Ladies and gentlemen, thank you for standing by. Thank you for your patience. 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 speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Allison Malkin of ICR. You may begin. Allison

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. 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.

Great. Thank you, Allison. Good afternoon, everyone. Let's see if maybe we can get up to a better start than last quarter. I should ask who is the person that asked to set up a call that got my response that echoed around the world. I can't remember, but I'm gonna put you last in the queues. Yep. Anyway, 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 in fiscal 2025 as revenue increased 12% in the first quarter despite the polarizing impact of tariff uncertainty and the worst housing market in almost fifty 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 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 $37 million to $39 million of demand in 2025 for the full fiscal year, with the online demand reaching approximately $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-mile radius two hours outside of London can generate $46 million of total demand in its 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 full fiscal year? We believe exponentially more. While many questioned the decision to open our storage 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 around. We've learned during our journey at RH when we've done extraordinary and remarkable work, we've always figured out a way to monetize it. And we've also learned that it's hard to monetize ordinary and unremarkable. We are 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 Dusseldorf. We are 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, and they identified opportunities that we both believe could double our current business over the next couple of years. We believe RH Paris, the gallery in the Champs Elysees, 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 have 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 Les Jardins 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. Let's repeat, 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'Oje, 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 twelve 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 Arie Chaya, president, co-chief merchandising officer, 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. 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 fifty 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, with 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, 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 separation 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 and countries. 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 projects 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, which 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 to $300 million in cost that we plan to turn into cash over the next twelve to eighteen months as we optimize our assortments post our product transformation. We are forecasting to generate $250 million to $350 million of free cash flow in 2025, and our plans also call for 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 to $250 million in 2026, and $150 million to $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 rock wash tub debt 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 to 2017, and recently repurchased 30% of the outstanding shares during this housing downturn in 2022 and 2023. In addition, we believe another wash tub bet is to play offense in the current environment by increasing our discount from 25% to 30%. This incremental incentive will position us to capture market share, increase market share, and drive additional membership, all serving 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 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 post furniture to our own North Carolina factory, where we've been operating for ten 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 risks, we are delaying the launch of the new concept that was planned for the second half of 2025 to the spring of 2026 when there is more certainty regarding tariffs and the price of the 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 six points 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% to 13%, adjusted operating margin of 14% to 15%, adjusted EBITDA margin of 20% to 21%, and free cash flow of $250 million to $350 million. Second quarter 2025 guidance includes revenue growth of 8% to 10%, adjusted operating margin of 15% to 16%, and adjusted EBITDA margin of 20.5% to 21.5%. The above outlook includes an approximately negative 180 basis point operating margin impact from investment and startup costs to support our international expansion. Every act of creation is 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 expansion plans for 2025 include our 2025 RH outdoor source book, which arrived in homes in February with aging furniture collections, 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 Interiors source book 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 18 new collections across furniture, upholstery, 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 and immersive physical experiences in our industry, and some would say the world. Spaces that are a reflection of human design, 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 multibillion-dollar opportunity. Our platform elevation and expansion plan 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 in East Hampton this week by opening a freestanding RH outdoor gallery just a couple of doors down from our current gallery. And we 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 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 Nobel Prize winner, commander of the legendary Rough Riders, Medal of Honor recipient, promoter of the conservation movement, leader in 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 a stillborn 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 dominantly who errs and comes up short again and again, because there is no effort without error. Or shortcomings. But he or she who actually strives to do the deeds who knows the great enthusiasms, the great devotions, who spends himself in a worthy cause, who at its best knows Indiana the triumph of high achievement and who at his worst if he fails at least fails while daring greatly. Though his place shall never be with his cold and timid souls, we know neither victory nor defeat. While our ambitions are not political, they are personal. We remain inspired by the progressive thinkers afraid to push forward new ideas and fresh perspectives. It's a culture of leadership versus followship. Innovation versus implication, 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 $100 million plus RH design 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 twenty years ago with a vision of transforming a nearly bankrupt business that has $20 million market cap and a box to of laundry detergent on the cover, 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 can't 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 friends? If it means that president Roosevelt said in his speech of the subborn, 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, we'll now open the call to questions. Thank you.

We ask that you please limit yourself to one question and one follow-up. Your question comes from the line of Steven Forbes with Guggenheim. Your line is open.

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 had done in the past, but given how demand has ramped at RH England, would 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 twelve or twenty-four months from now, especially as you have advertising investments behind them. Sure. I think you know, what we've learned in this couple of years, and again, not all the galleries have been open during this time, is 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've kinda have enough data to say it can be as disruptive and productive in Europe as it can be in America. You know? And that's what the early trends look like. The early trends are littered with what I'd call just choppy execution. Right? A company in America trying to open a company in Europe. You know, we're not experts there. You know, our brand's never been anywhere there. You know, we've got excellent people in all of our galleries and, you know, leading the teams. But you know, 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. And you know, and you find out you start to find out if you're in this you know, you're in business area, you start to get real data on what other people do, what their volumes are. And 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 four in the morning taking questions from our team. You know, they would have kept going if we had to kick them out. But you know, they're so excited. And if we can improve three pieces of this, you know, being in stock, having the right fabrics because with flammability issues in The US, we put now the right fabrics. We couldn't you know, we stocked 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 so on and so we kept having delays. Nobody wanted to come out and you know, do a check on the property or permit sign off. I mean, kinda funny. You know, it's that you know, when you build out in a remote area like that. But we opened, and we really didn't have the right product in the center. We just went through the biggest merchandising transformation in our history, and I'm sure in the history of this industry. By multiples. And so you know, not having you know, you're going through a product transformation you know, with the best 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. It's just so when, you know, you're figuring out what the best sellers are and so on and so well, those just aren't making it. Europe on the go around or two. Yeah. 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, you know, I've been doing this for forty years now I've never been in a year of a down housing market. I think every one of them has been twelve to eighteen months. Yeah. So yeah, you've gotta stay really focused in markets like these. And, you know, maximize market share and so on and so. So you know, just the execution on just being in stock, looking at the time of special orders because many of our vendors couldn't make you know, the products with the flame retardant and you know, the orders weren't that big. So they weren't on the front burner and if we just do kinda three big things our team believes our business can double. That's how many customers you know, we're turning away. Know? And we've got five-month lead times on special orders. So I sit here and go, wait a Yeah. We can see the trends across all of these galleries and you know, some better than others as you know, they're gonna be and you know? But the most part you know, they're going to trend, I believe, over the next couple of years to levels that will drive four-wall profitability. You know, four-wall cash contributions as good or better than The US. That's what it's starting to look like. And, you know, if we really kinda some of these things like, you know, it did you know, you just start to get really excited about what this model can look like. You know, so you know, I would say we're just yeah. We are so excited in Europe. We couldn't sleep. Like, so when 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. So yeah, we feel enlightened and energized and really good. About the potential. Yeah. We're gonna get some things wrong, and you know but yeah, we made we made a big bet. Right? We took multiple locations at one time from Abercrombie, you know, to get the Paris and London locations, which have taken us twenty years to find locations like that. You know, those were critical to the brand. And, I mean, it's fine. My wife fella is at a friend's wedding in London, and she was out last night with a huge group of people. And if anybody's been in London, go walk by our Mayfair site because it's you know, it's the biggest Vitruvian Man you've ever seen with our design. He's on the building and people are taking pictures of it, and yeah. Posting it on Instagram and other places. And she was shocked. She told me, honey, you cannot believe the buzz you have here. In London. You know? I mean, I think it's I think it we are gonna rock when we open Paris and London and Milan. I think I think we are you know, we are gonna change things. And, yeah, we're just we can talk about it for hours, Steve, so I better let the next question come.

I appreciate that, Gary. And 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 non-operational assets or operational assets as we think about sort of transactions that would be sale leaseback oriented or transactions that would literally just be the monetization of assets?

Yes. We have 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 gotta balance that with what the interest costs are and long term, short term, term you know, you can say, hey. Let's do the sale leaseback now, you know, but you're doing a sale leaseback at a you know, at a different cap rate. Right? And the and and the sale, you know, is gonna you know, will determine the rent and will determine you know, how much cash we'll take out of it and and what our you know, our long term rent stream and profitability stream would be. So we're trying to be a little patient. We don't like paying so much interest right now. But, you know so there's, you know, good attention. There. So but, yeah, we we how many right now, we've got about six or so sale leaseback. And then, yeah, we have quite a big portfolio in Aspen. We're fifty-fifty joint venture partner. I mean, it's people can pull out you know, the press release from 2020, you know, made the initial investment and I I think we have you know, in the high twenties, low thirties properties, somewhere around there, call it, about 30 properties. With you know, many, know, we we we invested not only because we were gonna build an eco 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 gonna be a three level experience that, you know, it's it's the only building of its kind in Aspen. I mean, it's it's incredible. There's got a three story atrium going up to middle with a restaurant on a on the rooftop with views of Ajax Mountain with all day sun. And know the the frontage must be a couple 100 feet. That wraps around that corner. And we have an incredible guesthouse location It's right on the street where Lift 1 is up know? So it will be a main thoroughfare. And we're on a great corner It's gonna 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. Know, it's a little political there sometimes and a little difficult, but we finally got our thought approved and we're, you know, getting ready to go. The last couple of permits were waiting on and and then we'll finish out the guest house and we'll be open and then I would say just based on the you know, the kind of incredible clientele we have at our current guesthouse that has just been built by word-of-mouth, I think Aspen is gonna it'll be it'll be the best hospitality experience in Aspen. Nothing like it. And it's got its own unique flavor versus New York. You know, it's it's kind of like a contemporary ski lodge, but a lot of the core ideas around it being built around and luxury and you know, we like to say privacy is the one thing everybody's given away with social media. It's one thing that the Internet's taken away because you can Google anything about anyone. And so, you know, the whole desktop is built around privacy. And that's a really unique thing, and I was a small town of Aspen. Yeah. We're kind of you know, in the center of town, you know, you know, great area, you know, you're you walk through and you're transported into you know, into this world of privacy and luxury, and we think it's gonna be tremendous We've got a great restaurant and campaign and caviar bar. And you know, we may or may not open exactly, you know, when we opened with the bathhouse and spa. You know, we may 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 there's not that, like, you know, the thing we wanna allocate capital to right now. We wanna get the guest house open, get the branding open, and we'll probably probably follow that up, you know, at some point with our bathhouse and spa. It's all framed. It's, you know, the concrete framing's all there, you know, for the the beautiful beautiful experience underground. And then we've got, you know, just incredible tenants. In our JV from some of the best luxury brands in the world and know, we get to learn what it's like being a landlord with real estate you know, kind of valuations and things can happen. So we have we have a lot of a lot of value in Aspen. We have a lot of value in in multiple sale leasebacks. We still own some other properties. And some we have an option on a second building in Madrid. Madrid is one of the biggest buildings in all of Europe. We've opened our Madrid gallery, and it is you know, ramping nicely. And it's small and it's beautiful, and we're gonna put a little cafe on the Top Floor, you know, kinda like, RH Montecito, and we think that'll bring even more energy to it. But you know, we've we've bought a building to have an optionality to have two buildings, kinda like we we do in Los Angeles. We have a you know, freestanding 30,000 square foot gallery in Melrose. We have a 15,000, if you count the outdoor space, probably 20,000 square feet. Modern gallery you know, and we may may extend expand our ecosystem further there. So we've got an option, you know, that could do something or we could you know, monetize assets. So we have a lot of flexibility. Yeah. It's not the easiest time to be, you know, real estate development business, you know, with interest rates where they are. But you know, you don't get it all right. You know, you know, is it timing you know, do I wish I waited another year or two to buy our stock? You know, did I think the thousand downturn was gonna be three years? Yeah. I wish I waited to buy the stock and then I know the house downturn is gonna be three years. None of it's dead. But then again, you know, when we you know, look back at the assets we have and we can monetize and look at the momentum of the business that we have, We look at the cash flow potential of business. When you think about cycling this you know, this time that we, you know, we spent a lot of capital and it's expensive to build today. You know, I made a comment in the letter that I don't think will ever see someone build the kind of retail experiences we built over the last fifteen, twenty years. They just won't be able to afford to. Know, post COVID the cost of building one of our galleries is yeah, almost twice as much. And we've been yeah. You'll hear more about how we're gonna be really creative with capital we've designed and 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 a you know, one of our typical galleries with the 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 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 And, yeah, we're getting department store pads in Walnut Creek. We we've got Neiman Marcus pad on the best corner in the East Bay Of entire San Francisco Bay area. In Naples, we get this incredible sight into Nordstrom's close in and we've got Aventura in Miami You know, it's a the Bank of America, you know, on the street. It's it's kind of in this shop at the store shopping center. Parking lot. And, you know, we're gonna build with three compounds and I think we we have to you know, we're hoping that we've got another opportunity with one of our partners that we're doing with the ones with, development partners. But we think we can disaggregate a gallery build it for half the cost, and you know, you'd have all these buildings connected by gardens. You're in indoors, outdoors, you know, under little you know, down pathways. You got outdoor furniture all around. You got a restaurant in the middle. I I think it might be the most exciting thing we've ever done. And and we can do it for half the capital. But yeah, it's it's good to have you know, okay. I'd like to say humans without deadlines are useless. Like, we need deadlines so we don't get our work done. We need you know, we need crisises to kind of figure out our potential. And so 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. So, some of the things we come up with whether a design compound, the design ecosystems, We said, hey. There's another way to break up the thing. You know, do we have to build the whole thing or in Greenwich, Connecticut, you're gonna see we've got our I I, you know, I think you've been out to work the we're we we have the galleries and store closed office center of town, the best location in all of Greenwich. That building. You know, for retail and especially what we did to it. The next best building was the Ralph Lauren building. That got built yes, a little after us, right, or right before us, maybe. Right before us. And Ralph Stein downsizing, think three, four, five years ago when they closed some of their their stores. You know, no one was able to really operationalize that building very well. We were able to get in you know, and get that building. And so we know, tied up a lease on that building. That will be a building to support the 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. And so 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 what it allows us to do is move much more quickly with less capital Right? As we're taking buildings and know, modifying them a bit. You know, I think we're gonna have a restaurant in the Ralph Lauren building there. Right? I'm right it's called the Ralph Lauren. But I can't call it what our concept is because I haven't told you what our I call it the you know, RH SIS building. You have a vision. Like, what would you put in a building that looks like that? Anyway, Aaron's shaking her head. I I shouldn't do this. But but we're gonna, you know, we're gonna have a a r h all day cafe in there. It could be super cool. And I think I don't know. I spent, like, 2 and a half million of capital? Like, 2 and a half million of capital. Like, for us, it's like a free store. And you know, said said we we've just got lots of creative ways to grow and opportunities. I mean, yeah, just like in Europe, we've we've got some very expensive real estate where we built in Europe. And, you know, by next year, you know, that that capital kinda gets behind us. And, you know, start throwing a lot of great cash flow up. But we've also have things you know, the other galleries that we picked up we didn't spend that much capital in. You know, we we're very creative with it. And so you know, 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 market side. I think I mentioned I mentioned about Palm Desert. We opened our RH free standing 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, a little kind of cool sofa. It doesn't even have our coffee Right? It's got a cool antique, you know, like, reproduction cool thing that's you know, that the highest level is fine. And, you know, we find things like that so we can actually aspire to sell those. If you have any people ask about them. But it's just a design office with a, you know, little room in the in the front, and it's can I say how much it's doing? I can say how much it's doing. Right? It's it's doing a mill it's 3,000 feet. It's doing a million dollars a month. Yeah. And the design clients we're getting there because it's just a beautiful space. Yep. And I don't know, we I did replace Lululemon there. They're right. They I don't think Lululemon's doing 12,000,000 a year and 3,000 feet. You know? So and that's just weeks you know, warm it up and stuff. So we've just got a lot of ways to access markets. We've got you know, the like said, the design compounds, the design ecosystem, the design studios, We have the design concept stores where you know, it's it's kind of a a tie where we can, again, go into an existing building, do an RH that's anywhere from 14 to you know, 30,000 feet. You put in a lot less capital and we have a lot of those in the pipeline that allowing us to access markets much more quickly And that's what know, we communicated in the letter that we're gonna accelerate our openings to seven to nine you know, a year. And so you know, we feel good, and and we think we can do it in a very capital efficient way.

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

Hey, Gary, Jack. So Gary, a bunch of tactical pivots all sound pretty good. I wanted to ask about the sale. Saw you said it was limited time. Can you assess anything about the underlying newness with the sale? Meaning, 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? And then how do you kind of ease off of Thank you.

Yeah. Well, we the the the you know, we just increased the the value to our members. Right? For how many weeks?

Six four, five weeks. Like Oh, outdoor. Outdoor. Outdoor. Yep. Yeah. And then and then really what we've we we've been we've been thinking about taking membership from 25% to 30%. I don't know, for five years. You know, it's 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. You you 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 at 30 off, and they were running their business that way until, I think, you know, found out the government doesn't let you do that. And and you know, so but they were just trying to say, hey. You don't have to you can sell buy something similar here because you know, you have to you know, get HRH $100 for a membership, then here, we'll give you 30% off. And it went really 30% off. You know, it's mark up the goods and yeah. So but we we just always thought at the trade level, the the discount's more 30 to forty. And we just think that'll open up the market if feels more compelling You know? So I don't really and and, you know, look. If if we did it during a difficult market like this, we're gonna do something like this. We might as well do it now. You know, because people are really sensitive. You know, if you yeah. We made a move on outdoor furniture for X number of weeks and you know, picked up significant business. And it was important that it's more important there, you know, like, you know, when we went to 35 is outdoor has a peak and it's a, you know, it's a short peak. It's an all all you know, we sell out to all year round, but you have a massive peak. In the outdoor business. You know, the March, April, May, June period, and we wanted to, you know, just capture more market share during that time. And and that business got a little rock Like, you know, everywhere got rocked. You know, from kind of their reciprocal tariff announcements and the when the market went down, our business went down. Yeah. Know, you had to pull forward. You had to get back. You know, it's like a noisy noisy time right now to run your business. Yeah. It's not a simple time. You know, there's I know. How anybody keeps up with the news. Of, you know, what's happening with tariffs, what's happening with you know, Israel or this or that. You know, there's, like, there's this noise all over the place. And, you know, I think it's you know, it's got and and you're sitting there with a down housing mark for the year. I don't know. Anybody even knows, to go back in history, when's the last time that's happened? If it's ever happened. If it hasn't happened in my career, as long as I've you know, forty years in this industry. I haven't seen it. So, you know, so this this isn't a normal time. But the the twenty five to thirty is a strategic thing. We've been thinking about it for five years, debating it back and and we said, Look. We've we gotta do it now. We're like, why not take the market share now? And you know, when outdoor is a kind of a onetime thing, what we anniversary that next year? I don't know. Maybe, maybe not.

And as a quick follow-up, in the path back to the 20% plus or EBITDA margins, does this compromise? Do you think I know it's you sound like you're confident that it won't but how do you get confident in that, that you're not harming the brand in any way, offering this type of discount? Even for a short period of time?

You mean the 35% off for, like, five weeks in outdoor? Or less? Yeah. It's three and half. Three and half weeks. Just so you know, Simeon, the 30% is a strategic move. It's not it's not temper. And and our cash flow It's our guidance. The 30 off membership is forever. And and our guidance is 20 to twenty one. Yes. Not, Brenda.

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

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

Hi, this is Ariana Lordin on for Steve. Thank you for taking our questions. So my question is what gives you the confidence the 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?

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

Got it. Thank you. My follow-up is how did product margin perform in the quarter? The last few quarters you spoke to sequential improvement. So what's your updated view on product margin for the full year?

So our core business product were up year over year. Some of the other businesses were down slightly year over year and you can see that just mentioned in our MD and A. But I think the most important part of the story is our core core core business margins year over year. Yeah. Year over year. And we expect it to be up year over year. The rest of the year. We don't comment on on quarter over quarter part of the trend, but I think it's important to look at you know, the the commentary about the year over year.

Great. Thank you so much.

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

Good evening. Thank you so much for taking my question. So you came into the year with EBITDA margin guidance in the 2021%, It sounds like the decision to increase the discount for members was made more recently So what is the offset that is allowing you to offer a greater discount and yet still keep the same probability 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?

Yeah. Like, Michael, like I said, we've been thinking about this five years. You know? So yeah, we decided to do it now because it seems like a strategically good time to do it. And you know, we we always have a lot of optionality know, and a lot of things we're thinking about strategically. Know, based on you know, the market, the competitive market, what's happening, you know, it's like so yeah, so, you know, just we thought it was a good time to do it. For all the reasons I've kinda said. Take market share. You know, if you read the letter, it does kinda play offense. Right? And take market share. And we have the margin structure you know, to be able to do things. So yeah, we're always tweaking our mark, you know, our mark our model and you know, looking at ways to build a better brand, build a better business model, and so on and so. So you know, our basic know, that this should work well.

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

Yeah. Well, we we generally will take a price change you know, at the beginning of the year, every year. And think there's many times that we haven't And then, you know, we were reacting to tariffs you know, appropriately, but you know, we we are coming out with some pretty big margin flexibility. You know, just if you look at kind of our more recent trends as we're coming into this year where the new product was margins were, you know, where we've negotiated bigger bets and better pricing and and so on and so. And so we've yeah. And we you know, we think our our offer is yeah, is really distinctive. And, you know, in the in know, the environment that we sell the goods in is distinctive. The brand is and I think the I think everything that we do, they 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. And as you build a brand and the brand becomes you know, more desired and more distinctive, you have more flexibility. I mean, people will pay more for better things. Yeah. And so I mean, we've been doing this like, the whole time. Right? Like, we're selling many less categories, much higher quality product, that you know, higher prices and we have fewer customers doing more volume. And we have much more leverage in that model. And so yeah, we've been building and tweaking this model for twenty five years. Kinda just won't very much for that, Mike.

It's what you do. I got I got I got you. And I My quick follow-up question is on the six point deferral of revenue from second quarter into the back half of the year. Is that demand that's already been realized you simply will deliver the product later on? Okay. I mean, given that, can you give us this sense for demand has trended Yeah. This For for that for that to happen, Mike, the demand was much higher than the revenues. Okay? But what happened when the reciprocal tariffs hit, we stopped shipments you know, people stopped producing this. You know, manufacturers thought, you know, like, I mean, it it created disruption you know, for Ramp back up quickly in a chaotic time like that. Things are just you know, things are late. Things get backed up. You know, we we stopped the factory. You know, for a week or two It gets backed up. And then you gotta catch up. And so again, so you're just gonna have a deferral kind of a lag of shipments and a deferral. So that yeah. This is the big one. Yeah. You'll usually know, only have things like this if the demands, you know, really up there, like, 30% or 20%. Like, when we were running some really high numbers earlier and we said, hey. We're gonna have a 4% to I think eight point, you know, lag during during this certain period but this was a disruption lag. You know, I I wouldn't be surprised if other people because people haven't reported that period yet, have they? Other retailers? Are we the to report? Well, the Q1 no. Q1 were the last. Q2, obviously, what we're guiding so some of that's in there. Yeah. Yeah. So I think I think I think you're gonna see this in a lot of places that sold furnace 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 the shipping. Like, you know, the you know, the know, the manufacturers don't know what to do. They're like, hey. Can I ship this? It's gonna cost a lot more. You know, that it was a that was a shocking thing that happened, you know, liberation day. For business. Yeah. Mean, we're lucky we're a big business. I mean, it's devastating for small businesses. You know, that don't have flexibility. So, yeah. Yeah. You know, so you're gonna have things like this. I I mean, I'd be surprised if other people in the furniture business you know, that have, like, special order like that that, you know, that's all gonna get hung up And some of your other goods gonna get hung up. Right? Back orders and so.

Thank you very much, and good luck.

Thank you, Michael. Your next question comes from Max Reklinkel with TD Cowen. Your line is open.

Guys. Thanks a lot for taking my question. So how much of the Yenksos inventory did you work through in 1Q? And given that your 1Q free cash flow generation was sort of in the mid-thirty million dollars range, you just help us bridge the gap to the full year guide? Thanks.

Well, I think inventory wasn't down year over year, was it? Well, that and but I think importantly, sequentially inventory you know, was down just slightly from Yeah. You know, a billion 20 to a billion 8, so down 12,000,000. Yeah. So making, you know, making a little bit of progress, but clearly that's implied. Yeah. That that's a the bigger moves will be in the second half of the year. As we keep going. We got ability to meaningfully you know, reduce inventory this year and next year.

Got it. Okay. And then switching gears, you guys have an incremental, it looks in the 10 Q to be about $3.00 $8,000,000 available on the ABL. So 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 move to raise capital? Shore up the balance sheet.

No. But, I mean, If would we raise capital opportunistically? Maybe. Not at this stock price. I mean, I'm mean, we're kinda famous for doing zero coupon convertibles I mean, you know, probably missed the window. It $4.50. We should have done one and you know, I mean, the great thing is we've got a highly volatile stock, so we can monetize the volatility. And you know, raise capital in the convertible markets pretty easily, but not not at where the stock is. You know, today. But, yeah, if it goes up to to a much higher price, we think about it? Of course, we're You know? And because it would lower interest rates than yeah. So and so but we there's nothing there's nothing we're not doing that we wanna 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 set we're we're opening maybe 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 them in The States. You know, but the big investments the whole year piece were yeah. We've made big real estate moves here, opened really important galleries here. We've got a pipeline full of galleries here. We're launching new concepts that we're opening with three physical locations. That kinda means we're excited. About that concept. And you know, we're I think, you know, we just 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?

22. 22 restaurants. And we're opening how many would we have in the pipeline this year?

We can't. We've got two in Paris. We've got two. Like I yeah. 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. Yeah. You know, no one will ever build anything like that. Again, we have a two seventy seat restaurant that is trending right now at 22,000,000, and we're not feeding the whole thing quite yet as we're building up the capability in team. So that gallery is trending at yeah. With the record gallery and restaurant, it'd be our $100,000,000 you know, gallery. I mean, we just opened it. You know? So I mean, you know, like, we're we're doing everything we wanna do.

Awesome. Thanks a lot, guys. Best regards.

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

Question is on the disruption. Of course, Liberation Day was in the last month or quarter. Was there any headwind in the quarter? And then kind of a second question, if you've got six points coming out of 2Q, then that means demand should be 14% to 16%. And if it's three points, therefore, coming in the back, tow or overall that comes back, that means demand slows to 7% to 12 you give us anything on the exit rate in June or why you have that kind of slowing in the half here? Thanks.

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

I don't have to I had to try. I guess question I'd ask is then kinda 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 deposits really don't help. It's starting and stopping. Are you seeing, like, a lot of incremental traction or not really?

And we have very strong key to trade business. Yeah. 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 air interior designers. And, you know, our business is strong.

Your next question comes from Mario Morar with Zelman. Your line is open.

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 products categories. And I was just wondering why that is? Is there something about outdoor or something else might have driven it?

I think it's the timing. The outdoor season is relatively short season. If you miss that season, know, the peak to that season, that's hard to make up. And so, you know, that's you know, During the disruption and yeah, around the tariffs and all that noise that was disrupting a business that you only got so many weeks. Right? So you can't make you can't make up the peak. Months in the out months. So again, we just thought it was the right thing to do. It was an unusual you know, situation that happened with the with the tariffs and everything else and, you know, we're an unusual world, so you in an unusual world, you should do some unusual things. Because if you if you try to do the usual things in an unusual world, it's how you fall behind. So I mean, we think very deeply about what we do. But you know, we think really hard about what we do, and we usually make decisions that are very strategic and long term in nature. But there's times like, an outdoor season where you know, you're gonna make a tactical decision because the math says it's a much better thing to have those sales at a slightly lower margin. So yeah. It's just day to day business calls. You know, if we're in a a messy time, very unpredictable time, You know, things you know, you've got to be flexible in times like this. If you wanna if you wanna win and take share and position yourself for the other side. I mean, 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 are a lot of them are blowing up going away. Yeah. Seen 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 wanna position yourself for the other side. The other side's where all the upside is. So if you're in a position like we have been, you know, and get it's not free. You know, we're paying interest on the debt and you know, that wasn't by choice. I mean, we knew we're gonna pay some interest. We know interest rates were gonna rise the fastest in history. We're not We don't have a crystal ball. We can't see things like that. Neither can anybody else. But I wouldn't get too hung up on it took outdoor to 35%. For x number of weeks during a extraordinary political you know, and product for turmoil around the world. Like, do you think Apple's been doing anything different? You know, Apple is flying jets you know, of iPhones to The US. You know, the tariff. Apple's opening factories in India you know, like, everybody's got problems right now. Tesla's got problems, not just because of you know, Elon being involved in the government. You know, it's it's a different world. Lots of things are changing. You have to improvise, adapt, and overcome. So changes aren't always bad. You know, I I read a lot of analysts reports like, oh god. They did this. So it's got you know, I'm like, holy cow. Get out of the weeds. You know? Look at the big picture. And, you know, 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? If anybody have a restaurant concept, you know, that it drives the kind of energy and engagement that we do you know, that is a profit center, you know, that driving traffic. Anybody have our interior design business? We're I think we're the largest residential in type interior design firm in the world today. You know, we we feel really important foundational things here. That I I just don't think anybody sees it yet what's gonna happen. Over the next ten years. They don't under 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. Well, okay. We are. We're also making a lot of money. In a shitty housing market. Folks, I'm gonna go walk you know, I'm gonna go on that. See, I said that word again. I could say, oh, this, but I didn't.

You didn't mean that to me. Of course. There we go.

Yeah. Thank you.

Yep. On the contract and hospitality business, you called it out in the letter. Just curious internationally, how how's the adoption there? And is that something that's in line with, the design business or or the general retail business? Or is it sort of following it? Is it leading it? Any insight there would be helpful.

We we've been in that business for twenty years.

No. Internationally, I mean, in Europe.

Oh, well well, contract too. We've been selling internationally in the contract division for for many years. So Yeah. I I think fifteen or twenty years. Yeah. Probably. Yeah. I mean, those were our international customers in a sense. Right? Yeah. Before before the consumers Yeah. So I'm not sure what's safe, but Yeah. We don't we don't comment specifically on the trends in that in that particular business. But Yeah. Follow it follows the strength of of our core business given the product transformation. Thank you.

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

Great. Good evening, Gary and Jack. I had one question and it was on Waterworks. Didn't catch any comments on that business in the prepared remarks. So maybe just give us an update on your efforts to elevate the brand there. I think you've been working to integrate that business more with RH. So where are you finding success What's the updated pacing for working that product into RH galleries and maybe what still needs to be refined?

Yeah. Yeah. Well, what what else has done I think I've 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 either Peter Ralph and the leadership team that been tremendous partners as far as and we've learned a lot from them. About the industry, about the business and the dynamics. You know, there's it's there's you know, there's a retail kinda the 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. And we think that that that the trade platform is is a dated platform because it's not a transparent platform nor is it in inaccessible platform. So it really limits the business. And I think Peter and Ralph see that and understand that, and that's why they wanted to partner with us and you know but you know, they've spent you know, the time with us building a really great base you know, the businesses double the size that EBITDA went from, I know, two to 16% this year or something like that. I mean, we don't disclose that, but, yeah, let you know. I mean, it's it's yeah. It's turning into a really good strong business, and it's a bad housing market still. And and we think that they're we we we always wanted to partner with them and, you know, 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. And, you know, it 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, if it's you know, most of them, it's the jewelry of the house. So we love the association. We're starting to you know, test integration efforts. We put in a a waterworks, kind of shop in Newport Beach, You know, we've been open I don't know, five, six months now. Six months. You know, we're learning. We're seeing how it's going. The customer you know, you know, what happens to the customer, they're not expecting to find it there. You know? And so you know, we're testing and we're learning and growing, and I think we'll over the next couple years, we'll connect some dots then. Figure out you know, a big move. You know? So but, 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 and yeah, helping expose one of the great brands in the world to a much bigger audience. And especially now, it's I mean, they they were global before us. You know, they were in Europe before we we were. But know, we're we're gonna you know, I believe over the next ten years have kind of a global assault almost. Right? And you know, it could combination of us you know, doing it all ourselves. We could you know, do some licensing and franchise deals go faster and more capital efficient. I think I think RH and Waterworks are two brands that should be global. I think the world would want those two brands. I think it'll be very successful two brands. And and so we'll do a combination of you know, some integration, some stand alone because you still have a important business there. But all good. Their business is strong. Despite the housing market. And so we're really proud to be associated with them.

Thanks for that update. Best of luck.

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

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? And you also mentioned on the letter that vendors were absorbing a significant portion of the cost So the portion that RH is absorbing what what savings or what what areas are you finding offsets to to you know, to to offset that cost?

Yeah. I know if I wanna educate our competitors You know, so but how we're doing, what we're doing, and know, what specifically we're doing. But you know, it's I we we have tremendous partners that we've been working with for years. You know, in a lot of ways we operate like one company. And so there's just incredible collaboration and big picture thinking and how do we win together And so yeah. I mean, yeah, it's not it's not new that, you know, what it's what it what it is right now is it's kinda chaotic and unpredictable. You don't know what the tariffs are gonna really be. You don't know how long they're gonna be. You don't know you know, what countries are gonna be what exactly. And you know, there's a lot of smart people that I know that you know, that government connections in multiple places in the world that believes that where the tariffs are now is kinda where they're gonna be except China is an outlier and and the other ones will be minor changes that is that right or not? I'm just telling you what I'm hearing. And I I think, I don't think we're gonna see The US all since wing 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 and here's the imbalance, and therefore, here's the reciprocal. I think that was the start of a negotiation. And I think that it's not just about tariffs. We're all seeing now it's also about the materials for you know, AI chips, what do they call them?

NVIDIA? What? No. No. The the We're an old.

Yeah. The Rare Mineral Minerals. I'm sorry. Rare Minerals. There's I mean, there's lots of things that are you know, I think the current administration is trying to kind of kind of rebalance trade, but also rebalance other strategic things at the same time. And so it's probably a bigger negotiation than any of us really understand. And so, you know, we're not privy. To those details. So actually seems more chaotic when you know, you can't anticipate something. And so I you know, but I I think what I what I hear from behind the scenes of people who I think are relatively well connected is things are gonna 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 US. So we'll see. I mean, I you know, But, yeah, everything we set, 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've been teach to whatever 10 competitors that we're listening in on our call. We don't have our experience or relationships.

Your next question comes from the line of Brian Nagel of Oppenheimer. Your line is open.

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 talking about sheets and 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 guys really want to gear towards?

Yeah. I'd I'd look at history, what we've done. You know, this is a little unusual. Again, know, we we got doing it. $2.2 billion of debt. And, you know, we got caught like everybody else did with the fastest rise of interest rates in the history of America. And so yeah, Do we like the debt ratio we have today? No. Like, do we like paying $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 we're we're a real company. You know, like I said, we're we're in a crappy housing market, and we're gonna you know, We're we're guiding to north of 20%. Adjusted EBITDA.

I know. No. We don't. I mean, we've said this before, Brian, but we don't don't. Have specific targets. We don't also have any covenants that, you know, that require us. I mean, obviously, I think heard with Gary that, you know, would do we wish the ratio was better? Sure. But if you also look, you know, we peaked last year at five five times. We're at 4.6 times nationally delevering from the growth in EBITDA. So, you know, and I think our guidance speaks for itself, so you can do the math of where where that's going. And know, the the the like, again, just to reiterate, no no specific targets.

Okay. I appreciate it. Thanks.

Thank you, Brian.

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

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

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