RH 2027 Q2 Earnings Call

Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2026 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I 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 more detailed descriptions 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. Now I'd like to turn the call over to Gary.

Good afternoon, everyone. We're coming live from New York City today. We got in last night for the opening of our first RH Estates gallery in Greenwich, Connecticut. I know I saw some of you there last night, and those who haven't seen it, I would encourage everyone to get there. Our newest, latest, greatest work. Let me start with the letter to our people, partners, and shareholders. GAAP net revenues of $922.2 million exceeded the high end of our guidance, increasing 2.6% versus last year and accelerating 4.2 points over the first quarter as our momentum begins to build from the significant growth strategies we have recently put into motion.

Normalized adjusted EBITDA margin of 13.4% also exceeded the high end of our guidance for adjusted EBITDA margin, and we generated $72.3 million of cash in the quarter, inclusive of a free cash flow and a $42 million distribution from our Aspen joint ventures, excluding tariff refunds of $69.2 million. We recognized a tariff benefit of $55.1 million in the second quarter and expect to recognize an additional $13.9 million tariff benefit in the second half of the year, which we plan to use to offset $50 million of unplanned cost increases across our supply chain due to significant and sustained spike in oil prices as a result of the continued conflict in the Middle East. The remaining $19 million of tariff proceeds will benefit earnings and is included in our updated adjusted EBITDA margin outlook for fiscal 2026. Updated fiscal year 2026 outlook.

Revenue growth of 5.5%-7%, adjusted EBITDA margin of 15%-16.2%, free cash flow, asset sales, and distribution of equity method investments of $300 million-$400 million. The above outlook includes an approximate negative 340 basis point adjusted EBITDA margin impact from pre-opening and start-up costs to support our international expansion. Third quarter 2026 outlook. Revenue growth of 5%-6%, inclusive of backlog reduction of 2.5 points, RH Estates of two points, new galleries and other, one point. Adjusted EBITDA margin of 12.5%-13.5%. The above outlook includes an approximate negative 310 basis point adjusted EBITDA margin impact from pre-opening and start-up costs to support our international expansion. Fourth quarter 2026 outlook. Revenue growth of 16.1%-21.2%, inclusive of backlog reductions of 6.5 points, RH Estates growth of eight points, new galleries and other of four points. Adjusted EBITDA margin of 19.7%-22.9%.

The above outlook includes an approximately negative 190 basis points of adjusted EBITDA margin impact from pre-opening and start-up costs to support our international expansion. Expanding the brand and doubling the TAM. We believe the introduction of RH Estates, our latest brand extension, introduced with a 268-page source book that arrived in homes late June through mid-July, has the potential to double the total addressable market of the RH brand. Over 60% of luxury homes across North America have traditional or classic architecture with a higher concentration in Europe. A home's architectural vernacular is generally the driving factor influencing stylistic direction for both interior designers and consumers.

Additionally, we believe traditional and classic furniture will anchor the next major style trend across the industry over the next 20 plus years as the dominant trends from the 1980s through 2010, such as eclecticism based on classic design and antiques highlighted with contemporary modern pieces, and the California look pioneered by Michael Taylor, who Architectural Digest called one of the 20 greatest designers of all time, and who twisted eclecticism towards a more rustic yet refined point of view, blurring the lines between indoors and outdoors. Michael Taylor's California look was amplified and refined by Richard Hallberg, Daniel Cuevas, and Barbara Wiseley, designers who together launched Formations, one of the most admired and respected design firms to the trade luxury furniture showrooms in the United States, recognized and respected globally.

The three later acquired Dennis & Leen, giving them authority in authentic classical European furniture and antiques, blending them masterfully and creating a stylistic vocabulary that was layered and looked to have been collected over time. Their flagship showrooms on Melrose Avenue in West Hollywood Design District have been the first stop for many of the best interior designers and collectors from around the world. Our acquisitions over the past 6 years of Michael Taylor Designs, Formations, Dennis & Leen, Joseph Jeup, and Dmitriy & Co, plus our decades-long relationship with many of the world's distinguished antique collectors such as Ed Hardy of San Francisco, Ludovic Messager, who set the tone and trends at the world-famous Paris Flea Market, and Rebecca Hill of London and Lugano, who now leads product curation for RH Upholstery.

Plus, designers such as Anouska Hempel, the inventor of Blakes, the first and most famous boutique hotel in the world, who also designed the world of RH Bar & Lounge, and The Perch Restaurant at RH London. Plus, the many designers, artisans, and manufacturers who are all part of the intricate and inspiring RH Ecosystems of design have come together to lead, form, and ride this next wave with the launch of RH Estates. This is a collective effort with a level of talent, experience, and scale unseen before in our industry. While we launched RH Estates with a conservative initial mailing, our plan is to aggressively expand the assortment and circulation in November, where we will have Estates on the main floor of our galleries that represent 80% of our business, and in-stocks will be at an adequate level to meet and fill demand.

Hence the fourth quarter acceleration in our outlook. You can expect us to continue to rapidly expand the assortment over the next 5 years, and we predict it will represent 50% of our offering at that time. We also believe RH Estates will be margin accretive on multiple levels. One, we believe the quality, design, and exclusivity of the offering will command higher margins. And two, the average price point is currently 45% higher than our existing assortment, thus creating cost leverage and margin accretion throughout our operating model. It's also important to note that we will aggressively protect the exclusivity of our products and the integrity of our brand.

Almost the entirety of the RH Estates collection is currently protected by trade dress or have design patents pending due to the acquisitions of Michael Taylor, Formations, Dennis & Leen, and Dmitriy & Co, as well as pieces developed with internal and external designers. You will note on the back of the sourcebook it reads, "RH vigorously protects and pursues appropriate legal remedies against unauthorized copying, imitation, or misuse worldwide of its product designs, photographs, and collection names through intellectual property rights, including design patents, unregistered design rights, trade dress, trademarks, copyrights, and pending applications." Extraordinary takes more time, costs more money, involves more people doing more things in a more complicated manner, but it's worth it.

Over the entrance of RH Center of Innovation, it reads, "RH, the home of the extraordinary, the remarkable, and the amazing." I am sure there are people who visit or come in for an interview and think the above is some corporate nonsense. I am here to tell you it is not. It is logic, experience, and I would argue, common sense. What we have learned on our 26-year journey of transforming Restoration Hardware, a nearly bankrupt company with a $20 million market cap and a box of Oxydol laundry detergent on the cover of its catalog into RH, the leading luxury home brand in the world with almost $4 billion in annual revenues, is that we always figured out how to monetize extraordinary and remarkable work. We found it very hard to monetize ordinary and unremarkable.

Yes, it has taken more time, cost more money, involved more people doing more things in a more complicated manner. Yes, it has always been worth it, and this time will be no different. If you are a long-term shareholder and owner like I am, thank you for your belief and patience. While we have been running through the mud for the past four years of the worst housing market in four decades, we have also made some amazing investments, done remarkable work, and expect extraordinary results over the next several quarters and years. Let me take you through a few of them. RH International. We expect the drag from international to decrease from 450 basis points in half one of this year to 250 basis points in half two, or 340 basis points for the year.