RH (RH) Earnings Call Transcript & Summary

Thank you, and good afternoon everyone. We're glad you could join us for the earnings call covering our first quarter of fiscal 26. Joining me are Gary G. Friedman, who serves as our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Before we begin, I'd like to mention our legal disclaimer: today we'll be making some forward-looking statements as defined under the federal securities laws, including statements regarding our business outlook and other topics covered in the press release we issued today. These forward-looking statements carry a number of risks and uncertainties that might lead actual results to differ materially. If you want a fuller picture of the risk factors that could influence what we report, take a look at the filings we make with the SEC and the press release we put out today. Keep in mind, too, that what we say about the future reflects where we stand only on the day of this call. If new information comes in or events unfold later, we're not committing to update those statements or make any revised version public. One more thing: on this call we might bring up non GAAP financial measures, which take our GAAP results and strip out the effect of particular items. Details about those non-GAAP financial measures, along with how they reconcile to GAAP, are included in the press release on today's results. You can also access a live webcast of this call through the Investor Relations area of our site, ir.rh.com. At this point, I'll hand things over to Gary.

Thank you, Allison. Greetings, everybody. I'll begin by reading our letter aloud. To our employees, partners, and investors. During Q1, revenues reached $800.3 million while adjusted EBITDA came in at 7.1%, both surpassing the upper boundary of what we had anticipated for the quarter, even though backorder and special order balances ran roughly $75 million above where they stood 12 months earlier. That gap stems largely from resourcing tied to tariffs. Because our first-quarter performance came in stronger than forecast, we're lifting our guidance for fiscal year 26 and also offering the following second-quarter outlook. Fiscal year 26 outlook. On the top line, we're looking at growth between 4.5 and 8%. Adjusted EBITDA margin should land between 14.2 and 16%, and adjusted free cash flow is projected at $300 million to $400 million. Those figures account for roughly a 270-basis-point drag on adjusted EBITDA margin, which comes from preopening and start up costs related to supporting our international expansion. Turning to the second quarter 26 outlook: revenue growth of 0.5% to 2.5%, with adjusted EBITDA margin of 11.5% to 13%. This guidance similarly includes an approximate 380-basis-point negative impact on adjusted EBITDA margin, again driven by preopening and start up costs tied to backing our international expansion. As for how we get from where we are now to where we're headed — some of you may be wondering about that bridge. Given the kind of economy we're dealing with right now, can you actually get from your first-half figures to your second-half figures in order to hit the full year? Three components make up what you could call the bridge to the other side. They back up the argument that our business can go from flat in the first half to a 12% gain in the second half, something we've accomplished plenty of times. Those components appear below; our approach calls for cutting backlog, which supplies 4.5 percentage-points over the back half. Adding stores brings in 2.5 percentage-points, and new concepts contribute 5 points via our RH Estates. This sets the foundation for a global luxury brand, akin to structures designed to last for generations. Take enduring fame and profound admiration. Luxury brands are imagined and built the same way — on an exceptionally strong foundation. People see both as hard to achieve and often out of reach. They always require more hours and more money, and usually they're made by relentless, hard-to-relate-to individuals and teams. Over the years, you've heard us describe ascending the luxury mountain. How it isn't meant for those lacking courage. Because the higher up you go, the thinner the air becomes, and the chances shrink. In our view, the work we're set to reveal resembles those grueling final strides and those desperate gulps of air. We think the debut of RH Madrid, Milan, and London could be called the three most transporting and motivating brand encounters found anywhere on the planet. They'll establish the base required to win the esteem and acknowledgment of the European and UK shopper, plus a worldwide 1. They convey a feeling of enduringness, a label that has committed itself to honing its craft across many decades. The final building block is each escapes. Mister Gorbachev, tear down this wall. Ronald Reagan. Our position is that certain people have taste but not scope, whereas others have scope yet no taste. Across the last half-century, the global design business has been comfortable with that division. This business is characterized by shutting people out rather than letting them in. Going back many decades, the pinnacle of residential design — the exquisitely hand-tailored upholstery from Dmitriy & Co., the uncompromising made-to-order casework from Joseph Jeup, the classical splendor of Dennis & Leen, the painstaking reproductions from formations, the artisan-crafted fixtures from waterworks, and the legendary creations of Michael Taylor, whom Architectural Digest called 1 of the greatest interior designers of all time — has remained concealed, locked away behind what amounts to a figurative iron curtain. That curtain is the trade-only showroom network with its closed doors. If you don't carry a professional license or bring in a gatekeeper, you are barred from viewing, encountering, or buying the most refined examples of human craftsmanship. The general public stays on the outside. Meanwhile, several of the absolute finest designs and highest quality items stay on the inside. Almost 40 years ago, while standing at the Brandenburg Gate, a onetime American president gazed upon a world split in two and delivered a defiant, historic command. Mister Gorbachev, tear down this wall. Now, we examine the luxury home sector and pose that very question; with the debut of RH Estates, we are dismantling the obstacles that kept discernment apart from reach. What we're doing is amplifying the work of the world's top designers, artisans, and makers throughout our global platform, and that doesn't mean quality gets sacrificed in any way. It's mastery being set free. By gathering these legendary ateliers together in a way no one else does, and elevating what they create inside spaces of architectural importance, we're opening the door to some of the finest-designed, best-made classic contemporary and modern furniture found anywhere in the world. Pieces that do more than just occupy a room — they're what defines it. But tearing down those barriers takes more than opening doors; it means lifting the creative limits that for years have forced designers into a choice between our scale and the exacting specificity that only trade-only showrooms can offer. To strengthen the design community, we are bringing forward RH bespoke furniture and RH Couture upholstery. Through RH bespoke, we are delivering a degree of customization never before witnessed at scale. Designers and architects can now dictate dimensions for dressers, dining tables, sideboards, and cabinets. So they match the precise proportions of their architectural canvas. At the same time, RH Couture Upholstery will reshape what's possible by folding custom sizing with COM — Customer's Own Material — into the RH ecosystem. We are handing designers the creative latitude to dictate custom sizes and fabrics for sofas, sectionals, chairs, ottomans, and beds. You obtain the fabric from any corner of the globe, and we supply the atelier-level construction and craftsmanship. The scale of taste — our detractors will contend that genuine luxury is incapable of being scaled. They are mistaken. They don't grasp that the capacity to scale pace yields superior quality and value for the customer as well as the designer. As with previous breakthroughs, this one can expand the market, improve how we live, and lift humanity higher. Instead of sticking with the outdated approach in which every item is made alone, we produce these premium designs in tightly managed production runs. Scale provides leverage unlike anything we've had before. That enables far better procurement of materials. Strict quality assurance, plus meaningful gains in manufacturing and shipping efficiency. Let me be clear. Art is not being mechanized by us. The detailed hand carving and finishing work continues to be done one at a time by the finest craftspeople anywhere. Thanks to that human element, each piece stays a unique masterpiece in its own right; yet by bringing together the previously disconnected supply chain, and showcasing these items on a similarly unmatched, inspiring architectural stage, buyers can now reach a standard of design and quality that once was offered only to a privileged few. A fresh agreement with the trade, We know that fully realizing what our products can be depends on the imagination of extraordinary talent. To pay respect to the design community, we are changing the way we work with professionals; we are launching a dedicated program for interior designers, architects, and members of the trade. This initiative guarantees that professionals receive compensation for the enormous value and aesthetic vision they deliver to consumers. Our goal is to motivate the most gifted people in the world to create their work on our platform. forming a mutually beneficial ecosystem in which design is both within reach and rewarded at every stage. The divide between good taste and large scale no longer exists. The curtain has come down. the moment has arrived to bring that wall down. Carpe diem, Gary. Operator, we will now take questions from the call.

Good afternoon, Gary Jack. Gary, with all the discussion about customization in the shareholder letter you just walked us through, I'm curious whether you could give us a big-picture take on what you believe this actually means for the brand's reach and its addressable TAM, particularly once that new trade program is factored in. Like, how much of the market truly gets opened up, I'm not sure there's a way to put it in context for us regarding how you're looking at it right now.

It really does open things up on several levels. To begin with, during last quarter's video, I mentioned that around 60% of the luxury home market consists of the traditional classic segment. At present, our presence in that segment is severely lacking. If you were to examine an RH course book from 2014—I think it had 704 pages—you would find it was completely classic, all rooted in tradition. Now consider our current business: owing to the growth and broadening of modern, followed by a shift into contemporary as trends affected our brand, as happens with numerous brands—and, as you know, a lot of us came up within the fashion industry. So, my background is with Gap, and when you're learning how to develop a specialty brand, the usual approach is to stay tightly focused and narrow so you can cut through in the market. And one thing I didn't really pick up on — when you look at the home industry more broadly — is that trends tend to elevate the aesthetic side during certain cycles, yet the rest of the categories never truly quit selling. Their volume simply drops. That's because architecture is what truly powers this market. Alright, so when we looked back and reviewed our history, we asked ourselves: what were the smartest moves we made, and what did we overlook or could have handled better? Our conclusion, which I also described in the video, is that we can structure our business around the three main aesthetic categories — traditional, contemporary, and modern. We'll call it estates interiors in modern. That's how I'd put it, I suppose. Looking back across roughly a dozen years—maybe ten to twelve—it's possible we handed over something in the neighborhood of a billion dollars. Could be even higher. That's what comes out when we examine the marketplace, revisit the figures, and attempt to project outward—so there's that element. And I'd put it this way: any time you bring something fresh to market, you don't capture a complete hundred percent on top of whatever already exists. Growing a market inevitably brings some cannibalization, whether that means expanding your offerings or your brick-and-mortar presence, or deepening penetration—typically you'll see a mix of incremental gains alongside some cannibalization. The way we see it, this ranks among the most incremental moves we've ever made. Yes, Modern was highly incremental, but that market was quite small. When we introduced RH Modern, the quantity of modern architecture around the globe, even though it was trending and the world was heading that way, is still just a sliver compared to the size of this market. So that's my thinking on the first part. The second part is viewing it through a market lens rather than only an aesthetic one — through a design and quality lens. From where we sit, RH Estates represents that initial rung up toward the summit of the luxury mountain, if you like that image; it's the peak level of quality and design that exists anywhere in the world, unless what you're buying is genuinely rare antiques. Right? But consider the brands we've brought together over the past 5 years, everything we've picked up during that stretch, and what we're now launching with the estates, which all of you have only gotten a tiny glimpse of. I mean, it's such a tiny glimpse; this is simply a caliber of design and quality that the consumer cannot get. You know, we own these showrooms. Take, for instance, one of our absolute best — and we have 2 of these — entry isn't available to just anyone. You have to ring a bell first. Exactly. So suppose you're just a shopper walking by, hoping to go in; ringing that bell is an option. Yet without a scheduled appointment, you may be turned away. And if you happen to be outside the trade, or, well, you don't have an appointment booked. So that covers the design and quality angle, and beyond that comes accessibility — whenever we develop a product, searches on it are always something we perform. Every type of visual search, on each platform, is something we'll carry out. Correct, so we can determine who else is selling something comparable. Right? Because, you know, the world is examining different things and noticing different things and grasping different trends and then attempting to scale things. And I can tell you, I mean, we've never seen such a low hit rate. Compared with what we're introducing to the market. So you could choose to look at it pessimistically and say, perhaps no one has any interest in that. That is the reason it is not showing up for you. No — the real explanation is that, in my view, virtually no other company is actually capable of selling it. They lack the platform, they lack the brand, and they lack the capacity to source it on a value equation the way we are able to. Personally, I have, you know, I have been fortunate. And this one, this is — well, I call it fortunate, though not entirely fortunate. I joke with the team that this is the first trend where, well, I'm old enough to have actually shopped for it myself — you know, thinking about whatever comes along after this, that period of eclecticism and the California look tied to Michael Taylor, there were several different names people gave it, and each one hits a little differently, but the essential pieces of those massive trends that show up — this one is among the biggest there's ever been. This one specifically was bigger and ran longer than modern or any other trend we've taken on since I've been at RH. Right? But I was the customer. I came to RH.

So when I was moving into my house in Belvedere — that's the first house I've ever lived in during my whole life, you know? The only house I've ever built. And, you know, my first wife, she worked as a luxury interior designer, and I was actually her client for a condominium down in San Francisco. In that house I had that round Michael Taylor dining table. I had a reproduction of the Coco Chanel sofa. You know, I had plenty of these various kinds of items that become trends. Now, I probably shouldn't be saying this — you know, some of this stuff, I've gotta watch myself, since every one of my competitors is listening in on these calls. And they're, you know, just waiting for me to slip up so they can hear or see something. But you know, I lived through this trend myself. And so, you know, at my house in Belvedere — how many pieces do I own from Formations that I purchased? You said 6 or 7. 6 or 7 pieces from Formations that I bought years back. I've got the Michael Taylor reptile rectangle dining table in my house, so, you know, I bought 2 of them. There was the round 1 in the condo, the first job we did together, and then the rectangle 1. I know exactly what I paid for those 27, 26, 27 years ago, and I know what they've been selling for lately, you know, since we own those businesses. And the value equation, the quality we're going to bring, and the value equation we're going to bring to market, has never been seen before. You know? And I don't say that lightly. I almost never, you know, go out on a limb like this, but never been seen before. And if you try a visual search online, it isn't out there, unless you want to go on First Dibs and buy an antique, which is fine. We can't stop you from buying an antique. I had to read everybody what we have on the back of our catalog, right? Because if anybody tries to come after any of these goods, it's gonna be a bad day. Yeah. Because we own the intellectual property on the vast majority of what we're bringing to the market. I mean, we could, you know, we have patent pendings on what — what percent of this book, would we say, 80? Yeah. Okay. 75. 65% to 80% of the book should go down. Then we should go back and just actually add it all up. 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, you know, the people making these goods grew up making these goods. At the end of the day, the manufacturers producing these items were previously part of that sector, you know, creating goods for the most exclusive showrooms. That was before we connected with them and began growing alongside them. They're also thrilled to be able to produce this level of quality once more. You know, since they are—well, the market is extremely fragmented; but, you know, so the design and quality, you know, that element of it is enormous. Then the following component you've got is we are, you know, we're going to throw the market open to what do we call them? Super buyers, the furniture. What I mean is, we have an extremely large trade business. We deliver outstanding service to the trade and to high end interior designers and design firms. You know, our teams function as a back office; we'll create designs and renderings and presentations for them. You know? We'll assist them however we can, often with delivery and installation. And yet at the same time, you know, there's a dimension of simply recognition and compensation that, you know, we haven't addressed. And the team jokes about it, yeah, because each time I visit High Point, you know, somebody approaches me and says, you know, like, I adore your brand. Oh my god. And, you know, please, you know, help us make money. You know, let us make money on your brand; and, you know, we haven't provided and incentivized the design trade. And I, and I reflect on it and I think, you know, when—because I came from a, you know, family situation that included an interior designer, and I had—I possess the insight of examining, you know, exactly how complex and difficult that was, you know? And it was also, you know, it was, you know, not only was it lacking transparency, you know, it's simply not accessible. You couldn't obtain and view it. You couldn't purchase it. You know? And I simply believed, you know, eventually, just making high quality goods available would, you know, lead consumers to drive designers toward our brand, and I believe they have. You know? But simultaneously, you know, there are truly excellent interior designers who, you know, operate under a different model. And you know, even, you know, the mother of my girls, you know, who was here consulting with us, what, 10 days ago, 2 weeks ago, just to provide us the insight of a, you know, high end designer. She operates a design firm. She said, you know, she said, listen. You know, do I buy RH? Of course, I buy RH. Do I expect that first? No. You know, many times, you know, my clients will say, hey, look. Okay. Do your designs. So, like, in the main living room, the main bedroom, the main dining room — but then, you know, have RH handle the family room, the media room, and every other bedroom. And she's just standing there, and finally she goes, fine, I'll do it. And she tells me, but in my head I'm going, there's no way for me to earn anything here. You know? Because, like, interior designers work on a markup system, right? Plus an hourly system. But honestly, they sort of need both for the business to function. And I believe we simply haven't been that kind of open platform. And I think we're just missing what is kind of a phenomenal customer. I mean, buying furniture is what they do every single day — it's their livelihood. So when you really examine it critically, it kind of doesn't add up that we aren't serving them. I think it genuinely makes sense in this case as well, you know, the way the timing works, since not only will we offer design and quality at the absolute top tier of the market, we'll also give designers and consumers — you know, for that matter — and every one of our designers the power to customize.

Plus the capability to handle COM and Customer’s Own, you know, materials, plus the capability to handle everything those customers need or want — genuinely bespoke work at the very top tier. What I’d say is that this is only the start. Right? It isn’t, and it isn’t the sole thing we’re going to pursue. Yeah. Somebody asked me the other day, hey, you know, will your pricing be going up? Well, yeah, it’s going to go up. I mean, the quality is enormously, you know, better. Yet it’s still such an amazing value. And the price ought to be higher. This isn’t merely, you know, kind of smooth wood with a sprayed-on finish, or, you know, a modern piece with curved edges; this is hand-patinaed, hand-carved, you know, hand-distressed, with so many details needed to get it right. And each piece is one of a kind, you know, because of the handwork and the way it’s made; and you know, so yeah. But somebody said, oh, well, how do you know you won’t make a mistake? Like contemporary? Well, contemporary lacked the handwork, lacked that level of detail, lacked those things. And we just, you know, were somewhat arrogant back then; so but because, you know, we’re out here with a unique product too, you know, I think that we’re, we’re offering such an unbelievable value, you know? But I think 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 brand launch we’ve done, you know, we really began investing in this in 2000, you know? So here we are, you know, in 2026. Now we bought Dmitriy & Co; and Joseph Jeup in 2020. 2020. Not 2000. Yeah. Thank you. Yes. 2020. Yeah. Thank you. Not that long ago. But, you know, it’s been a long-term investment. So this, you know, and on so many levels, you know, think about the opening of the high-end design market on this, and yeah, there’s nothing we’re doing to value-engineer the product. I mean, you know, we’re making, I would say, identical quality, you know, the diamond table is made with the identical molds of Michael Taylor, you know, the, you know, the tops and everything are the same quality. The finishes, you know, that we’re offering — the array of finishes is at a completely different level. You’re going to see when you see this book, it’s being sent home next week. Where do we stand? End of next week, early the following week? Early following. Yeah. Okay. Early the following week. We continued adjusting and adjusting, and plenty of last-minute concepts came up to sort of improve it while we worked; yet, sure, it also meant things took somewhat more time since it demanded a, well, slightly distinct degree of thinking plus discipline, along with compositions and how it's presented. To deliver it at the standard it ought to be shown at. So, well, those few weeks behind schedule for us, well, it's not a huge issue, right? I realize I've gone through a few analyst reports. I think, oh my goodness, it's delayed. Like, I'm not sure. Like, was Tesla ever punctual? You know? It transformed the entire auto sector. So, well, it isn't about, like, hey, I'm, I'm hurrying toward mediocrity here, okay? We're attempting to create major shifts that are, that are reshaping the industry. And I believe this is one of them. I believe this is, well, this is the largest shift we've ever undertaken; it's essentially, well, distinct across so many levels and unlocks so many dimensions of a market, yet it also unlocks the learning, correct, that can be used for modern and for interiors and so forth and so on, plus contemplating how large our market is, right? Like, when you consider what I just mentioned regarding, well, my daughter's mother, and she said, yes. Customers will say, okay. Handle the primary rooms, and afterward, well, rely on RH for these other rooms. Well, what's truly fascinating regarding that—our entire emphasis with this initial lens, the essential component of the lens, was we were aware of that, incidentally. So we said, let's conquer the primary rooms. Let's ensure we secure the primary bedroom. If we secure the primary bedroom, possess the assortment to secure the other rooms. Let's secure the primary dining room. When you view some of the dining tables we offer, you'd visit first divs and begin at $250 thousand with the expensive dining table; and proceed all the way through it down to the prices we offer it at. You won't discover anything matching our quality, you know, or design. Yes. We examined all of it, right? We're familiar with every dining table on first dibs, you know, at every, well, competitor at the top end, to, well, downward. We invested considerable time researching this market, right? So, well, the objective is, well, the dining room, the primary living room, the primary bedroom. But these items can likewise eclectically be shown, well, in, well, a really cool manner. What you'll observe once it's, once it's all displayed, it's, it appears, it appears unlike RH currently, yet it does appear like RH currently. Yet I believe a really massive shift is coming. You know, folks are simply going to react like, whoa. What I mean is, I think people in the design world are going to say, whoa. I had no idea they were capable of this. So yes, I realize that was quite a long-winded tangent, but, you know, I am just so thrilled. If all of you would like to spend the next 5 hours discussing estate, then yeah, you will definitely have me listening. Thanks, Gary.

And perhaps one really fast additional question for Jack. Because of what was said about tariff refunds in the queue. Could you just assist us or verify if any refunds are included in the guidance?

No. There are no additional refunds. I mean, the refund began arriving, but there is not any — you know, those have sort of been halted. you may be tracking some of that activity regarding the DOJ and the and, you know, how those are unfolding in the courts. So, but when it comes to the guidance, it does not reflect free cash flow specifically does not reflect any additional, tariff refunds.

Thanks, both of you.

Good evening, and thanks a lot for taking my question. I'd like to dig into the 500 basis points of contribution you expect from RH Estates in the back half of the year — that's just under $100 million. What's the basis for that expectation? And you've already alluded to the need to evolve some elements of the model, or the way you interact with core customers like the trade. Do you think further changes are needed to your customer acquisition engine, beyond the legacy model of simply mailing out a book and then expecting the consumer to show up, in this age where your competitors are going hard after social media and other manners by which they reach the consumer? Thank you.

I don't know. They've been doing that for the last 3 years, and we've outperformed all of them. So, you know, I think, you know, when you say we're mailing a book and expecting people to come, we've built the best — the greatest physical platform on the planet Earth for our kind of products. Right? So don't overlook the physical platform, you know? And Michael, if you look at that video I did last quarter, I outlined that, you know, furniture is the least digitized business, you know? 80% is done in stores. It's 20% done online. At the luxury level, it's 95%; so, you know, this is a business you need to see, touch, feel it, you know — comfort, scale, all those kind of things. So I mean, the book is just, you know, it's the small way. We use it to integrate the whole thing, you know? People look forward to getting our books, you know, it's a — it's a physical thing. It's still — 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. You know, we just think it's massively unauthentic to pay some stranger, you know, some influencer to go talk about our goods, and they don't know anything about us; they know nothing about the product. They're not an expert in the — in the field. And, you know, I think — I think that's a lot of noise. You know? Maybe it's good for, you know, building beauty brands to teenagers or, you know, other stuff like that. It doesn't affect what I buy, you know? 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, you know? And, well, when you examine the most recent quarter — take a look at where we stand across a 2-year or 3-year window — on that 2-year measure, nobody besides West Elm has matched our performance. Across 3 years, we beat everyone. Right? And, well, West Elm just delivered a terrific quarter. I believe they're executing extremely well. But here's the thing — with anyone out there purchasing furniture, I often tell folks, when you head out and start banging pots and pans, attempting to grab eyeballs, doing things that aren't genuine, all you're really doing is making noise. You're generating your very own noise. Then you end up, well, pursuing various things while believing they matter. Yet they don't. Right? As for us, we've experimented with and validated a range of approaches, plus we hold plenty of data supporting our actions and, well, the reasons behind our methods. And, well, nobody believed we were wise to construct the stores we built and the galleries we built, yet those worked out quite nicely. Meanwhile, everyone else quit sending out books, while we continue sending out books. Yes, the sole distinction is that, at this particular moment, well, you could compare our model to anyone's. Well, compare it to today's very best customer. Strip out what we've invested in growing internationally, well, strip out what we've invested in constructing estates — which isn't some minor debut, well, of a, well, 80-page book, well, that, well, that, well, 5 or 7 years afterward, you're left with 1 store. Yeah. This is, well, we're placing significant bets to construct a platform the likes of which nobody else has. Right? So in a market this weak, is our model going to appear less impressive? Yeah. Okay. Well? Yet what you're observing are folks who aren't even putting money in. They aren't constructing a thing. They're merely attempting to excel as cost controllers. Right? So yeah, simply hold on until we reach the opposite side of this cycle. And, well, I believe we'll possess a cash generation machine unlike anything this industry has ever witnessed. Understood.

For my follow-up, I'd like to ask about the margin structure over at RH Estates. Does that margin sit sufficiently higher than what the older business delivers, so that it can cover the money you're putting in, the incentives you're providing to the trade community, plus whatever else may be on the horizon, while still delivering the margin growth you've baked into the second half? Or are there additional pieces you're counting on to reach that expected margin expansion? Thanks so much.

If we're judging it by margin structure, I'd say judging it by how good those goods are, how exclusive they are, and how much people want them is the better approach. Right? When you possess a certain standard of craftsmanship, excellence, and limited availability, and you generate that want, the profit percentages become unpredictable. In my view, what we earn is shaped by how we stack up against rivals; if competitors are offering goods out there, fine. Is there a gap in caliber? What size is that gap? To what extent does the styling differ? And things of that nature. What kind of reach into the marketplace do they enjoy? Is their presence large enough to be significant? All sorts of factors come into play. It is not truly about inflating margins to fund something such as a trade incentive. The way the trade works is pretty straightforward. We hand over x, and in return we need an x plus a y list. On a model like the one we run, that's really a small thing, since our leverage and flow-through are so strong, you know? I mean, you just have to consider how our models operate. Take estates, for example — our entire business follows a different model from everyone else's, largely because of where our product sits in terms of price points, right, compared with most furniture sellers. That gives us considerably more leverage, you know, simply in terms of handling the goods, shipping them, getting them delivered, and all of that. Our interior design segment gives us a great deal of operating leverage, since the typical ticket size we're writing is quite large. Sure, doing that work requires putting capital in, but the upside on each additional sale is enormous. Once more, that benefit is somewhat obscured right now owing to the money we're putting into overseas expansion as well as initiatives such as estates and similar efforts. Even so, the margins we enjoy are more than enough to fund everything we're pursuing, and those margins should keep expanding from here. As I mentioned, we're examining what we think the cash generation model for this business will look like, since we consider that the key metric. So once we move past the peak of the investment cycle—which happens this year—then in our view, revenue ought to begin climbing. That's true no matter what the external market does, unless, well, consider this: should a war erupt that severely damages the economy, fuels inflation, and so on, then of course it would put pressure on everyone. Those events do occur, but growing does not require a major shift in housing. A shift in housing isn't even necessary for us. Regarding the guidance all of you just received, I'm not depending on the market improving at all. Things out there might deteriorate, and honestly, I'd be shocked if we fail to exceed those figures. So treating a 5% incremental gain on Estates as the assumption is truly cautious. Thanks so much, and best of luck.

Thanks.

Hello, Gary. Hey, Jack. I'd like to ask about 2 things. First, the estates and how the top line is trending, and then my second question concerns the balance sheet. So starting with the states, could you help us understand the sequencing of how much of the collection is rolling out? My assumption is that it happens continuously. What share of items on floors and galleries will be estates? At what point do we think that's fully ramped? And should the customer deposit line be rising somewhat, not only because of those back orders, but also because of states? Then I'll hold off for my follow-up.

How many questions was that, actually? She's doing fine. That was pretty good. I mean, I just ran into you in Milan. I figured you'd already asked me everything you could think of. you likely have a — yeah. Perhaps everyone calling in should ask you about estates. you are 1 of the few people that saw it. know,, set up in Milan; but okay. So regarding the order in which products arrive at the stores, we'll be terracing across stores. When do we reach, say, 60% of the sales, 65%? That was that? September. End of September? So by the time September ends, we will be in the galleries that account for you know, about 60 to 65% of business, you know, about 2 thirds of the business, and then what's the following wave that arrives? it is Pretty much every month. And Every month? So each month, we December; we will kind of have — by December? So December will be all galleries? Yes. Our second mailing of the states will be early part of November. So and that's going to be a fairly significant expansion of the assortment. So you will you will see us building this assortment over the next couple of years. And then the custom oh, yeah. Yeah; they got this selected. Should we expect deposits to tick up I mean, they follow our business. So as — Yeah. As revenues grow, demand grew up, which is driven, customer deposits tick up. Yeah.

Alright, so I'll make the follow-up a two-parter. Given these backorders, shouldn't deposits be rising by now — or were they already counted in deposits? Then, just regarding the balance sheet: as the business gets better and turns the corner, like you mentioned, Gary, there's substantial leverage there. The cash flow and balance sheet issues ought to work themselves out. Still, could you walk us through the route to becoming debt free by 2029? Any update on that? What additional actions are you taking toward it? How big a priority is that, compared with simply letting the business — letting the estate collection speak for itself — and generating natural deleverage?

I believe we've been fairly clear; it's a major priority, and, as you know, we laid out asset sales of roughly $200 million to $250 million annually across the next 2 years. We recently finished a transaction within our Aspen Real Estate. You know, we sold certain properties to our partner, and, you know, that partner sold the property to us, and now we hold greater independent control over the process — you know, plenty of properties we can monetize faster rather than slower. How many properties did we gain control of? 8 altogether. 8 altogether. We now have 100% control. So, you know, we don't need to work through, you know, a JV and a partnership in order to, sort of, monetize things, and, you know, David G. Stanchak is back, and David understands how to close deals, you know, whether buying or selling. And so, yeah. And, you know, we were, you know, also holding some real estate beyond the JV, and, you know, so there's that, plus there's, you know, the business performance. There's the spending, you know, inflecting downward — you know, deflection, I suppose you'd call it — or, you know, so this multi-check. I know any point jump in with anything, but, you know, it's really the, you know, spending coming down. Sales are going to rise. We'll have asset sales. And free cash flow will build, yeah, throughout that time period.

To repeat what Gary mentioned, that continues to be something we prioritize. As for exactly when we'll have no debt, well, that's our aim, our objective. But what matters most, I'd say, is pushing forward on those efforts. That's where our attention is.

Yes. And I think, look, we've got a track record of, you know, being fairly inventive when it comes to capital markets. You know, we've enjoyed a lot of good timing, you know, prior to this, you know, 4-year slump in housing. So you know, our buyback wasn't timed as well as perhaps our other buybacks were, and in our, you know, capital approach to it, you know, I wish we'd locked it in, but we didn't. And you know, plenty of you know, large banks that you folks worked for advised us, oh, no, don't lock it in. You know, it's you know, rates aren't climbing. Oh, no, there's still 1 tiny move left. And I will send had the quickest interest rate increase ever recorded. In our lifetimes. you know? So you don't always get these things right. But I mean, you know, when our stock reaches the proper levels, would we exercise you know, convertible options to pay down debt and shift debt around. Like, do we have so many methods to maneuver the balance sheet to accomplish things. you know? you know, you don't want to do any convertible debt, you know, at this level. But, you know, we don't believe our stock's gonna sit at this level for long, and we believe it's gonna move yeah, alongside our business; and as we execute and, you know, again, we're sort of on the far side of the cycle. you know, we just we're in our most prolific spending stretch ever, and you know, sadly, it was, you know, after COVID, and we're building some of the most important things we've ever built, and it all cost, you know, a hell of a lot more than you know, we'd have built it before COVID; so yep, unlucky timing, but even so, all sort of near term items to navigate around. I mean, it, you know, once you spend the money, the money's behind you. Right? And you know, I look at it and I say, yeah. I mean, there are some folks that wanna focus on operating margin, you know, and we're gonna carry a, you know, a lot more depreciation, but you know, for investors who wanna focus on that line, Alright? know,, focus on that line. Perhaps some folks are gonna be a few hundred basis points better than us. We're gonna be focused on EBITDA and cash flow. And I think the smartest investors are going to be focused on that line. And, you know, and that's where we're gonna be able to generate I think, the best returns in this industry. Thanks, guys.

The product seems excellent. Best of luck.

Wonderful. Appreciate it, Simeon.

Thanks a lot for taking my question — I really appreciate it. So, just to follow up: once you're through the investment cycle, after London opens and the states roll out, how should we think about what that margin inflection might look like over the medium term? You've clearly given a second half outlook. As you begin to see the payoff from the investments you've made over the past few years, how should we think about medium term margin power?