-developed countries like China. That’s, it’s going to hurt people. There’s just, you know, there’s going to be challenges there. It is what it is. Improvise, adapt, and overcome.

Gary Friedman, Chairman and Chief Executive Officer, RH: Got it. Thanks a lot, guys. Best of luck and speak soon.

Jack Preston, Chief Financial Officer, RH: Thanks, Max.

Tiffany, Conference Operator: Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Analyst, Various (Morgan Stanley, Guggenheim, TD Cowen, UBS, Citi, Oppenheimer): Good evening. Thank you so much for taking my question. Gary, the investment community is very focused on the degree to which there’s discounting and promotions in your messaging. The results in the quarter suggest that you’ve been able to overcome it with your profitability. With that being said, is it driving incremental sales? Is the thesis that you will be able to pull back on some of this discounting-oriented messaging as the housing market improves and the natural rate of demand simply increases and offsets what’s being done right now?

Jack Preston, Chief Financial Officer, RH: Sure. Just start, Michael, in the world of furniture, at the luxury end, it’s all on sale. At the highest end, in the top design showrooms, interior designers, architects, all get 30% or 40% off. Our model of a membership model was a model to kind of smooth that out and be competitive. This is not like Chanel or Hermes, where they burn the markdowns or throw them out or whatever they do, right? Because they have such ridiculous margins. This is not fashion. If people confuse it with fashion, they’re going to miss the whole game here. We’re also in the third year of the worst housing market I’ve seen in my 38 years in this industry. Thirty-eight years, I’ve never seen a third year like this, and I’ve never seen one like this. You could decide to not promote.

Some people are telling you they’re not promoting, and they are promoting. I don’t even know how anybody publishes press on who they are. Like, oh, they’re not promoting. Look at their emails. They’re promoting every week, and it’s disguising it as not store-wide. Whatever. It’s got to be the highest percentage of their business is being done on promotion. If you’re selling furniture, you get away with some of the other categories like frames and other stuff like that. Those are bigger for other people’s businesses if they’re a home furnishings kind of driven business and have a lower furniture mix. We’re 80% furniture with the highest probably mix of furniture of anybody you can fit a feet with. We eliminated Christmas, we eliminated holidays, we don’t sell Halloween plates and all that stuff that renders the furniture less valuable.

Furniture is an industry that at the highest level does not sell at full price. It doesn’t. People just get over it. You don’t understand the furniture industry at the luxury level unless you just want to fucking go bankrupt, excuse my language, in a market.

Tiffany, Conference Operator: You know, stand there and be righteous and say, I’m not promoting. Good luck. Good luck. Go for it. Tell me who’s not doing it, Michael. Who’s not promoting?

Allison Malkin, Investor Relations, ICR: It’s hard to name names right now, Gary, but that’s a great segue into my second question, which is there is some skepticism around the margin outlook in the back half of the year. You’re guiding below what was expected for the third quarter and well above for the fourth quarter. Can you give us more detail on what underlies those margin expectations and build the market’s confidence that those are realistic? Thank you very much.

Tiffany, Conference Operator: Jack, do you want to take that?

Allison Malkin, Investor Relations, ICR: Michael, we gave a bat, like an H2 guidance. We didn’t give out a quarterly guidance. If you’re referring to how the analyst community is considering the guidance, no, but I meant he’s saying, what I heard, Michael, maybe you could clarify is how it changed versus the prior guidance. Is that what you asked? I’m just curious.

Tiffany, Conference Operator: I’m just asking for what drives those or underlies those, Jack. If you could give us a sense for what you’re expecting, is it that tariffs are going to be a headwind in 3Q, but you’ll take price by the time you get to 4Q, such that you’ll see a significant amount of leverage in the fourth quarter?

Allison Malkin, Investor Relations, ICR: I think price margin should be talking. Do we price margin or do we guide operating? Michael, you’re talking about operating?

Tiffany, Conference Operator: Yes, sir.

Allison Malkin, Investor Relations, ICR: Okay. Just as a reminder, we have seasonality in our business as it relates to advertising expense and the books that get expensed when there’s our mailings. That’s one factor that I’d point out. We’re not here to point out pricing actions or timing of those and those kinds of offsets. That’s all embedded in our guidance, but we’re not, it’s not commentary we’re hearing.

Tiffany, Conference Operator: Okay, thank you very much and good luck.

Allison Malkin, Investor Relations, ICR: Thanks, Michael.

Gary Friedman, Chairman and Chief Executive Officer, RH: Your next question comes from the line of Stephanie Zhadkevich with Citi. Please go ahead.

Jack Preston, Chief Financial Officer, RH: Great. Good afternoon. Thanks very much for taking my question. I wanted to go over that pricing comment and just kind of understand, could you, Gary, you mentioned about pricing in the industry because of tariffs. What’s your assessment of pricing, you know, from an industry perspective? Is it getting worse as we get into the back half of the year in terms of increases because of these tariffs? Do you think the second half is when we see the peak, or is that kind of carrying it to 2026?

Tiffany, Conference Operator: Yeah, you know, look, I listen to everybody’s conference calls, right? You know, that’s in our industry. I don’t think anybody’s really addressed the tariffs with transparency. I think they’re all dancing around it. No one’s, everybody’s waiting for somebody to tell the truth, and maybe we’re the first ones telling the truth. I don’t think anybody’s getting better pricing than we do. I don’t think anybody’s mitigating more than we are. No one’s got the same leverage we do, you know, for a single brand. I think everybody’s got to take price in the second half. I think there’s going to be big furniture inflation in the second half everywhere. I don’t know how anybody gets around it unless you’re some little tiny person making all your stuff in America.

Then again, they’re going to get hit because all the parts are coming for all kinds of the pieces and parts are coming from places. Fabric’s coming out of Asia for a lot of those people. Other people that might be saying they’re making furniture in America, and hopefully this is what the investigation is about, is people that are having all the wood made and finished in Asia and then kind of shipped in a flat pack to America, and they’re actually screwing it together, and they’re saying it’s assembled in America or something like that. They think they’re going to not get tariffed. I mean, there might be some, I was trying to think like what triggered this next investigation of the tariffs. The only thing I can think about is something like that. That does go on.

There’s probably people out there that are trying to avoid tariffs some way, bringing it in unassembled or doing something. It’s parts from other places. Maybe that’s where you’re going to see other new tariffs coming. I think everybody’s got to take pricing. There’s just no way. I mean, your margins are going to get killed.

Jack Preston, Chief Financial Officer, RH: Yeah, I understood. Follow up on the international margin question that Max had. If we think about the 200 basis points drag this year, does that ease next year, or should we be thinking London opening and Milan are still going to have some pretty heavy startup costs?

Tiffany, Conference Operator: They’ll have heavy startup costs. I mean, we, you know, it’ll all depend where the ramp in Paris goes, which will inform the ramp in London, which should be meaningfully higher than Paris. Milan, I don’t know where Milan actually is going to fall, probably a little less than Paris, but it’s bigger, so it might do more. I mean, it is a big market. We’ll see. During Salone, which is the biggest design show in the world, 500,000 people go to Milan for Salone. The world of design goes there for a week, and we’re opening on that week. Any of these next two parties, you don’t want to miss these openings.

Jack Preston, Chief Financial Officer, RH: I’ll be there. Thank you.

Tiffany, Conference Operator: Great events.

Gary Friedman, Chairman and Chief Executive Officer, RH: Your final question comes from the line of Brian William Nagel with Oppenheimer & Co. Inc. Please go ahead.

Analyst, Various (Morgan Stanley, Guggenheim, TD Cowen, UBS, Citi, Oppenheimer): Hey, good evening. Thanks for slipping me in here. A couple of questions. First off, I want to make sure I understand the dynamic correctly. If you look at, you know, the inventory growth perspective, it seems like you’re, you know, you’re managing inventories much better here. We’ve seen growth moderate significantly in the second quarter. I guess, you know, that dynamic would help to drive cash. Again, I just want to make sure I’ve seen that correctly. The question I have is, you know, as you think about managing inventories better, does that potentially become a headwind to sales? If your inventories are tighter, you know, through the back half of the year or whatever?

Tiffany, Conference Operator: Yeah, look, everything is worth something, right? It all depends where the housing market goes, what offsets you’re going to have, how much, like, are new concepts going to be worth? I think this is the biggest new thing we’ve ever done. I think it’s going to be bigger than modern, significantly. It deals with the biggest part of the market. We’ve got new galleries and things happening. We’ve got big galleries happening in London and in Milan. We’ve got outdoor galleries coming, new concept galleries coming, and we’ve got compounds coming. There’s just a lot that we’ve invested into, time and capital, to set the company up for the next 10 years. That’s how we think about this next move. If we do really well, I mean, like, I can tell you Paris, we’re getting a lot of inbounds on, hey, do you want to open in Abu Dhabi?

Do you want to open in Dubai? Can we partner with you? Can we license your brand? Can we do this? When you see something like Paris that you’ve never seen anywhere in the world by anybody at any level, there are buyers of that, meaning whether it’s developers or whether it’s someone that wants to run the brand for us there. Maybe in the Middle East, we do a low capital kind of deal, and we take some percentage off the top and we sell the rights for a big chunk of money for the next 20 years, or we run it ourselves and we want the sales growth and so on and so forth. We’re willing to put in the capital. We are creating optionality.

The key is breakthrough, breakthrough, and become one of the most admired brands in the world in this next period by doing what we’re doing in Europe. It creates all kinds of options. When we go to Asia, what are we going to do? We’ve had people try to get us to come to the Middle East for 12, 15 years, come to Asia for the last 10 years. We wanted to do it in the right order. Somewhere along the line, I heard someone say that Bernard Arnault was asked, how do you build a brand in China? His answer was, you build great stores in Paris, London, and New York. We did a little backwards, right? Because we come from America. We said the first thing we had to do is build the bridge to Europe. We built RH New York.

We got a lot of visibility there and a lot of European clients coming over and they know us. We wanted to do Paris and London next, but to get Paris and London, we had opened things in a different order. Now that Paris and London are coming and then Milan’s coming, we’re going to know a lot more. I think the brand heat is going to exponentially build. I think the quality of work that we’re doing, I mean, if you want to, I said this when we first built, like I think it was Atlanta or something. I said, put down your spreadsheet and go to Atlanta. If you want to know us, go and see us, right? We all have six senses, but our sight is our dominant sense, and it drives 80% of our behavior, our perception, and our education.

If you really want to know where RH is going, get on a plane and go see Paris and then give us a call or just fly right back to the center of innovation and you’ll really come to see what we’re doing. What we’re about to do next is the greatest work in the history of this company, and it might be some of the greatest work in the history of any part of the retail industry. I’m not trying to boast. At the end of the day, it’s not what we say or think, as Jane Austen would say, it’s what we do that defines us. Go see the work. That’s what’s going to define us. You’ll understand it. Max, you’re surprised still. Steve, you were there. A few other people were there. Good. I think everybody who was there is like, holy cow.

I had no idea what was coming. When you see the world of RH and what we did there to communicate to the world who we are, to see our body of work around the world and all of our places presented in this incredible, sexy salon style with a bar, you can order food, you can take client meetings there, and people walking through, you see RH New York, RH Boston, RH Chicago, all the great work we’ve done everywhere, presented beautifully and beautiful velvet draped walls with picture lighting. Then you’ve got these giant French art easels with, I don’t know how big the TVs are, like six feet, giant TVs and beautiful giant gold frames with videos that you can watch and watch them, the making of RH Boston, the making of RH New York. You can watch videos on the designers, on the artisans.

You know, it’s the physical and digital immersion into the brand. It’s so cool. I mean, my biggest worry is people are going to go, what is this? And no one would be there. The night of the party, it was packed in that room. We had our first diner out of our two restaurants, and that’s kind of a semi-third. We don’t, you know, to have a bar, we have to serve food there. So we’ve got a menu. The first meal we served was in the bar, you know, the world of RH. Everybody’s seen it. It’s like, oh my God, like, you know, especially people who don’t know us, like they have no idea. It’s just, we have a body of work that no one else has in the world.

From an architecture, interior design, landscape architecture point of view, it gives us great credibility in our interior design business, which is now morphing into an interior architecture business and a landscape architecture business, right? Our bespoke part of that business, which is one of the fastest growing parts of the business, is doing these super high-end, premium, complete redos. We had already, before we even got to Paris, done an incredible, complete metamorphosis of an apartment in Paris for a U.S. customer, transformed it completely, complete new interior architecture, fireplaces, everything. That’s the other thing to really understand what we’re doing in interior design. We are the biggest residential interior design platform in the world today, and we’re investing in it in a meaningful way. It’s Paris, it is a freestanding building on our property that we built.

RH Interior Design has its own building, its own entry, and it’s packed in. It might be the best interior design office anywhere in the world. It says to people that we want on the team, we’re prepared to invest to get the best people in the world. We’re not just a retailer. We’re something that hasn’t been done before. When it all comes together, I think it’s going to make a lot of sense.

Analyst, Various (Morgan Stanley, Guggenheim, TD Cowen, UBS, Citi, Oppenheimer): Thanks, Jack. Maybe we ask just a quick follow-up, and maybe it’s for Jack. With regard to tariffs, should we be expecting RH is putting mitigation efforts, particularly price increases as the tariffs hit, or are you able to, in some instances, start adjusting prices maybe before the actual tariff is hitting you?

Allison Malkin, Investor Relations, ICR: Tariffs are a little wacky.

Tiffany, Conference Operator: Yeah.

Allison Malkin, Investor Relations, ICR: We also did the membership thing.

Tiffany, Conference Operator: Yeah.

Allison Malkin, Investor Relations, ICR: You know.

Tiffany, Conference Operator: I think it’s a bit of both, to be honest. I mean, it’s obviously, you know, we want to be very judicious about price increases and not, and as Gary talked about, on the one hand, you’re protecting margin, but on the other hand, you want to also be thoughtful about the revenue of the business and the impact of that. We’re very strategic and thoughtful, and we’ve been doing this ever since we had to deal with the 2018 tariffs or the 2017 or 2018 tariffs and initial ones in China. We’ll keep doing, keep running our playbook.

Analyst, Various (Morgan Stanley, Guggenheim, TD Cowen, UBS, Citi, Oppenheimer): I appreciate it. Thank you.

Gary Friedman, Chairman and Chief Executive Officer, RH: That concludes our question and answer session. I will now turn the call back over to Gary Friedman for closing remarks.

Tiffany, Conference Operator: Great. Thank you, everyone, for your interest. It is interesting times in our industry, but even more interesting times for our company. I just want to congratulate everybody throughout our organization. Even though you might not be in Paris or you weren’t in Paris, everybody had a hand in it. Everybody has worked hard to put this company in a position to open what we believe is the most exciting, immersive retail experience at any level in the world today. We couldn’t be more proud. I told the team, I said, if only for a moment, we kind of broke through and poked our head up at the top of the luxury mountain. Now it’s up to us to just plant a flag up there, right? There’s a lot more work to do. They know the people at the top.

I think they now know the potential that we have, the work that we’ve demonstrated that we can do. I think we’ve earned their respect and they expect us to come. We’ve got a lot of work to do to really plant that flag and to build one of the most admired brands in the world. The momentum we have, the kind of ceiling we broke through, it picked up and it was a proud moment for this company. I want to just thank everybody on every level for just the effort that everybody’s putting through in these three difficult years that we’ve had. The clouds will break, as Warren Buffett says, and the sun will come out again. When it does, we’ll be there. Thank you, everyone, for your interest. Thank you, Team RH, for your leadership and your hard work and for living and breathing our values.

Our time has come. Thank you.

Gary Friedman, Chairman and Chief Executive Officer, RH: Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect.

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