Rh (RH) Earnings

Management highlights

- Strategic Product Launch: RH Estates, the new traditional/classic luxury furniture collection, removes the trade-only barrier that previously locked high-end elite design away from the general public, uniting elite taste with scalable accessible access. - New Customization Offerings: RH Bespoke furniture allows full dimension customization for case goods to fit specific architectural spaces, while RH Couture upholstery enables custom sizing and customer-supplied own material (COM) within the RH ecosystem. - New Trade Program: A redesigned exclusive program for interior designers, architects, and trade members incentivizes professionals with compensation for their work, creating a symbiotic ecosystem that rewards design mastery at all levels. - Global Luxury Brand Foundation: The upcoming openings of new flagship RH galleries in Paris, Milan, and London will serve as the foundational brand experience hub for RH's international expansion, establishing the brand's credibility with global customers. - Operational Update: RH Estates product rollout will be phased: 60-65% of the assortment will be available in core galleries by the end of September 2025, with full rollout to all galleries complete by December 2025. The full RH Estates catalog launch is delayed a few weeks to refine presentation quality, consistent with management's focus on delivering an industry-redefining product. - New Store Prototype: The new single-level compound gallery prototype reduces construction costs by eliminating unnecessary structural elements (multiple elevators, large stairwells, multi-level mechanical systems) while maintaining an inspiring customer experience, and is expected to deliver returns on invested capital similar to RH's historical peak levels.

Guidance

- Management raised full fiscal year 2026 guidance following better-than-expected first quarter results. Full year 2026 guidance calls for revenue growth of 4.5% to 8%, adjusted EBITDA margin of 14.2% to 16%, and adjusted free cash flow of $300 million to $400 million. The full year guidance includes a 270 basis point negative adjusted EBITDA margin impact from pre-opening and startup costs for international expansion. - Second quarter 2026 guidance calls for revenue growth of 0.5% to 2.5%, adjusted EBITDA margin of 11.5% to 13%, and includes a 380 basis point negative adjusted EBITDA margin impact from international expansion pre-opening costs. - Management expects second half 2026 revenue growth of 12% year-over-year, consisting of three contributions: 4.5 percentage points from existing elevated backlog reduction, 2.5 percentage points from new store growth, and 5 percentage points from RH Estates new concept growth. Guidance does not assume any improvement in the overall housing market or macroeconomic conditions, and management expects to outperform guidance even if market conditions weaken. - RH reaffirms its long-term target to become debt-free by 2029, which remains a top company priority. Medium-term, meaningful margin expansion is expected after exiting the current peak investment cycle, driven by top-line growth from new initiatives and declining pre-opening investment spending.

Segment performance

No segment-specific financial performance (absolute revenue or revenue contribution percentage) was broken out for individual product segments in this call. Total company first quarter revenues came in at $800.3 million, and adjusted EBITDA margin was 7.1%, which exceeded the high end of management's prior expectations. Back order and special order balances were $75 million higher than the prior year, primarily due to tariff-related sourcing resourcing transitions.

Risks & headwinds

- Ongoing macroeconomic weakness, elevated inflation and high interest rates have extended the U.S. housing market downturn into a fourth consecutive year, which creates pressure on all home furnishings industry participants. - The European and UK housing markets are facing even more severe economic weakness than the U.S. due to the ongoing impact of geopolitical conflict, creating timing headwinds for RH's international flagship openings. - Post-COVID construction cost increases have made current international and new gallery projects significantly more expensive than originally projected pre-pandemic, pressuring near-term margins. - Sourcing transitions related to tariff rescheduling have elevated backlogs above normal levels, delaying revenue recognition even though demand remains solid. - Tariff refund legal processes are currently paused amid ongoing DOJ and court activity, so no future tariff refunds are included in current guidance.

Analyst Q&A

• Q: How does the RH Estates launch expand RH's total addressable market, especially with the new trade program? /

  A: RH estimates traditional classic design represents 60% of the luxury home market, where RH is currently vastly underpenetrated. Management estimates RH may have left as much as $1 billion or more in incremental revenue on the table over the past 12 years by narrowing its product focus, and RH Estates is highly incremental to the existing business with far lower cannibalization than prior new lines. The collection brings exclusive, trade-only high-end designs (most with pending IP protection) to the mass market at an unprecedented value equation, and the new trade program incentivizes interior designers to specify RH products, opening up a large incremental customer base of professional trade buyers. 65-80% of RH Estates designs have exclusive intellectual property, so no direct comparable products exist in the broader retail market.

• Q: Do you need to change your customer acquisition strategy beyond the legacy catalog/physical gallery model to compete with rivals focused on social media and influencer marketing? /

  A: RH continues to outperform all peers over the past three years with its existing model. Luxury furniture is an experience-driven, low-digitization category, where 95% of luxury sales are completed in-store, so RH's large-scale physical gallery platform is its biggest competitive advantage. Catalogs are integrated with digital and physical channels, and management views influencer marketing as inauthentic noise that does not resonate with RH's luxury customer base. RH's investments in product and physical experience, rather than inauthentic marketing, will drive long-term growth.

• Q: What is the roadmap for RH Estates rollout, and what is the update on the target to become debt-free by 2029? /

  A: RH Estates will roll out in phases, with 60-65% of the collection in core galleries by end of September, full rollout to all galleries by December, with assortment expansion continuing over the next several years. Becoming debt-free by 2029 remains a top priority. RH completed a transaction to gain full control of 8 JV real estate properties, enabling faster monetization, and targets $200-$250 million in annual asset sales over the next two years. After the peak current investment cycle ends, growing free cash flow from operations will also accelerate deleveraging.

• Q: Why is now the right time to launch the new trade incentive program, and how has RH's trade business performed recently? /

  A: RH's trade business has outperformed the broader industry over the past three years. Management removed a prior trade incentive program in 2016, but now recognizes this was a misjudgment. The timing is right because RH Estates opens access to the very top of the luxury design market, where trade professionals are the core customer. Incentivizing trade partners leverages RH's existing strong trade business, and the incremental flow through from incremental trade sales is more than enough to cover the cost of incentives.