RH - Q4 2026

Transcript

Gary Friedman (Chairman and CEO)

Welcome to the World of RH. Albert Einstein's three rules of work, out of clutter, find simplicity, from discord, find harmony. In the middle of difficulty, lies opportunity. They seem especially relevant at this moment. We're compounding clutter from tariffs, global discord as a result of war, and the most dire housing market in decades, which can make it difficult to separate the signal from the noise. It's important to remember, necessity is the mother of invention, and our most important innovations were birthed during the most uncertain times. Transforming a nearly bankrupt Restoration Hardware into RH, the leading luxury home brand in North America, was not a feat for the faint of heart. While the external challenges are somewhat familiar, our internal opportunities are massively different. We're not closing stores and fighting to survive. We're building a never-seen-before brand that's positioned to thrive.

Before we get into the details of our strategy, let's start with a few facts that should quiet some of the noise. In 2025, RH achieved revenue growth of 8% and two-year growth of 15%, far outpacing our furniture industry peers by 8-30 points. Adjusted EBITDA reached $597 million or 17.3% of revenues versus $539 million, or 16.9% of revenues in 2024. Free cash flow of $252 million versus negative free cash flow of $214 million in 2024, an increase of $466 million year-over-year.

Those results were despite 2025 being our peak investment year with $289 million of adjusted CapEx to support our global expansion, plus an additional $37 million to purchase the Michael Taylor, Formations, and Dennis & Leen brands to support the launch of our new concept, RH Estates. A strong performance considering the unusual circumstances. Let me shift your focus to our strategy and how we expect our growth to accelerate over the next several years. We believe there are those with taste and no scale, and those with scale and no taste. The idea of scaling taste is large and far-reaching. We believe our goal to position RH as the arbiter of taste for the home will prove to be both disruptive and lucrative as we continue our quest of building one of the most admired brands in the world.

We like to use a simple question to frame our significant opportunity. Who is the home brand for the luxury customer? The LVMH, Hermès, Cartier, or Cucinelli customer? RH has curated the most compelling collection presented in the most inspiring spaces in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our growing global platform. Our product is both categorically and stylistically dominant, enabling RH to address the largest market of any brand of its kind. We curate across the seven major product categories, furniture, upholstery, outdoor, lighting, linens, rugs, and decor. We integrate across the three dominant product styles, traditional, contemporary, and modern, which we refer to as RH Estates, RH Interiors, and RH Modern. RH Estates, our newest brand extension launching this spring, will address the traditional market where the RH brand is currently under-penetrated 60% of luxury homes feature classic or traditional architecture, which influences the majority of furniture purchasing behavior.

RH Estates will feature the introduction of RH Bespoke Furniture, customizable collections from our recently acquired Michael Taylor, Joseph Buquet, Formations, and Dennis & Leen to the trade brands. RH Estates will also include the introduction of RH Couture Upholstery by Dmitriy & Co. Tailor-made sofas, sectionals, and chairs of arguably the highest quality upholstery available anywhere in the world. Designers will be able to order custom-made sizes and finishes, plus specify COM fabrics. RH Bespoke Furniture and RH Couture Upholstery will enable interior design firms to now specify RH with their most discerning clients in custom projects. RH Estates will also include collections from many of the most talented designers and artisans in our industry. Let's take a look at some of their work.

RH Estates will premiere at the opening of RH Milan, the gallery on Corso Venezia, a 70,000 sq ft former palace during Salone, the largest design show in the world, with an estimated 500,000 visitors descending on the city that week. The launch of RH Estates will include a dedicated source book mailing mid-May, an international advertising campaign, and freestanding estates galleries in Greenwich, Connecticut, and the San Francisco Design District opening early summer, and the West Hollywood Design District opening in 2027. We believe RH Estates will become our largest and highest margin brand extension, driving significant growth over the next several years.

Let me shift your attention to our multidimensional physical first global ecosystem, the World of RH, that goes far beyond a typical multi-channel approach, inspiring customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in our industry. The question we often are asked is why physical first in a digital world? Let me explain. Furniture remains the least digitized large retail category with an 80/20 store to online split, with luxury furniture estimated to be as high as 95/5. Why do stores still dominate? Comfort, scale, finish, and quality are hard to judge online. Even when customers purchase on a website, most experience the product in a store. We believe the physical manifestation of a brand will continue to be significantly more valuable than an invisible online one.

We also believe most retail stores are archaic windowless boxes that lack any sense of humanity. That's why we don't build retail stores. We create inspiring spaces. Spaces that are a reflection of human design, a study of balance and symmetry that creates harmony. 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. While most have been closing or shrinking the size of their stores, we've been building some of the largest and most immersive spaces in the history of our industry. Let's take a look at our most recent work. We believe our investments in building completely unique immersive experiences in Paris, Milan, and London will set the stage for RH to become a truly global luxury brand.

It's important to understand that there are several strategically significant businesses embedded in our galleries, including RH Interior Design, where we've become the largest residential interior design firm in the world, with projects from San Francisco to Sydney, Los Angeles to London, Miami to Milan, and Dallas to Dubai. We offer design services including interior architecture, landscape architecture, art and antique curation, and turnkey installations. Another important business embedded in our galleries is RH To The Trade, a specialized team that calls on services and supports interior design firms, assisting in the design, curation, delivery, and installation of many of their projects. RH Hospitality operates beautifully integrated restaurants, wine, and barista bars in our galleries that generate significant traffic and brand awareness. While our galleries might see several hundred customers per week, our restaurants feed several thousand.

With 26 restaurants in operation today and is scheduled to reach 40 by the end of 2027, RH is one of only seven globally owned and operated luxury restaurant brands with 20 or more locations worldwide. We believe our galleries create a unique competitive advantage that will likely never be duplicated in our lifetime, as the cost of construction at the luxury level has doubled post-COVID. To address that challenge, we've developed several immersive new gallery concepts that will enable us to scale in a faster and more capital efficient manner. The first and most revolutionary is what we call an RH Design Compound, currently in development in Naples, Miami, and Walnut Creek. A compound is six to eight independent buildings connected by beautifully landscaped garden courtyards with a sun-filled atrium restaurant anchoring the project.

Due to the absence of multiple stories that require steel structures, grand staircases, elevators, complex mechanical systems, and long development timelines, we believe we can build Design Compounds significantly faster and more capital efficient than our prior design galleries. Another new approach to deploying the RH brand in a faster and more capital efficient manner is what we call a design ecosystem, currently under construction in Greenwich and Palm Desert, and in the development process in West Hollywood Design District. An ecosystem is a multi-building brand presence on a street in a neighborhood, design district or shopping center. Our first ecosystem will be in Greenwich, Connecticut, and includes our gallery at the Historic Post Office, our new outdoor gallery opened last year, and our new RH Estates gallery with an integrated restaurant opening in the former Ralph Lauren building this summer.

We've also developed a new single-story gallery ranging from 15,000-20,000 sq ft with a dramatic courtyard restaurant targeting secondary markets. We're currently under construction in Los Gatos, California, and are in design development for galleries in Richmond and Milwaukee. We've been extremely pleased with our performance of our first freestanding RH Interior Design office in Palm Desert, California, and have plans to open a second Interior Design office in Malibu this fall. In total, we have an opportunity to expand our presence in 27 existing markets and open one of our new design concepts in 48 new markets across North America, representing a $2 billion opportunity. Let me shift your attention to our business model and balance sheet.

While we believe it's prudent to plan conservatively this year due to uncertainties around interest rates and inflation and a planned revenue growth in the 4%-8% range in 2026, we do expect growth to accelerate to 10%-12% in 2027 and reach $5.4 billion-$5.8 billion by 2030. Adjusted EBITDA in the 14%-16% range for 2026, reaching 25%-28% by 2030. We expect cash flow of $300 million-$400 million in 2026 and $500 million-$600 million in 2027, inclusive of $200 million-$250 million of asset sales each year. We expect cumulative cash flow of $3 billion by 2030, inclusive of the asset sales, and expect to be debt-free by 2029.

While one might look at the current market discord and argue that RH has been in the wrong place at the wrong time, I would argue we've used this period to position our brand to be in the perfect place at the perfect time.

Let me explain why. There are two important factors that will meaningfully expand the size of our market over the next 10 years. One is the exponential spending of high and ultra-high net worth consumers on the home. Ultra-high net worth consumers with a net worth above $20 million own on average 3.7 homes. Billionaires own 10. Ultra-high net worth consumers spend 6.4x more on home furnishings than a consumer with a single primary residence. Two is the estimated $30 trillion-$38 trillion wealth transfer projected to take place over the next 10 years, which is more than double the past 10 years. Not only does the absolute dollar amount more than double, it's estimated that the dollars transfer from one to an average of seven people. It's possible over the next 10 years, our market will be multiple times larger than the past 10 years.

When you combine that with our efforts to elevate and expand our product, globally expand our platform, generate significant revenues and brand awareness with our immersive hospitality venues, I would argue that the RH brand is in the perfect place at the perfect time, and we will emerge from this period of clutter, discord, and difficulty as one of the highest performing and most admired brands in the world.

Operator (participant)

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We kindly ask that you limit your questions to one and one follow-up for today's call. You may re-queue for any additional. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman (Equity Analyst)

Hey, Gary. Hey, Jack. First question. I wanna talk about demand signals from the consumer. This has been a transitional period for the company. I realize the demand is outpacing a lot of other home furnishing companies, but it's come at a pretty big cost to margin. Expectations around demand improving while we see the margin of the business begin to turn. That's my first question.

Gary Friedman (Chairman and CEO)

Simeon, the margin pressures somewhat disconnected and unrelated from the demand. You know, the margin pressure is really from the kind of investment cadence we have as far as expanding the business, you know, throughout Europe and some of the margin pressure, you know, coming from, you know, the tariffs, you know, from a transition in timing and resourcing. You know, you basically have kind of an inflection point of, you know, we're in a kind of a peak investment period from a capital and expense and, you know, cost perspective, based on the investments we're making, both from a global expansion and North American expansion point of view, and from a product point of view with the launch of RH Estates.

I think you have to think about the launch of RH Estates in Q2. We'll have, you know, significant costs with source book and advertising and launching costs without having, you know, much revenue until we get into the third and fourth quarter. RH Estates, you know, remember, is basically running late. Our original plan was to have RH Estates in the third and fourth quarter of last year. We have some timing issues, I think, when you think about the significant investments we're making both from a capital and expense perspective. We're going through, you know, kind of an unpredictable time.

I think that's why it's important as you're looking at the business, you're looking at the model, you're thinking about, you know, being an investor here. You know, you have to have a longer term view than a shorter term view in periods like these. You know, in many ways, a lot of people are going left, and we're going right, you know, as people are pulling back and, you know, trying to manage the margin side of their business. You know, we're investing, you know, in the most significant way we have in our history. You know, that's just gonna create some timing dislocations from an earnings perspective.

Simeon Gutman (Equity Analyst)

Then my follow-up. You know, you've made a couple of executive leadership changes. One, a new president and two, a second person. In the release, it talked about potentially helping monetize some of the real estate. Can you talk about both of those hires? You know, what prompted them? You know, what does it speak to about the direction the business is heading in?

Gary Friedman (Chairman and CEO)

Well, I think it's explained in the press releases. I don't know if there's anything different than that. You know, we mentioned, you know, we're extremely happy to have Dave Stanchak rejoin team RH. You know, he has made a significant impact while he was here, both from a North American transformation point of view and a global transformation point of view, and was involved in really setting up the structure of the real estate for European expansion. It's good to have Dave back.

I think Dave is probably the most experienced real estate executive on a retail point of view because he's, you know, both, you know, not someone who's just been involved with mall leasing and, you know, which is typical, when you think about most retailers. Dave's been involved in that real estate investment. He is an investor. He's had his own shopping centers and controls real estate himself. He comes at it from an investor perspective, a much bigger perspective and, you know, and some kind of transformational leader as we think about a unique business like ours, and the platform we're building, which is unlike anything anybody else is doing or has done, you know, at a level of quality and locations and, you know, so on and so forth.

There's not, you know, not anything Dave didn't talk about, I think, in the press release. With Veronica joining RH, we've known Veronica for a long time. You know, we've been able to observe her and her leadership and her ability to build what we think is, you know, one of the leading manufacturing businesses in North America from an upholstery point of view. But, you know, mostly what we think about here is not just, you know, the upholstery part of our business, but if you think about the best luxury models in the world, whether you're looking at Vuitton or Hermès or Chanel or others, one of the things that's very unique with their business models is they have a very concentrated core business.

80% of their business is in, you know, the leather goods and accessories part of the business. It's very similar to our business from a penetration point of view, 80% of our business is furniture. That's, you know, that's typical if you look at the home furnishings business. You know, if you're in all categories, that's gonna directionally be the mix, you know, depending on how you position those categories. We think there's an opportunity when you look at our business from a global scale of building a unique platform that's synergistic and appropriate for the unique platform we're building from the selling side. You know, I think we have built and are building the most unique, you know, physical selling platform in the world.

I think it deserves and will be, you know, positively impacted by building the most unique manufacturing and sourcing platform in the world. You know, eliminating the inefficiencies of manufacturing, when you don't control your distribution, there's quite a bit. Long term, we think, you know, we can build a unique manufacturing platform. As I said in the press release, a combination of owned, joint ventured and outsourced that can be very unique and significantly accretive, we think, both a revenue and a cost perspective and a margin perspective. We're excited. We think Veronica's the best person in the industry we've met. We think she's a unique talent and leader.

She's an engineer by education and experience and has a big and very big and kind of strategic view of manufacturing and sourcing. It's a new level of talent in the company. We've never had someone of this kind of pedigree and experience and talent, and we think she's gonna do some incredible things long term.

Operator (participant)

Your next question comes from the line of Steven Forbes with Guggenheim Securities. Please go ahead.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

Good afternoon, Gary, Jack. Gary, with Milan and London set to open here in short order, curious if you could give us an update on RH Paris, you know, and/or just comment on the anticipated revenue contribution from the broader RH International strategy, behind the 2030 reference year you laid out in your prepared remarks. You know, obviously just looking today for any color to help support or build conviction around those longer term outlooks you laid out today.

Gary Friedman (Chairman and CEO)

Not sure I picked that question up correctly.

Jack Preston (CFO)

The impact of international as it relates to the 2030 targets, you know, how we think about that growth, about that.

Gary Friedman (Chairman and CEO)

I think what we've articulated, you know, most recently over the last few quarters and, you know, really since I think our start, that really the opening of Paris, Milan, and London is kind of the brand foundation to build on, when you think about European expansion. They're the three most important cities in Europe. We think they're important from a positioning of the brand, and a brand awareness point of view. All three of those are really the, besides, again, RH England, which is out in the countryside, which was important from a you know a brand impression and awareness perspective and how to kind of make an entry into the European market.

These really are where we have significant investments in, you know, the presentation of the product, the hospitality experience, which we think is gonna be critical long-term to building brand awareness, you know, throughout Europe. One of the keys here is really not just these key stores, because if you know, as we assess the business in Europe, and we have since day one, believed that the basic distribution, and where the sales will come from will be long-term, more important in suburbs, and second-home markets than cities. The cities are really gonna be the key to brand awareness and driving the brand and positioning the brand and will do significantly more revenues, we believe, in Paris and Milan and London than we will in other cities.

If we were, you know, ranking them, you know, clearly London, we believe, is gonna be the biggest market for us, you know, as it should be. Our distribution of business is significantly suburbs and second-home markets in North America. 90%-92% of our business is in suburbs and second-home markets. Second-home markets are kind of like a suburb, right? About 8% of our business is in the cities. We think that distribution is gonna be similar throughout Europe.

If you looked at Apple's real estate strategy, and you looked at their distribution throughout Europe, which we believe was a good kinda model for us to look at as far as a higher end consumer, you know, and you looked at like Apple's North American kinda distribution versus our North American distribution, their penetration in suburbs, you know, our penetration in suburbs, you know, there's similarities there. You know, we're more highly probably penetrated in second-home markets than they are. Most people, you know, have their phone with them.

You know, it's one of the keys for, I think, Dave's joining the company too, is just to, you know, continue that leadership into Europe and, you know, building out into the suburbs and into the second-home markets to cover the business. You know, strategically, you know, we're setting up the business in the kind of key markets that you would from a brand and awareness perspective. Not that we don't think that the business is gonna have revenues there, we just think the biggest revenues are gonna come long-term when you think about the longer term plan as we expand into, you know, the suburbs and markets where, you know, people really, you know, buy much more furniture, both indoors and outdoors.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

Thanks for that. Maybe just a quick follow-up. Obviously great to hear Dave rejoining the company.

Gary Friedman (Chairman and CEO)

Yeah.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

You talked about $250 million of asset sales in each of the next two years. Sort of a two-part question. One, can you speak to, you know, sort of the value of the non-core assets, or the assets, you know, that you don't plan to operate in the future versus the value of the assets RH is still planning to operate in the future? Then maybe any color on sort of timing for 2026 asset sales as we think through the potential interest expense savings.

Gary Friedman (Chairman and CEO)

As far as that mix, I'd say that, you know, the majority of the asset sales are, you know, assets that we will be operating that are kind of sale-leaseback kind of properties. Then there's some investment properties that we had in Aspen, you know, and a few other things that we've decided not to pursue for, you know, whatever reason. We own a building in Milan. Not Milan, excuse me, Madrid. And you know, we're not gonna pursue the development of that. We're fine with the location we have today. And so it's just looking at, you know, taking a look at our balance sheet and and, you know, just turning those assets into cash as we said we would be doing.

you know, we've said we have, you know, about a $0.5 billion of real estate assets that we could monetize. you know, we're gonna begin to monetize those. You know, Dave has got tremendous experience on, you know, that end of real estate. you know, he feels very confident in, you know, what we're gonna be able to do. some of these are properties that we had purchased and, you know, had developed over the last two to three years, I guess. You know, you gotta think about a lot of our investment horizons are pretty long.

You know, from when you think about some of the galleries that we've built, you've got, you know, significant time to design and develop and get through the approval process, and then you've got significant time building them. You have a relatively long holding time. I think, post-COVID, all of the construction costs have went up, particularly at the luxury level. Those prompted us, as we communicated in the video, to develop just other faster, more flexible ways to deploy the brand.

When you think about the design compounds and think about where the first couple are going in Naples, we're taking what was formerly a Nordstrom site. In Walnut Creek, we're taking what was formerly a Neiman Marcus site. In Miami, we're developing kind of a parking lot site in a key visible area in Miami that was kind of a Bank of America. We think about those opportunities to be significantly faster and more capital efficient. You know, we've built most of our big kind of, I'd say, you know, the higher investment, higher capital side of the business. You know, we've been transforming the real estate here now for 15 years.

You know, even on a European and global point of view, I would say that, you know, we have Sydney coming, but that's a different model that's really being built by the developer. You know, it's not gonna take much capital from RH. Yeah, we have significant assets we're gonna now monetize, turn into cash. We've got some assets, you know, in Aspen and other things like that we'll monetize over time. Yeah. A lot of that will come off the balance sheet. I don't know, Jack, do you have anything to add?

Jack Preston (CFO)

No, I think from a timing perspective, Steve, we'll just keep you posted. We're not ready to, you know, commit CapEx into 2026, and we'll just update you know, as appropriate.

Steven Forbes (Senior Managing Director and Equity Research Analyst)

Thank you both.

Operator (participant)

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

Max Rakhlenko (Director of Consumer and Retail and Fitness Research Analyst)

Hey, thanks a lot for taking my question. First on Estates, can you provide color on how you're thinking about scaling the collection? We know when the books will hit, but how are you thinking about the cadence of the product rollout into the galleries? How are you looking at inventory, et cetera? Just if you could compare and contrast this collection versus the Modern and Interiors launches that you had a couple years back.

Gary Friedman (Chairman and CEO)

Sure. The books will hit kind of mid-May. Gosh, we've got a you know handful of stores that will get you know the initial product that we'll be able to kinda test and then we you know get some reads on. We, you know feel very confident in this collection. We've went out with a bigger inventory buy you know. A lot of it's based on you know just the data. You know you have 60% of luxury homes in America you know that have classic and traditional architecture. It is really the next big trend. As you think about how the trends cycle through you know this trend is you know a lot of the product you're gonna see cycle through.

It's why we've made some of the acquisitions that we made, whether it's the Michael Taylor brand and the famous diamond table and so on and so forth, to really be able to not only have authority, but be able to have intellectual property rights for a lot of the kinda key products that are gonna come. We just think it's gonna be a big building trend. In the second half, we'll be in how many galleries do we think?

Speaker 10

I think at least.

Gary Friedman (Chairman and CEO)

30.

Speaker 10

Yeah.

Gary Friedman (Chairman and CEO)

About 30-40 galleries. Our top 30-40 galleries in the large design galleries will take over the first floor with RH Estates. This is a significant launch and a significant bet.

Max Rakhlenko (Director of Consumer and Retail and Fitness Research Analyst)

Got it. That's helpful. Then just a two-parter on margins. If you could just isolate how you're thinking about the impact of tariffs for 2026, both the cadence and magnitude, as I don't think you discussed that in the letter this time around. Then separately, you know, if we exclude tariffs and some of the timing shifts that you discussed earlier on the call, you know, how healthy is sort of your or how healthy are your product margins as we think about the long-term targets you laid out? You know, how much higher can the product margins go as you do continue to add, you know, these new collections that, you know, I think come with much higher margins?

If we just think about the core, you know, where can the business go from a product margin perspective?

Gary Friedman (Chairman and CEO)

Yeah, I think, you know, I mean, we're not giving, you know, the detailed margin forecast, but, you know, our margin, our product margins are relatively healthy, you know, except for some, you know, bumps we're going through from a tariff point of view. You know, I think we've, you know, been able to perform reasonably well.

You know, if you exclude kind of the weight that we have from this investment cycle and the drag from Europe and you kinda take a look at the business and you know, I think one of the things we're doing as we think about this business, you know, it's a lot of times with brands, as you go through the history of brands, you've got kind of the levels and the transformations you make to kind of get to where you wanna go. This next cycle we're in now is a key investment cycle. You know, clearly we've spent a lot of capital.

We've made big investments to kind of position the brand not only in North America, but position it in Europe for the long term. Once you get past those cycles, you know, we're gonna have great leverage. You know, opening galleries like we're opening and restaurants like we're opening are significant costs, especially when you're doing them in a different country. You know, there's just more travel, you know, more expense from, you know, hiring people and building new organizations and so on and so forth. You know, I just think it's not just the product margins, it's really just the overall margin structure of the business.

Once we go post-peak here on this, you know, investment cycle, both from a capital and from an expense and cost point of view, I think the model of this business is gonna look like one of the best models people have ever seen in our industry. If not the best model, I would think it's gonna be the best model anyone's seen. You know, we feel confident in that. I mean, yeah, we're also, you know, just, you know, from a global perspective, you know, navigating through very uncertain times. We do have, you know, a product mix that is gonna be somewhat more cyclical and have more of a drag.

You know, when you're really focused on the furniture business versus the home furnishings, you know, the broader furnishings business, accessories business, tabletop business, kitchen businesses, so on and so forth, you know, you're gonna have more weight during times like these. You know, that's gonna require you to fight for more business. Throughout our history, we've always fought for the business in times like these. We've always been, you know, more promotional than less promotional in times like these. We think it's times like these that there's a lot of fallout, you know, and there's gonna be a lot of competition that's not gonna make it through these times.

There's been greater fallout in the furniture business, as most people know, over the last few years than you know in any time in history. I think as long as the you know the housing market remains difficult, there's just gonna be a lot less competition, and we're gonna be you know better positioned than we've ever been for the other side of the cycle. You know, as we build out the assortment, especially in Estates, you know over You know, think about the Estates expansion over really a five-year horizon from a product point of view. I'd say, you know over the next five years, the Estates assortment's gonna grow, it's gonna build, it's gonna become more dominant.

The trend is gonna, you know, that wave is gonna keep building over the next five to 10 years, right? You know, I just think about the whole model of the business and that's why, you know, we're very confident in the long-term model. You know, I think what confuses people is most public companies, you know, go public, and they kinda manage the business, right? They have a simple rollout, and they're gonna do so many stores a year. You know, they, you know, the stores are all the same and the, you know, everything's really predictable. You know, most of them, you know, go through their rollout cycle of, you know, five to seven to 10 years, however, you know, what amount of time they stay relevant for.

Usually, you know, becomes kind of a dated concept over time, you know. That's why we like to say that most retail malls are graveyards for short-lived ideas. You know, most retail companies don't even, you know, concepts don't live out, you know, the first term or second term of their of their leases. So, you know, we're going through one of those investment cycles that, you know, will leapfrog this business forward. You're looking at kind of peak in this investment cycle and kind of trough, kind of economic cycle, right. So, you know, even with those two, you know, you still get a business here with a kind of a mid-teen EBITDA margin to high teens EBITDA margin. Once you get past this cycle, there's a lot of leverage in this model.

Yeah.

Jack Preston (CFO)

Max, I'll add on tariffs. In Q4, you know, we talked about last year tariffs having an impact of 90 basis points in terms of a drag. Q4, we had talked about 170, we ended up at 190 in Q4. The way we characterize that in the last call is that that's ultimately by Q4, you're fully baked into the sort of prior tariff regime. Obviously, things have changed now with the Supreme Court decision. You know, tariffs come out in and out on turn, as you know. While in the, you know, let's say in the first half, you might have some

Tailwinds from that relatively lower rate that exists under Section 122 today. You know, who knows what happens in the second half. There's obviously a sprint to replace all those tariffs and potentially more, as Trump first said, under Section 301 in the back half. We're just, you know, playing it by ear and being, as you know, nimble and dynamic. As far as last year's tariff impact was sort of fully baked in Q4. It's a bit of an indicator as to how it plays out in the first half. You know, obviously, the math will tell you that there's gonna be, you know, some relief there, as far as that direct tariff drag is concerned. We'll keep you updated as things play out.

Gary Friedman (Chairman and CEO)

Obviously, we're watching it like you guys are watching.

Max Rakhlenko (Director of Consumer and Retail and Fitness Research Analyst)

Got it. Thanks a lot, guys, and best regards.

Operator (participant)

Your next question comes from the line of Steven Zaccone with Citi. Please go ahead.

Steven Zaccone (US Broadlines and Hardlines Retail Analyst)

Great. Good afternoon. Thanks for taking my question. I wanted to ask about the cadence of the year from a revenue growth perspective, because the first quarter, obviously calling for revenue to be down, but then the full year, it looks like an acceleration in the back half. Can you just talk through the points of the acceleration? I assume Estates is a big piece. How much is international? Any details you could share would be helpful.

Gary Friedman (Chairman and CEO)

Well, yeah. Clearly, it's international and Estates. The cycling of, you know, it's staged across the entire platform, international, you know, from, you know, opening cadence and, you know, just what we think, you know, the, you know, the growth in the first couple of years. We really, you know, RH England is kind of our best point of history, and we know how that ramps, so we expect, you know, the international stores to, you know, have a ramp to them over the first several years. But when you think about the back half, sure, you've got, you know, openings in North America, you've got openings in Europe, you've got Estates, you know, which will, you know, in Q3, Q4, you know, you'll start seeing the revenues flow from demand in Q2.

You know, you'll see a ramp in Estates. You'll have a second mailing of the book. You'll have newness in both Interiors and Modern. You know, all of those things combined, you know, we believe, you know, it's a big step up in the business in the second half. We would've you know, expected more in the you know, in the back half of last year and the first half of this year because Estates would have been part of that cadence.

Steven Zaccone (US Broadlines and Hardlines Retail Analyst)

Okay. Understood. Second question I have is just on the margin recovery of the business, right? Because we've been in an investment period for the business for some time, and I think you've used the term leapfrog in terms of margins in the past. You know, for the longer duration investor, when you look at the business, what do you think is the biggest factor holding back margins from improving? Is it just the fact that some of the investments have taken a little bit longer and have been a little bit higher than expected? You know, has it been the top line, you know, the macro environment? How do we think about some of the unlocks to see that margin improvement on the other side come back stronger? Thanks.

Gary Friedman (Chairman and CEO)

I think you just outlined it. Yeah, I mean, we've you know, we're in peak investment cycle and trough economic cycle, especially from a home point of view. So, you know, I mean, not just trough investment cycle. You know, you've had the whole kind of chaotic tariff cycle that's caused you know, kind of significant disruption on the business. I mean, we've resourced 40% of our assortment. You know, business of our size, you know, resourcing 40% of your core assortment, which is really, you know, 40% of the assortment is quite bigger. It's a larger part of the business, you know. So, you know, it's all of those things together, Steve.

This is a good time to buy our stock. This is when people create generational wealth, right? This is no different than trough times in a real estate market, trough times in any kind of a transitional time for an industry or business. It's all businesses in our industry get hit in these times, and all businesses that survive to the other side get a lift in this time. I think what's different is, we've historically been investors during times like this. It's when we've seen the biggest opportunities. This time is, I think, different than previous times because we're in a kind of a real peak investment cycle.

You know, we're opening Europe, we're you know, launching new businesses and you know, so you know, the opportunity to have a leapfrog, you know, if we're more right than wrong, and we don't have to be completely right, we just have to be directionally right here. So you know, we say, you know, "Don't let perfect be the enemy of great." Yeah, we've got a lot of experience here in this company. We've been doing this a long time. I think we've proven that we've been a lot more right than a lot more wrong.

I mean, if you think about the transformation from what was Restoration Hardware before to what is RH today, if you think about the transformation of this brand, you know, over a 20+ year period and try to say, you know, name other brands that have made transformations like that, name other brands that are positioned like we are. You know, these are the times that businesses like ours separate ourselves even farther from the pack. You know, you have to make those investments. You have to take that level of risk to be able to do that. You know, you know, we're not kind of a management culture or leadership culture. You know, we're constantly innovating and investing, but this is one of those significant cycles.

It just happens to be, you know, during a significant down cycle, especially focused on our industry. You know, we're in a better position than we've ever been from a historical point of view to weather the storm. I think if you just think about what is, what does the next five years look like from an investment point of view. I mean, we're gonna come off, if you take the $37 million and the $289 million, you've got kind of a peak kind of investment year historically.

We come off that peak, and we come into the, you know, $250 million-$260 million, and then that's gonna drop to $150 million-$170 million a year. So you think about the company growing, the capital investment periods coming down, and it's not just the capital, right? You know, the investment, but it's also all the expense that's connected to that capital. You know, all the expense that's connected to bringing up those stores, training the people, building the infrastructure, building the distribution capability in the business.

You know, all the marketing and advertising that supports a launch, all the time and energy to kind of build out the assortments, develop all the products at scale, you know, to create a leapfrog, not, you know, not to kind of slightly outperform. You know, it's no different than, you know, taking, you know, a $300 million business that was losing $40 million a year, and, you know, that was Restoration Hardware and creating RH that's, you know, $3.5 billion business. I mean, that's. You know, think about what the next cycle looks like. The next cycle is, I think, even more magnified. You know, to set. We've been giving you our framework for the model.

You know, the biggest pieces of the model are the pieces we're talking about. You know, if I was on the outside looking at this, I'd say, "Hey, what is the, you know, the outlook for capital investments as they go forward?" Not just thinking about the capital, but what is the expense, the cost investments that are connected to that capital? How does that change over the next five years? You know, how does it change over the next couple of years, right? Just over the next couple of years. The investment cycle is post-peak, and it's gonna turn down and accelerate in a downward way, just as revenues are gonna accelerate in a positive way, right?

When you have those two things going in different directions, that's when you have inflection points in return on invested capital, on, you know, margins, earnings, et cetera, et cetera. You know, the framework for the math is pretty simple. I think the strategy, because it's never been seen before, is, you know, can be, you know, suspect and can be hard to understand. You know, there can be less believers than more believers at certain times. You know, look, I don't blame anybody, you know, for kind of saying, "Hey, this is, you know, looks like an uncertain time to invest," whether it's in our stock or any stock in our category. Especially, you know, you've got to kind of believe in the longer term bet here.

You know, we think this is gonna be the, you know, one of the best bets that people will make. You know, as referenced by my personal investment here. That's, you know, that's how we think about it.

Steven Zaccone (US Broadlines and Hardlines Retail Analyst)

Yep. Thanks for all the details. Best of luck.

Operator (participant)

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

Michael Lasser (Managing Director of Equity Research)

Good evening. Thank you so much for taking my question. Gary, you've laid out this ambitious and aspirational plan to take advantage of what seems like a very large and growing addressable market. Yet the market's not really willing to give you the benefit of the doubt. Part of that is, RH has been averse to and does not really look at its business on a same store basis, which is understandable in the long haul how you've articulated it. At this point, that has defaulted to the narrative where RH needs to grow concepts, then, its physical footprint in order to drive growth. That comes with a significant cost. As a result, it may not be able to realize its aspirations. Understanding that it's come a long way from its origins, but the market's relying heavily on the recent experience.

Why, based on the recent experience, is the default of the market wrong?

Gary Friedman (Chairman and CEO)

I think it's what I just said. You know, you have to think about peak investment period, you know, and what hopefully is a low point in the trough from a market perspective. Again, I think if you pull out the investments, you know, just pull out the European drag of the investment, you know. Think about it. We're investing in Europe. The European market is worse than the American market right now. You know, that you know, it's that we're investing in a time you likely would like to not invest, but you can't make long-term real estate investments and, you know, expect to get them all right. Right?

You know, the why is the simple model, Michael, of saying, I'm cycling peak investments and I'm cycling, you know, hopefully what is trough growth, right? We've got significant growth opportunities as we've laid out. The costs are gonna kinda go away. It's. A lot of people thought Amazon wasn't gonna make a lot of money until it did, right? You know, that's. I think it's that simple. I think about-

Michael Lasser (Managing Director of Equity Research)

Okay. Got you.

Gary Friedman (Chairman and CEO)

Yeah. Just, I think the key is, you know, don't bake this cost structure into your model right now. You're looking at the, you know, a peak cost structure, both from capital and an expense perspective. These galleries that we're opening are the most expensive galleries that we've opened, both from a capital and a cost point of view.

Michael Lasser (Managing Director of Equity Research)

Got you.

Gary Friedman (Chairman and CEO)

Yeah.

Michael Lasser (Managing Director of Equity Research)

Thank you. Very helpful. You know, to put it in parlance that, you know, the investment community would think about it is essentially this is, you know, the peak of the disruption. There will be significant same brand growth that will lead to sizable margin expansion, especially as these investments moderate. Now, the counterpoint would be, hey, we're living in a world of high uncertainty between the geopolitical, the technological and other factors. What would be the sensitivity to your outlook for free cash flow in the event that sales and macro factors don't materialize like we would expect? Without asking you to show your hand, but it is important to the investment case, what options would you pursue in the event you needed more financial flexibility to execute on your strategy? Thank you very much.

Gary Friedman (Chairman and CEO)

Yeah. That's not. I think it's a great question, Michael. You know, look, we've got the ability to pull back investments further, right? When I think about the major strategic investments that, you know, we had to decide to go international, you know, invest into Europe years ago, right? These weren't short-term decisions. These were five, six, seven, eight years ago, right? You know, we're making some of these decisions and investments and, you know, those decisions are easy. I mean, are not easy to pull back on, right? We're cycling those.

We've got a lot of flexibility when you think about the next wave of investments, whether it's, you know, expanding in North America, whether it's expanding in Europe, you know, you're looking at much smaller investments. You're looking at much more flexible real estate. You know, many more choices, et cetera, et cetera. You're just not gonna have the same kind of costs. I mean, we're gonna. You know, the cost of building some of the new concepts that we've laid out, you know, just the way we're thinking about deploying capital in North America through compounds and ecosystems and secondary market galleries that are in the 15,000 sq ft-20,000 sq ft range.

You know, the real estate risk, the investment risk of those, the financial participation of, you know, developers and landlords is much higher than when you're investing in major cities internationally. It's just a very different investment cadence. We just have a lot more flexibility. You don't have the same time horizon, right? You know, there's just a lot more flexibility. You know, so I'd say, you know, peak investment, peak risk right now. You know, you're looking at peak investment, peak risk, and, you know, who knows from day to day or hour to hour about the geopolitical and economic environment.

Of course, this is, you know, kind of different times and, you know, there's, you know, major news headlines are made by, you know, tweets and posts today, right? They happen all day long. I just think that if you're just trying to say, "Okay, how do I think about the go forward?" There's just a lot less risk. You know, there's a lot more risk, I'd say, over the last couple of years than over the next couple of years. I mean, there's you know, is there further risk to the housing market? There always could be further risk. There always could be, you know, other things. I mean, you know, could the war escalate? Could China try to take Taiwan? You know, could

Yeah, there's a lot of things that can go the wrong way. We can all kind of imagine what those look like. You know, it's no different than calculating what the federal funds rate's gonna be, right? Like, everybody's been wrong on that, and unfortunately, that's been bad for our business, right? There was supposed to be three cuts to the federal funds rate this year. Now it looks like there's gonna be no cuts, then there might be hikes. You know, does that raise some short-term risk? It does. You know, can we navigate through that? We can. Do we have more upside to downside in the second half from a revenue, you know, demand and revenue point of view? We do.

I kinda say, look, if I was on the outside of this today, and I had the information that, you know, the outside world has, that we're giving you today, you know, I'd say it's. Look, I bought this stock at what, $216 a share. I bought $10 million of the stock. I was wrong. You know, it wasn't the low point. But I don't see, you know, too much more downside risk in the model. You know, most of the work is behind us, building the galleries, getting the people trained, bringing up restaurants internationally. You know, the product side I think is a lot less risky. You know, we're not going into some unknown aesthetic or trend.

We're betting on, you know, what is kind of the biggest market, the traditional classic market. It just so happens, if you look at the trend that's gonna come through, that is gonna be the next trend. Yeah, your question, Brad. We have toggles we can pull. We have assets that we can monetize. We're pretty good at navigating through times like this. You know, this is my 26th year here, so, you know, I've seen cycles and this team's seen cycles, and we've navigated through, I would say, somewhat similar times. In fact, completely similar times.

Michael Lasser (Managing Director of Equity Research)

Got you. Very helpful. Thank you so much.

Thank you.

Look forward to another 26.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Brad Thomas (Managing Director and Equity Research Analyst)

Hi. Thank you. Gary, first I wanted to follow up a bit more about the RH Estates line. You, I believe, alluded to working more with designers and decorators in this. I was hoping you could talk a bit more if the selling process or how you go to market needs to be different on this line that seems to have so much potential for you.

Gary Friedman (Chairman and CEO)

Well, we do a big business with interior designers. Today we have, I think, what I outlined in my comments, you know, that we have, you know, multiple businesses embedded in our galleries. We have a trade team that services interior designers and decorators. You know, that's a meaningful part of our business. We think it will become a bigger part of our business, especially with the launch of RH Bespoke Furniture and RH Couture Upholstery, because that's gonna open up the ability to have kind of more customizable products, you know, from a size, fabric finish and so on and so forth. I think it should open up that market pretty significantly.

We have some other strategies to address that market, you know, that you'll hear more about, you know, that will kinda support what we're doing, you know, from a marketing point of view. You know, RH Estates, I think, is when you think about kind of the high-end part of the business that we're gonna address with RH Estates, and that's just kind of the beginning. We'll also address that throughout the entire brand. Let's say, you know, RH Estates represents the launch of RH Bespoke Furniture and the launch of RH Couture Upholstery, kind of, you know, framing those, think about those across the whole business long term.

Brad Thomas (Managing Director and Equity Research Analyst)

That's helpful. If I could ask a follow-up on the 2030 margin targets. Just wondering if there's any high-level framework to think about perhaps how international fits into that and how much mix or leverage of sales factors into that. Thanks.

Gary Friedman (Chairman and CEO)

I mean, we have it. Yeah, we have some data now. We kind of know, you know, as we've opened some of these, you know, how they're evolving, how to think about how they might evolve and grow. I think we have very reasonable targets internationally, you know, mixed into this. I don't think there's anything that's a stretch perspective. When you look at the total composition of the top line accelerating in the out years to 12% growth, I think the way I'd think about that is you've got about 4-5 points from the platform expansion. You've got 3-4 points, maybe 5 points from the product expansion.

You've got, at some point here, you know, we think there's a couple of points from the housing market coming back. I mean, I don't think we're gonna be in a nine or ten-year downturn of the housing market. Let's hope not. But, you know, if it doesn't come back, it's not like we've got a big number out there for the housing market. You know, we've got a, you know, kind of a 2-3 point hope in, you know, the out years of that plan that we'll see some lift in the housing market. If we see a lift in the housing market, you could see. I mean, based on where it's been, I mean, you could argue there's a 10-point lift from the housing market in the out years, you know.

If that happens, you don't have us growing at 10%-12%, you have us growing at 18%-22%.

Brad Thomas (Managing Director and Equity Research Analyst)

Thanks, Gary. Looking forward to getting my Estates book in a few months.

Gary Friedman (Chairman and CEO)

Thanks, Brad.

Operator (participant)

Your final question comes from the line of Marius Morar with Zelman. Please go ahead.

Marius Morar (Managing Director of Research and Securities)

Thank you, and good afternoon. Just a quick question on the growth outlook for next year. Gary, I think on in the video you mentioned that it's a bit conservative. I was just wondering at the low end, do you sort of embed any sort of deterioration in the housing market or maybe an increase in interest rates?

Gary Friedman (Chairman and CEO)

Yeah, I think, you know, we're conservative, you know, throughout the second half. I mean, obviously, you know, we have embedded, you know, the growth from our platform and the new galleries and the galleries that are, you know, cycling, and we've got, you know, growth from Estates and some of the, you know, newness and expansion of the assortments in interiors and modern. You know, but we... Do we have the housing market getting worse? I'd say we have embedded in this the current environment right now, which I believe is worse, and mostly from a geopolitical point of view and a perception point of view, you know, of more things can go wrong than maybe can go right.

I think that's how the markets generally risk times like these, when you've got uncertainty and you've got global tensions and war and oil issues and, you know, the endless amount of things that oil impacts, right? Yeah, I mean, it's. You know, did the housing market get better when interest rates, you know, came down somewhat? Not really. Is the housing market gonna get worse if they go back? You know, if we get 25, 50, 75 basis points and get three hikes, I don't think it gets much worse. You know, I think you've gotta think back at history and say, in 1978, we sold, you know, there were 4.06 million homes sold, and that was a low point.

And in 2003, 2004, and 2005, you had 4.06 million homes sold. You know, on average, you know, 4 to 4.06. So somewhere about 4.03. And that's with 53% more people, right? So it's hard to believe it gets worse than this. Could it get worse than this for a small period? I mean, none of us have seen a World War in our lifetimes, right? You know, is there risk of World War? I don't think so. I mean, I think cooler heads will prevail, but you know, this is uncertain times. You know, so I think the-

You know, whether the interest rates go up or down, you know, 25-75 basis points, I don't think it's gonna change much in the housing market. If the, you know, if the interest rates go up 300 or 400 basis points, I think that's different. I think if they go down 100 basis points with pricing coming down, which is pricing is coming down across, you know, across the market, I think you're gonna see a housing market acceleration. You know, I'd say short term, you know, handicap it's even. I think we're seeing pressure right now. Longer term, I think you have to kind of handicap it as a positive because we've never seen. We're now in the fourth year of the worst housing market in 40-50 years.

That hasn't happened in my lifetime. I've never seen two down years. I've seen one and a half down years in my career. I've never seen three down years, and I've, you know, surely never seen a fourth down year. I don't think anybody has. You know, how long does it stay here? I don't know. You know, flat today is the new normal and build out from here. At some point, I think housing market comes back. I think it's more likely to come back than go down. If the interest rates are moving 50-75 basis points to 100 basis points, I don't know if that moves the needle plus or minus. You know, on the minus side, you're getting closer to affordability, right? On the upside, yeah, you could have some moderate slowing.

I think the bigger thing is if we have real inflation and interest rates have to rise 300-400 basis points, that's a problem.

Marius Morar (Managing Director of Research and Securities)

That's helpful. Maybe a quick follow-up. In the first quarter guidance, do you also embed any drag from the back order and special order, similar to the drag you had in the fourth quarter?

Gary Friedman (Chairman and CEO)

Yeah. Do you wanna take it?

Jack Preston (CFO)

Yeah, that's something that's gonna take probably until the second half to fully resolve itself just because of the complexities of resourcing. There's something that's

Gary Friedman (Chairman and CEO)

We baked that drag in. Yeah.

Marius Morar (Managing Director of Research and Securities)

Is that getting worse in the first quarter?

Jack Preston (CFO)

There's some modest impact that's over and above what we felt in Q4, and then we'll see the resolution of that in the second half.

Marius Morar (Managing Director of Research and Securities)

Very helpful. Thank you.

Gary Friedman (Chairman and CEO)

It's basically from the amount of resourcing and just the new factories being brought up in different countries being able to ramp up fast enough. You know, that's the biggest hit is coming from tariff related resourcing of, you know, furniture, outdoor furniture, specifically metal outdoor furniture. Lighting is a big one. Rugs is a big one, and furniture is a big one. You know, if you think about our business and you take the furniture part of the business, which is about 80%, and then you take, you know, lighting and rugs, which are the next biggest pieces, those are all being impacted. You know, the by far biggest part of our business has been all impacted in a bigger way.

Resourcing things like bedding, pillows, throws, accessories, picture frames, things like that, which are, you know, from percentage point of view, not a very big part of our business, much easier to resource those things. Much easier to move picture frames, pillowcases, throws, tabletop, glassware, accessories, things like that, much more easier. You know, when you talk about ramping furniture factories, lighting factories, rug factories, moving those categories, just more complex. You know, those have been, you know, just slower to scale and transition. When you think about, you know, just the, you know, being on the manufacturing side or manufacturing partners, you know, moving from one country to another, building factories, scaling them, and then all of a sudden having tariffs change and going, "Oh, God, what do I do now?" By doing the right thing.

You know, think about the rug business. For a while there, you know, I mean, India was a big source of rugs, and you get hit with a 50% tariff, and you're, you know, sourcing rugs to other countries. You know, there's not that many places, you know, that have, you know, that kind of capacity to move those businesses. You know, same thing with lighting. Lighting's very different than any other kind of an item. Again, the more accessories, more seasonal parts of the business, you wanna resource Christmas ornaments, things like that, very simple. When you're resourcing the core part of our business, much more complex.

Operator (participant)

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

Gary Friedman (Chairman and CEO)

Thanks. Thank you. Well, thank you, everyone. You know, we know this is an uncertain time in our business. Hopefully, we've shed some light to give you more certainty and more confidence in our outlook and our strategy. We believe this is the most important period in our history. We've never been more excited about the outlook and what we believe will be the outcome. We look forward to talking to you soon. Thank you for all the leadership and partnership from our teams and our partners all around the world. You know, everybody's working hard to kind of get to the next place. Thank you.

Operator (participant)

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