RH - Earnings Call - Q1 2026

Executive Summary

• Q1 FY2025 (Q1 2026) delivered $813.952M (+12% YoY) with GAAP operating margin 6.9% and adjusted operating margin 7.0%; adjusted EBITDA margin was 13.1% and free cash flow $34.1M.
• Versus S&P Global consensus, Q1 EPS beat (actual $0.13 vs -$0.07*), revenue slightly missed ($813.952M vs $818.570M*), and EBITDA was below consensus (actual $91.147M* vs $104.350M*)—management reported adjusted EBITDA of $106.4M.
• Guidance for FY2025 was maintained in Q1 (revenue +10–13%, adj. op margin 14–15%, adj. EBITDA margin 20–21%), but revised in Q2 to +9–11%, 13–14%, and 19–20%, respectively, reflecting tariff costs and Sourcebook timing.
• Near‑term catalyst: permanent membership discount increased to 30% and tactical 35% outdoor promotion to capture share amid tariff disruptions; Q2 expected ~6-point revenue deferral to 2H recovery.

What Went Well and What Went Wrong

What Went Well

• Double‑digit top‑line growth (+12% YoY) and margins at high end of expectations; adjusted operating margin 7.0% and adjusted EBITDA margin 13.1%.
• Positive free cash flow ($34.1M) with inventory sequentially lower; management forecasts FY2025 FCF of $250–$350M.
• Europe momentum: RH England gallery demand +47% and online +44% in Q1; strong pipeline ahead of RH Paris opening.
  • “We have never been more excited or confident about the desirability of the RH brand globally.” — Gary Friedman.

What Went Wrong

• Tariff shocks disrupted shipments globally, deferring ~6 points of Q2 revenue to 2H; reciprocal tariff uncertainty persists.
• Interest burden remains heavy: Q1 net interest expense $56.6M; TTM net debt/adjusted EBITDA 4.6x.
• Tactical promotions (limited‑time 35% outdoor) and permanent membership discount to 30% could pressure near‑term profitability despite management’s confidence in offsets.

Transcript

Operator (participant)

Hello and welcome to the RH first quarter 2025 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 and if you would like to ask a question during this time, please press star 1 on your telephone keypad. I would now like to turn the conference over to Allison Malkin of ICR. You may begin.

Allison Malkin (Partner)

Thank you. Good afternoon everyone. Thank you for joining us for our first quarter fiscal 2025 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer.

Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events.

Also during this call we may discuss non-GAAP financial measures which adjust our GAAP 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. With that, I would now like to turn the call over to Gary.

Gary Friedman (Chairman and CEO)

Great. Thank you, Allison. Good afternoon, everyone. Let's see if maybe we can get off to a better start than last quarter. I should ask who was the person that asked the setup call that got my response that echoed around the world? I can't remember, but I'm going to put you last in the queues. Thank you, and thanks for joining us. Let me take you through the highlights of our letter, and we'll open the call to questions to our people, partners, and shareholders. Our industry leading growth continued into fiscal 2025 as revenue increased 12% in the first quarter despite the polarizing impact of tariff uncertainty and the worst housing market in almost 50 years. Both adjusted operating margin of 7% and adjusted EBITDA of 13.1% were at the high end of our expectations, and we achieved positive free cash flow of $34 million in the quarter.

The substantial investments to elevate and expand our product and platform have resulted in significant share gains and strategic separation, positioning the RH brand for continued growth over the next decade. We continue to be pleased with the second year demand trends at RH England, with the gallery up 47% in the first quarter and online demand up 44%. Current demand trends indicate the gallery will now reach approximately GBP 37-39 million demand in 2025, the second full fiscal year, with the online demand reaching approximately GBP 8 million.

To put those results into perspective, if an RH gallery in the English countryside with an estimated population of 100,000 in a 10 mi radius two hours outside of London can generate $46 million of total demand in its second full fiscal year, what can an RH gallery in the center of Mayfair, the most exclusive shopping district in London, with a population of 9.7 million do in its second full fiscal year? We believe exponentially more. While many question the decision to open our first RH gallery in such a remote location, believing it would fail, what they failed to understand is the value of doing something so extraordinary and remarkable that it breaks through the clutter and creates a conversation that is authentic and uniquely our own.

We've learned during our journey at RH that when we've done extraordinary and remarkable work, we've always figured out a way to monetize it. We've also learned that it's hard to monetize ordinary and unremarkable. We're also pleased to report our business in Europe continues to accelerate with demand growth of 60% in the first quarter across two comparable galleries, RH Munich and RH Düsseldorf. We're also pleased with the continued demand acceleration in our non-comparable galleries, RH Brussels and RH Madrid. Last week our leadership traveled to RH England, RH Madrid, and the soon to open RH Paris. While there we met with our teams from all five galleries, listening and learning as they identified opportunities that we both believe could double our current business over the next couple of years.

We believe RH Paris, the gallery on the Champs, will be our most elegant and inspiring gallery yet. Located on the famous Parisian boulevard just off the Avenue Montaigne, it is at the epicenter of fashion and luxury. You will pass through 20 foot gold gilded gates that lead you down a hedge lined decomposed granite pathway into a beautifully landscaped garden where we built a freestanding RH interior design studio. Opposite the studio, you enter the gallery through 18 foot bronze and brass doors flanked by trickling fountains and encounter the dramatic atrium with ornate railings, scissor stairs, and a magnificent glass elevator connecting the six floors and two restaurants.

While enjoying lunch or dinner from our curated menu of American classics at Le Jardin RH, located on the second floor terrace overlooking the garden, you'll be seated under a soaring curved glass atrium inspired by the Grand Palais with a bar sculpted from and floating above a floor of rare white onyx. Les Petites RH will occupy the top floor and the rooftop where you can take in majestic views of the Eiffel Tower and Grand Palais while enjoying a creative menu of small bites, special caviar dishes and seafood towers while sipping a perfectly crafted cocktail or glass of champagne. Our plan is to open RH Paris in early September to coincide with Maison d'Auber, the premier interior design show in Europe that attracts design professionals from around the world.

When we assess the current business momentum across our galleries, the upcoming openings of RH Paris, London and Milan all in iconic locations over the next 12 months, I can honestly say we have never been more excited or confident about the desirability of the RH brand globally. Another topic we could not be more excited about is welcoming Lisa Chi back to Team RH as President, Co-Chief Merchandising and Creative Officer. Lisa is a proven creative and merchandising force in our industry as witnessed by the product transformation and brand elevation she led over the past four years at our house. In her role as Chief Merchandising Officer and prior as a consultant to the company, Lisa will co-lead all merchandising and creative efforts with Ari Chaya, President, Co-Chief Merchandising and Creative Officer and a member of the RH Board of Directors.

Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. Warren Buffett. While we expect a higher risk business environment this year due to the uncertainty caused by tariffs, market volatility, inflation risk, and an increasing level of global discord, we believe it's important to separate the signal from the noise. The fact is, we've been operating in the worst housing market in almost 50 years. For context, in 1978 there were 4.09 million existing homes sold when the U.S. had a population of 223 million. Contrast that to 2024 where 4.06 million existing homes sold with a population of 341 million and it illuminates just how depressed the housing market has been this year. Despite that fact, we are performing at a level most would expect in a robust housing market.

We believe it's a result of investing with a very narrow focus and a long term view or what we like to call an inch wide and a mile deep. Elevating and expanding our platform by creating the most desired products presented in the most inspiring spaces in the world with bespoke interior design services and beautiful restaurants that generate energy, engagement, and tremendous awareness of the RH brand while also serving as a profitable customer acquisition vehicle. Our intentions and attention to detail are reflected in everything we do and in every house we turn into a home. While our business has been strong, it has been so due to action versus inaction, innovating versus duplicating, investing versus divesting, and aggressively taking market share during this downturn so we're positioned to create long term strategic separdation.

On the other side of it, we are investing in the most iconic global locations in retail that will likely never be replicated in our lifetimes. We are building a global hospitality company with multiple concepts across multiple continents, countries and continent. We are creating a global bespoke interior design business that regularly does million dollar plus full installations. We are building a global contract and hospitality business where our products are featured in some of the finest hotels and residential products in the world and we are creating the most desirable and distinguished brand in our industry, all while forecasting an adjusted EBITDA margin north of 20%. Imagine what our margins and cash flow might look like in a robust housing market once we begin to cycle and leverage those investments.

While we began the year with meaningful debt almost entirely due to our stock repurchases of $2.2 billion, we also began the year with incredible business momentum and meaningful assets. The assets include real estate that we believe has an estimated equity value of approximately $500 million that we plan to monetize opportunistically as market conditions warrant, and excess inventory of $200 million-$300 million at cost that we plan to turn into cash over the next 12 to 18 months as we optimize our assortments post our product transformation. We are forecasting to generate $250 million-$350 million free cash flow in 2025 and our plans also call for a significant and growing cash flow from operations and lower capital requirements over the next several years.

As we cycle this aggressive investment period, we estimate that our adjusted capital expenditures will decrease to a range of $200 million-$250 million in 2026 and $150 million-$200 million in 2027 and beyond. We remain confident in our ability to make the necessary investments to continue our industry leading growth while significantly reducing debt and lowering interest expense. As Warren Buffett wrote in his 2016 letter to Berkshire Hathaway shareholders, every decade or so dark clouds will fill the economic skies and they will briefly rain gold. When downpours of that sort occur, it is imperative that we rush outdoors turning washtubs, not teaspoons. Our debt is reflective of the washtub bet on ourselves. We purchased 60% of our outstanding shares that greatly benefited our long term shareholders post the publishing of Mr.

Buffett's letter in 2016 and 2017 and recently repurchased 30% of the outstanding shares during this housing downturn in 2022 and 2023. In addition, we believe another washed up bet is to play offense in the current environment by increasing our membership discount from 25% to 30%. This incremental incentive will position us to capture market share, increase market share and drive additional membership, which all serve us extremely well when the housing market recovers. While the sky in our sector has been darkened by inflation, interest rates, tariffs and global politics, those clouds will soon too pass and it will not only be clear skies but also clear that it was a good time to be a shareholder of RH.

Reciprocal tariffs, we have continued to shift sourcing out of China and expect receipts to decrease from 16% in Q1 to 2% in Q4, with a meaningful portion of the tariff absorbed by our vendor partners. We've also resourced a significant portion of our upholstered furniture to our own North Carolina factory where we've been operating 10 years. We're now projecting that 52% of our upholstered furniture will be produced in the United States and 21% will be produced in Italy by the end of 2025. While there remains uncertainty until the reciprocal tariff negotiations are complete, we have proven we are well positioned to compete favorably in any market conditions. Let's look at our outlook.

Despite the speculative and uncertain outcome related to tariffs and the macroeconomic environment, we are maintaining our current guidance for fiscal 2025 assuming the existing tariffs remain unchanged. To mitigate risk, we are delaying the launch of the new concept that was planned for the second half 2025 to the spring of 2026, when there is more certainty regarding tariffs and price of product. Additionally, due to significant and unexpected Liberation Day tariffs announced on April 2, shipments and sourcing efforts were disrupted globally. We believe the disruption will negatively impact revenues by approximately 6% in the second quarter and will be recovered in the second half, which is reflected in our outlook below.

For fiscal 2025, we are forecasting revenue growth of 10-13%, adjusted operating margin of 14-15%, adjusted EBITDA margin of 20-21%, and free cash flow of $250-$350 million. Second quarter 2025 guidance includes revenue growth of 8-10%, adjusted operating margin of 15-16%, and adjusted EBITDA margin of 20.5-21.5%. The above outlook includes an approximately negative 100 and 80 basis point operating margin impact from investments and startup costs to support our international expansion. Every act of creation is first an act of destruction. Pablo Picasso. We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand.

We believe the important investments we are making to elevate and expand our product and platform during this depressed housing cycle are creating a level of strategic separation in our industry that rivals the most important brands in the world. Our product elevation and extension plans for 2025 include our 2025 RH Outdoor Sourcebook arrived in homes February with eight new furniture collections and exciting new textiles offering plus a significantly improved in stock position to start the season versus a year ago. While the business started strong, we experienced a slowdown following the reciprocal tariffs due to the compressed peak selling season and the market becoming highly promotional. We responded by increasing our RH membership discount to 35% for a limited time to maximize market share in this important category. The introduction of our new RH Interior Sourcebook arrived in homes mid February.

We've been pleased with the early response to the new collections despite what has been a volatile period post the tariff announcements. Our RH Modern Sourcebook is in home this week with 18 new collections across furniture, upholsteries, lighting, rugs, and textiles. We are introducing a new design aesthetic, Japandi, harmonizing elements of Japanese serenity and Scandinavian simplicity. As mentioned, we are delaying the launch of the significant new brand extension previously planned for the fall of 2025 to the spring of 2026 that we believe will meaningfully expand market size and share of the RH brand. This new brand extension will include a source book and three freestanding galleries in San Francisco, West Hollywood, and Greenwich, Connecticut. We'll be sharing more details of the exciting new venture later this year.

Our platform elevation and expansion plans for 2025, we continue to open the most inspiring, immersive physical experiences in our industry and some would say the world. Spaces that are a reflection of human design, the study of balance, symmetry, and perfect proportions, spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality, spaces with garden courtyards, rooftop restaurants, wine and barista bars, spaces that activate all of the senses, and spaces that cannot be replicated online. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform elevation and expansion plans for 2025 include the opening of seven design galleries in Oklahoma City and Montreal in the second quarter, plus Paris, Detroit, Manhasset, San Diego, and Palm Desert in the second half.

We also plan to expand our brand presence in East Hampton this week by opening a freestanding art outdoor gallery just a couple of doors down from our current gallery and are exploring plans to further enhance our design ecosystem with a new concept gallery in the near future. As previously communicated, we anticipate an inflection of our business in Europe and as we begin to open in the important brand building markets of Paris in 2025 plus London and Milan in 2026, all with dramatic and brand building hospitality experiences, we believe post each opening we will begin to have the scale to support the necessary advertising investments to accelerate our growth in Europe.

Looking forward, we plan to accelerate our platform expansion strategy to include the opening of seven to nine new galleries per year, plus two to three design studios, outdoor galleries or new concept galleries per year that increase our current presence in underpenetrated markets or open new markets to the RH brand. Every movement has a lunatic fringe. Theodore Roosevelt, America's first Nobel Prize winner, commander of the legendary Rough Riders, Medal of Honor recipient, promoter of the conservation movement, leader of the progressive movement, noted for his exuberant personality and ranked by scholars as one of the greatest presidents. Theodore Teddy Roosevelt proclaimed in his famous speech at the Sorbonne in Paris it is not the critic who counts, not the man or woman who points out how the strong man stumbles, or where the doer of deeds could have done better.

The credit belongs to the man or woman who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again because there is no effort without error or shortcoming, but he or she who actually strives to do the deeds, who knows the great enthusiasms, the great devotions, who spend himself in a worthy cause, who at its best knows in the end the triumph of high achievement and who at his worst if he fails, at least fails while daring greatly. His place shall never be with those cold and timid souls who know neither victory nor defeat. While our ambitions are not political, they are personal. We remain inspired by the progressive thinkers, unafraid to push forward new ideas and fresh perspectives.

It's a culture of leadership versus followship, innovation versus duplication, enlightenment versus ego. It's believing none of us are smarter than all of us, that we need all the brains in the game and the egos out of the room. It's about thinking until it hurts. Until we can see what others can't see. So we can do what others can't do. That's how you transform a money losing Restoration Hardware store at Aventura Mall in Miami that did $2 million in annual sales into an RH gallery that does $44 million in the exact same space with the exact same square footage. It's also how we will transform that $44 million Legacy Gallery into a $100 million plus RH Divine Compound, a yet to be unveiled multi building design resort of sorts in the parking lot of the same shopping center.

We began this journey over 20 years ago with a vision of transforming a nearly bankrupt business that had a $20 million market cap and a box of Oxidol laundry detergent on the COVID This catalog into the leading luxury home brand in the world. The lessons and learnings, the insights and intricacies, the sacrifices made and the scar tissues developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral qualities that build character in individuals and form cultures and organizations. Lessons that cannot be learned in a classroom or by managing a business. Lessons that must be earned by building one. Are we a part of the lunatic frames?

If it means that President Roosevelt said in his speech at the Sorbonne that our place shall never be with those cold and timid souls who know neither victory nor defeat, then put us in that arena. Onward Team RH. Carpe Diem. Operator will now open the call to questions.

Operator (participant)

Thank you. If you would like to ask a question, please press Star one on your telephone keypad. If you would like to withdraw your question, simply press Star one again. Please ensure that your phone is not on mute when called upon. We ask that you please limit yourself to one question and one follow up and rejoin the queue if necessary. Your first question comes from the line of Stephen Forbes with Guggenheim. Your line is open.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

Good afternoon Jack and Gary and team. Gary, you started the letter this time focusing on Europe and it may be too early and not sure if you want to repeat maybe what you've done in the past, but given how demand has ramped at RH England, we'd love to hear your sort of high level thoughts or initial thoughts on how your demand planning, forecasting for Paris, London and Madrid have evolved as many of us sort of try to think about where the business looks in Europe 12 or 24 months from now, especially as you have advertising investments behind them.

Gary Friedman (Chairman and CEO)

Sure.

I think what we've learned in this first couple of years, and again, not all the galleries have been open during this time, is that I think that the headline is that when you really look at the patterns, you look at it closely, you look at what you're doing right, you look at what you're doing wrong. Is that the RH brand as it is today, we believe we kind of have enough data to say it can be as disruptive and productive in Europe as it can be in America. That's what the early trends look like. The early trends are littered with what I'd call just choppy execution. A company in America trying to open a company in Europe, we're not experts there. Our brand's never been anywhere there. We've got excellent people in all of our galleries and leading the teams.

You listen to people and everybody tells you, oh, you need much smaller furniture or you need color or you need this, or you need picture frames and candles and more accessories and all these things. You find out, you start to find out if you're in this business area, you start to get real data on what other people do, what their volumes are. You know, we're just able to connect the dots and see the patterns and say, wow, once we fix like three things, three headline things that we got, we were in a conference room until 4:00 A.M. taking questions from our team. You know, they would have kept going. We had to kick them out. You know, they're so excited.

If we can improve three pieces of this, you know, being in stock, having the right fabrics, because with flammability issues in the U.S. we couldn't have the right fabrics. We couldn't, you know, we stocked this, the DC over there, a year before we opened. Right. RH England, because we had all the COVID issues of trying to, you know, stop and start and build and, and so on and so forth. We kept having delays. Nobody wanted to come out and, you know, do a check on the property or permit sign off. I mean, it was kind of funny, you know, when you build out in a remote area like that. We opened and we really didn't have the right product in the distribution center.

We just went through the biggest merchandising transformation in our history and I'm sure in the history of this industry, you know, by multiples, and so, you know, not having, you know, you're going through a product transformation, you know, with the, you know, our business, the core of the business is here. So we need, and you're testing many new collections. We need the goods here when you're figuring out what the best sellers are and so on and so forth. Those shifts aren't making it to Europe on the first go round or two. We're trying to optimize the business here and we're fighting through the worst housing market any of us have ever been in. I've been doing this for 40 years now. I've never been in a third year of a down housing market.

I think every one of them then 12 to 18 months. You have to stay really focused in markets like these and maximize market share and so on and so forth. Just the execution on just being in stock, looking at the time of special orders because many of our vendors could not make the products with the flame retardant and the orders were not that big so they were not on the front burner. If we just do kind of three big things, our team believes our business can double. That is how many customers we are turning away. We have five month lead times in special orders. I sit here and go, wait a minute. We can see the trends across all of these galleries and some better than others as they are going to be.

the most part, they're going to trend, I believe, over the next couple of years to levels that will drive four wall profitability, four wall cash contributions as good or better than the U.S. That's what it's starting to look like. If we really kind of pick some of these things, you just start to get really excited what this model can look like. I would say we were so excited in Europe we couldn't sleep. We're just listening and learning and we're looking at the trends building and we're realizing that there's so much more opportunity. Yeah, we feel enlightened and energized and really good about the potential. Yeah, we're going to get some things wrong. We made a big bet, right?

We took multiple locations at one time from Abercrombie, to get the Paris and London locations, which could have taken us 20 years to find locations like that. Those were crazy critical, critical to the brand. I mean, it's funny, my wife Bella is at a best friend's wedding in London and she was out last night with a huge group of people. If anybody's been in London, go walk by our Mayfair site because it's the biggest Vitruvian man you've ever seen with our designees on the building and people are taking pictures of it and posting it on Instagram and other places. She was shocked. She told me, honey, you cannot believe the buzz you have here in London. I mean, I think it's, I think we are going to rock when we open Paris and London and Milan.

I think we are, you know, we are going to change things. Yeah, we're just, we talk about it for hours, Steve. I better let the next question come.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

I appreciate that, Gary. And then just a quick follow up. The $500 million of real estate value that you noted, is there any way you could sort of break that down into two buckets, sort of, you know, non operational assets or operational assets as we think about, you know, sort of, you know, transactions that would be sale leaseback oriented or transferred transactions that would literally just be the monetization of assets?

Gary Friedman (Chairman and CEO)

Yeah, we have, you know, quite a few galleries that are opening with some that have already opened that we own that, you know, we'll do sale leasebacks on, you know, not exactly the best time to do a sale leaseback.

But you know, you got to balance that with what the interest costs are and long, you know, long term, short term, you know, short term, you know, you can say, hey, let's do the sale leaseback now. You know, but you're doing the sale leaseback at a, you know, at a different cap rate. Right. And the sale, you know, is going to, you know, will determine the rent and will determine, you know, how much cash we'll take out of it and what our, you know, what our long term rent stream and profitability stream would be. We are trying to be a little patient. We do not like paying so much interest right now. There is good attention there. Right now we have about six or so sale leasebacks and then we have quite a big portfolio in Aspen.

We're 50, 50 joint venture partners. I mean people can pull out, you know, the press release from 2020, you know, made the initial investment. I think we have, you know, in the high 20s, low 30s properties somewhere around there, call it about 30 properties with, you know, many. You know, we invested not only because we were going to build an ecosystem. You know, we're building an ecosystem with a. We call it a gallery that we call the RH Mountain House, which is on absolutely the best corner in Aspen. And it's going to be a three level experience. It's probably the only building of its kind in Aspen. I mean, it's incredible. It's got a three story atrium going up through the middle with a restaurant on the rooftop with views of Ajax Mountain with all day sun.

I know the frontage must be a couple hundred feet that wraps around that corner. We have an incredible guest house location. It is right on the street where lift one is opening. You know, it will be a main thoroughfare and we are on a great corner. It is going to be a tremendous guest house. You guys have probably followed some of the news. You know what, you know, our partner in Aspen likes to say building in Aspen is harder than building on the moon. You know, it is a little political there sometimes and a little difficult. We finally got our facade approved and we are getting ready to go. The last couple of permits we are waiting on and then we will finish out the guest house and we will be open.

I would say just based on the kind of incredible clientele we have at our current guest house that has just been built by word of mouth, I think Aspen is going to. It'll be the best hospitality experience in Aspen. It's nothing like it. It's got its own unique flavor versus New York. It's kind of like a contemporary ski lodge. A lot of the core ideas around it are being built around privacy and luxury. We like to say privacy is the one thing everybody's given away with social media and it's one thing that the Internet's taken away because you can Google anything about anyone. The whole guest house is built around privacy and that's a really unique thing. It was the small town of Aspen.

You know, we're kind of in the center of town in a great area, but you know, you walk through and you're transported into, you know, into this world of privacy and luxury. We think it's going to be tremendous. We've got a great restaurant and a champagne and caviar bar and, you know, we may or may not open exactly, you know, when we open with the bathhouse and spa, and we may first get the guest house open and open that later. That's a, it's a more membership driven business and it's a new business that, so it's not like, you know, the first thing we want to allocate capital to right now. We want to get the guest house open, get the branding open, and we'll probably follow that up, you know, at some point with our bathhouse and spa.

It's all framed, it's the, you know, the concrete framing is all there, you know, for a beautiful, beautiful experience underground. We have just incredible tenants in our JV from some of the best luxury brands in the world. We get to learn what it's like being a landlord with real estate valuations and things can happen. We have a lot of value in Aspen. We have a lot of value in multiple sale leasebacks. We still own some other properties and we have an option on a second building in Madrid. Madrid's one of the biggest buildings in all of Europe. We've opened our first Madrid gallery and it is ramping nicely and it's small and it's beautiful and we're going to put a little cafe on the top floor, kind of like RH Montecito and we think that'll bring even more energy to it.

You know, we bought a building to have an optionality to have two buildings, kind of like we do in Los Angeles. We have a, you know, freestanding 30,000 sq ft gallery. In Melrose we have a 15,000, if you count the outdoor space, probably 20,000 sq ft, modern gallery, you know, and we may expand our ecosystem further there. We have got an option, you know, that we could do something or we could, you know, monetize assets. We have a lot of flexibility. It is not the easiest time to be in the real estate development business, you know, with interest rates where they are. You do not get it all right. You know, the timing, you know, do I wish I waited another year or two to buy our stock?

You know, did I think the housing downturn was going to be three years? Yeah, I wish I waited to buy the stock. Did I know the housing downturn was going to be three years? None of us did. Then again, when we look back at the assets we have and what we can monetize, we look at the momentum of the business that we have, we look at the cash flow potential of the business. When you think about cycling this time that we spent a lot of capital and it is expensive to build today, you know, and I made a comment in the letter that I do not think we will ever see someone build the kind of retail experiences we have built over the last 15-20 years. They just will not be able to afford to, you know, post Covid.

The cost of building one of our galleries is almost twice as much. And we've been. You'll hear more about how we're going to be really creative with capital. We've designed, I call it out of, you know, necessity is the mother of invention, right? And we had some great opportunities for new galleries. But, you know, building it, you know, one of our typical galleries with a restaurant on the top with, you know, three stories and a grand staircase and two elevators and all the equipment and so on and so forth is expensive and complex. And Covid's made it almost twice expensive. And so, you know, that economic model is not as attractive. So we developed a concept that we called the compound, the design compound. And what we did is we took a gallery and we broke it into six to nine separate buildings.

We're getting department store pads in Walnut Creek. We've got the Neiman Marcus pad on the best corner in the East Bay of the entire San Francisco Bay Area. In Naples, we get this incredible site. It's in Nordstrom's that closed. We've got Aventura in Miami, Bank of America on the street. It's kind of in this Aventura shopping center parking lot. We're going to build with three compounds. I think we're hoping that we've got another opportunity with one of our partners, that we're doing one of the first ones with development partners. We think we can disaggregate a gallery, build it for half the cost. You'd have all these buildings connected by gardens. You're walking indoors, outdoors, down pathways. You've got outdoor furniture all around. You got a restaurant in the middle.

I think it might be the most exciting thing we've ever, ever done. We can do it for half the capital. Yeah, it's good to have, you know, like to say humans without deadlines are useless. We need deadlines or we don't get our work done. We need, you know, we need crisis to kind of figure out our potential. You know, I love the fact and we always say here, you know, necessity is the mother of invention, and it's when we do our best work. Some of the things we come up with, whether it's the design compound, the design ecosystems, we said, hey, there's another way to break up the thing. Do we have to build the whole thing or in Greenwich, Connecticut, you're going to see, we've got, I think you've been out.

We have the gallery at the historic post office center town. The best location in all of Greenwich. The best building for retail and especially what we did to it. The next best building was the Ralph Lauren building that got built a little after us, right? Or right before us. Maybe right before us. And you know, in Ralph Lauren downsizing, I think three, four or five years ago, when they closed some of their stores, you know, no one was able to really operationalize that building very well. We were able to get in and get that building. And so we tied up a lease on that building that will be a building to support a new concept that we're opening. We also transformed our Baby Child gallery into an RH outdoor gallery. Because outdoor is a very important business to us long term, strategically.

We will have three incredible locations and we call that a design ecosystem. You'll see another design ecosystem in Palm Desert. Some of these, what it allows us to do is move much more quickly with less capital. Right. Because we're taking buildings and modifying them a bit. You know, I think we're going to have a restaurant in the Ralph Lauren building there, right? I'm called the Ralph Lauren. I can't call it what our concept is because I haven't told you what our concept is. Or I call it the, you know, RH this building. You have a vision like what would you put in a building that looks like that anyway? Ari's shaking her head like I shouldn't do this but. We're going to, you know, we're going to have a RH all day cafe in there. It's going to be super cool.

I think what are we going to spend? Like $2.5 million of capital. Like $2.5 million of capital. Rest is like a free store. We've just got lots of creative ways to grow and opportunities. I mean, just like in Europe we've got some very expensive real estate we built in Europe. By next year that capital kind of gets behind us and starts throwing a lot of great cash flow. We've also got things at the other galleries that we picked up we didn't spend that much capital in. We were very creative with it. It's one of the things, as you think about just the model and the cash flow, just how we can deploy the brand into markets. I think I mentioned about Palm Desert.

We opened our first RH freestanding interior design studio. It's really an office. It has two sitting rooms, like outside of the offices, where we got the same sofa twice. That's like the little kind of cool sofa. It doesn't even have our coffee table right. It's got a cool antique, you know, like, reproduction pool thing that, you know, the highest level is fine. And we find things like that. So we can actually aspire to sell this. How many people ask about them? But it's just a design office with a little room in the front. It's. Can I say how much it's doing? I can say how much it's doing. It's 3,000 sq ft. It's doing $1 million a month. And the design clients were getting there because it's just a beautiful space. And we might have replaced Lululemon.

I do not think Lululemon is doing $12 million a year in 3,000 sq ft, you know. You know, so. And that is just weeks, you know, warming up and stuff. We have just got a lot of ways to access markets. We have got, you know, as I said, the design compounds, the design ecosystem, the design studios. We have the design concept stores where, you know, it is kind of a, where we can again, go into an existing building, do an RH that is anywhere from 14,000 to, you know, 30,000 sq ft. A lot less capital, and we have a lot of those in the pipeline that is allowing us to access markets much more quickly. That is what, you know, we communicated in the letter that we are going to accelerate our openings to seven to nine a year, and so feel good.

We think we can do it in a very capital efficient way.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

Thank you, Gary.

Gary Friedman (Chairman and CEO)

Yep.

Operator (participant)

Your next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman (Analyst)

Hey, Gary. Jack. Gary, a bunch of tactical pivots all sound pretty good. I wanted to ask about the sale. I saw you said it was limited time. Can you assess anything about the underlying newness with the sale? Meaning, have you seen demand spike up? Is there still a way to assess what the underlying strength of these newness is doing to the business, even with the sale? How do you kind of ease off of it? Thank you.

Gary Friedman (Chairman and CEO)

Yeah, you know, we just increased the value to our members. Right. For how many weeks or five weeks outdoor? Yeah, yeah. Really what we, we've been, we've been thinking about taking membership from 25% to 30%, I do not know, for five years. You know, it is not a new idea for us.

You know, it's a long term strategic move because you know, we live in a really promotional world and you know, we're a market, market leader and other people, you know, try to do things yet but for one, start with nobody sells furniture at regular price anywhere in the world. You know, all furniture is on sale basically. And it's just a sale industry. It's just, it even starts at the highest end with interior designers. Every interior designer gets 20% to 40% off. You know, most of them get 30% to 40% off with design showrooms. So, you know, and then you know, more of the other. Yeah, other people in our industry, you know, try to figure out like what can we do? You know, one time we had a competitor that put their entire assortment on sale. It's 30% off.

They were running their business that way until, I think, you know, they found out the government does not let you do that. You know, they were just trying to say, hey, you do not have to, you can sell, buy something similar here because, you know, you have to, you know, get paid $200 for a membership and here we will give you 30% off. It was not really 30% off, you know, just mark up the goods and, you know. We just always thought at the trade level, the discount is more 30-40% and we just think that will open up the market. It feels more compelling, you know, so I do not really. You know, look, is it, we did it during a difficult market like this.

If you're going to do something like this, you might as well do it now, you know, because people are really sensitive, you know. Yeah, we made a move on outdoor furniture for X number of weeks and, you know, picked up significant business and it was important. There's more important there, you know, like, you know, when we went to 35, outdoor has a peak and it's a short peak. We sell outdoor all year round, but you have a massive peak in the outdoor business, the March, April, May, June period. We wanted to just capture more market share during that time. That business got a little rocked everywhere. Got rocked from the reciprocal tariff announcements and, when the market went down, our business went down. You had to pull forward, you had to give back.

It's like a noisy, noisy time right now to run your business. It's not a simple time. I don't know how anybody keeps up with the news of what's happening with tariffs, what's happening with Israel or this or that. This is noise all over the place. And you know, I think it's, you know, and you're sitting there with a down housing market for the third year. I don't know if anybody even knows. If you go back in history, when's the last time that's happened, if it's ever happened? It hasn't happened in my career. As long as I've, you know, 40 years in this industry, I haven't seen it. This isn't a normal time, but the 25-30 is a strategic thing.

We've been thinking about it for five years, debating it back and forth and we say, hey, look, we ought to do it now. Why not take the market share now? Outdoors is kind of a one time thing. Will we anniversary that next year? Don't know, maybe, maybe not.

Simeon Gutman (Analyst)

As a quick follow up, the path back to the 20% plus or EBITDA margins. Does this compromise, do you think? I know it's, you know, it sounds like you're confident that it, that it won't, but how do you get confident in that, you know, that you're not harming the brand in any way by offering this type of discount even for a short period of time.

Gary Friedman (Chairman and CEO)

You mean the 35% off for like five weeks in outdoor or less?

Three and a half.

Simeon Gutman (Analyst)

Three and a half weeks.

Gary Friedman (Chairman and CEO)

Just so you know, Simeon, the 30% is a strategic move. It's not, it's not temporary. Our cash flow,

the 30% off membership, is forever.

Our guidance is 20%-21%.

Simeon Gutman (Analyst)

Okay. Oh, sorry. Yeah. Okay. Thanks for the clarification. Yep.

Operator (participant)

The next question comes from Steven Zaccon with Citi. Your line is open.

Ariana Warden (Equity Research Associate)

Hi, this is Ayanna Morden on for Steve. Thank you for taking our questions. My first question is, what gives you the confidence in the second half sales improvement? Is it just a function of timing of deliveries between second and third quarter or is there some risk that demand shifts out to 2026?

Gary Friedman (Chairman and CEO)

What's the question then? What gives us the confidence for the second half sales plan? I don't know. This is what we do for a living. We're generally more right than wrong. I mean, it's a lot of factors. It takes me too long to explain all of it. I mean, our current performance, you know, what we have in the pipeline, the number of new galleries we're opening, I mean, there's a whole, you know, this whole built up model of pieces that says this is what it looks like. We are in the, you know, most unpredictable market I've ever seen. You know, we're more confident than less confident.

Ariana Warden (Equity Research Associate)

Got it, thank you. My follow up is how did.

Product margin performed in the quarter.

Last few quarters you spoke to sequential improvement. What's your updated view on product margin for the full year?

Gary Friedman (Chairman and CEO)

Our core business product margins were up year over year. Some of the other businesses were down slightly year over year. You can see that just mentioned in our MD&A. I think the most important part of the story is our core core business margins year over year. Year over year. We expect it to be up year over year the rest of the year. We do not comment on the quarter over quarter margin trend, but I think it is important to look at the commentary about that year over year.

Ariana Warden (Equity Research Associate)

Great, thank you so much.

Operator (participant)

Your next question comes from Michael Lasser with UBS. Your line is open.

Michael Lasser (Equity Research Analyst)

Good evening. Thank you so much for taking my question. You came into the year with EBITDA margin guidance in the 20-21%. It sounds like the decision to increase the discount for members was made more recently. What is the offset that is allowing you to offer a greater discount and yet still keep the same profitability for the rest of the year, even as it does seem like sales have proven to be a bit more volatile than what you had originally expected?

Gary Friedman (Chairman and CEO)

Yeah, Michael, like I said, we've been thinking about this for five years. We decided to do it now because it seemed like a strategically good time to do it.

You know, we always have a lot of optionality, you know, and a lot of things we're thinking about strategically, you know, based on, you know, the market, the competitive market, what's happening, like so, yeah, so, you know, just we thought it was a good time to do it for all the reasons I've kind of said to take market share, you know, if you read the letter to kind of play offense. Right. And take market share. Yeah. And have the margin structure, you know, to be able to do things, you know. Yeah, we're always tweaking our mark, you know, our model and, you know, looking at ways to build a better brand, build a better business model and so on and so forth.

You know, art, you know that this should work well.

Michael Lasser (Equity Research Analyst)

I guess my question, Gary, was, have you taken up some prices to compensate or offset for the increased discount such that your profitability is where you thought it would be?

Gary Friedman (Chairman and CEO)

Yeah, we generally would take a price change at the beginning of the year, every year. I do not think there are many times that we have not. You know, we are reacting to tariffs appropriately. We were coming out with some pretty big margin flexibility. Just if you look at kind of our more recent trends as we are coming into this year, where the new product was, margins were where we have negotiated bigger bets and better pricing and so on and so forth.

We, you know, we think our offer is, you know, is really distinctive. You know, the environment that we sell the goods are in is distinctive. The brand is, I think everything that we do, the galleries, you know, the restaurants, the design services, all these elements render the product much more valuable. Our source books render the product more valuable. As you build a brand and the brand becomes more desired and more distinctive, you have more flexibility. I mean, people will pay more for better things. Yeah. I mean, we've been doing this like the whole time, right? Like, we're selling many less categories, much higher quality product at, you know, higher prices and we have fewer customers doing more volume and we have much more leverage in that model.

Yeah, we've been building and tweaking this model for 25 years. Kind of just.

Michael Lasser (Equity Research Analyst)

Thank you very much for that, Mike. It's what you do. I got you. I thought. My quick follow-up question is on the 6 point deferral of revenue from the second quarter into the back half of the year. Is that demand that's already been realized and you simply will deliver the product later on? Okay. I mean, given that, can you give us a sense for how demand has trended?

Gary Friedman (Chairman and CEO)

Yeah, for that to happen, Michael, the demand was much higher than the revenues. Okay. What happened when the reciprocal tariffs hit? We stopped shipments. You know, people stopped producing goods. You know, manufacturers thought, yeah, like, I mean, it created disruption, you know, for several weeks in the supply chain.

When you try to ramp back up quickly in a chaotic time like that, things are just, you know, things are late, things get backed up. You know, when you stop the factory for a week or two, it gets backed up and then you got to catch up. You are just going to have a deferral, you know, kind of a lag of shipments and a deferral. Yeah, this is a big one. You will not usually only have things like this if the demand is really up there, like 30% or 20%. Like when we were running some really high numbers earlier, we said, hey, we are going to have a four- to eight-point lag during a certain period. This was a disruption lag.

I wouldn't be surprised if other people, because people haven't reported that period yet, have they? Other retailers. Are we the first to report Q1, were the last Q2, obviously what we're guiding. Some of that's in there. Yeah, yeah, yeah. I think you're going to see this in a lot of places that sold furniture and stuff because when all of a sudden you get, you know, 45% tariffs, 35% tariffs, 100 something percent tariffs, you don't just go, oh yes, business is normal, you know, business as usual, keep on shipping. I mean, we're like, hey, stop shipments. You know, the manufacturers don't know what to do. They're like, hey, can I ship this? It's going to cost a lot more. You know, that was a shocking thing that happened, you know, Liberation day for business.

Yeah, I mean we're lucky we're a big business. I mean it's devastating for small businesses, you know, that don't have flexibility. Yeah, you're going to have things like this. I mean, I'd be surprised if other people in the furniture business, you know, that have like special order things like that, you know, that's all going to get hung up and some of your other goods, you're going to get hung up, right, back orders and so forth.

Michael Lasser (Equity Research Analyst)

Thank you very much and good luck.

Gary Friedman (Chairman and CEO)

Thank you. Michael.

Operator (participant)

Your next question comes from Max Reclinko with TD Cowen. Your line is open.

Max Rakhlenko (Managing Director)

Hey guys, thanks a lot for taking my question. First, how much of the excess inventory did you work through in Q1? Given that your Q1 free cash flow generation was sort of in the mid $30 million range, can you just help us bridge the gap to the full year guide?

Thanks.

Gary Friedman (Chairman and CEO)

I do not think inventory was down year over year, was it? Not, and I think importantly, Max, sequentially inventory, you know, was down just slightly from, you know, $1.020 billion to $1.008 billion. Down $12 million. Yeah. Making, you know, making a little bit of progress, but really that is implied. Yeah. Not big. The bigger moves will be in the second half of the year as we keep going. Yeah. We had ability to meaningfully, you know, reduce inventory this year and next year.

Max Rakhlenko (Managing Director)

Got it. Okay. Switching gears, you guys have an incremental, it looks in the 10Q to be about $308 million available on the ABL.

Just given this level and your goal to generate free cash flow, can you discuss whether or not you think you may need to raise capital or opportunistically look to raise capital, shore up the balance sheet?

Gary Friedman (Chairman and CEO)

No, but I mean. Yes. Would we raise capital opportunistically? Maybe not at this stock price. I mean, we're kind of famous for doing zero coupon convertibles. You know, probably missed the window at $450. We should have done one. The great thing is we've got a highly volatile stock, so we can monetize the volatility and raise capital in the convertible markets pretty easily, but not at where the stock is today. If it goes up to a much higher price, would we think about it? Of course.

Because it would lower interest rates then. Yeah, so. But there's nothing. There's nothing we're not doing that we want to do right now. I mean, if you look at what we're doing and the amount of activity that's happening here. Yeah, we're opening. We're opening maybe the most beautiful and magnificent retail stores that have ever been. Ever opened anywhere in the world. Like, there's nothing like them in Europe. There's nothing like in the States. You know, big investments. The whole Europe piece, we're. Yeah, we made big real estate moves here, opened really important galleries here. We've got a pipeline full of galleries here for launching new concepts that we're opening with three physical locations. That kind of means we're excited about that concept. And, you know, we're. I think, you know, we just. We just went through the biggest product transformation anywhere.

We built a restaurant company. I don't think anybody realizes that. Like, how many restaurants do we have now? Twenty-two restaurants. And we're opening how many. What do we have in the pipeline this year? You know, we got two in Paris. We've got two, you know, like, we're gonna have 30 restaurants very soon here. I mean, a restaurant company. How many retailers have a restaurant company that have that really. Actually, people go to and they do volume. Yeah. I don't know if anybody saw it, but we just. We just got named restaurant in the year in Orange County, the RH Ocean Grill. I mean we just built Newport Beach for God's sake. That wasn't cheap. No one will ever build anything like that again. We have a 270 seat restaurant that is trending right now at $22 million.

We're not feeding the whole thing quite yet as we're building up the capability and team. That gallery is trending with the gallery and restaurant. It'd be our second $100 million gallery. We just opened it, you know, so I mean, you know, like we're doing everything we want to do.

Max Rakhlenko (Managing Director)

Awesome. Thanks a lot, guys. Best regards.

Operator (participant)

Your next question comes from Andrew Carter with Stifel. Your line is open.

Andrew Carter (VP)

Thank you. Good evening. First question is on this, on the disruption, of course. Liberation Day was in the last month of your quarter. Was there any headwind in the quarter? Kind of a second question. If you've got six points coming out of 2Q, that means demand should be 14-16. If it's three points therefore coming in the back overall that comes back, that means demand slows to 7-12. Can you give us anything on the exit rate in June or why you have that kind of slowing in the second half here? Thanks.

Gary Friedman (Chairman and CEO)

Yeah, that's not what our numbers look like, you know.

You know, I don't,

Jack Preston (CFO)

yeah, Andrew, I mean you're asking a lot of detail on a monthly level and I think you know us well enough to know that we don't, we don't get into those kind of details unless there's a purpose to do that. I think our guidance speaks for itself and our confidence in the business, and there's obviously a level of, you know, as we've said before, there's, you know, naturally a level of, you know, there's our internal plan and then there's what we communicate externally and those aren't. Yeah, there's some between us.

Andrew Carter (VP)

I'll have to try, I guess. Second question I'd ask is then in kind of in this environment right now, are you seeing a lot of like incremental traction on the, to the trade business?

I mean, to the trade guy or the trade guys out there, things are being canceled. The start. The policies really don't help. It's starting and stopping. Are you seeing like a lot of incremental traction or not really?

Gary Friedman (Chairman and CEO)

And we have very strong, see the trade business, you know, we have trade teams in every gallery. We have interior design teams and we have trade teams there. The trade team service the exterior, you know, the external interior designers and you know, our business is strong

Andrew Carter (VP)

enough. Pass it on.

Gary Friedman (Chairman and CEO)

Okay.

Operator (participant)

Your next question comes from Marius Cornel Morar with Zelman & Associates. Your line is open.

Marius Morar (Director)

Good evening. Thank you for taking my question. Just a quick one. On outdoor, you mentioned some slowdown. I was just curious. It seems like it was more pronounced than in some of the other product categories. I was just wondering why that is. Is there something about outdoor or something else that might have driven it?

Gary Friedman (Chairman and CEO)

I think it's the timing. You know, the outdoor season is relatively a short season. If you miss that season, you know, the peak of that season, that's hard to make up. You know, during the disruption and around the terrace and all that noise that was disrupting a business that you only got so many weeks right to, you can't make, you can't make up the peak months in the out months. We just thought it was the right thing to do.

It was an unusual situation that happened with the tariffs and everything else. We're in an unusual world. In an unusual world, you should do some unusual things because if you try to do the usual things in an unusual world, that's how you fall behind. I mean, we think very deeply about what we do. You know, we think really hard about what we do and we usually make decisions that are very strategic and long term in nature. There are times like in an outdoor season where you know, you're going to make a tactical decision because the math says it's a much better thing to have those sales that are slightly lower margin. Yeah, it's just day to day business calls. You know, we're in a messy time, very unpredictable time.

You know, things, you know, you've got to be flexible in times like this if you want to, if you want to win and take share and position yourself for the other side. I mean, there's a lot of people going bankrupt. You know, a lot of the ankle biter businesses, the little online things, they know that they can't raise capital. Their business, a lot of them are blowing up. They're going away. Yeah. See the other businesses that I think don't make it through the rest of this year, you know, they don't have the scale to deal with the tariffs. They don't have the leverage, you know, they don't have the strategic flexibility, you know, so you want to position yourself for the other side. The other side's where all the upside is.

If you're in a position like we have been, you know, again, it's not free. You know, we're paying interest on the debt. You know, that wasn't by choice. I mean, we knew we were going to pay some interest. We didn't know interest rates were going to rise the fastest in history. You know, got it. You know, we don't have a crystal ball. We can't see things like that and neither can anybody else. I wouldn't get too hung up on it. Took outdoor to 35% per x number of weeks during an extraordinary political product turmoil around the world. Do you think Apple, they're doing anything different? Apple is flying jets of iPhones to the U.S. for the tariff. Apple's opening factories in India. Everybody's got problems right now. Tesla's got problems. Not just because of Elon being involved in the government.

A different world. Lots of things are changing. You have to improvise, adapt and overcome. Changes aren't always bad. You know, I read a lot of analyst reports like, oh, God, they did this. Oh, yeah. You know, I'm like, holy cow, get out of the weeds. You know, look at the big picture. Are we heading in the right direction? Are we more right than wrong? Is anybody building a platform like us? Does anybody have the product assortment that we do? Does anybody have a restaurant concept, you know, that drives the kind of energy and engagement that we do? You know, that is a profit center, you know, driving traffic. Anybody have our interior design business? I think we're the largest residential interior design firm in the world today. You know, we.

We've built really important foundational things here that I just don't think anybody sees it yet. What's going to happen over the next 10 years. They don't understand, can't. Because the investments don't look like anybody else's. No one's ever done it, so I think people are afraid of it sometimes. Oh, God, look what they're building. Oh, man, they're spending a lot of money. Okay, we are. We're also making a lot of money in a shitty housing market. Oops, I'm going to go, you know, I'm going to go national on that, too. I said that word again. I could say, oh, this, but I didn't. Give me another meeting. Yeah, thank you.

Marius Morar (Director)

On the contract and hospitality business, you called it out in the letter. Just curious.

Internationally, how's the adoption there and is that something that's in line with the design business or the general retail business, or is it following it? Is it leading it? Any insight there would be helpful. We've been in that business for 20 years. No, internationally. I mean, in Europe.

Jack Preston (CFO)

Contract too. We've been selling internationally in the contract division for many years.

Gary Friedman (Chairman and CEO)

Yeah, I think 15 or 20 years. Yeah,

Jack Preston (CFO)

probably. Yeah. I mean, those were our first international customers in a sense. Right.

Gary Friedman (Chairman and CEO)

Yeah.

Jack Preston (CFO)

Before the consumers. I'm not sure what to say that we don't comment specifically on the trends in that particular business. Yeah, it follows the strength of our core business given the product transformation.

Marius Morar (Director)

Thank you.

Operator (participant)

Your next question comes from Jonathan Richard Matuszewski with Jefferies. Your line is open.

Jonathan Matuszewski (SVP)

Great. Good evening, Gary and Jack. I had one question, and it was on Waterworks. Did not catch any comments on that business in the prepared remarks. Maybe just give us an update on your efforts to elevate the brand there. I think you have been working to integrate that business more with RH. You know, where are you finding success? What is the updated pacing for working that product into RH Galleries and maybe what still needs to be refined. Thanks so much.

Gary Friedman (Chairman and CEO)

Yeah. What RH has been, I think I have commented not too long ago, an incredible job building the brand. The assortment, the positioning in the market, the offshore sourcing. You know, I think Peter, Ralph and the leadership team have been tremendous partners of ours, and we have learned a lot from them about the industry, about the business and the dynamics.

You know, there's, you know, there's a retail kind of. The world's been set up historically as retail and trade. You know, when you have architects, interior designers and everything interfacing at the trade level and consumers more interfacing at the retail level. We think that the trade platform is a dated platform because it's not a transparent platform, nor is it an accessible platform. It really limits the business. I think Peter and Ralph see that and understand that, and that's why they wanted to partner with us. You know, they've spent the time with us building a really great base. The business is double the size. The EBITDA has went from, I don't know, 2% to 16% this year or something like that.

I mean, we do not disclose that, but, you know, it is turning into a really good, strong business. It is a bad housing market still. We think that there. We always wanted to partner with them and integrate the two businesses because we thought it completes the home and we were already in the business, but nowhere near, you know, at the level they were. You know, it is the best brand, I think, in, in the, in the bath and kitchen area, you know, in the world. You know, any great house, you know, it is, you know, most of them, it is the jewelry of the house. We love the association. We are starting to, you know, test integration efforts. We put in a Waterworks kind of shop in Newport Beach. You know, we have been open, I do not know, five, six months now. Six months.

You know, we're learning, we're seeing how it's going. The customer, you know, what happens to the customer. They're not expecting to find it there, you know. You know, we're testing and we're learning and growing. I think we'll, over the next couple years, we'll connect some dots and figure out, you know, a big move, you know. It's a great brand. I think it renders us more valuable. I think, you know, we can long term also render Waterworks more valuable and in, you know, helping expose one of the great brands in the world to a much bigger audience. Especially now. I mean, they were global before us. You know, they were in Europe before we were.

You know, we're going to, you know, I believe over the next 10 years have kind of a global assault almost. Right. You know, it could be a combination of us, you know, doing it all ourselves. We could, you know, do some licensing and franchise deals to go faster and more capital efficient. I think RH and Waterworks are two brands that should be global. I think the world would want those two brands. I think they'll be very successful two brands. We'll do a combination of some integration standalone because you still have an important business there. All good. Their business is strong despite the housing market. We're really proud to be associated with them.

Jonathan Matuszewski (SVP)

Thanks for that update. Best of luck.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from Cristina Fernández with Telsey Advisory Group. Your line is open.

Cristina Fernández (Managing Director and Senior Research Analyst)

Good afternoon and thanks for taking my question.

I just have one.

I wanted to see if you can expand on the tariff mitigation efforts. The product that's moving out of China, outside of upholstery, where is it going? You also mentioned on the letter that vendors were absorbing a significant portion of the cost. The portion that RH is absorbing, what savings or what areas are you finding offsets to, to, you know, to offset that cost?

Gary Friedman (Chairman and CEO)

Yeah, I don't know if I want to educate our competitors how we're doing, what we're doing and what specifically we're doing. You know, we have tremendous partners that we've been working with for years. You know, in a lot of ways, we operate like one company. There is just incredible collaboration and big picture thinking and how do we win together? Yeah, I mean, it's not new. What it is right now is it's kind of chaotic and unpredictable. You don't know what the tariffs are going to really be. You don't know how long they're going to be. You don't know what countries are going to be, what exactly.

There are a lot of smart people that I know that have government connections in multiple places in the world that believe that where the tariffs are now is kind of where they're going to be, except China is an outlier and the other ones will be minor changes. Is that right or not? I'm just telling you what I'm hearing. I think, I don't think we're going to see the U.S. all of a sudden swing the pendulum back and, you know, to kind of the initial, I mean, the initial moves on the tariffs, right, were. I think they're well articulated. I think there was a lot of logic to them. Here's the imbalance and therefore here's the reciprocal. I think that was the start of a negotiation. I think that it's not just about tariffs we're all seeing now.

It's also about the materials for AI chips. What do they call them? Nvidia? No, no. Rare minerals. Yeah, the rare minerals. Rare minerals. I mean, there's lots of things that are. I think the current administration is trying to kind of rebalance trade, but also rebalance other strategic things at the same time. It is probably a bigger negotiation than any of us really understand. You know, we're not privy to those details. It actually seems more chaotic when, you know, you can't anticipate something.

I think what I hear from behind the scenes of people who I think are relatively well connected is things are going to get resolved over the next few months and the world will kind of go back to a more predictable operating outlook and it should be better for the U.S., so we'll see. I mean, you know, everything we said, you know, we wanted to say is kind of in the letter about tariffs. You know, we don't need to kind of disclose things that, you know, that we can teach to whatever 10 competitors that are listening and on our call. We don't have our experience or relationships.

Operator (participant)

Your next question comes from the line of Brian William Nagel of Oppenheimer & Co. Inc. Your line is open.

Brian Nagel (Managing Director and Senior Analyst)

Hi, good evening. Appreciate you sneaking me in here. I know the calls went long, so I'll just ask one question. Look, a lot of talk in the balance sheets. My cash flow is there. As you're looking at the business now, and particularly with the shifting tariff dynamic is there, are you working towards or you think about some kind of a target debt metrics or coverage metrics for the balance sheet or income statement that you really want to gear towards?

Gary Friedman (Chairman and CEO)

Yeah, I'd look at history, what we've done. This is a little unusual. Again, we got $2.2 billion of debt and we got caught like everybody else did with the fastest rise of interest rates in the history of America. Do we like the debt ratio we have today? No. Do we like paying $230 or $240 million of interest a year? Of course not.

Are we profitable in spite of that? Can we drive free cash flow despite that? Yeah, of course. You know, we're a real company. Like I said, we're in a crappy housing market and we're going to, you know, we're guiding to north of 20% adjusted EBITDA.

Jack Preston (CFO)

I don't know. Now, we don't, I mean, we've said this before, Brian, but we don't, you know, have specific targets. We don't also have any covenants that, you know, require us. I mean, obviously I heard with Gary that, you know, do we wish the ratio was better? Sure. If you also look, you know, we peaked last year at 5 times. We're at 4.6 times, naturally delevering from the growth in EBITDA. I think our guidance speaks for itself.

You can do the map of where, where that's going and you know, again, just to reiterate, no specific targets.

Brian Nagel (Managing Director and Senior Analyst)

All right, guys, I appreciate it. Thanks.

Gary Friedman (Chairman and CEO)

Thank you, Brian.

Operator (participant)

This concludes the question and answer session. I'll turn the call to Gary Friedman for closing remarks.

Gary Friedman (Chairman and CEO)

Great. Thank you, operator. Thank you, everyone on the call. Thank you, Team RH, for fighting the good fight, living and breathing our values and moving us closer and closer to the top of that mountain and becoming one of the most admired brands in the world. Onward. Thank you.

Allison Malkin (Partner)

This concludes today's conference call. Thank you for joining. You may now disconnect.