RH ($RH)

Hello, and welcome to the RH First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Allison Malkin of ICR. Allison, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2026 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I'd like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our 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. And now I'd like to turn the call over to Gary.

Thank you, Allison. Hello, everyone. Let me start with a reading of our letter to our people, partners and shareholders. First quarter revenues of $800.3 million and adjusted EBITDA of 7.1% exceeded the high end of our expectations in the first quarter despite backorder and special order balances, approximately $75 million higher than a year ago, primarily due to tariff-related resourcing. As a result of our better-than-expected first quarter results, we are raising our outlook for fiscal year 2026 and providing the following outlook for the second quarter. Fiscal year 2026 outlook. Revenue growth of 4.5% to 8%, adjusted EBITDA margin of 14.2% to 16%, adjusted free cash flow of $300 million to $400 million. The above outlook includes an approximate negative 270 basis point adjusted EBITDA margin impact from preopening and start-up costs to support our international expansion. Second quarter 2026 outlook. Revenue growth of 0.5% to 2.5%, adjusted EBITDA margin of 11.5% to 13%. The above outlook includes an approximate negative 380 basis point adjusted EBITDA margin impact from preopening and start-up costs to support our international expansion. The bridge from here to there, how, many may ask, in an economic environment like the one we are navigating through, do you get from your half 1 numbers to your half 2 numbers necessary to make the year? There are 3 parts that formed a proverbial bridge to the other side, supporting the case for our business to accelerate from flat in half 1 to up 12% in half 2 as we've done many times before. We've listed them below. We plan a backlog reduction that's worth 4.5 percentage points in the second half, new store growth of 2.5 percentage points and new concept growth of 5 points for RH estates, building the foundation for a global luxury brand, similar to structures that stand the test of time, those rewarded with historical recognition and reference. Luxury brands are designed and built in the same fashion, on incredibly strong foundations. Both endeavors are considered hard and, in many cases impossible. They always require more time and capital and are generally built by unrelenting and unrelatable individuals and teams. You've heard us talk over the years about climbing the luxury mountain, how it's not for the faint of heart, as the higher you climb, the air gets thin and the odds become slim. We believe the work we are about to unveil is akin to those difficult last steps and gasping for those vital breaths. We believe the openings of RH Paris, Milan and London, arguably the 3 most immersive and inspiring brand experiences anywhere in the world will form the foundation necessary to earn the respect and recognition of not only the European and U.K. customer, but a global one. They communicate a sense of permanence, a brand that has been dedicated to crafting their skills over decades. The last foundational piece, RH estates. Mr. Gorbachev, tear down this wall - Ronald Reagan. We believe that there are those with taste and no scale, and those with scale and no taste. The global design market has spent the last half century comfortable with that division. It is an industry defined by exclusion versus inclusion. For decades, the highest echelon of home design, the masterfully tailored upholstery of Dmitriy & Co, the uncompromising bespoke casework of Joseph Jeup, the classical grandeur of Dennis & Leen, the meticulous reproductions of Formations, the artisanal fixtures of Waterworks and the iconic designs of Michael Taylor, whom Architectural Digest named one of the greatest interior designers of all time has been hidden, trapped behind the metaphorical iron curtain. This curtain is the closed door trade-only showroom network. Unless you hold a professional license or hire a gatekeeper, you are forbidden from seeing, experiencing or purchasing the finest expressions of human craftsmanship. The public is left outside, while some of the very best design and quality remains hidden inside. Nearly 40 years ago, standing at the Brandenburg Gate, a former American President looked out at a divided world and issued a defiant historic decree, Mr. Gorbachev, tear down this wall. Today, we look at the luxury home industry and ask the same. With the launch of RH Estates, we are removing the barriers that have segregated taste from scale. We are amplifying the work with the world's most elite designers, artisans and manufacturers on our global platform. This is not a compromise of quality, it is a liberation of mastery. By uniting these legendary ateliers and elevating their work in architecturally significant spaces, we are providing access to some of the most beautifully designed, highest-quality classic contemporary and modern furniture in the world. Pieces that not only furnish a home, those that define it. But tearing down the walls means more than just opening the doors. It means eliminating the creative limitations that has historically forced designers to choose between our scale and the uncompromising specificity of trade-only showrooms. To empower the design community, we are introducing RH Bespoke Furniture and RH Couture Upholstery. With RH Bespoke, we are offering a level of customization never seen before at scale. Interior designers and architects can now specify dimensions for dressers, dining tables, sideboards and cabinets to fit the exact proportions of their architectural canvas. Simultaneously, RH Couture Upholstery will redefine the boundaries by integrating custom sizing with COM, customer's own material, into the RH ecosystem. We are giving designers the creative freedom to specify custom sizes and fabrics for sofas, sectionals, chairs, ottomans and beds. You source the fabric from anywhere in the world, we provide the atelier level construction and craftsmanship. The scale of taste. Our critics will argue that true luxury cannot be scaled. They are wrong. They failed to understand the ability to scale taste creates higher quality and value for both the customer and the designer. It has the ability, as other innovations have to create a larger market, enhance the way we live and elevate humanity. By moving past the antiquated model where each piece is built in isolation, we are building these elite designs and highly disciplined batches. Scale gives us unprecedented leverage, allowing for vastly superior sourcing of raw materials, rigorous quality control and significant manufacturing and transportation efficiencies. Make no mistake, we are not mechanizing art. The intricate hand carvings and finishes are still executed individually by the world's finest artisans. Because of this human touch, every single piece remains a one-of-a-kind masterpiece in its own right. However, by integrating the fragmented supply chain and presenting these products on an equally unrivaled inspiring architectural platform, consumers now have the access to a level of design and quality previously only available to a select few, a new covenant with the trade. We recognize the ultimate expression of our products requires the vision of incredible talent. To honor the design community, we are redefining how we partner with professionals. We are introducing an exclusive program for interior designers, architects and trade members. The program ensures that professionals are compensated for the tremendous value and aesthetic clarity they create for consumers. We want to incentivize the world's best talent to build their campuses using our platform, creating a symbiotic ecosystem where design mastery is both accessible and rewarded at every level. The separation between taste and scale is over. The curtain has fallen. It's time to tear down that wall. Carpe Diem, Gary. Operator, we'll now open the call to questions.

[Operator Instructions] Your first question comes from the line of Steve Forbes with Guggenheim.

Gary, given the commentary around customization within the Shareholder Letter that you just went through, curious if you can maybe just give us a high-level view on what you think this really means for the brand's reach and addressable TAM, especially once you layer in that new trade program, like how much of the market really gets opened up. I don't know if there's a way to contextualize it for us on how you're thinking about it today?

Well, it really opens up on multiple levels. So one is I mentioned on the video last quarter, the traditional classic market represents about 60% of the luxury home market. And today, we're just vastly underpenetrated in that market. and if you look back, if you looked at an RH source book from 2014, I think we had 704 pages, and it was all classic, all traditionally based. And if you look at our business today, because of the evolution and the expansion of modern then the evolution into contemporary as the trends hit, our brand, like many brands and many of us grew up in the fashion industry, I grew up with The Gap. And so learning to build a specialty brand, you're generally keeping it in a very focused kind of limited point of view. So it will break through the market. And I think one of the things that I fail to kind of recognize, if you think about the bigger picture of the home industry is that the trends kind of lift aesthetics during cycles. But the other things don't really stop selling. They just sell kind of less because the architecture is really the driving force in the market. So as we went back and just kind of studied our history and said, look, what are the smartest things we've done, what are the things we think we missed, what could we have done better? Our view is that we could build as I outlined in the video, build our business around the 3 major aesthetic kind of pieces, and that's traditional contemporary and modern, and we'll refer to it as estates, interiors and modern. So this is -- I would say, I don't know, there's maybe a chance to -- we might have given away over the last 10, 12 years, $1 billion, yes, maybe more. As we assess the market and try to go back and just do the math and try to extrapolate things, so that's one piece. And then I say, every time you do something new, I mean, it's not 100% incremental. There's going to be some level of cannibalization as you expand a market, whether it's you're expanding product or you're expanding physically in penetration, there's going to generally be some level of incrementality and there's going to be a level of cannibalization. Our view here, this is one of the most incremental things, I think, we've ever done. Yes. Modern was very incremental, but it was a very small market when we launched RH Modern. The amount of modern architecture in the world. While it was trending, and the world was moving in that direction. Still it's a fragment of the size of this market. So that's how I think about the first piece. The second piece is looking at it not just from aesthetic point of view, but really a market point of view, a design and quality point of view. RH Estates is, from our view, the first step up to the top of the luxury mountain, if you use that metaphor. It is the highest level of quality and design that exists in the world, unless you're really buying rare antiques. But if you think about the brands that we've aggregated over the last 5 years and what we've learned over that time and what we're bringing to market with estates, which you guys have only seen just a little teaser, I mean that's such a little teaser. It's -- this is just a level of design and quality that is not available to the consumer. We own showrooms. And one of our very best ones, there are 2 of them. The door is not open to the public. There's the doorbell. So even if you're a consumer and you're walking down the street and you want to go in, you ring a doorbell and you may not be able to get in if you don't have an appointment. And if you're not a member of the trader and you don't have an appointment. So the design and quality and then you've got the acceptability. Whenever we develop any product, we always do searches on the products. We'll do all kinds of visual searches across all platforms, right, to see who might have something like this. The world is looking at different things and seeing different things and understanding different trends and then you're trying to scale things. And I can tell you, we've never had such a low hit rate versus what we're bringing in the market. Now, you can take a negative view and go, well, maybe nobody wants that. That's why you're not seeing it. Now, you're not seeing it because nobody -- I don't believe anybody else can really sell it because they don't have the platform, and they don't have the brand and they don't have the ability to source it at a value equation that we can. I have been lucky and this one, this is -- I mean I say lucky and not so lucky, I joke with the team. This is the first trend that I'm old enough that I was the customer. When you think about the next thing that's coming the age of eclecticism and the California look with Michael Taylor, there's a few different kind of names. I think it'll come through somewhat differently, but the foundational elements of these giant trends that come through is this is one of the biggest ones ever. This is -- this one was bigger and longer than modern or any trend we've addressed in my history of RH. But I was a customer. I joined RH as I was moving into my house in Belvedere, which is the first house I ever lived in, in my life, the only house that I built in my life. And my first wife was a luxury interior designer. I was her client for a condominium in San Francisco. I had the round Michael Taylor dining table in that house, and I had a reproduction of the Coco Chanel sofa. I had a lot of these different kind of products that are trends. Now I probably shouldn't say some of the stuff, I got to be careful because all of my competitors are on these calls and they are going to wait for me to slip up and let them hear or see something. But I lived through this trend. And so at my house in Belvedere, how many things I have from formations that I bought. 6 or 7 items from formations that I bought years ago. I have the Michael Taylor rectangle dining table in my house. So I bought 2 of them, I had the round one in the condo, the first job we did together and the rectangle one. I know how much I paid for those 27 -- 26, 27 years ago. And I know what they've been selling for recently because we own those businesses and the value equation, the quality we're going to bring to the market and the value equation we're going to bring to market has never been seen before. And I don't say that lightly. I usually never go out on a limb like this, but never been seen before. And you try to do a visual search online, it is not out there unless you want to go in 1stDibs and buy an antique, which is fine. We can't stop you for buying an antique. I had to read everybody with what we have on the back of our catalog, right? Because if anybody tries to come after any of these goods, that's going to be a bad day because we own the intellectual property on the vast majority of what we're bringing to the market. I mean we could -- we have patent pendings on what would we say, what percent of this book, 65% to 80% of the book, we should go down. And we should go back and just actually add it all up. Yes. So there's just so many things we're doing, we've never done before. And the way we're addressing the market and the way we're sourcing these goods, I mean the people that are making these goods grew up making these goods. The manufacturers that are making these, they were part of that industry, making for the highest end showrooms before we met them and started to scale with them. And they're also excited to be able to make this quality again because they're -- the market is so fragmented. But it -- so the design and quality aspect of this is huge. And then the next piece you have is, we're going to open the market up to what do we call them, super buyers, furniture. I mean we have a very big trade business. We provide excellent service to the trade and to high-end interior designers and design firms. Our teams act as back office, we'll do designs and renderings and presentations for them. We'll support them in any way we can in many times in delivery and installation. And -- but at the same time, there is an aspect of just recognition and compensation that we haven't done. And the team jokes around because every time they go to a high point, someone comes up to me and says, like, "I love your brand, oh my god, and please help us make money." Let us make money on your brand. And we haven't offered and incentivized the design trade. And I look back and I think when -- because I came from a family situation that had Interior Designer and I have the insight of looking at just how complex and difficult that was. And it was also -- it was -- not only was it not transparent, it's just not accessible. You can't see it, you can't buy it. And I just thought, over time, just making high-quality goods available with -- that the consumers would drive designers to our brand. And I think they have. But at the same time, there's really great interior designers that they're running a different model. And even the mother of my girls who was here consulting us, what, 10 days ago, 2 weeks ago, just gave us the insight of a high-end designer. She runs a design firm. She said, listen, do I buy RH? Of course, I buy RH. Do I want to spec that first? No. A lot of times, my clients will say, "Hey, look, okay, do your designs in the primary living room, in the primary bedroom, in the primary dining room, but like do RH for the family room and the media room and all the rest of the bedrooms." And she was saying like, okay, I will. And she said, but I'm thinking of myself, I can't make any money. Like interior designers have a markup model, right? And an hourly model, right? But they kind of need both to make the business work. And I think we just haven't -- we haven't been an open platform like that. And I think we are just overlooking kind of a super customer. I mean, they're -- they buy furniture all day long. That's what they do for a living. So it kind of doesn't make sense that we're not doing it when you really look at it critically. But I think it really makes sense here, too, the timing of this because -- and not only are we going to have this design and quality that is at the very highest level of the market, we're going to also empower the designers and consumers for that matter, and all of our designers with the ability to customize and the ability to do COM, customers own material, and the ability to do all the things that they need or want to do, to do truly custom work at the highest end. And I would say this is just the beginning, right? It's not the only thing we'll do. Someone asked me the other day, hey, are your price is going to be higher? Well, yes, they're going to be higher. I mean the quality is massively higher. But it's such a tremendous value. And the price should be higher. This is not just kind of smooth wood with the sprayed-on finish or a contemporary piece with curved edges. This is hand painted, hand carved, hand distressed, so many details to get it right. And every piece is a one of a kind because of the handwork and how it's made. And so -- yes. But someone said, "Oh, well, how do you know you're not going to make a mistake like contemporary." Well, contemporary wasn't -- didn't have the handwork, didn't have that level of detail, didn't have those things. And we just -- we were a bit arrogant at that point in time. But because we're out here with a unique product also, I think that we're offering such an incredible value. But I think that there's also an opportunity because of how long we've been thinking about this, working on it. I mean I think it's the most intelligent, deep thinking launch of a brand we've done. We really started investing in this in 2000. So here we are in 2026, we acquired Dmitriy and Joseph Jeup in 2000.

2020.

2020, not 2000. Yes. Thank you. 2020. Yes. Thank you, not that long ago. But it's been a long-term investment. So many like -- think about the opening of the high-end design market on this, and there's nothing that we're doing to value engineer the product. I mean we are making identical quality. The diamond table is made with the identical molds of Michael Taylor, the tops and everything at the same quality that finishes that we're offering. The array of finishes is that at a whole different level. You're going to see -- when you see this book and see it at home next week, or we saying end of next week -- early following week.

Early following week.

Yes. Okay, Early following week. We kept tweaking it and tweaking it, we had a lot of last-minute ideas to kind of make it better as we're working on it. But it was also taken us a little longer because it required a different level of thought and discipline and compositions and presentation to do it at the level that it deserved to be presented at. And so it was late to us, it's not a big deal. I know I read a couple of analyst reports going, oh, my god, it's late, like I don't know, like it was test live around time, changed the whole car industry. So it's not about like, hey, I'm rushing to mediocrity here. We're trying to make big moves that are industry redefining. And I think this is one of them. I think this is -- the biggest move we've ever made is fundamentally different on so many levels and opens up so many dimensions of the market but it also opens up the learning, right, that can be applied to modern and to interiors and so on and so forth and thinking about how big is our market? Like when you think about what I just said about my daughter's mother and she said, yes, customers will say, "Okay, do the primary rooms and then use RH for these other rooms." Well, that's really interesting about that. Our whole focus with this initial lens, the key part of the lens was -- because we knew that, by the way. So we said let's win the primary rooms. Let's make sure we get the primary bedroom. If we get the primary bedroom, we have the assortment to get the other rooms. Let's get the primary dining room. When you see some of the dining tables we have, you go in first dib, and start at $250,000 with expense dining table and go all the way through it down to the prices. We have it at, you won't find anything of our quality or design. We went through all of it. We know every dining table on 1stDibs at every competitor at the highest end to down. We spent a lot of time studying this market. So the goal is the dining room, the primary living room, the primary bedroom but these goods can also eclectically be presented in a very cool way. This thing you'll see it when it's all presented, it looks different than RH today, but it does look like RH today. But I think you'll see a very big move. You're just going to see like, well, I mean, I think the design community is going to go, "Well, I didn't know they had this in." So I know that's a long ramble, but like I'm so excited, if you guys want to talk to the next 5 hours about estate, you're going to have my attention.

And maybe a very quick follow-up for Jack. Given the tariff refund commentary in the Q, maybe just help us or confirm whether or not any refunds are included within the guidance?

No, no further refunds. I mean the refund started coming, but there's no -- there's been kind of pause. You might be following some of that activity as far as the DOJ and how those are playing out in the courts. But as far as the guidance reflects -- it does not reflect the free cash flow -- specifically does not reflect any further tariff refunds.

Your next question comes from the line of Michael Lasser with UBS.

I wanted to dig in on the 500 basis points of contribution that you were expecting from RH Estates in the back half of the year. So just under $100 million. What is the basis for that expectation. And you've already alluded to a need to evolve some of the elements of the model or the way you interact with core customers like to trade. Do you think you need to make further changes to your customer acquisition engine beyond the legacy model of just simply mailing out a book and then expecting that the consumer will come, especially in this age where your competitors are going hard after social media and other forms of manners that they're reaching the consumer.

I don't know. They've been doing that for the last 3 years, and we've outperformed all of them. So I think when you say we're mainly in a book and expecting people to come. We've built the greatest physical platform on the planet Earth for our kind of products, right? So don't overlook the physical platform. And if you -- Michael, if you look at that video I did last quarter, I outlined that furniture is the least digitized business, 80% done in stores, 20% done online, at the luxury level, it's 95.5%. So this is a business you need to see, touch, sit in comfort scale, all these kind of things. So I mean the book is just a small way. We use it to integrate the whole thing. People look forward to getting our books. It's a physical thing. As Phil said, we have a digital book, too. But we just don't -- I'm just not a believer in following the trends of a lot of people that are following other people. We just think it's massively unauthentic to pay some stranger, to some influencer to go talk about our goods, and they don't know nothing about us. They know nothing about the product. They're not an expert in the field. And I think that's a lot of noise. Maybe it's good for building beauty brands to teenagers or other stuff like that. It doesn't affect what I buy, and I have a lot of homes. And so I don't think it affects our customer or we wouldn't be the biggest brand of our kind. We wouldn't have outperformed everybody. I mean, indeed, if you look at this last quarter we have, and if you look at it at over a 2-year basis or 3-year basis, over a 2-year basis, only West Elm has performed as well as us. On a 3-year basis, we're better than everybody. And West Elm just had a great quarter. And I think they're doing a great job. But if you look at anybody buying furniture, it's -- I tell people, when you go out there bang pots and pans and try to get attention, doing inauthentic things, you're just creating noise, you're creating your own noise. And you wind up chasing things and thinking that they're relevant when they're not. And we tried and tested different things, and we have a lot of data behind what we've done and why we're doing what we do, and nobody thought we were smart to build the stores we did and the galleries we did and those turned out pretty well. And yes, everybody stopped mailing books and we're still mailing books. The only difference like right now in a point in time, you can put our model against anybody, put it against today's very best customer, back out our investments in international expansion, back out our investment in building estates, which is not like some little introduction of a 80-page book that, that 5 or 7 years later, you wind up with one store. This is -- we're making serious investments to build a platform unlike anybody else. And so in a down market like this, are we going to -- is our model not going to look as good? Yes. Yes. Okay. But you're looking at people that aren't even investing. They're not building anything. They're trying to be great cost controllers. So yes, just wait till the other side of this cycle for us. And I think we're going to have a cash generation machine that this industry has never seen.

Understood. My follow-up question is about the margin profile of RH Estates? Is it sufficiently higher than the legacy business in order to -- on the investments that you're doing provide the incentives to the trade community as well as anything else you might have on the horizon and still drive the margin expansion that you embedded in the back half? Or do you see other building blocks arrive at the margin expansion that you're expecting?

Estate has got its margin profile based on the quality and exclusivity and desirability of those goods, right? If you've got a level of design and quality and scarcity and build desire, who knows what the margins will be. I think we determine our margins based on a competitive nature. And if there's others selling something in the market, okay, is there a quality differentiation? How big is it? How different is the design? So on and so forth. What access do they have to the market? Do they have a big enough platform to matter, all kinds of things, like we're not really doing margin building paper, something like incentive for the trade. The incentive for the trade, it's a simple model, like we give X and we need an X -- we need a list of Y. And it's so minor on a model like ours because we have such leverage and flow through. I mean just you have to think about our model, like even think about estates on a -- our whole business has a different model than everybody else just because kind of the price points of our product, right, versus most people selling furniture. So we have significantly more leverage, just handling goods, shipping goods, delivering goods, so and so forth. And we have tremendous leverage in our interior design business because we're selling high average orders. And yes, there's an investment to do that work, but we have such leverage on the incremental sales. And again, it's a little masked today because of the investments we're making in international in things like Estates and so on and so forth. But yes, we've got plenty of margin to cover what we're doing. We'll have plenty of margin growth going forward. Like I said, we're looking at our what we believe the cash generation model of this business is going to look like because we think that's the most important metric. And I think as we move past the peak investment cycle this year in our -- we believe our top line is going to reflect that. Kind of the relevant of what the external market does unless it really -- look, if we get into a war that massively impacts the economy, the inflation, so on and so forth, it's going to put pressure on everyone. Those things happen. But we don't need a big move in the housing market to grow. We don't even need a move in the housing market. I'm not counting on the guidance we just gave everyone, I'm not counting on the market getting any better and the market could get worse. And I'd be surprised if we don't beat those numbers. So 5% incremental move on estate is really conservative.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Gary, Jack, I want to follow up on 2 items. First, estates and top line trajectory and then my follow-up will be on the balance sheet. So first on estates, can you give us a sense of sequencing how much of the collection is being launched. I assume it will be continuous. What percentage of items on floors and galleries will be estates? When should we expect that fully ramp? And then should we be seeing the customer deposit line pick up a bit, not just from these back orders, but from estates? And then I'll wait for the follow-up.

How many questions did you just ask here. That was good. I mean I just saw you in Milan. But I thought you asked me all the questions you might have had. You probably have -- maybe everybody on the phone should ask you questions about estate. You're one of the few people that saw it set up in Milan. But -- okay. So sequencing that the products coming into stores, we will be kind of tariffing in stores. When do we get to like 60% of the sales, 65%, what was that? End of September. So end of September, we'll be in the galleries that represent roughly 60% to 65% of the business, roughly 2/3 of the business. And then what's the next wave that hits.

Pretty much every month.

Every month. So every month, we kind of have -- so December will be all galleries. Our second mailing of estates will be early part of November. So -- and that will be a pretty meaningful expansion of the assortment. So you'll see us building this assortment over the next couple of years. [indiscernible] should we expect deposits to pick up?

I mean they follow our business. So as revenues grow and demand is driven, customer deposits pick up.

Yes.

So then I'll put the follow-up. 2 parts in the follow-up. Should the deposits already be ticking up as these back orders exist or no, if that was already on deposits? And then just thinking about balance sheet. Like the business improves and in flex, as you said, Gary, there's a lot of leverage in it. The balance sheet cash flow stuff should resolve itself. But can you remind us this path to getting debt free by '29. What -- is there an update? What other steps are you taking to get to that? How much of a priority is it versus just letting the business now -- let the Estates collection speak for itself and then drives the natural deleverage of the business?

I think we were pretty clear. It's a big priority. And we outlined asset sales of, what, $200 million to $250 million a year over the next 2 years. We just completed a transaction inside our Aspen Real estate, where we sold some properties to our partner and sold the property to us and we now have more independent control across a lot of properties that we can monetize more quickly than less quickly, how many properties did we take control, 8 or...?

8 in total.

8 in total, we have 100% control now. So we don't have to work through a JV and partnership to kind of monetize things. And Dave Stanchak is back, and Dave knows how to get deals done, buying or selling. And so -- and we are holding -- also have real estate outside of the JV. And so there's that and there's the business performance, there's the pending inflection down, deflection, I guess, you can call it or -- so, there's multi -- Jack at any point jump in with anything, but it's really the spending comes down, the sales are going to go up that we'll have asset sales...

And free cash flow will build through that time period. So again, I think I just reiterate what Gary said, which is it remains a priority. The exact timing of being debt free, I mean, again, it's our target, it's our goal. But I think importantly, just that making progress on those initiatives. That's what we're focused on.

Yes. And I think, look, we have a history of being relatively creative with the capital markets. We've had a lot of good timing before this 4-year downturn of the housing market. So our buyback wasn't as well timed as maybe our other buybacks and in our capital approach to it, we would have locked it in, but we didn't. Many big banks that you guys worked for told us, "Oh, no, you don't lock it in. Interest rates aren't going up, no, there's one little move." We had the fastest rise of interest rates in history of our lifetimes. So you don't always get these things right. But I mean, yes, when our stock gets to the right levels, would we exercise convertible option to take down debt and move debt. Like we have so many ways to work the balance sheet to do things. You don't want to do any convertible debt at this level. But we don't think our stock is going to be at this level very long, and we think it's going to move with our business and as we execute. And again, we're kind of on the side of the cycle. We just -- we're in our most prolific spending period of all time. Unfortunately, it was post-COVID, we're building some of the most important things we've ever built, and it all cost a hell of a lot more than we'd have built pre-COVID, unfortunate timing. But nonetheless, I'll kind of short-term things to navigate around. I mean once you spend the money, the money is behind you, right? And I look at it and I say, yes, I mean there are some people that want to focus on operating margin, and we're going to carry a lot more depreciation, but for investors who want to focus on that line, all right, focus on that line. Maybe some people are going to be a few hundred basis points better than us. But we're going to be focused on EBITDA and cash flow. And I think smartest investor is going to be focused on that line. And that's where we're going to be able to create, I think, the best returns in this industry.

Your next question comes from the line of Max Rakhlenko with TD Cowen.

So as a follow-up, as you guys exit the investment cycle, following the opening of London and the rollout of states. How should we think about what that margin inflection could look like over the medium term? You've obviously provided a second half outlook. But how should we think about the medium-term margin power as you do start to benefit from the investments that you've made over the past few years?

I mean I think we gave you a longer-term outlook, and we believe that's the right outlook and the right -- refer to the video. Yes. We've kind of laid all that out. So we believe there's -- again, we think we believe there's meaningful margin expansion as whether or not the housing market gets any better just because of the cycle and coming around in the growth that we expect from these investments. And yes, I mean, we don't -- I mean Europe is -- and the U.K. is an even worse than the U.S., right? And it's even getting hit more than the U.S. from the war and stuff like that. But you're talking about -- we're not -- we didn't exactly open at the most optimal time and from a housing point of view and from an economic point of view. But the good news is, I've never seen an economy that stayed down forever. Now I used to say I never saw housing market that stayed down over -- stayed down longer than 18 months in my career. But now we're going into -- yes, we'll definitely probably -- Yes. I don't think it's going to recover this year. So we'll see 48 months. Will it go into a fifth year? It may. It all depends on inflation and interest rates. So -- but -- so we -- I think we're going to see a lot of leverage in this model either way. I mean we're just really excited. We can -- it's one thing that talk about and conceptualize Estates and work on it and work on it and work on it and tweak it and tweak it. And then when you see it all come together, you go through this accelerated learning at the end of a development of a new business like this. And it's just -- I don't think any of us have ever worked harder because we're doing -- we have some of the most important galleries and opening the most important markets in the world and doing some of our best work from platform and physical point of view and we're doing our best work from a product point of view and a presentation point of view. And so -- but I don't think there's ever been a higher level of excitement here. We have a lot of people here that have been a long time, 10 to 20 years and man, like I don't think -- I think everybody sees it very clearly just how unique the product is, just how unique the positioning that the brand is. And so we're excited to see our efforts and work pay off and monetize for our shareholders, and we're all shareholders here, right? Everybody has got skin in the game and everybody's got upside in this effort. So no.

Got it. That's helpful. And then, Gary, as you guys scale and begin to open galleries in the U.S. with the new prototype, how do you think about the unit economics there? Do you think that you can generate similar revenues as the boxes that you've opened over the past decade? And then should we assume that the new galleries because they are going to cost less, should take you higher unit margins as well?

We do, yes. Yes, we'll have a -- I think we're going to have a great return on investment. We laid out for you guys in the video, the compound and the logic behind the compound, right, it's disaggregating the multilevel 3-level gallery and saying, what can you take out? You don't need -- in a compound, you don't need elevators. You don't need a grand staircase. You don't need exit stairwells. I don't think a lot of people know, in all these big buildings, there's 2 exit stairwells that are all concrete going up. There's a giant grand staircase, there's generally 2 elevators. There's all kinds of levels. When you're building a -- there's a restaurant on a rooftop that takes extra steel and bigger foundations to carry the load and takes complex mechanical systems to operate a building like that. And we spent several years here dissecting that. We started seeing post-COVID, the cost became meaningfully more 2x, 2.5x more in some cases. And so we broke it down and said, "Hey, how can we have an experience that's no less inspiring and beautiful." And we came up with a compound. And I think it's going to be -- I think people are going to think it's the newest, great physical experience out there. In some ways, it's going to look to people like we may have spent more money, right? Because they've never seen anything like it. It still looks like it's beautiful gardens you're walking through and but all that area doesn't need to be air conditioned. You've got minimum lighting, garden lighting and stuff like that. We're aggregating all the bathrooms and toilets in one place. Like we're building a -- lot of these buildings, they have electric and a small pipe with sprinkler heads. And it's not -- it's like imagine building a house without bedrooms and without bathrooms and kitchens and all the things that are really expensive, and you just aggregate everything in the center where the restaurant is, I think we've -- I think these things are really smart. And it would be really exciting. So we're excited to unveil them. And then I think our secondary market salaries, I think, we expect everything to be as productive, if not more productive. And I would think all the new things we're going to open are going to be more productive because we've got a bigger assortment, and we've got estates. And we have -- if you think about how we've grown, we've grown through product expansion, primarily in the early years because we had no capital and then platform expansion when we presented those goods at a physical level and the kind of lift that we've talked about historically. So yes, I think the -- all of that we're so excited about, like when we talk about going plus peak, from a spending point of view, the things that we're going under construction, we saw a couple of leftover ones that are -- some cleanups that are a little bit more than that we wanted to spend just we couldn't redesign them. But I think the whole model is going to look different. The return on invested capital is going to hit back, I think, to the levels we were at in our peak. And I think we hit like 75% return on invested capital, yes. And I think we'll be at that kind of level. And yes. So yes, the good news is, we've -- we're just so much smarter and have so much more experience and you'll -- that will all be reflected in the outcome and the economics. But we got a little stuck, we're building in some expensive places an expensive cities that, yes, it's not like we can unwind that -- those things together whoops, let's not build in the most expensive cities in the world with some of the most complex projects at exactly the most expensive time. I mean -- but the good news is what doesn't kill you makes you stronger, right? So we're still here.

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

I'll keep it short. I guess the question I want to ask is just on the guidance, And you've already discussed this a bit. the ramp in sales growth is expected in the second half of this year. And now you're talking a lot about the Estate. I guess the way I want to frame the question is, as you look at the business today, the piece of the business today, I mean how much of a ramp do you need to have in that existing business in order to achieve -- with the components you talked about, these new pieces to achieve that guidance for the second half of the year?

Well, if you really look at the build of the backorders of special orders, right? Our business is better than kind of reflected in the revenue, right? Like we've got pretty big balances. So those balances are being created now. But we're not shipping those revenues. We're not shipping that demand yet because of -- we still have transitional things and impacts from major resourcing. And a lot of our people -- in all categories the people are still catching up. And so we'll just see that -- I mean you have to kind of look at it and say, okay, what does that look like? Where are we really -- what is it building to. You have to think about that flop that's kind of coming across. And a lot of that. When you think about that, Brian, there's a pretty big number that we don't have to drive demand to hit it. It's -- we've already driven that demand, right? And you've got a big chunk of business that's going to just flop over to the second half. Does that make sense?

No, conceptually it makes sense. So I apologize, but have you quantified that piece, I'd like you to use your term, Gary, the piece of the business will flop over to the second half. That's already there and can you quantify that?

Yes, it's in the little table.

Yes, in the letter, it's the $75 million or 4.5%.

Okay. Is that in demand now?

Yes, that's in the demand now. We're not reporting demand, but we're reporting revenues. But yes, all that -- that $75 million is on our books and will ship.

Again, back orders and specials orders over and above normal -- we always have back orders and special orders in our business. But this is elevated because of unnatural things happening between things that are taking more effort like resourcing, transportation impacts whatnot. So that piece, that elevated piece over sort of "normal" is what is Gary and I were talking about for the second half. That's 4.5%.

Yes.

Your next question comes from the line of Zach Fadem with Wells Fargo.

So first question on the initial response from Milan and your expectations for year 1 in the market. And now that you have galleries open in both Milan and Paris with London around the corner, any revised thoughts on sales trajectory from the 3? And if you think New York is a good benchmark for what those markets could look like?

Look, I think they'll all be great markets over time, and we've got to build the brand and build the customer base, build our design business, continue to build the pipeline. And I think I used before with the ramp, the first one was RH England, and that's been opened the longest. And with that ramp to not a great economy for the home business in the U.K., but in a store outside of London with not a lot of people around. So that gives us high hopes, and we have greater brand awareness in London for 2 reasons. There's a lot more expats. There's a lot more people that have lived in New York and gone back and forth. There's a lot more people that know the brand. Everybody speaks the same language so on and so forth. So we meaningfully higher brand awareness, and we've been open out in the Cotswolds, the English countryside for 3 years. So -- and then kind of just getting started in Paris, and we're just kind of open in Milan, and we like what we see. We like the responses that we're seeing. And the key for us is to build the design books and get the ramps. And so I think we're going to -- as these mature and grow, I think we're going to like the outcome. But I think London, I was just talking to the team about this, London is kind of the accelerator for all of it, right? Because everybody goes to London, it is the financial hub and just -- if you were going to be in one place, you'd be in London. And if you're going to be 2, you'd be in London and Paris or London and Milan, they're pretty close for a slightly different reason, Milan is the center of the universe for the home design business because of Salone and Design Week and the eyeballs, you can get not just from designers and from true customers, they come that fly in with their architects and their interior designers, and they're shopping from all the brands at the shows. So I think it's -- look, I think these 3 are the core of the platform. These are the 3 key things the foundation of building a global brand outside of the United States of America, right? And I think I'd say someone told me once they heard Bernard Arnault was asked the question, how do you build the brand in China. And apparently, his response was you build great stores in Paris, London and New York. And so we've just done it backwards, and we threw Milan in there because it's so important for our industry, right? And so yes. This is -- it's really once we get London going, I think the whole thing is like game on. I think London will create the biggest echo. The biggest -- it's where we're known the most, it's where we should ramp the fastest, do the most volume. And because everybody travels into London for so many different reasons. You've got a huge Middle East customer there that lives between London and the Middle East and the U.S. for that matter that I think, knows our brand and it's going to respond to our brand. And I just think the echo of London is going to amplify Milan and Paris and every other gallery that we've opened.

And just a quick 1 for Jack. I think the opening costs in Q1, you said would be about 420 basis points if that ended up being the case. And for Q2, you're guiding, I think, 380 basis points for London. Could you just help us out on which of those costs should we consider transitory and come out in the second half of the year versus costs that are now in the base and will persist?

Q1 ended up 450 basis, so right there with the 420 basis points. We're not guiding specifically the quarters. So you got the year at 270. I guess you can back into some math as to 450 and 380 and how they average out to 270 on the year would be one way to approach it and that delta being transitory being let's call it, mid-100s in the back half and the delta between that and the numbers for Q1 and Q2 are the transitory sort of preopening driven related to the openings.

Your next question comes from the line of Jonathan Matuszewski with Jefferies.

Just 1 question here. Gary, could you share some context on why now is the right time to pursue loyalty program that compensates your trade clients. Presumably, you've maybe considered this pivot in the past. What makes now the right time to roll this out? And if you could discuss maybe just the overall growth trend in your trade business in recent years relative to the end consumer business, that would be helpful, whether trade has been outperforming consumer, and this is the playbook to supercharge it. Or has trade been underperforming and this is a way to improve the trend?

Yes. For those competitors that report trade, I think we've been overperforming in the last 3 years. So we've got a very strong trade business. We have great leadership, great teams, very high-quality people that live and breathe our values that have built great organizations. And this -- yes, it becomes supercharged. Look, I'm the guy that -- we used to have a trade incentive program, and I took it out against a lot of people debate. So -- but when we were making the move to membership, just -- is it the right call or not? I don't know. Probably not now that I reflect on it with the wisdom I have today versus what I felt in, what was that 2016 right, 10 years ago. Yes, I just don't think I was thinking about it correctly. And why is now the right time is because of Estates because Estates opens up the very top of the market for this brand. No other brand has goods at this level of design and quality, no one at the retail level. They may tell you they do like -- they have probably never been into these businesses that we bought. So -- and so we -- and we've taken what we do really well and amplified those assortments. So like you're going to see things you've never seen before. And dimensionalized in a way and presented in a way, just doesn't exist. And why wouldn't you want to open up the best interior designers in the world to what we're doing today. I mean we're just smarter honestly. Like I flip back and if I said today, if I knew what I know today, would I have made the same decision? No, I would not have made the same decision. So I'm smarter today. I know more today, I have more knowledge. And it's funny because I was married to an interior designer. Kendall and I were together for 11 years. I knew her business pretty well. It helped me conceptualize what to do with RH, quite frankly. That helped me see the opportunity. But I don't think I really understood the market correctly, and it's changed too. I mean there's more and more people that -- you have growth in wealth, right? There's more and more people that have the financial ability to use interior designers. Yes, there's more used people -- are more exposed to design and quality more people are better houses and better design everywhere. So anyway, but yes, we're happy to be the advocates and partners and open up our platform and support them in a greater way. And I think, look, today, it's a big part of our business today. Our trade business is a big part of our business. So it's not a little part, but we think it could be meaningfully bigger. And people say, "Oh, you're going to incentivize them." The lift we have to get is very small on incremental business, with massive flow-through on this model.

That concludes our question-and-answer session. I will now turn the call back to Gary Friedman for closing remarks.

Great. Thank you, everyone, for your time and your questions and for the conversation today. And I just want to say to our teams across the country, across the world, across our campus here, I think everybody knows what we're working on. Everybody knows what we're aspiring to do. I think this is one of the most important times in the history of RH. And I couldn't be more proud of the work everyone is doing. The organization that's been built here based on our values and beliefs and our work is going to a new level. I think our performance is going to go into a new level, and it's all because of the team members who have built this thing over the last 25 years that I've been here. So I just want to thank everyone. Everybody's effort is important and contributes to this cause. And I think we're going to feel very proud here very soon, even prouder than we've ever felt. So I can't wait to share it with you. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.