Rh Q3 FY2025 earnings call

• Revenue grew 9% in Q3 with 18% two-year growth despite tough housing market and tariffs. • Adjusted operating margin was 11.6% due to higher tariff expenses. • Free cash flow in Q3 was $83 million, year-to-date $198 million on track for $250-$300M for the year. • International expansion has investment and startup costs impacting operating margin. • RH Paris opened as a significant retail experience with hospitality and design elements. • Hospitality business integrated with core business, RH Ocean Grill at RH Newport Beach is a key example. • First freestanding interior design office in Palm Desert generating $1M/month in design business. • Launched innovative retail concepts and continues to invest in unique experiences.

In the third quarter, revenue increased 9% with a two-year growth of 18%. Adjusted operating margin was 11.6%, below guidance due to higher tariff expenses. Adjusted EBITDA was 17.6%, and free cash flow in Q3 was $83 million, with year-to-date free cash flow at $198 million. Net debt was $2.427 billion, down $85 million from Q2. Inventory was down 11% versus last year and $82 million versus Q2, with an estimated $300 million inventory reduction goal. Revenue contribution details weren't explicitly broken down by product segment but overall performance is highlighted.

• Fourth quarter: Revenue growth 7%-8%, adjusted operating margin 12.5%-13.5%, adjusted EBITDA margin 18.7%-19.6%, with ~200 basis point operating margin impact from international expansion investments and 170 basis point tariff impact. • Fiscal year 2025: Revenue growth 9%-9.2%, adjusted operating margin 11.6%-11.9%, adjusted EBITDA margin 17.6%-18%, free cash flow $250M-$300M, with ~210 basis point operating margin impact from international expansion investments and 90 basis point tariff impact.

• Uncertain housing market as it's the worst in almost 50 years. • Tariffs disrupting supply chains, causing product delays, out-of-stocks, and multiple price negotiations. • International expansion has higher than expected costs and learning curves in areas like staffing and market awareness. • Dynamic environment with potential new tariff announcements and unpredictable market changes.

Q: Steven Forbes asked about the demand book building for RH Paris and its influence on pro forma expectations ahead of RH Milan and RH London.

A: Gary Friedman discussed the unique aspects of RH Paris, lessons learned from its opening, including staffing, language barriers, and learnings for Milan and London expansions. He also talked about hospitality, design library, and event business learnings.

Q: Max Rakhlenko asked about customer response to price increases, elasticity, and future price points in light of tariffs.

A: Gary Friedman mentioned learning from price increases due to tariffs, fairness in the market, and the potential for further price increases. He also discussed the upcoming new collection launch next year targeting a major design show in Milan.

Q: Michael Lasser asked about the pace of initiatives, profitability, and guidance for Q4 and 2026 in light of tariffs.

A: Gary Friedman and Jack Preston discussed the discipline of being a public company, not lowering ambitions despite challenges, and the impact of tariffs on top line and margin absorption. They also talked about long-term value creation and hospitality business insights.

Q: Simeon Gutman asked about furniture market backdrop, customer change in demand, and free cash flow positivity.

A: Gary Friedman stated it's an unusual time with unpredictability, but expected free cash flow to remain positive. He discussed delays, stage launches, and innovations to overcome challenges, emphasizing long-term strategy over short-term predictability.

Q: Jonathan Matuszewski asked about market share gains from fragmented design showrooms, regional stores, and independent boutiques.

A: Gary Friedman discussed the reduction in the number of fragmented high-end boutiques, share gains from various channels, and considerations for future product assortments and business expansions related to home accessories and design elements