RH Q2 FY2026 earnings call

• Financial Execution: Q2 results exceeded guidance on both revenue and margin. Generated $72.3 million in cash flow, inclusive of free cash flow and joint venture distributions.
• Tariff & Cost Management: Recognized a $55.1 million tariff benefit in Q2, with an additional $13.9 million expected in H2. These proceeds will offset $50 million in unplanned supply chain cost increases driven by oil price spikes due to Middle East conflicts.
• Brand Expansion (RH Estates): Launched 'RH Estates,' a traditional/classic furniture collection aimed at doubling the Total Addressable Market (TAM). The average price point is 45% higher than existing assortments, leveraging exclusivity and design patents to command premium margins.
• International Growth: Opened the flagship gallery in London (Mayfair) in June, which saw a design pipeline of nearly $7 million in its first eight weeks. Expectations are for international drag on margins to decrease from 450 basis points in H1 to 250 basis points in H2.
• Real Estate Strategy Shift: Moving away from expensive multi-story galleries toward 'RH Compounds' (multi-building shopping experiences) and single-story design galleries. These new formats offer faster payback periods (12-18 months) and lower construction costs compared to pre-pandemic models.
• Trade Program Success: The revamped trade program has seen strong engagement, with designers re-engaging and volume levels already offsetting discounting efforts. Bespoke services are driving deeper client relationships.

GapNet revenues reached $922.2 million, representing a 2.6% year-over-year increase and accelerating growth momentum. The company reported a normalized adjusted EBITDA margin of 13.4%, exceeding the high end of guidance. Specific financial performance breakdowns by product segment (such as Estates vs. Contemporary) are not explicitly itemized in absolute terms within the prepared remarks; however, management highlights that RH Estates is expected to contribute significantly to future revenue growth, with projections indicating it could represent up to 50% of the offering over five years.

• Fiscal Year 2026 Full Year Outlook:
  • Revenue growth: 5.5% to 7.0%.
  • Adjusted EBITDA margin: 15.0% to 16.2%.
  • Free cash flow, asset sales, and equity method distributions: $300 million to $400 million.
  • Note: Outlook includes a ~340 bps negative impact from pre-opening/startup costs for international expansion.
• Third Quarter 2026 Outlook:
  • Revenue growth: 5.0% to 6.0% (inclusive of backlog reduction of 2.5 points, RH Estates growth of 2 points, and new galleries/other of 1 point).
  • Adjusted EBITDA margin: 12.5% to 13.5%.
  • Note: Includes a ~310 bps negative impact from international startup costs.
• Fourth Quarter 2026 Outlook:
  • Revenue growth: 16.1% to 21.2% (inclusive of backlog reduction of 6.5 points, RH Estates growth of 8 points, and new galleries/other of 4 points).
  • Adjusted EBITDA margin: 19.7% to 22.9%.
  • Note: Includes a ~190 bps negative impact from international startup costs.

• Supply Chain & Inflation Costs: Significant unplanned cost increases across the supply chain due to sustained spikes in oil prices resulting from the conflict in the Middle East. Tariff refunds are being used to offset these costs.
• International Startup Drag: Pre-opening and startup costs for global flagships (Paris, Milan, London) are impacting adjusted EBITDA margins negatively in the short term, though this drag is expected to diminish as locations mature.
• Operational Complexity: Managing multiple aesthetic vernaculars (Estates, Interiors, Modern) and complex hospitality integrations requires significant operational discipline to maintain brand integrity and avoid dilution.
• Market Volatility: Operating during one of the worst housing markets in four decades, requiring continuous innovation and investment to drive demand despite macroeconomic headwinds.

Q: Steven Zaccone (Citigroup) asked about early demand trends for RH Estates, specifically regarding new customer acquisition and the rationale behind the 45% price premium compared to past pricing miscues.

A: Gary Friedman explained that the premium is justified by the exclusivity, quality, and intricate detailing of the products, which cannot be easily copied or found elsewhere. He emphasized that value perception starts with design love, followed by quality recognition, and finally price assessment. He noted that the launch is highly incremental, attracting entirely new customers who previously did not buy from RH, similar to the initial launch of RH Modern.

Q: Simeon Gutman (Morgan Stanley) questioned the confidence behind the stepped revenue acceleration in H2, particularly the jump in Q4, and whether it was solely driven by Estates.

A: Management confirmed the Q4 outlook includes specific contributions: 6.5 points from backlog reduction, 8 points from RH Estates, and 4 points from new galleries and other factors. Friedman expressed confidence based on historical precedents where product transformations accelerated business by 15-20 points, suggesting the current guidance may even be conservative given the scale of the Estates opportunity.

Q: Max Raklenko (TD Cowen) sought clarity on how unit economics of the new 'RH Compounds' compare to legacy multi-story galleries, asking if margins would be stronger due to lower SG&A.

A: Friedman detailed that legacy multi-story galleries suffered from high construction costs due to elevators, staircases, and complex mechanical systems, especially post-COVID inflation. RH Compounds disaggregate this into smaller, wood-frame buildings connected by courtyards, eliminating the need for expensive structural elements like cranes and grand stairways. This approach reduces construction costs by approximately half while increasing product density per square foot, leading to superior return on invested capital.

Q: Chris Nardone (Bank of America) asked about core inventory health and whether promotional activity would increase to clear space for the Estates rollout.

A: Friedman stated that Estates is additive to the assortment rather than a replacement, so there is no need for aggressive clearance promotions. While acknowledging a promotional environment in the home goods sector, he noted that RH’s underlying margins remain healthy. The strategy involves using outlet networks and ecosystem deployments (combining Contemporary, Modern, and Estates in key markets) to efficiently manage real estate and inventory without diluting the brand.

Q: Marius Maurer (Zelman) asked why RH Estates designs are easier to defend against knockoffs compared to contemporary styles, given the industry's history of IP disputes.

A: Friedman highlighted that RH has aggressively pursued design patents on almost all Estates items, leveraging acquisitions like Michael Taylor Designs and Formations which brought strong IP portfolios. He asserted that the complexity and intricacy of the finishes make copying difficult and legally risky for competitors. RH plans to take an offensive legal stance, deterring infringement through robust intellectual property protection and litigation readiness.