Rh Q2 FY2025 earnings call

Key Points

• Revenue grew 8.4% with demand up 13.7%, 2-year revenue up 12% and demand up 21%.
• Adjusted operating margin and EBITDA increased, with an approx 170 basis point drag from European expansion investments.
• RH England showed strong demand trends, with gallery demand expected to reach $37M-$39M in 2025 and online demand $8M.
• RH Paris opened on Champs-Élysées, featuring innovative design, hospitality concepts (Le Jardin RH, Le Petit RH, etc.) and immersive brand experiences.
• Shifted sourcing out of China, with receipts from China decreasing from 16% in Q1 to 2% in Q4, and responding to India tariffs by identifying alternative countries and resourcing upholstered furniture to North Carolina factory.
• Plan to open 4 additional design galleries in 2025, with Europe expansion including Paris in 2025 and London, Milan in 2026.

In the second quarter, RH's revenue increased 8.4% with demand up 13.7%. Adjusted operating margin was 15.1% and adjusted EBITDA was 20.6%, both up 340 basis points. Net income increased 79% and free cash flow was $81 million. For RH England, gallery demand was up 76% in Q2 and online demand up 34%. RH Paris opened with strong traffic, exceeding RH New York day by day, and the design pipeline in the first 6 days was greater than the first 5 European galleries combined in their first 6 days.

Fiscal 2025 Outlook

• Revenue growth 9%-11%, adjusted operating margin 13%-14%, adjusted EBITDA margin 19%-20%, free cash flow $250M-$300M.
• Delayed new brand extension to spring 2026 and Fall Interiors Sourcebook by 8 weeks.
• $40M revenue shift from Q3 to Q4 and Q1 '26 due to tariff and launch delays.
• Outlook includes approx -200 basis point operating margin impact from international expansion and -90 basis point impact from tariffs net of mitigations.

Risks

• Tariff uncertainties: potential additional furniture tariffs, which could disrupt the industry, cause job losses, and lead to inflation. Smaller companies may struggle to survive, and U.S. manufacturers may move production to avoid costs.
• Inflation risk: tariffs could lead to higher prices and impact consumer demand.
• Market volatility: uncertain housing market and global discord pose risks to business performance.

Q: Free cash flow is improving, is real estate monetization still necessary?

A: Gary Friedman said it's opportunistic, not necessary, but they're open to it as a way to learn and potentially monetize assets. Jack Preston added it's an opportunistic move to highlight real estate value on the balance sheet.

Q: Any risk to the brand extension launch?

A: Gary Friedman said no risk at all, though things might be more expensive for everyone, but RH has advantages with leverage in buying.

Q: How to think about Europe revenues per market and four-wall economics?

A: Gary Friedman discussed that Europe is early, with Paris off to a strong start, and four-wall economics in Europe are expected to scale, though there are initial start-up costs and execution challenges, but the brand is building momentum.