Prepared remarks
Hello and welcome to the RH First Quarter Fiscal 26 Earnings Call. All lines have been placed on mute to prevent any background noise. 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. I would now like to turn the conference over to Allison Malkin of ICR. Allison, please go ahead.
Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 26 earnings call. Joining me today are Gary G. Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer. We will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our outlook for the business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our 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 webcast of this call is also available on the Investor Relations section of our website at ir.rh.com. And now I would like to turn the call over to Gary.
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 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, 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 26 and providing the following outlook for the second quarter. Fiscal year 26 outlook: revenue growth of 4.5% to 8%; adjusted EBITDA margin of 14.2% to 16%; adjusted free cash flow of $300 million to $400 million. The above outlook includes an approximate negative 270-basis-point adjusted EBITDA margin impact from preopening and startup costs to support our international expansion. Second quarter 26 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 preopening and startup costs to support our international expansion. The bridge from here to there: How, some may ask, in an economic environment like the one we are navigating through, do you get from your half-one numbers to your half-two numbers necessary to make the year? There are three parts that form the proverbial bridge to the other side supporting the case for our business to accelerate from flat in half one to up 12% in half two, as we have done many times before. We have listed them below. We plan a backlog reduction that is worth 4.5 percentage points in the second half; new store growth of 2.5 percentage points; and new concept growth of 5 percentage points for our RH Estates. Building the foundation for a global luxury brand similar to structures that stand the test of time, 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 and 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. We believe the openings of RH Madrid, 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 its skills over decades. The last foundational piece are the estates. “Mr. Gorbachev, tear down this wall.” We believe that there are those with taste and no scale and those with scale and no taste. The global design market has spent the last half century comfortable with that division. It is an industry defined by exclusion versus inclusion. For decades, the highest echelon of home design — the masterfully tailored upholstery of 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, whom 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 remain hidden inside. Nearly 40 years ago, standing at the Brandenburg Gate, a former American president looked out at a divided world and issued a defiant historic decree: “Mr. Gorbachev, tear down this wall.” Today, we look at the luxury home industry and ask the same. With the launch of RH Estates, we are removing the barriers that have segregated taste from scale. We are amplifying the work of the world's most elite designers, artisans, and manufacturers on our global platform. This is not a compromise of quality. It is a liberation of mastery. By uniting these legendary ateliers and elevating their work in architecturally significant spaces, we are providing access to some of the most beautifully designed, highest-quality classic, contemporary, and modern furniture in the world — pieces that not only furnish a home but define it. Tearing down the walls means more than just opening the doors. It means eliminating the creative limitations that have historically forced designers to choose between our scale and the uncompromising specificity of trade-only showrooms. To empower the design community, we are introducing RH Bespoke Furniture and RH Couture Upholstery. With RH Bespoke, we are offering a level of customization never seen before at scale. 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. Critics will argue that true luxury cannot be scaled. They are wrong. They fail to understand the ability to scale that creates higher quality and value for both the customer and the designer. It has the ability, as other innovations have, to create a larger market, enhance the way we live, and elevate humanity. By moving past the antiquated model where each piece is built in isolation, we are building these elite designs in highly disciplined batches. Scale gives us unprecedented leverage, allowing for vastly superior sourcing of raw materials, rigorous quality control, and significant manufacturing and transportation efficiencies. Make no mistake: we are not mechanizing art. The intricate hand carvings and finishes are still executed individually by the world's finest artisans. Because of this human touch, every single piece remains a one-of-a-kind masterpiece in its own right. 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. A new covenant with the trade: we recognize the ultimate expression of our products requires the vision of incredible talent. To honor the design community, we are redefining how we partner with professionals. We are introducing an exclusive program for interior designers, architects, and trade members. The program ensures that professionals are compensated for the tremendous value and aesthetic clarity they create for consumers. We want to incentivize the world's best talent to build their canvases using our platform, creating a symbiotic ecosystem where design is both accessible and rewarded at every level. The separation between taste and scale is over. The curtain has fallen. It is time to tear down that wall. Carpe diem. Operator, we will now open the call to questions.
Questions and answers
At this time, if you would like to ask a question, please press star then the number 1 on your telephone keypad. To withdraw your question, simply press star 1 again. We kindly ask that you limit your questions to one and 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. Your first question comes from the line of Steven Forbes with Guggenheim. Please go ahead.
Good afternoon, Gary, Jack. Gary, given the commentary around customization within the shareholder letter that you just went through, curious if you can 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 do not know if there is a way to contextualize it for us on how you are thinking about it today.
It really opens up on multiple levels. One: the traditional classic market represents about 60% of the luxury home market, and today we are vastly underpenetrated in that market. If you look back at an RH course book from 2014, it was all classic, traditionally based. Our business today evolved into modern, and then into contemporary as trends shifted. When building a specialty brand, you generally keep a focused point of view to break through the market. One of the things I failed to fully recognize is that trends lift aesthetics during cycles, but other aesthetics do not stop selling; they just sell less. Architecture is the driving force in the market. We reviewed our history and concluded we could have built the business earlier around three major aesthetic pieces: traditional, contemporary, and modern — which we will refer to as estates, interiors, and modern. We estimate we may have given away, over the last 10 to 12 years, perhaps a billion dollars or more by not addressing this sooner. Every time you do something new it is not 100% incremental; there will be some cannibalization, but we believe this is one of the most incremental things we have ever done. RH Modern was incremental but from a small market. The classic market is much larger. RH Estates is the first step up to the top of the luxury mountain. It represents the highest level of quality and design available today, unless someone is buying rare antiques. The brands we have aggregated over the last five years and the products we bring to market with Estates provide a level of design and quality not available to the consumer previously. Many of these showrooms have doors that are not open to the public; you often need an appointment or trade access to enter. When we develop a product, we run searches across platforms to see who might have similar items. We have never seen such a low hit rate compared to what we are bringing to market. It's not that nobody wants this; it's that nobody else can really sell it because they lack the platform, brand, and sourcing capability at a value equation we can achieve. I have lived through this trend. I bought pieces decades ago and know what they cost then and what they sell for now. The value equation and quality we will bring have never been seen before. When you try visual searches online, you will not find alternatives unless you go to marketplaces for antiques. We own the intellectual property on the vast majority of what we are bringing to market; many pieces have patent pendings and protection. We are doing things we have never done before in how we source and present these goods. The manufacturers making these goods grew up making them for the highest-end showrooms and are excited to make this quality again at scale. The design and quality aspect is huge. We are also opening the market to 'super buyers' in the trade. We have a big trade business and provide exceptional service to high-end interior designers and design firms; our teams act as a back office providing design, renderings, presentations, delivery, and installation support. At the same time, designers need recognition and compensation. Many times trade firms say they want to make money from our brand and be compensated. Historically, we have not incentivized the design trade effectively. I have insight into this world, having been exposed to high-end interior design; designers run a markup and hourly model and need both to make the business work. We have not been an open platform to fully support that model, and we are overlooking a super customer who buys furniture daily. The timing is right because Estates delivers the highest-level design and quality, and we will empower designers and customers with customization and COM capabilities. This is just the beginning. Regarding pricing, yes, prices will be higher given the much higher quality, but there is tremendous value. These are hand-patinated, hand-carved, hand-distressed pieces with many details and one-of-a-kind characteristics due to the human craftsmanship. Contemporary did not have this level of handwork and detail. We are offering identical quality to the original molds and finishes and presenting a breadth of finishes at a whole different level. The Estates book will be mailed next week and will be worth the wait; it required a higher level of thought, discipline, composition, and presentation, which took a little longer. We expect a significant expansion of the assortment and feel this is a highly intelligent, deep-thinking launch that we have invested in since acquiring key brands in 2020. There is a large opening of the high-end design market and no value engineering to reduce quality; this is identical or higher quality. The assortment and presentation will be unlike anything else, and we expect the design community to respond enthusiastically.
And maybe a very quick follow-up for Jack. Given the tariff refund commentary in the Q, maybe just help us or confirm whether any refunds are within the guidance?
No. There are no further refunds assumed in our guidance. Refunds started coming, but they have been kind of paused. You might be following some of that activity with the DOJ and how those matters are playing out in the courts. As far as our guidance, it does not reflect any further tariff refunds, and specifically free cash flow guidance does not reflect further tariff refunds.
Thank you both.
Your next question comes from the line of Michael Lasser with UBS. Please go ahead.
Good evening. Thank you so much for taking my question. I wanted to dig in on the 500-basis-points of contribution that you were expecting from RH Estates in the back half of the year — so just under $100 million. What is the basis for that expectation? And you have already alluded to the need to evolve some elements of the model and how 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 mailing out a book and expecting consumers to show up in an age where competitors are going hard after social media and other methods of reaching consumers? Thank you.
We have been testing and refining our approach. Mailing a book is only one element. We have built the greatest physical platform on the planet for our kind of products. Furniture is the least digitized business: roughly 80% of sales are done in stores and 20% online; at the luxury level it is closer to 95% in store. This is a business people need to see, touch, and feel. The book integrates the whole thing and is a physical touchpoint people look forward to receiving. I am not a believer in inauthentic influencer-led strategies where a paid influencer talks about our goods without expertise. That creates noise. We have tried and tested many things and have data behind our model. Many thought we were not smart to build the stores and galleries we did, but they turned out well. People have been moving away from mailing books, but we still mail books because they work for our customer and our product. Right now, you can compare our model to anyone. Back out our investments in international expansion and Estates, which are not minor, and you still see a strong model. In a down market our model will not look as good as in a robust market, but those not investing are simply focusing on cost control. Wait until the other side of this cycle; we expect to have a cash generation machine the industry has not seen before.
My follow-up question is about the margin profile of RH Estates. Is it sufficiently higher than the legacy business to fund the investments you are making, provide the incentives to the trade community, and still drive the margin expansion embedded in the back half, or do you see other building blocks to arrive at the margin expansion you are expecting? Thank you very much.
Margins are based on quality, exclusivity, and desirability. If you have design, quality, and scarcity that build desire, you can set prices appropriately. We determine margins based on the competitive nature of the market and differentiation. The trade incentive is a simple model: we give X and ask for a list of Y, and its impact is minor on a model like ours because we have such leverage and flow-through. Think about our business: our price points give us significant leverage across handling, shipping, delivery, and interior design services with high average orders. There is an investment to support that work, but we have tremendous leverage on incremental sales. Some of the margin picture is masked today by our investments in international expansion and Estates. We have plenty of margin to cover what we are doing and expect margin growth going forward. We are focused on EBITDA and cash flow and believe that once we move past this peak investment cycle, free cash flow will be a key driver and that we will create great returns for shareholders.
Thank you.
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Hi, Gary. Hey, Jack. I want to follow up on two items: first, Estates and top-line trajectory; second, the balance sheet. On Estates, can you give us a sense of sequencing — how much of the collection is being launched now, and will it be continuous? What percentage of items on floors and galleries will be Estates? When should we expect it fully ramped? Should we expect the customer deposit line to pick up a bit, not just from backorders but from Estates?
We will terrace products into stores. By the end of September, we will be in the galleries that represent roughly 60% to 65% of business — roughly two-thirds. New assortments will come every month, with significant expansion by the second mailing in early November. You will see us build the assortment over the next couple of years. Custom and bespoke options will roll out as the program matures. Customer deposits follow our business: as revenues grow, demand grows, and customer deposits tick up.
So then my follow-up is in two parts: were deposits already ticking up due to backorders, or were those already included in deposits? And on the balance sheet, can you remind us of the path to getting debt-free by 2029, whether there is any update, what steps you are taking to get there, and how much of a priority it is versus letting the business deleverage naturally?
We are prioritizing deleveraging. We outlined asset monetization of about $200 million to $250 million a year over the next two years. We completed a transaction within our Aspen real estate portfolio and now have 100% control of eight properties, which allows us to monetize them more directly. David Stanchak is back and will help get deals done. We have other properties outside JVs that can be monetized. We expect business performance to improve, spending to inflect down, and asset sales and free cash flow to build over time.
To reiterate, deleveraging and getting to a debt-free position remains a priority. The exact timing of being debt-free is our target and goal. We are focused on making progress on the initiatives that will get us there, including asset monetizations, improving business performance, and managing spending.
We have history of being creative with capital markets. Our buyback timing was not ideal given the rapid rise in interest rates. We have many tools to work the balance sheet — asset sales, convertible options when appropriate, and other mechanisms. Our stock is likely to move with our business as we execute. We are in a prolific spending period building important long-term assets, and while the timing was expensive post-COVID, these investments are now behind us. Investors should focus on EBITDA and cash flow rather than just operating margin — we expect cash generation to be a key differentiator going forward.
Product looks great. Good luck.
Great. Thanks, Simeon.
Your next question comes from the line of Max Rakhlenko with TD Cowen. Please go ahead.
Great. Thanks a lot for taking my question. As you exit the investment cycle following the opening of London and the rollout of Estates, how should we think about what that margin inflection could look like over the medium term? You have provided a second-half outlook. How should we think about medium-term margin power as you start to benefit from the investments made over the past few years?
We provided a longer-term outlook in our investor materials and a video that lays out the logic and timeline. We believe there is meaningful margin expansion regardless of the immediate housing market because of the investments and the growth we expect. Europe and the UK are in tougher economic shapes today, but economies don't stay down forever. Housing may not recover this year; it might take longer, but our model has leverage and will show strong returns on the other side. We are executing some of the most important gallery and product work in our history, and the team is energized. We expect the investments to pay off and for the brand to deliver differentiated performance over time.
That is helpful. As you scale and open galleries in the U.S. with the new prototype, how do you think about unit economics? Can you generate similar revenues as the boxes you've opened over the past decade? Should we assume new galleries, because they cost less, will deliver higher unit margins as well?
Yes, we expect a great return on investment. We laid out the compound logic in the video. Our three-level gallery concept identifies what is necessary for an inspiring experience and what is not. You do not need certain expensive structural features in every building. Post-COVID construction costs rose substantially, so we redesigned a compound that provides the same inspiring experience with much smarter capital allocation. The compound concept — gardens, aggregated service areas, and fewer expensive interior infrastructure elements — reduces costs while preserving or enhancing the customer experience. We expect these new galleries to be as productive, if not more productive, than our historical boxes because we will have a larger assortment, Estates, and continued product expansion. The return on invested capital should return to peak levels as we optimize costs and apply lessons learned. We did build some very expensive projects at expensive times, but those investments are behind us. The model will look different, but we expect to recover strong economics and returns on invested capital similar to prior peak levels.
Great. Look forward to seeing you.
Your next question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.
Hi. Good evening. I appreciate you taking my question. I will keep it short. On guidance, with the ramp in sales growth expected in the second half, how much of a ramp do you need in the existing business for that guidance to be achieved, combined with the components you described?
You have to look at backorders and special orders. Our revenue does not yet reflect a considerable balance of backorders and special orders that are on our books. Those balances have been created and are waiting to ship. Many of those are trending into the second half as we catch up from resourcing and transportation impacts. There is a pretty big number that we don't have to drive new demand to hit; the demand has already been created and will 'flop' into the second half.
That elevated piece above normal backorder levels, which is driven by resourcing and transportation impacts, is what Gary and I are talking about for the second half. It amounts to $75 million, or about 4.5 percentage points.
Okay, that is helpful. Thank you.
Thanks, Brian.
Your next question comes from the line of Steven Zaccone with Wells Fargo. Please go ahead.
Good afternoon. First, on initial response from Milan and expectations for year one in the market: now that you have galleries open in Milan and Madrid with London around the corner, any revised thoughts on sales trajectory from the three? Is New York a good benchmark for what those markets could look like?
They will all be great markets over time; we need to build the brand, customer base, and design pipeline. RH England has been open the longest and provides perspective on ramping even in weaker economies. We have greater brand awareness in London, which will accelerate everything because it is a global hub and travel magnet. Milan is pivotal for our industry because of Salone and Design Week — it draws designers and high-net-worth customers from around the world and provides visibility. Madrid and Milan are showing encouraging early responses. London will be the accelerator and amplify activity globally. London will create the biggest echo and help ramp Milan, Madrid, and other galleries.
Quick question for Jack: Q1 opening cost you said would be about 24 basis points — did that end up being the case? For Q2, you are guiding about a 380-basis-point impact for London. Which of those costs should we consider transitory and will come out in the second half versus costs that are now in the base and will persist?
Q1 ended up being a roughly 450-basis-point impact, so right there with the 420 we referenced. We don't provide quarter-by-quarter granularity in guidance, but you can annualize and allocate between Madrid and Milan and then estimate the February-to-year impact. The transitory component is largely the preopening and startup costs; call it the mid-hundreds in basis points in the back half, and the delta between that and Q1/Q2 is the transitory portion related to openings.
Thanks for the time.
Your next question comes from the line of Jonathan Matuszewski with Jefferies. Please go ahead.
Gary, could you share context on why now is the right time to pursue a loyalty program that compensates your trade clients? Presumably you considered this pivot in the past. What makes now the right time to roll this out? Also, can you discuss recent growth trends in your trade business relative to the end-consumer business — has trade been outperforming, and is this the playbook to supercharge it, or has trade been underperforming and this is how you improve it?
For those competitors that report trade, we have been overperforming in the last three years. We have a strong trade business with great leadership and teams. This program is a supercharge. Historically, we had a trade incentive program and removed it when we shifted strategy, which in hindsight may not have been the right call. Today, Estates opens up the very top of the market for our brand. No other retail brand has goods at this level of design and quality. We are offering unique product and presentation, so it makes sense to open up our best interior designers to what we are doing. We have learned and evolved; today we have better insight and an opportunity to partner with designers in a more rewarding way. Trade is already a significant part of our business, and we believe it can be meaningfully bigger. The incremental lift is small given the size of the trade's purchase activity, and we have massive flow-through on this model.
Thank you.
That concludes our question-and-answer session. We will now turn the call back to Gary G. Friedman for closing remarks.
Thank you, everyone, for your time, questions, and conversation today. To our teams across the country and around the world: everyone knows what we are working on and what we are aspiring to do. This is one of the most important times in RH's history. I could not be more proud of the work everyone is doing and the organization we have built over the last 25 years based on our values and beliefs. Our work is reaching a new level, and I think our performance will go to a new level as well. All of this is because of our team members. Everyone's effort is important and contributes to this cause, and I think we will feel very proud very soon, even prouder than ever before. I cannot wait to share it with you. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.