Q1 2026 RH Earnings Call

June 11, 2026

Operator: Hello. Welcome to the RH Q1 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. Allison, please go ahead.

Speaker #3: After the speakers' 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 1 on your telephone keypad.

Speaker #3: I will now turn the conference over to Allison Malkin of ICR. Allison, please go ahead.

Speaker #2: 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.

Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our Q1 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, 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.

Speaker #2: 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.

Speaker #2: Including statements about our outlook, 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.

Speaker #2: 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.

Speaker #2: 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.

Allison Malkin: Please also note that these forward-looking statements reflect our opinion 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. Now I'd like to turn the call over to Gary.

Speaker #2: 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.

Speaker #2: 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.

Speaker #3: Thank you, Allison. Hello, everyone. Let me start with a reading of our letter. To our people, partners, and shareholders: first-quarter revenues of $800.3 million and adjusted EBITDA margin of 7.1% exceeded the high end of our expectations in the first quarter, despite backorder and special order balances approximately $75 million higher than a year ago.

Gary Friedman: Thank you, Allison. Hello, everyone. Let me start with a reading of our letter to our people, partners, and shareholders. Q1 revenues of $800.3 million and adjusted EBITDA of 7.1% exceeded the high end of our expectations in the Q1, 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 Q1 results, we are raising our outlook for fiscal year 2026 and providing the following outlook for the Q2. 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 -270 basis point adjusted EBITDA margin impact from pre-opening and start-up costs to support our international expansion. Q2 2026 outlook.

Speaker #3: 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.

Speaker #3: Fiscal year 2026 outlook: Revenue growth of 4.5% to 8%, adjusted EBITDA margin of 14.2% to 16%, and 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.

Speaker #3: 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.

Gary Friedman: Revenue growth of 0.5% to 2.5%. Adjusted EBITDA margin of 11.5% to 13%. The above outlook includes an approximate -380 basis point adjusted EBITDA margin impact from pre-opening and start-up 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 H1 numbers to your H2 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 H1 to up 12% in H2, 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 H2, new store growth of 2.5 percentage points, and new concept growth of 5 points for RH Estates.

Speaker #3: 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?

Speaker #3: There are three parts that form the proverbial bridge to the other side, supporting the case for our business to accelerate from flat in the first half to up 12% in the second half, as we've done many times before.

Speaker #3: 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 5 points for each of our estates.

Speaker #3: Building the foundation for a global luxury brand, similar to structures that stand the test of time—those rewarded with historical recognition and reverence.

Gary Friedman: 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 have heard us talk over the years about climbing the luxury mountain, how it is 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.

Speaker #3: 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.

Speaker #3: You've heard us talk over the years about climbing the luxury mountain—how it's not for the faint of heart. As you climb higher, the air gets thin and the odds become slim.

Speaker #3: 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 each of our Paris, Milan, and London locations—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.

Gary Friedman: We believe the openings of RH 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, RH Estates. 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.

Speaker #3: They communicate a sense of permanence, a brand that has been dedicated to crafting their skills over decades. The last foundational piece: our each estates.

Speaker #3: Mr. Gorbachev, pare down this wall. Ronald Reagan. We believe that there are those with taste and no scale, and those with scale and no taste.

Speaker #3: 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 Juke, the classical grandeur of Dennis & Leen, 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.

Gary Friedman: For decades, the highest echelon of home design, the masterfully tailored upholstery of Dmitriy & Co., the uncompromising bespoke casework of Joseph Jeup, the classical grandeur of Dennis & Leen, 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.

Speaker #3: 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.

Speaker #3: Mr. Gorbachev, pare 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.

Gary Friedman: 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. Tearing down the wall 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: And modern furniture in the world. Pieces that not only furnish a home, but those that define it. But tearing down the wall means more than just opening the doors.

Speaker #3: 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.

Gary Friedman: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: They are wrong. They failed to understand that 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.

Gary Friedman: 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.

Speaker #3: By moving past the antiquated model, where each piece is built in isolation, we are building the elite designs in highly disciplined batches. Scale gives us unprecedented leverage.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: However, by integrating the fragmented supply chain and presenting these products on an equally unrivaled, inspiring architectural platform, consumers now have access to a level of design and quality previously only available to a select few.

Speaker #3: 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.

Gary Friedman: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #4: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again.

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 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 Steven Forbes with Guggenheim. Please go ahead.

Speaker #4: We kindly ask that you limit your questions to one, with one follow-up, and return to the queue for any additional questions. We will pause for just a moment to compile the Q&A roster.

Speaker #4: Your first question comes from the line of Steve Forbes with Guggenheim. Please go ahead.

Speaker #5: Good afternoon, Gary. Jack. Gary, given the commentary around customization within the share of the letter that you just went through, I'm curious if you can maybe just give us a high-level view on what you think this really means for the brand's reach and addressable TAM, especially once you layer in that new trade program.

Steven Forbes: Good afternoon, Gary, Jack. Gary, given the commentary around customization within the shareholder 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 and addressable TAM, especially once you layer in that new trade program. 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.

Speaker #5: 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.

Speaker #3: Yeah, well, it really opens up on multiple levels. So, one is, I mentioned on the video last quarter, the traditional and classic market represents about 60% of the luxury home market.

Gary Friedman: It really opens up on multiple levels. One is, I mentioned on the video last quarter, the traditional and classic market represents about 60% of the luxury home market, and today we're just vastly under-penetrated in that market. 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. 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, our brand, like many brands, and many of us grew up in the fashion industry. I grew up with The Gap, 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.

Speaker #3: And today, we're just vastly underpenetrated in that market. 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.

Speaker #3: 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 our brand—like many brands—and many of us grew up in the fashion industry.

Speaker #3: I grew up with The Gap. And so, learning to build a specialty brand, you're generally keeping it in a very focused, kind of limited way.

Speaker #3: Point of view. So it'll break through the market. And I think one of the things that I failed to kind of recognize is you think about the bigger picture of the home industry, is that the trends kind of kind of lift kind of aesthetics during cycles, but they but the other things don't really stop selling.

Gary Friedman: I think one of the things that I failed to kind of recognize, if you think about the bigger picture of the home industry, is that the trends kind of lift kind of aesthetics during cycles, but the other things don't really stop selling. They just sell kind of less because the architecture is really the driving force in the market. As we went back and just kind of studied our history and said, Look, what are the smartest things we've done? What are the things we or you think we missed? What could we have done better? 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. We'll refer to it as Estates, interiors, and Modern. This is, I would say I don't know.

Speaker #3: They just sell kind of less because the architecture is really the driving force in the market. So as we went back and just kind of studied our history and said, look, what are the smartest things we've done?

Speaker #3: What are the things we, or you, think we missed? What could we have done better? Our view is that we could build, as I outlined in the video, build our business around the three major aesthetic kind of pieces.

Speaker #3: And that's traditional, contemporary, and modern. And we'll refer to it as Estates, Interiors, and Modern. So this is, I would say, I don't know, there's maybe a chance that we might have given away, over the last 10, 12 years, a billion dollars.

Gary Friedman: There's maybe a chance that we might have given away over the last 10, 12 years, $1 billion, maybe more as we assess the market and try to go back and just do the math and try to extrapolate things. That's one piece. Then I say every time you do something new, it's not 100% incremental. There's going to be some level of cannibalization as you expand a market, whether it's you're expanding product or 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 when we launched RH Modern.

Speaker #3: Maybe more. As we assess the market and try to go back and do the math and try to extrapolate things, so that's one piece.

Speaker #3: And then I'd say every time you do something new, I mean, it's not 100% incremental. There's going to be some level of cannibalization as you expand.

Speaker #3: A market, whether it’s you’re expanding product, you’re expanding physically, and penetration, there’s going to generally be some level of incrementality, and there’s going to be a level of cannibalization.

Speaker #3: 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.

Speaker #3: When we launched RH Modern, 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.

Gary Friedman: 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. That's how I think about the first piece. The second piece is looking at it not just from aesthetic point of view, but really a market point of view, a design and quality point of view. RH 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. If you think about the brands that we've aggregated over the last five years and what we've learned over that time, and what we're bringing to market with Estates, which you guys have only seen just a little teaser.

Speaker #3: So that's how I think about the first piece. The second piece is looking at it not just from an aesthetic point of view, but really a market point of view—a design and quality point of view.

Speaker #3: RH 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.

Speaker #3: But if you think about the brands that we've aggregated over the last five years, and what we've learned over that time, and what we're bringing to market with the states—which you guys have only seen just a little teaser.

Speaker #3: I mean, that's just a little teaser. This is a level of design and quality that is not available to the consumer. We own these showrooms.

Gary Friedman: That's such a little teaser. This is just a level of design and quality that is not available to the consumer. We own these showrooms, and one of our very best ones, there are two of them, the door's not open to the public. There's a doorbell. 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. The 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 to see who might have something like this.

Speaker #3: And one of our very best ones, there are two of them, the door's 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 the doorbell.

Speaker #3: 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, or you don't have an appointment.

Speaker #3: So the 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.

Speaker #3: Because 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 to the market.

Gary Friedman: Because 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 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 they don't have the ability to source it at a value equation that we can. I've been lucky. This one, I say lucky, not so lucky. I joke with the team, this is the first trend that I'm old enough that I was the customer of.

Speaker #3: 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—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 they don't have the ability to source it at a value equation that we can.

Speaker #3: 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'm old enough that I was the customer of.

Speaker #3: When you think about the next thing that's coming—the age of eclecticism, the California look with Michael Taylor—there's a few different kind of names that, and they all come through some.

Gary Friedman: When you think about the next thing that's coming, the age of eclecticism, the California look with Michael Taylor, there's a few different names they gave it, and they all come through somewhat differently. The foundational elements of these giant trends that come through, this is one of the biggest ones ever. This one was bigger and longer than modern or any trend we've addressed in my history of RH. I was the customer. I joined RH as I was moving into my house in Belvedere, which is the first house I ever lived in in my life, the only house I built in my life. My first wife was a luxury interior designer, and I was her client for a condominium in San Francisco. I had the round Michael Taylor dining table in that house. I had the reproduction of the Coco Chanel sofa.

Speaker #3: But differently, the foundational elements of these giant trends that come through—this is one of the biggest ones ever. This one was bigger and longer than Modern or any trend we've addressed in my history at RH.

Speaker #3: But I was the customer. I joined RH as I was moving into my house in Belvedere, which is the first house I ever lived in, in my life.

Speaker #3: The only house I built in my life—and my first wife was a luxury interior designer—and I was her client for a condominium in San Francisco.

Speaker #3: I had the round Michael Taylor dining table in that house. I had a reproduction of the Coco Chanel sofa. I had a lot of these different kinds of products that are trends.

Gary Friedman: I had a lot of these different kind of products that are trends. I probably shouldn't say this. 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. I lived through this trend, at my house in Belvedere, how many things do I have from Formations that I bought? I think you said six or seven. Six or seven items from Formations that I bought years ago. I have the Michael Taylor rectangle diamond table in my house. I had bought two of them. I had the round one in the condo, the first job we did together, and then the rectangle one.

Speaker #3: Now, I probably shouldn't say this. Some of this stuff, I have to be careful because all of my competitors are on these calls, and they're going to wait for me to slip up.

Speaker #3: 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?

Speaker #5: You said six or seven.

Speaker #4: Six or seven items from Formations that I bought years ago. I have the Michael Taylor rectangle diamond table in my house. So I bought two of them.

Speaker #4: I had the round one in the condo, the first job we did together, and then the rectangle one. I know how much I paid for those—27, 26, 27 years ago.

Gary Friedman: I know how much I paid for those 26, 27 years ago, and I know what they've been selling for recently, because we own those businesses. 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. I don't say that lightly. I usually never go out on a limb like this, never been seen before. You try to do a visual search online, it is not out there unless you want to go on 1stDibs 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. Because if anybody tries to come after any of these goods, it's going to be a bad day.

Speaker #4: And I know what they've been selling for recently because we own those businesses. And the value equation, the quality we're going to bring to the market, and the value equation we're going to bring to the market has never been seen before.

Speaker #4: And I don't say that lightly. I usually never go out on a limb like this. But it's never been seen before. And if you try to do a visual search online, it is not out there unless you want to go on First Dibs and buy an antique.

Speaker #4: 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?

Speaker #4: Because if anybody tries to come after any of these goods, it's going to be a bad day. Because we own the intellectual property on the vast majority of what we're bringing to the market.

Gary Friedman: We own the intellectual property on the vast majority of what we're bringing to the market. We have patent pendings on, what would we say? What percent of this book? 80?

Speaker #4: I mean, we could—we have patent pendings on what would we say? What percent of this book—80?

Speaker #5: Yeah. I'd say 75%.

Jack Preston: Yeah. I'd say 75 now.

Allison Malkin: Yeah. I'd say 75 now.

Gary Friedman: 65% to 80% of the book. We should go back and just actually add it all up. There's just so many things we're doing we've never done before. The way we're addressing the market, and the way we're sourcing these goods. The people that are making these goods grew up making these goods. The manufacturers that are making these, they were part of that industry, making for the highest-end showrooms before we met them and started to scale with them. They're all so excited to be able to make this quality again, because the market is so fragmented. The design and quality aspect of this is huge. The next piece you have is we're going to open the market up to, what do we call them? The super buyers of furniture. We have a very big trade business.

Speaker #4: 65% to 80% of the book we should go down. And we should go back and just actually add it all up. So, there are just so many things we're doing we've never done before.

Speaker #4: And the way we're addressing the market and the way we're sourcing these goods—I mean, the people that are making these goods grew up making these goods.

Speaker #4: The manufacturers that are making these, they were part of that industry, making for the highest-end showrooms before we met them and started to scale with them.

Speaker #4: And they're all so excited to be able to make this quality again, because the market is so fragmented. So, the design and quality aspect of this is huge.

Speaker #4: 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.

Speaker #4: 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.

Gary Friedman: 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, and many times in delivery and installation. At the same time, there is an aspect of just recognition and compensation that we haven't done. The team jokes around, because every time I go to High Point, someone comes up to me and says, I love your brand. Oh my God. Please help us make money. Let us make money on your brand. We haven't offered and incentivized the design trade. I look back and I think, because I came from a family situation that had interior designer, and I had the insight of looking at just how complex and difficult that was.

Speaker #4: We'll do designs and renderings and presentations for them. We'll support them in any way we can, and many times in delivery and installation. But at the same time, there is an aspect of recognition and compensation that we haven't done.

Speaker #4: And the team jokes around because every time I go to High Point, someone comes up to me and says, "I love your brand. Oh my God. And please, please help us make money."

Speaker #4: Let us make money on your brand. And we haven't offered and incentivized the design trade. And I look back and I think, when because I came from a family situation that had interior designer, and I had the insight of looking at just how complex and difficult that was, and it was also it was not only was it not transparent, just not accessible.

Gary Friedman: It was also, not only was it not transparent, it's just not accessible. You couldn't get to see it, you couldn't buy it. I just thought, over time, just making high quality goods available, that the consumers would drive designers to our brand. I think they have. At the same time, there's really great interior designers that, they're running a different model. Even the mother of my girls, who was here consulting us, what, 10 days ago? Two weeks ago? Just give us the insight of a high-end designer. She runs a design firm. She said, Listen, 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.

Speaker #4: You couldn't see it. You couldn't buy it. And I just thought, over time, just making high-quality goods available would mean that the consumers would drive designers to our brand.

Speaker #4: And I think they have. But at the same time, there are really great interior designers that are running a different model. And even the mother of my girls, who was here consulting us—what, 10 days ago, 2 weeks ago?

Speaker #4: Just give us the insight of a high-end designer. She runs a design firm. And she said, "Listen, do I buy RH? Of course, I buy RH. Do I want to spec that first?"

Speaker #4: No. A lot of times my clients will say, "Hey, look, OK, do your designs in the primary living room, in the primary bedroom, in the primary dining room. But do our 'H' for the family room and the media room and all the rest of the bedrooms."

Gary Friedman: Do RH for the family room and the media room and all the rest of the bedrooms. She was finally like, Okay, I will. She said, But I'm thinking to myself, I can't make any money. Interior designers have a markup model, and an hourly model. They need both to make the business work. I think we haven't been an open platform like that, and I think we are just overlooking kind of a super customer. They buy furniture all day long. That's what they do for a living. It kind of doesn't make sense that we're not doing it when you really look at it critically.

Speaker #4: And she was saying, just kind of like, "Okay, I will." And she said, "But I'm thinking to myself, I can't make any money." Interior designers have a markup model, right?

Speaker #4: And an hourly model. But they kind of need both to make the business work. And I think we just haven't—we haven't been an open platform like that.

Speaker #4: And I think that we are just overlooking kind of a super customer. I mean, they buy furniture all day long—that's what they do for a living.

Speaker #4: So it kind of doesn't make sense that we're not doing it, when you really look at it critically. But I think it really makes sense here, too—the timing of this.

Gary Friedman: I think it really makes sense here, too, the timing of this, because 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. The ability to do all the things that they need or want to do, to do truly custom work at the highest end. I would say this is just the beginning. It's not the only thing we'll do. Someone asked me the other day, "Hey, are your prices going to be higher?" Well, yeah, they're going to be higher. The quality's massively higher. It's such a tremendous value. The price should be higher.

Speaker #4: Because not only are we going to have this design and quality that is at the very highest level of the market, we're also going to empower the designers—and consumers, for that matter—and all of our designers with the ability to customize.

Speaker #4: And the ability to do COM and customers’ own material, and the ability to do all the things that they need or want to do to truly custom work at the highest end.

Speaker #4: And I would say this is just the beginning, right? It's not, and it's not the only thing we'll do. If someone asked me the other day, "Hey, are your prices going to be higher?" Well, yeah, they're going to be higher.

Speaker #4: I mean, the quality is massively higher, but it's such a tremendous value. The price should be higher. This is not just kind of smooth wood with a sprayed-on finish, or a contemporary piece with curved edges.

Gary Friedman: This is not just smooth wood with a sprayed-on finish or a contemporary piece with curved edges. This is hand-patinated, hand-carved, hand distressed, so many details to get it right. Every piece is a one of a kind because of the hand work and how it's made. Somebody said, "Oh, well, how do you know you're not going to make a mistake like contemporary?" Well, contemporary didn't have the hand work, didn't have that level of detail, didn't have those things. We were a bit arrogant at that point in time. Because we're out here with a unique product also, I think that we're offering such an incredible value. I think that there's also an opportunity because of how long we've been thinking about this, working on it. I think it's the most intelligent, deep-thinking launch of a brand we've done.

Speaker #4: This is hand patina, hand-carved, hand-distressed—so many details to get it right. And every piece is a one-of-a-kind, because of the handwork and how it’s made.

Speaker #4: Someone said, "Oh, well, how do you know you're not going to make a mistake like contemporary?" Well, contemporary didn't have the handwork, didn't have that level of detail, didn't have those things.

Speaker #4: And we just, we were a bit arrogant at that point in time. But because we're out here with a unique product, I also think that we're offering such incredible value.

Speaker #4: 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.

Gary Friedman: We've really started investing in this in 2000. Here we are, 2026. We acquired Dmitriy and Joseph Jeup in 2000.

Speaker #4: We really started investing in this in 2000. So, here we are in 2026. We acquired Dimitri and Joseph Jufe in 2000.

Speaker #5: 27. 2020.

Steven Forbes: 2020.

Speaker #4: Huh? 2020, not 2000. Yeah, thank you.

Steven Forbes: Huh?

Gary Friedman: Huh?

Gary Friedman: 2020.

Steven Forbes: 2020.

Gary Friedman: 2020, not 2000. Yeah. Thank you.

Speaker #5: Yes.

Steven Forbes: Yes.

Speaker #4: 2020, yeah. Thank you. Not that long ago, but it's been a long-term investment. So, this and so many think about the opening of the high-end design market on this.

Gary Friedman: 2020. Yeah. Thank you. Not that long ago. 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. We are making identical quality. The diamond table is made with the identical molds of Michael Taylor. The tops and everything are the same quality. The finishes that we're offering, the array of finishes is at a whole different level. You're going to see when you see this book. Is BNST at home next week? What are we saying? End of next week? Early the following week?

Speaker #4: 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.

Speaker #4: But the tops and everything are the same quality. The finishes 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 begins to be at home next week.

Speaker #4: We'll be saying end of next week, early the following week. Yeah, OK, early the 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.

Gary Friedman: Early the following week.

Allison Malkin: Early the following week.

Gary Friedman: Yeah. Okay. Early the following week. We kept tweaking it and tweaking it, and we had a lot of last-minute ideas to make it better as we were working on it. It was also 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. If it was late to us, it's not the big deal. I know I read a couple of analyst reports that are 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, 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.

Speaker #4: But it was also 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.

Speaker #4: And so, a few weeks late to us is not a big deal. I know I read a couple of analyst reports that go, "Oh my God, it's late." I don't know.

Speaker #4: Was Tesla ever on time? It changed the whole car industry. So 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.

Speaker #4: 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.

Gary Friedman: It is fundamentally different on so many levels and opens up so many dimensions of a market. It also opens up the learning, right, that can be applied to modern and to interiors and so on and so forth. Thinking about how big is our market? When you think about what I just said about my daughter's mother, and she said, Yeah, customers will say, Okay, do the primary rooms, and then 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. 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.

Speaker #4: But it also opens up the learning, right, that can be applied to modern and to interiors, and so on and so forth. And thinking about: how big is our market?

Speaker #4: When you think about what I just said about my daughter's mother, and she said, "Yeah, customers will say, 'OK, do the primary rooms,' and then use RH for these other rooms."

Speaker #4: 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.

Speaker #4: 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."

Speaker #4: 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.

Gary Friedman: Let's get the primary dining room. When you see some of the dining tables we have, you can go on 1stDibs that 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, and you won't find anything of our quality or design. We've went through all of it. We know every dining table on 1stDibs, at every competitor at the highest end to down. We spent a lot of time studying this market. The goal is the dining room, the primary living room, and the primary bedroom. These goods can also eclectically be presented in a very cool way. You'll see it when it's all presented. It looks different than RH today, but it does look like RH today. I think you'll see a very big move.

Speaker #4: Down to the prices we have it at, you won't find anything of our quality or design. We've gone through all of it. We know every dining table on 1stDibs.

Speaker #4: At every competitor at the highest ends, to down. We spent a lot of time studying this market. So the goal is the dining room, the primary living room, the primary bedroom, but these goods can also eclectically be presented in a very cool way.

Speaker #4: The thing you'll see is, when it's all presented, it looks different than our age today, but it does look like our age today.

Speaker #4: But I think you'll see a very big move. 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."

Gary Friedman: You're just going to see, like, Whoa. I think the design community's going to go, Whoa, I didn't know they had this in them. I know that's a long ramble, but I'm so excited. If you guys want to talk for the next five hours about estates, you're going to have my attention.

Speaker #4: So I know that's a long ramble, but I'm so excited. If you guys want to talk for the next five hours about estates, you're going to have my attention.

Speaker #4: Thanks, Gary. And maybe a very quick follow-up for Jack, given the tariff refund commentary in the queue. Maybe just help us confirm whether or not any refunds are included within the guidance.

Steven Forbes: Thanks, Gary. 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.

Speaker #5: No, no further refunds. I mean, the refunds started coming, but they've been kind of paused. You might be following some of that activity as far as the DOJ and how those are playing out in the courts.

Jack Preston: No further refunds. The refunds started coming, but they've been kind of paused. You might be following some of that activity as far as the DOJ and how those are playing out in the course. As far as the guidance reflects, the free cash flow specifically does not reflect any further tariff refunds.

Speaker #5: But as far as the guidance, it does not reflect the free cash flow—specifically, it does not reflect any further tariff refunds.

Speaker #4: Thank you both.

Steven Forbes: Thank you both.

Speaker #1: Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

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

Speaker #7: Good evening. Thank you so much for taking my question. I wanted to dig in on the 500 basis points of contribution that you are expecting from our age estates in the back half of the year.

Michael Lasser: 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 H2 of the year. That's just under $100 million. What is the basis for that expectation? 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 media that are reaching the consumer? Thank you.

Speaker #7: So 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.

Speaker #7: 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 and manners that they're reaching the consumer?

Speaker #7: Thank you.

Speaker #5: I don't know. They've been doing that the last three years, and we've outperformed all of them. So I think when you say we're mailing a book and expecting people to come, we've built the greatest physical platform on planet Earth for our kind of products.

Gary Friedman: I don't know. They've been doing that the last three years, and we've outperformed all of them. I think when you say we're mailing a book and expecting people to come, we've built the greatest physical platform on the planet Earth for our kind of products, right? Don't overlook the physical platform. Michael, if you look at that video I did last quarter, I outlined that furniture is the least digitized business. It's 80% done in stores. It's 20% done online. At the luxury level, it's 95/5. This is a business you need to see, touch, sit in, comfort, scale, all those kind of things. I mean, the book is just a small way. We use it to integrate the whole thing. People look forward to getting our books. It's a physical thing.

Speaker #5: So, don't overlook the physical platform. And, Michael, if you look at that video I did last quarter, I outlined that furniture is the least digitized business.

Speaker #5: It's 80% done in stores. It's 20% done online. At the luxury level, it's 95/5. So this is a business you need to see, touch, fit in.

Speaker #5: Comfort, scale, all those kinds of things. So, I mean, the book is just a small way—we use it to integrate the whole thing.

Speaker #5: People look forward to getting our books. It's a physical thing. It still fits. We have a digital book, too. But we just don't—I'm just not a believer in following the trends of a lot of people that are following other people.

Gary Friedman: We have a digital book too, 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 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 the field. I think that's a lot of noise. Maybe it's good for building beauty brands to teenagers or other stuff like that. It doesn't affect what I buy, and I have a lot of homes. 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.

Speaker #5: We just think it's massively unauthentic to pay some stranger or some influencer to go talk about our goods, and they don't know anything about us.

Speaker #5: They know nothing about the product. They're not an expert in the field, and I think that's a lot of noise. Maybe it's good for building beauty brands to teenagers, or other stuff like that.

Speaker #5: It doesn't affect what I buy. And I have a lot of homes, and so I don't think it affects our customer, or we wouldn't be the biggest brand of our kind.

Speaker #5: We wouldn't have outperformed everybody—I mean, if you look at this last quarter, we have. And if you look at us over a two-year or three-year basis—over a two-year basis, only West Elm has performed as well as us.

Gary Friedman: Even if you look at this last quarter we have, if you look at us at over a 2-year basis or 3-year basis, over a 2-year basis, only West Elm has performed as well as us. On a 3-year basis, we're better than everybody. West Elm just had a great quarter, and I think they're doing a great job. If you look at anybody buying furniture, I tell people, when you go out there and bang pots and pans and try to get attention doing inauthentic things, you're just creating noise. You're creating your own noise. You wind up chasing things and thinking that they're relevant when they're not. We've tried and tested different things, and we have a lot of data behind what we've done and why we're doing what we do.

Speaker #5: On a three-year basis, we're better than everybody. And West Elm just had a great quarter. And I think they're doing a great job. But if you look at anybody buying furniture, I tell people, when you go out there and bang pots and pans and try to get attention, doing inauthentic things, you're just creating noise.

Speaker #5: You're creating your own noise, and you wind up chasing things and thinking that they're relevant when they're not. We've tried and tested different things.

Speaker #5: And we have a lot of data behind what we've done 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.

Gary Friedman: Nobody thought we were smart to build the stores we did and the galleries we did, those turned out pretty well. Everybody stopped mailing books, we're still mailing books. The only difference 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, back out our investment in building estates, which is not like some little introduction of an 80-page book that 5 or 7 years later you wind up with one store. We're making serious investments to build a platform unlike anybody else. In a down market like this, is our model not going to look as good? Yeah. Okay. You're looking at people that aren't even investing. They're not building anything. They're trying to be great cost controllers.

Speaker #5: And those turned out pretty well. And everybody stopped mailing books, and we're still mailing books. Yeah, the only difference right now, at a point in time, you can put our model against anybody.

Speaker #5: Put it against today's very best customer. Back out our investments in international expansion. Back out our investment in building estates. Which is not like some little introduction of an 80-page book, that five or seven years later, you wind up with one store.

Speaker #5: This is—we're making serious investments to build a platform unlike anybody else. And so, yeah, on a down market like this, are we going to—is our model not going to look as good?

Speaker #5: Yeah, OK. But you're looking at people that aren't even investing. They're not building anything. They're trying to be great cost controllers. So, yeah, just wait till the other side.

Gary Friedman: Just wait till the other side of this cycle for us, I think we're going to have a cash generation machine that this industry's never seen.

Speaker #5: That's the cycle for us. And I think we're going to have a cash generation machine that this industry has never seen.

Michael Lasser: 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.

Speaker #6: Understood. My follow-up question is about the margin profile of our Aged 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?

Speaker #6: Or do you see other building blocks to arrive at the margin expansion that you're expecting? Thank you very much.

Gary Friedman: Yeah. Estates has got its margin profile best based on the quality and exclusivity and desirability of those goods, right? If you've got a level of design and quality and scarcity and build desire. Who knows what the margins will be? I think we determine our margins based on a competitive nature. If there's others selling something in the market, okay, is there a quality differentiation? How big is it? How different is the design? So on and so forth. What access do they have to the market? Do they have a big enough platform to matter? All kinds of things. We're not really doing margin building to pay for something like an incentive for the trade. The incentive for the trade, it's a simple model. We give X, and we need an X, and we need a list of Y.

Speaker #5: Yeah, Estates has got its margin profile, best based on the quality, exclusivity, and desirability of those goods. If you've got a level of design and quality and scarcity, and build desire, who knows what the margins will be?

Speaker #5: I think we determine our margins based on a competitive nature. And if there's others selling something in the market, OK, is there a quality differentiation?

Speaker #5: How big is it? How different is the design? So on and so forth. What access do they have to the market? Do they have a big enough platform to matter?

Speaker #5: All kinds of things. We're not really building margin to pay for something like an incentive for the trade. The incentive for the trade, it's a simple model.

Speaker #5: We give X, and we need an X. We need a lift of Y. And it's so minor. On a model like ours, because we have such leverage and flow-through, I mean, you just have to think about our model.

Gary Friedman: It's so minor on a model like ours because we have such leverage and flow-through. You have to think about our model. Think about Estates. Our whole business has a different model than everybody else just because the price points of our product, right, versus most people selling furniture. We have significantly more leverage just handling goods, shipping goods, delivering goods, so on and so forth. We have tremendous leverage in our interior design business because we're selling high average orders. Yes, there's an investment to do that work, but we have such leverage on incremental sales. Again, it's a little masked today because of the investments we're making in international and in things like Estates and so on and so forth. We've got plenty of margin to cover what we're doing. We'll have plenty of margin growth going forward.

Speaker #5: Even think about estates. Our whole business has a different model than everybody else just because of the price points of our product.

Speaker #5: Versus most people selling furniture, we have significantly more leverage just handling goods—shipping goods, delivering goods, so on and so forth. And we have tremendous leverage in our interior design business because we're selling high average orders.

Speaker #5: And yes, there's an investment to do that work, but we have such leverage on incremental sales. And again, it's a little masked today because of the investments we're making in international, and things like estates, and so on and so forth.

Speaker #5: But 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 going to look like, because we think that's the most important metric.

Gary Friedman: Like I said, we're looking at what we believe the cash generation model of this business is going to look like because we think that's the most important metric. I think as we've moved past the peak investment cycle this year, and we believe our top line is going to inflect up, kind of irrelevant of what the external market does, unless it really Look, if we get into a war that massively impacts the economy, the inflation, so on and so forth, it's going to put pressure on everyone. Those things happen. 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.

Speaker #5: And I think as we move past the peak investment cycle this year, we believe our top line is going to inflect up.

Speaker #5: It's kind of irrelevant what the external market does, unless—really, look, if we get into a war that massively impacts the economy, inflation, and so on and so forth, that's going to put pressure on everyone.

Speaker #5: 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.

Speaker #5: I'm not counting on the guidance we just gave everyone. I'm not counting on the market getting any better. I mean, the market could get worse.

Gary Friedman: The market could get worse, and I'd be surprised if we don't beat those numbers. A 5% incremental move on estates is really conservative.

Speaker #5: And I'd be surprised if we don't beat those numbers. So a 5% incremental move on Estates is really conservative.

Speaker #6: Thank you very much, and good luck.

Michael Lasser: Thank you very much, and good luck.

Speaker #5: Thank you.

Gary Friedman: Thank you.

Speaker #1: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

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

Speaker #7: 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 sheet.

Simeon Gutman: 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 sheet. 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? Then should we be seeing the customer deposit line pick up a bit, not just from these back orders, but from estates? Then I'll wait for the follow-up.

Speaker #7: 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.

Speaker #7: What percentage of items on floors and galleries will be estates? When should we expect that to fully ramp? And then, should we be seeing the customer deposit line pick up a bit?

Speaker #7: Not just from these back orders, but from estates, and then I'll wait for the follow-up.

Speaker #5: How many questions did you just ask or something? I'm on track. That was good. Simeon, I just saw you in Milan. I thought you asked me all the questions you might have had.

Gary Friedman: How many questions did you just ask there, Simeon?

Simeon Gutman: I'm trying to track.

Gary Friedman: That was good. Simeon, 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. Okay. The sequencing of the products coming into stores, we will be kind of terracing in stores. When do we get to 60% of the sales, 65%? What was that? End of September. End of September. End of September, we'll be in the galleries that represent roughly 60% to 65% of the business, roughly two-thirds of the business. Then what's the next wave that hits, Sid? Pretty much every month. December will be all galleries? Yes. Our second mailing of estates will be the early part of November.

Speaker #5: You probably have a—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.

Speaker #5: But 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? Sixty-five percent?

Speaker #5: What was that?

Speaker #4: September.

Speaker #5: End of September? So, by the end of September, it will be in the galleries that represent roughly 60% to 65% of the business—roughly two-thirds of the business.

Speaker #5: And then what's the next wave that hits? Said every month, so every month we kind of have—so December will be all galleries. Our second mail-in of estates will be the early part of November.

Gary Friedman: That will be a pretty meaningful expansion of the assortment. You'll see us building this assortment over the next couple of years.

Speaker #5: And that will be a pretty meaningful expansion of the assortment. So you'll see us building this assortment over the next couple of years.

Gary Friedman: That will be a pretty meaningful expansion of the assortment. You'll see us building this assortment over the next couple of years.

Speaker #7: And then the custom—oh, yeah.

Simeon Gutman: The customer. Oh, yeah.

Speaker #5: Yeah, there you go. So, should we expect deposits to tick up? I mean...

Gary Friedman: Yeah. Should we expect deposits to tick up?

Jack Preston: They follow our business.

Speaker #7: They follow our business, so as revenues grow, demand is driven and customer deposits tick up.

Gary Friedman: Yes.

Jack Preston: As revenues grow, demand is driven, the customer deposits tick up.

Speaker #5: Yeah.

Gary Friedman: Yeah.

Speaker #7: 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 was already on deposits?

Simeon Gutman: 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 was already on deposits? Just thinking about balance sheet, 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. Can you remind us this path to getting debt-free by 2029, 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 assets collection speak for itself and then drives the natural de-leverage of the business?

Speaker #7: And then just thinking about the balance sheet, as the business improves and inflects, as you said, Gary, there’s a lot of leverage in it. The balance sheet and cash flow stuff should resolve itself.

Speaker #7: Can you remind us about the path to getting debt-free by ’29, is there an update? What other steps are you taking to get there?

Speaker #7: How much of a priority is it, versus just letting the business now let the Estates collection speak for itself and then drive the natural deleverage of the business?

Speaker #5: I think we're pretty clear. It's a big priority. And we outlined asset sales of, what, $200 to $250 million a year over the next two years.

Gary Friedman: I think we're pretty clear it's a big priority. We outlined asset sales of what, $two to $250 a year over the next two years. We just completed a transaction inside our Aspen real estate, where we sold some properties to our partner and sold a property to us, and we now have more independent control across a lot of properties that we can monetize more quickly than less quickly. How many properties did we take control of again? Eight?

Speaker #5: We just completed a transaction inside our Aspen real estate, where we sold some properties to our partner and sold a property to ourselves. We now have more independent control across a lot of properties that we can monetize more quickly rather than less quickly.

Speaker #5: How many properties did we take control of again? Eight, or...?

Jack Preston: Eight in total.

Speaker #7: Eight in total.

Speaker #5: Eight in total. We have 100% control now, so we don't have to work through a JV and a partnership to kind of monetize things. And Dave Stanchak is back.

Gary Friedman: Eight in total. We have 100% control now. We don't have to work through JV and a partnership to kind of monetize things. David Stanchak is back, and Dave knows how to get deals done buying or selling. We also have real estate outside of the JV. There's that and there's the business performance, there's the spending inflection down, deflection, I guess, you could call it. There's small type, Jack. I don't know if you want to jump in with anything, but it's really the spending comes down, the sales are going to go up. We'll have asset sales.

Speaker #5: And Dave knows how to get deals done. Buying or selling. And so and we're holding also have real estate outside of the JV. And so there's that.

Speaker #5: And there's the business performance. There's the spending inflection down—deflection, I guess, call it—or so. There's multi-checking on any point. Jump in with anything.

Speaker #5: But it’s really—the spending comes down, the sales are going to go up, and then we’ll have asset sales.

Speaker #7: And free cash flow will build through that time period. So again, I think it's just to reiterate what Gary said, which is it remains a priority.

Jack Preston: Free cash flow will build-

Gary Friedman: Yeah

Jack Preston: through that time period. Again, I think it's just reiterate what Gary said, which is it remains a priority. The exact timing of being debt-free, again, it's our target, it's our goal. I think importantly, just that making progress on those initiatives, that's what we're focused on.

Speaker #7: 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.

Speaker #5: Yeah, and I think, look, we have a history of being relatively creative with capital markets. We've had a lot of good timing. Before this four-year downturn of the housing market—so our buyback wasn't as well-timed as maybe our other buybacks.

Gary Friedman: Yeah. I think, look, we have a history of being relatively creative with the capital markets. We've had a lot of good timing before this four-year downturn of the housing market. Our buyback wasn't as well timed as maybe our other buybacks and in our capital approach to it. I wish we would've locked it in, but we didn't. Many big banks that you guys work for told us, Oh, no, don't lock it in. Interest rates aren't going up. Oh, no, there's one little move. Then all of a sudden, we had the fastest rise of interest rates in the history of our lifetimes. You don't always get these things right. When our stock gets to the right levels, would we exercise convertible options to take down debt and move debt?

Speaker #5: And in our capital approach to it, I wish we would have locked it in, but we didn't. And many big banks that you guys work for told us, "Oh, no, you don't lock it in."

Speaker #5: Interest rates aren't going up. Oh, no, there's one little move, and all of a sudden, we had the fastest rise of interest rates in history.

Speaker #5: Of our lifetimes. So, you don't always get these things right. But, I mean, when our stock gets to the right levels, would we exercise convertible options to take down debt and move debt?

Gary Friedman: We have so many ways to work the balance sheet to do things. You don't want to do any convertible debt at this level. We don't think our stock's going to be at this level very long, and we think it's going to move with our business and as we execute. Again, we're kind of on the other side of the cycle. We're in our most prolific spending period of all time. Unfortunately, it was post-COVID, and we're building some of the most important things we've ever built, and it all costs a hell of a lot more than we would've built it pre-COVID. Unfortunate timing, but nonetheless, all kind of short-term things to navigate around. Once you spend the money, the money's behind you, right?

Speaker #5: We have so many ways to work the balance sheet to do things. You don't want to do any convertible debt at this level, but we don't think our stock is going to be at this level very long.

Speaker #5: And we think it's going to move with our business. As we execute—and again, we're kind of on the other side of the cycle.

Speaker #5: We just were in our most prolific spending period of all time, and unfortunately, it was post-COVID. We're building some of the most important things we've ever built.

Speaker #5: And it all cost a hell of a lot more than if we had built it pre-COVID. So, unfortunate timing. But nonetheless, all kinds of short-term things to navigate around.

Speaker #5: I mean, once you spend the money, the money's behind you, right? And I look at it and I say, yeah, I mean, there are some people that want to focus on operating margin.

Gary Friedman: I look at it and I say, 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 basis points better than us. We're going to be focused on EBITDA and cash flow. I think the smartest investor is going to be focused on that line. That's where we're going to be able to create, I think, the best returns in this industry.

Speaker #5: 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.

Speaker #5: Maybe some people are going to be a few hundred basis points better than us, but we're going to be focused on EBITDA and cash flow.

Speaker #5: And I think the smartest investors are going to be focused on that line, and that's where we're going to be able to create, I think, the best returns in this industry.

Speaker #7: Thanks, guys. Product looks great. Good luck.

Simeon Gutman: Thanks, guys. Product looks great. Good luck.

Speaker #5: Great. Thanks, Tameen.

Gary Friedman: Great. Thanks, Simeon.

Speaker #1: Your next question comes from the line of Max Brocklinko with TD Cowen. Please go ahead.

Operator: Your next question comes from the line of Max Rakhlenko with TD Cowen. Please go ahead.

Max Rakhlenko [Director, Consumer: Great. Thanks a lot.

Speaker #8: Great, appreciate it. Thanks for taking my question. So, it's 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?

Gary Friedman: You're welcome there, Max.

Max Rakhlenko [Director, Consumer: Appreciate it. Thanks for taking my question. As a follow-up, as you guys exit the investment cycle following the opening of London and the rollout of RH Estates, how should we think about what that margin inflection could look like over the medium term? You've obviously provided a H2 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?

Speaker #8: 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?

Speaker #5: I mean, I think we gave you a longer-term outlook, and we believe that's the right outlook. And we refer to the video. Refer to the video.

Gary Friedman: I think we gave you a longer term outlook. We believe that's the right outlook and the right.

Max Rakhlenko [Director, Consumer: Refer to the video.

Gary Friedman: timeline. Refer to the video. Yeah. We've kind of laid all that out. We believe there's Again, we think, believe there's meaningful margin expansion as whether or not the housing market gets any better, just because of the cycle and coming around and the growth that we expect from these investments and Europe is in. The UK is in even worse shape than the US, right? It's even getting hit more than the US from the war and stuff like that. You're talking about we didn't exactly open at the most optimal time from a housing point of view and from an economic point of view. The good news is I've never seen an economy that stayed down forever. Now, I used to say I never saw a housing market that stayed down longer than 18 months in my career.

Speaker #5: Yeah. We've kind of laid all that out. So we believe there's again, we think, believe there's meaningful margin expansion as whether or not the housing market gets any better.

Speaker #5: Just because of the cycle, and coming around, and the growth that we expect from these investments. And yeah, I mean, we don't—I mean, Europe and the UK are in even worse shape than the US, right?

Speaker #5: And it's even getting hit more than the U.S. from the war and stuff like that. But you're talking about—we didn't exactly open at the most optimal time.

Speaker #5: 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's stayed down forever.

Speaker #5: Now, I used to say I never saw a housing market that stayed down or stayed down longer than 18 months in my career. But now we're going into—we'll definitely probably—I don't think it's going to recover this year.

Gary Friedman: Now We'll definitely, probably I don't think it's going to recover this year. 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 stakes and work on it, and tweak it, and then when you see it all come together and you go through this accelerated learning at the end of a development of a new business like this.

Speaker #5: So we'll see 48 months. Will it go into a fifth year? It may. It all depends on inflation and interest rates. But I think we're going to see a lot of leverage in this model either way.

Speaker #5: I mean, we're just really excited. We can it's one thing that talk about and conceptualize the states and work on it and work on it and work on it and tweak it and tweak it.

Speaker #5: And then when you see it all come together, and you go through this accelerated learning at the end of a development of a new business like this, it's just—I don't think any of us have ever worked harder, because we're doing some of the most important galleries and opening the most important markets in the world.

Gary Friedman: It's just I don't think any of us have ever worked harder 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. We're doing our best work from a product point of view and presentation point of view. I don't think there's ever been a higher level of excitement here for We have a lot of people here that have been a long time, 10 to 20 years, and man, I think everybody sees it very clearly just how unique the product is, just how unique the positioning of the brand is. We're excited to see our efforts and work pay off and monetize for our shareholders. We're all shareholders here, right?

Speaker #5: And doing some of our best work from a platform and physical point of view, and then we're doing our best work from a product point of view.

Speaker #5: And, from a 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.

Speaker #5: 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 we're excited to see our efforts and work pay off and monetize for our shareholders. And we're all shareholders here, right?

Speaker #5: Everybody has got skin in the game, and everybody's got upside in this effort. So,

Gary Friedman: Everybody's got skin in the game and everybody's got upside in this effort. Yep.

Speaker #8: 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?

Max Rakhlenko [Director, Consumer: Got it. That's helpful. Gary, as you guys scale and begin to open galleries in the US 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 over the past decade? Should we assume that the new galleries because they are going to cost less should get you higher unit margins as well? Thank you.

Speaker #8: Do you think that you can generate similar revenues as the boxes that you've opened over the past decade? And then, should we assume that the new galleries, because they are going to cost less, should get you higher unit margins as well?

Speaker #8: Thank you.

Speaker #5: We do. Yeah. Yeah. We'll have a—I think we're going to have a great return on investment. We laid out for you guys in the video, the compound.

Gary Friedman: We do. Yeah. I think we're going to have a great return on investment. We laid out for you guys in the video the compound and the logic behind the compound, right? It's kind of disaggregating the multilevel, three-level gallery and saying, what can you take out? What don't you need? In a compound, you don't need elevators. You don't need a grand staircase. You don't need exit stairwells. I don't think a lot of people know in all these big buildings, there's two exit stairwells that are all concrete going up. There's a giant grand staircase. There's generally two elevators. There's all kinds of levels. There's a restaurant on a rooftop that takes extra steel and bigger foundations to carry the load and takes complex mechanical systems to operate a building like that.

Speaker #5: And the logic behind the compound, right? It's kind of disaggregating the multi-level, three-level gallery, and saying, what can you take out? What don't you need?

Speaker #5: You don't need, in a compound, you don't need elevators. You don't need a grand staircase. You don't need exit stairwells. I don't think a lot of people know, in all these big buildings, there's two exit stairwells that are all concrete.

Speaker #5: Going up, there's a giant grand staircase. There are generally two elevators. There are all kinds of levels. When you're building, there's a restaurant on a rooftop.

Speaker #5: That takes extra steel and bigger foundations, carries the load, and takes complex mechanical systems to operate a building like that. And we spent several years here dissecting that.

Gary Friedman: We spent several years here dissecting that. We started seeing post-COVID the cost became meaningfully more, 2 to 2.5 times more in some cases. We broke it down and said, "Hey, how can we have an experience that's no less inspiring and beautiful?" We came up with a compound, and I think people are going to think it's the newest, greatest physical experience out there. It doesn't. 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 these beautiful gardens you're walking through. But all that area doesn't need to be air-conditioned. You've got minimal lighting, garden lighting and stuff like that. We're aggregating all the bathrooms and toilets in one place.

Speaker #5: We started seeing, post-COVID, the cost became meaningfully more—two to two and a half times, even two and a half times more in some cases.

Speaker #5: And so 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.

Speaker #5: And I think it's going to be—I think people are going to think it's the newest, great physical experience out there. And in some ways, it's going to look to people like we may have spent more money, right?

Speaker #5: Because they've never seen anything like it. It's going to look like this beautiful garden you're walking through. But all that area doesn't need to be air-conditioned.

Speaker #5: You've got minimal lighting, garden lighting, and stuff like that. We're aggregating all the bathrooms and toilets in one place. We're building a lot of these buildings; they have electric and a small pipe with sprinkler heads.

Gary Friedman: A lot of these buildings they have electric and a small pipe with sprinkler heads. It's like imagine building a house without bedrooms. I will see some without bathrooms and kitchens and all the things that are really expensive, and you just aggregate everything in the center where the restaurant is. I think these things are really smart, and I think it would be really exciting. We're excited to unveil them. Then I think our secondary market galleries, I think we expect everything to be as productive, if not more productive. 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.

Speaker #5: And it's not—it's like, imagine building a house without bedrooms. And I've seen some without bathrooms and kitchens, and all the things that are really expensive.

Speaker #5: And you just aggregate everything in the center where the restaurant is. I think these things are really smart, and I think it would be really exciting.

Speaker #5: So we're excited to unveil them. And then, I think our secondary market galleries—we expect everything to be as productive, if not more productive.

Speaker #5: 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.

Speaker #5: And if you think about how we've grown, we've grown through product expansion, primarily in the early years because we had no capital.

Gary Friedman: If you think about how we've grown, we've grown through product expansion primarily in the early years because we had no capital. Then platform expansion when we presented those goods at a physical level and the kind of lifts that we've talked about historically. Yeah, I think all of that we're so excited about. When we 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 cleanup that are a little bit more than we wanted to spend just. We couldn't redesign them. I think the whole model's going to look different. The return on invested capital is going to get back, I think, to the levels we were at in our peak. I think we hit 75% return on invested capital.

Speaker #5: And then platform expansion, when we presented those goods at a physical level. And the kind of lifts that we've talked about—yeah, I think all of that, we're so excited about.

Speaker #5: When we talk about going post-peak, but from a spending point of view, the things that we're going to under construction on, we still have a couple of leftover ones that are some cleanup that are a little bit more than we wanted to spend, just when we couldn't redesign them.

Speaker #5: But I think the whole model is going to look different. The return on invested capital is going to get back, I think, to the levels we were at in our peak.

Speaker #5: And I think we hit like 75% return on invested capital. Yeah. And I think we'll be at that kind of level. And yeah, so yeah, the good news is we're just so much smarter.

Jack Preston: Yeah.

Gary Friedman: Yeah. I think we'll be at that kind of level. The good news is we're just so much smarter and have so much more experience. That'll all be reflected in the outcome and the economics. We got a little stuck. We're building in some expensive places and expensive cities that it's not like we could unwind those things and go, "Whoops. Let's not build in the most expensive cities in the world with some of the most complex projects at exactly the most expensive time." The good news is, what doesn't kill you makes you stronger, right? We're still here.

Speaker #5: And have so much more experience, and that'll all be reflected in the outcome and the economics. But we got a little stuck. We're building in some expensive places and expensive cities, and it's not like we could unwind those things and go, "Oh, whoops."

Speaker #5: Let's not build in the most expensive cities in the world, with some of the most complex projects, at exactly the most expensive time. I mean, but the good news is: what doesn't kill you makes you stronger, right?

Speaker #5: So we're still here.

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

Speaker #8: That's great. I appreciate all the color, and certainly look forward to London.

Speaker #5: Great. Look forward to seeing you, Max.

Gary Friedman: Great. Look forward to seeing you, Max.

Speaker #2: Your next question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

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

Speaker #4: 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 you’ve already discussed this a bit.

Brian Nagel: 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 you've already discussed this a bit, but the ramp in sales growth that's expected the H2 of this year. Now you've talked a lot about estates. I guess the way I want to frame the question is, as you look at the business today, the piece of business today, how much more ramp do you have to have in that existing business in order to achieve with the components you talked about with these new pieces to achieve that guidance for the H2 of the year?

Brian W. Nagel: 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 you've already discussed this a bit, but the ramp in sales growth that's expected the H2 of this year. Now you've talked a lot about estates. I guess the way I want to frame the question is, as you look at the business today, the piece of business today, how much more ramp do you have to have in that existing business in order to achieve with the components you talked about with these new pieces to achieve that guidance for the H2 of the year?

Speaker #4: But the ramp and sales growth that's expected in 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: you look at the business today, the piece of the business today.

Speaker #4: I mean, how much do you have to have ramped in that existing business in order to achieve, with the capacity you talked about with these new pieces, to achieve that guidance for the second half of the year?

Speaker #5: Well, if you really look at the build of the backorders and special orders, right, our business is better than kind of reflected in the revenue.

Gary Friedman: If you really look at the build of the back orders and special orders, our business is better than reflected in the revenue. Right. We've got pretty big balances. Those balances are being created now. We're not shipping those revenues, or we're not shipping that demand yet because we still have transitional things and impacts from major resourcing. A lot of our people in all categories are still catching up and we'll just see that because you have to look at it and say, Okay, what does that look like? Where are we really? What is it building to? You have to think about that flop that's 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?

Speaker #5: Right? We've got pretty big balances, so there's balances that are being created now, but we're not shipping those revenues or we're not shipping that demand yet because we still have transitional things and impacts from major resourcing.

Speaker #5: And a lot of our people, in all categories, are still catching up. And so, we'll just see. I mean, you have to kind of look at it and say, "Okay, what does that look like?"

Speaker #5: 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, and we don't have to drive demand to hit it.

Speaker #5: 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?

Gary Friedman: You've got a big chunk of business that's going to just flop over to the H2. Does that make sense?

Speaker #4: No, yeah, conceptually, it makes sense. So I apologize, but have you quantified that piece of—like, to use your term, Gary—the piece of the business that will flop over to the second half? That's already there?

Brian Nagel: No, the conception makes sense. I apologize, have you quantified that piece of the, just to use your term, Gary, the piece of business will flop over to the H2 that's already there?

Brian W. Nagel: No, the conception makes sense. I apologize, have you quantified that piece of the, just to use your term, Gary, the piece of business will flop over to the H2 that's already there?

Gary Friedman: Yeah.

Brian Nagel: Have you quantified that?

Brian W. Nagel: Have you quantified that?

Speaker #4: Have you quantified that?

Gary Friedman: That's in the little table.

Speaker #5: Yeah, it's in the little table. Yeah, in the letter. It's the $75 million or 4.5%.

Jack Preston: Yeah. In the letter. It's the $75 million or 4 and a half percentage points.

Speaker #4: Okay.

Brian Nagel: Okay.

Brian W. Nagel: Okay.

Jack Preston: The backlog.

Brian Nagel: That's in the demand now. Okay.

Brian W. Nagel: That's in the demand now. Okay.

Speaker #5: So that's in the demand now. Yeah. No, yeah, that's in the demand now. We're not reporting demand, but we're reporting revenues. But yeah, all that, that's $75 million and is on our books and will ship.

Gary Friedman: Yeah. No, that's in the demand now. We're not reporting demand, but we're reporting revenues. Yeah, all that's $75 million and is on our books and will ship.

Speaker #5: Again, back orders and special orders are over and above a normal rate. I mean, over—yeah. We always have back orders and special orders in our business.

Jack Preston: Again, that's back orders and special orders over and above the normal rate.

Gary Friedman: Yeah.

Jack Preston: We always have back orders, special orders in our business.

Speaker #5: But this is elevated because of unnatural things happening between, 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.

Gary Friedman: This is.

Jack Preston: This is elevated because of unnatural things happening between or things that are taking more effort, like resourcing, transportation impacts, whatnot. That piece, that elevated piece over sort of normal, quote unquote, is what is Gary and I are talking about for the H2. That is four and a half points.

Speaker #5: That's four and a half percent. Yeah.

Speaker #4: Okay, that's helpful. I appreciate that. Thank you.

Brian Nagel: Okay, that is helpful. I appreciate that. Thank you.

Brian W. Nagel: Okay, that is helpful. I appreciate that. Thank you.

Speaker #5: Yeah. Thank you, Brian.

Gary Friedman: Yes. Thank you, Brian.

Speaker #2: Your next question comes from the line of Zach Fadom with Wells Fargo. Please go ahead.

Operator: Your next question comes from the line of Zachary Fadem with Wells Fargo. Please go ahead.

Speaker #5: Zach, are you on?

Gary Friedman: Zach, are you on?

Speaker #2: Zach, your line is open.

Operator: Zach, your line is open.

Zachary Fadem: Hey. Sorry about that. Good afternoon. First question on the initial response from Milan and your expectations for year 1 in the market, 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? If you think New York is a good benchmark for what those markets could look like.

Speaker #6: Hey, yes, sorry about that. Good afternoon. So, first question: on the initial response from Milan and your expectations for year one in the market.

Speaker #6: And now that you have galleries open in both Milan and Paris, with London around the corner, any revised thoughts on the sales trajectory from the three?

Speaker #6: And if you think New York is a good benchmark for what those markets could look like?

Gary Friedman: Yeah. Look, I think they'll all be great markets over time. We've got to build the brand and build the customer base, build our design business, continue to build the pipeline. I think I've used before with the ramp, the first one was RH England, and that's been open the longest. What that's ramped to in a not a great economy for the home business in the UK, but in a store that's 2 hours outside of London with not a lot of people around. It gives us high hopes. We have greater brand awareness in London for 2 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. Everybody speaks the same language, so on and so forth.

Speaker #5: Yeah. I mean, look, I think they'll all be great markets over time. And we've got to build the brand and build the customer base, build our design business, continue to build the pipeline.

Speaker #5: And I think I've used before with the ramp, the first one was RH England. And that's been open the longest, and what that's ramped to, and it's not a great economy for the home business.

Speaker #5: In the UK, but in a store that's two hours outside of London with not a lot of people around. So, that gives us high hopes.

Speaker #5: And in, we have greater brand awareness in London for two reasons. There are a lot more expats, and there are a lot more people that have lived in New York and gone back and forth.

Speaker #5: There's a lot more people that know the brand. Everybody speaks the same language, so on and so forth—so, meaningfully higher brand awareness.

Gary Friedman: We've meaningfully higher brand awareness, and we've been open out in the Cotswolds, the English countryside now for 3 years. We're just getting started in Paris, and we're just open in Milan, and we like what we see. We like the responses that we're seeing. The key for us is build the design books and get the ramps. I think as these mature and grow, I think we're going to like the outcome. I think London. I was just talking to the team about this. London is the accelerator for all of it, right? Because everybody goes to London. It is the financial hub, and if you were going to be in 1 place, you'd be in London. If you were going to be 2, you'd be in London and Paris or London and Milan. They're pretty close, but for slightly different reasons.

Speaker #5: And we've been open out in the Cotswolds, the English countryside, now for three or so. And then we're kind of just getting started in Paris.

Speaker #5: And we're just kind of open in Milan. And we like what we see. We like the responses that we're seeing. And the key for us is build the design books and get the ramps and so I think we're going to as these mature and grow, I think we're going to like the outcome.

Speaker #5: But I think London—I was just talking to the team about this—London is kind of the accelerator for all of it, right? Because everybody goes to London.

Speaker #5: It is the financial hub. And just if you were going to be in one place, you'd be in London. And if you were going to be in two, you'd be in London.

Speaker #5: And Paris or London, Milan, they're pretty close. But for a slightly different reason. Milan is the center of the universe for the home design business because of Salone and Design Week and the eyeballs.

Gary Friedman: Milan is the center of the universe for the home design business because of Salone and Design Week and the eyeballs you can get, not just from designers but from true customers that come, that fly in with their architects and their interior designers and they're shopping from all the brands at the shows. I think these 3 are the core of the platform. These are the 3 key things. This is the foundation of building a global brand outside of the United States of America, right? I like to say, someone told me once they heard Bernard Arnault was asked a question, "How do you build a brand in China?" Apparently, his response is, "You build great stores in Paris, London, and New York." We've just done it backwards, and we threw Milan in there because it's so important for our industry, right?

Speaker #5: You can get not just from designers, but from true customers that come, that fly in with their architects and their interior designers, and they're shopping from all the brands at the shows.

Speaker #5: So, I think it's—look, I think those three are the core of the platform. These are the three key things; this is the foundation of building a global brand outside of the United States of America.

Speaker #5: Right? And I think I like to say, someone told me once they heard Bernard Arnault was asked the question, "How do you build a brand in China?" And apparently, his response is, "You build great stores in Paris, London, and New York." And so we've just done it backwards.

Speaker #5: And we threw Milan in there because it's so important for our industry, right? And so, yeah, this is really—once we get London going, I think the whole thing is, like, game on.

Gary Friedman: Yeah. Really, once we get London going, I think the whole thing is game on. I think London will create the biggest echo. It's where we're known the most. It's where we should ramp the fastest, do the most volume. Because everybody travels into London for so many different reasons, you've got a huge Middle East customer there that lives between London and the Middle East and the US for that matter, that I think knows our brand and is going to respond to our brand. I just think the echo of London is going to amplify Milan and Paris and every other gallery that we've opened.

Speaker #5: I think London will create the biggest echo—the biggest. It's where we're known the most. It's where we should ramp the fastest and do the most volume.

Speaker #5: And because everybody travels into London for so many different reasons, you've got a huge Middle East customer there that lives between London and the Middle East.

Speaker #5: And the U.S., 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.

Speaker #4: Thanks for that, Gary. And just a quick one for Zach. I think the opening costs in Q1, you said, would be about 420 basis points if that ended up being the case.

Zachary Fadem: Thanks for that, Gary. 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. For Q2, you're guiding, I think, 380 basis points for London. Could you just help us out on which of those costs should we consider transitory and come out in H2 versus costs there that are now in the base and will persist?

Speaker #4: And for Q2, you're guiding, I think, 380 basis points for London. Could you just help us out on which of those costs we should consider transitory and will come out in the second half of the year versus costs there that are now in the base and will persist?

Speaker #5: Q1 ended up at $450, so right there with the $420. We're not guiding specifically for the quarters, so you've got the year at $270. I guess you can back into some math as to $450 and a $380 and how they average out to a $270 on the year.

Jack Preston: Q1 ended up 450, so right there with the 420. We're not guiding specifically the quarters. 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 to approach it. That delta being transitory. Let's call it mid-100s in H2. The delta between that and the numbers for Q1 and Q2 are the transitory sort of pre-opening driven related to the openings.

Speaker #5: It'd be one way to approach it. And that delta being transitory, being what, but let's call it mid-100s in the back half. And the delta between that and the numbers for Q1 and Q2 are the transitory, sort of pre-opening-driven, related to the openings.

Speaker #4: Got it. Thanks for your time.

Zachary Fadem: Got it. Thanks for the time.

Speaker #5: Got it.

Gary Friedman: Got it.

Speaker #1: Your next question comes from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

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

Speaker #4: 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?

Jonathan Matuszewski: 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? 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. 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.

Speaker #4: 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—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.

Speaker #4: Thanks so much.

Speaker #5: Yeah. For those competitors that report trade, I think we've been overperforming the last three years. So we've got a very strong trade business. We have great leadership, great teams, very high-quality people that live and breathe our values, that have built great organizations, and this, yeah, it becomes a supercharge.

Gary Friedman: For those competitors that report trade, I think we've been over-performing the last three years. We've got a very strong trade business. We have great leadership, great teams, very high-quality people. They live and breathe our values that have built great organizations. It becomes a supercharge. Look, I'm the guy that we used to have a trade incentive program, and I took it out against a lot of people's debate. When we were making the move to membership, is it the right call or not? I don't know. Probably not now that I reflect on it with the wisdom I have today versus what I saw and felt in, what was that? 2016, right?

Speaker #5: Look, I'm the guy that—we used to have a trade incentive program, and I took it out, against a lot of people's debates. And so, when we were making the move to membership, I just—I considered if it was the right call or not.

Speaker #5: I don't know. Probably not now, that I reflect on it with the wisdom I have today, versus what I saw and felt— and what was that?

Speaker #5: 2016, right? Yeah, ten years ago. Yeah, I just don't think I was thinking about it correctly. And why is now the right time? It's because of estates.

Jack Preston: Yeah.

Jack Preston: Yeah, 10 years ago. Yeah, I just don't think I was thinking about it correctly. Why is now the right time is because of Estates. 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, and dimensionalized in a way and presented in a way that just doesn't exist. Why wouldn't you want to open up the best interior designers in the world to what we're doing today? We're just smarter, honestly.

Gary Friedman: Yeah, 10 years ago. Yeah, I just don't think I was thinking about it correctly. Why is now the right time is because of Estates. 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, and dimensionalized in a way and presented in a way that just doesn't exist. Why wouldn't you want to open up the best interior designers in the world to what we're doing today? We're just smarter, honestly.

Speaker #5: 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.

Speaker #5: No one at the retail level. They may tell you they do. They probably have never been into these businesses that we bought. So, we've taken what we do really well and amplified those assortments.

Speaker #5: So you're just going to see things you've never seen before, and dimensionalized in a way and presented in a way that just doesn't exist. So, and why wouldn't you want to open up the best interior designers in the world to what we're doing today?

Speaker #5: I mean, we're just smarter, honestly. I look back and if I said today, if I knew what I know today, would I have made the same decisions?

Gary Friedman: I look back, if I said today, "If I knew what I know today, would I have made the same decisions?" No, I would not have made the same decision. I'm smarter today. I know more today. I have more knowledge. It's funny because I was married to an interior designer. Kendall and I were together for 11 years. I knew her business pretty well. It helped me conceptualize what to do at RH, quite frankly. That helped me see the opportunity. I don't think I really understood the market correctly. It's changed too. There's more and more people that you have growth and wealth, right? There's more and more people that have the financial ability to use interior designers. Yeah, there's more use. People are more exposed to design and quality. More people are-- better houses and better design everywhere.

Speaker #5: No, I would not have made the same decision. So, I'm smarter. Today, I know more and have more knowledge, and it's funny because I was married to an interior designer.

Speaker #5: Kendall and I were together for 11 years, and I knew her business pretty well. It helped me conceptualize what to do at RH, quite frankly.

Speaker #5: That helped me see the opportunity. But I don't think I really—I don't think I really understood the market correctly, and it's changed, too.

Speaker #5: I mean, there are more and more people, as you have growth and wealth, right? There are more and more people that have the financial ability to use interior designers.

Speaker #5: Yeah, there's more used people, or more exposed to design and quality. More people are in better houses and there's better design everywhere. So anyway, but yeah, we're happy to be advocates and partners and open up our platform and support them in a greater way.

Gary Friedman: Anyway. Yeah, we're happy to be advocates and partners and open up our platform and support them in a greater way. I think, look, today, it's a big part of our business today. Our trade business is a big part of our business. It's not a little part. We think it could be meaningfully bigger. When people say, "Oh, you're going to incentivize them," the lift we have to get is very small on incremental business. We have massive flow-through on this model.

Speaker #5: And I think, look, today it's a big part of our business. Our trade business is a big part of our business, so it's not a little part.

Speaker #5: But we think it could be meaningfully bigger, and as people say, "Oh, you're going to incentivize them." The lift we have to get is very small on incremental business.

Speaker #5: I mean, we have massive flow-through on this model.

Speaker #4: Thanks, and best of luck.

Jonathan Matuszewski: Thanks, best of luck.

Speaker #5: Thank you.

Gary Friedman: Thank you.

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

Speaker #1: That concludes our question-and-answer session. I will now turn the call back to Gary Friedman for closing remarks.

Speaker #5: Great. Thank you, everyone, for your time and your questions, and for the conversation today. I just want to say to our team—teams across the country, across the world, across our campus here—I think everybody knows what we're working on.

Gary Friedman: Great. Thank you, everyone, for your time and your questions and for the conversation today. I just want to say to our teams across the country, across the world, across our campus here, 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 RH. I couldn't be more proud of the work everyone's doing and the organization that's been built here based on our values and beliefs. Our work is going to a new level. I think our performance is going to go into a new level, and it's all because of the team members who have built this thing over the last 25 years that I've been here. I just want to thank everyone.

Speaker #5: Everybody knows what we're aspiring to do. I think this is one of the most important times in the history of RH, and I couldn't be more proud of the work everyone's doing.

Speaker #5: And the organization that's been built here, based on our values and beliefs and our work, is going to a new level. I think our performance is going to go to a new level, and it's all because of the team members who have built this thing over the last 25 years that I've been here.

Speaker #5: So I just want to thank everyone. Everybody's effort is important and contributes to this cause. And I think we're going to feel very proud here very soon—maybe even prouder than we've ever felt.

Gary Friedman: Everybody's effort is important and contributes to this cause. I think we're going to feel very proud here very soon, even prouder than we've ever felt. Can't wait to share it with you. Thank you.

Speaker #5: So I can't wait to share it with you. Thank you.

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

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