RH Q1 FY2025 earnings call

Key Points:

• Industry-leading growth continued in fiscal 2025 despite challenging conditions like tariff uncertainty and a weak housing market.
• Europe business is accelerating with strong demand trends in RH England and other galleries, and plans to open iconic galleries in Paris, London, and Milan.
• Product transformations include introducing Japandi design, delaying a new brand extension to spring 2026, and significant merchandising changes.
• Platform expansion plans involve opening multiple design galleries, design ecosystems, and outdoor galleries, with a focus on capital-efficient growth.
• Real estate monetization opportunities with ~$500M estimated equity value in real estate, including sale-leaseback and other monetization strategies.
• Tariff shifts: sourcing shifted out of China, expecting receipts to decrease from 16% in Q1 to 2% in Q4, with tariff absorbed by vendor partners, and increased production in US factories.

In fiscal 2025, RH achieved 12% revenue growth in Q1. RH England gallery saw 47% growth in Q1 with online demand up 44%, projecting full fiscal year demand for RH England gallery at ~$37M-$39M (gallery) and ~$8M (online). Europe business had 60% demand growth in Q1 across two comparable galleries (RH Munich and RH Dusseldorf), with continued acceleration in non-comparable galleries (RH Brussels and RH Madrid). Regarding production, 52% of upholstered furniture is projected to be produced in the US and 21% in Italy by end of 2025.

Fiscal 2025 Guidance:

• Maintaining current guidance assuming existing tariffs remain unchanged, with revenue growth forecasted at 10%-13%, adjusted operating margin 14%-15%, adjusted EBITDA margin 20%-21%, and free cash flow $250M-$350M.
• Delayed launch of a new concept planned for second half 2025 to spring 2026 due to tariff and product price uncertainty.
• Liberation Day tariffs on April 2 disrupted shipments, negatively impacting Q2 revenues by ~6 points, with recovery expected in the second half.

Risks:

• Tariff uncertainties and macroeconomic environment posing challenges to revenue and margin projections.
• Weak housing market, which has been at a 50-year low, impacting business performance.
• Disruption from unexpected tariffs (e.g., Liberation Day tariffs) causing global shipment and sourcing disruptions.

Q: Steven Forbes with Guggenheim asked about demand planning forecasting for Paris, London, and Madrid in Europe and the $500M real estate value.

A: Gary Friedman responded that the RH brand can be disruptive and productive in Europe like in America, with early trends showing potential, and discussed sale-leaseback and other real estate monetization plans.

Q: Steven Zaccone with Citi asked about confidence in sales improvement and product margin performance.

A: Gary Friedman mentioned general confidence in performance due to current trends, pipeline of new galleries, etc., and noted core business product margins were up year over year with expectations to continue.

Q: Michael Lasser with UBS asked about revenue deferral and product margin offsetting discounts.

A: Gary Friedman explained revenue deferral was due to shipment disruptions from tariffs, and discussed margin flexibility and brand distinctiveness allowing price flexibility.

Q: Max Reklinkel with TD Cowen asked about inventory, ABL availability, and capital raising.

A: Gary Friedman mentioned progress in reducing inventory, and that they are not currently planning to raise capital but have flexibility if needed.

Q: Andrew Carter with Stifel asked about disruption in Q2 and traction in To the Trade business.

A: Gary Friedman stated guidance speaks for itself and that the To the Trade business is strong with trade teams in galleries.

Q: Mario Morar with Zelman asked about outdoor slowdown and contract/hospitality business internationally.

A: Gary Friedman attributed outdoor slowdown to timing of the season and tariff disruptions, and mentioned contract business has been ongoing for years and follows core business strength.

Q: Jonathan Matuszewski with Jefferies asked about Waterworks integration.

A: Gary Friedman discussed Waterworks' brand strength, integration efforts, and potential for global expansion.

Q: Cristina Fernandez with Telsey Advisory Group asked about tariff mitigation efforts.

A: Gary Friedman discussed tariff negotiations being complex and potentially resolving in the next few months, with a more predictable outlook expected.

Q: Brian Nagel of Oppenheimer asked about debt metrics and coverage.

A: Jack Preston stated there are no specific targets, but the company is delevering with growth in EBITDA.