RH's Q2 2025: Contradictions Emerge on Real Estate Monetization, Inventory Strategy, Member Discounts, Tariffs, and European Expansion

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 11, 2025

Financials Results

• Revenue: Q2 FY2025 revenue increased 8.4% YOY; demand up 13.7% YOY (2-year revenue +12%, demand +21%)
• Operating Margin: Adjusted operating margin 15.1%, up 340 bps YOY (adjusted EBITDA margin 20.6%, up 340 bps YOY)

Guidance:

• FY2025: Revenue growth 9%-11%; adjusted operating margin 13%-14%; adjusted EBITDA margin 19%-20%; FCF $250M-$300M.
• Includes ~-200 bps operating margin drag from international start-up and ~90 bps tariff impact; ~$30M H2 tariff cost net of mitigation.
• Fall Interiors Sourcebook delayed ~8 weeks; ~$40M revenue shifts from Q3 to Q4 and Q1’26.
• Q3 FY2025: Revenue growth 8%-10%; adjusted operating margin 12%-13%; adjusted EBITDA margin 18%-19%.
• Q3 includes ~-270 bps operating margin drag (international/RH Paris) and ~120 bps tariff impact.
• Outlook excludes any new tariffs from the furniture investigation.

Business Commentary:

• Revenue and Demand Growth:
• RH reported a revenue increase of 8.4% in the second quarter of fiscal 2025, with demand increasing by 13.7%.

• This growth was driven by strong demand despite the polarizing impact of tariff uncertainty and the worst housing market in almost 50 years.

• Operating and EBITDA Margin Improvement:

• The adjusted operating margin increased to 15.1% and adjusted EBITDA margin to 20.6%, both up 340 basis points compared to last year.

• This improvement was due to effective management of long-term European expansion investments and cost mitigation.

• European Market Expansion:

• RH's European expansion in England showed demand trends with gallery demand up 76% and online demand up 34% in the second quarter.

• The opening of RH Paris, a significant brand-building initiative, is expected to create a higher scale to support advertising investments and accelerate growth in Europe.

• Tariff Impact and Mitigation:

• The company expects a $30 million cost of incremental tariffs net of mitigation in the second half of the year.
• Mitigation efforts include negotiating with manufacturing partners, shifting sourcing out of China, and resourcing production to the United States and other countries to alleviate tariff impacts.

Sentiment Analysis:

• Management cited strong Q2 performance: “revenue increased 8.4%… demand increased 13.7%… adjusted operating margin of 15.1%… net income increased 79%.” But they revised FY2025 outlook due to tariffs and delays: “updated outlook reflects a $30 million cost of incremental tariffs… delayed the Fall Interiors Sourcebook… ~$40 million in revenues to shift out of Q3.” They warned of “big furniture inflation in the second half” and ongoing start-up cost drag from Europe.

Q&A:

• Question from Simeon Gutman (Morgan Stanley): With improving free cash flow, do you still need to monetize real estate?
  Response: No; monetization would be opportunistic. RH is not a long-term real estate owner and will sell when conditions are favorable; ample assets (~$500M equity value) provide flexibility.

• Question from Simeon Gutman (Morgan Stanley): Is RH on the cusp of a growth period as investments peak?
  Response: Core business is ready with post-peak investments, but macro risks (inflation, tariffs, rates) warrant caution; priority is taming inflation over rate cuts.

• Question from Steven Forbes (Guggenheim): How much room remains to reduce inventory and any risk to the spring brand extension launch?
  Response: Brand extension for spring 2026 is on track barring extreme new tariffs; inventory turns can improve toward historical ~3x with $200–$300M reduction potential.

• Question from Steven Forbes (Guggenheim): Will three galleries open with the new brand extension in spring?
  Response: Yes—Greenwich and San Francisco confirmed; West Hollywood depends on permits, with a phased plan including a future restaurant.

• Question from Maksim Rakhlenko (TD Cowen): How to size European gallery revenue and four-wall economics vs. U.S.?
  Response: Paris is off to a strong start; London and Milan expected to be larger. Over time, four-wall margins should resemble U.S., though near-term start-up costs weigh.

• Question from Maksim Rakhlenko (TD Cowen): What drove gross margin improvement and how to think about promotions vs. tariffs?
  Response: Gross margin improved YOY by lapping prior markdowns; H2 gross margin faces tariff headwinds—pricing/mitigation helps but cannot fully offset.

• Question from Michael Lasser (UBS): Is discounting driving incremental sales and will you pull back as housing improves?
  Response: At luxury furniture levels, the industry structurally discounts (e.g., designer pricing); RH’s membership model competes effectively, and promotions are necessary in this housing downturn.

• Question from Michael Lasser (UBS): What underpins back-half operating margin guidance?
  Response: Seasonality (catalog/advertising expense timing) and embedded pricing/mitigation drive phasing; specifics by quarter not disclosed.

• Question from Steven Zaccone (Citi): How will tariffs affect industry pricing timing and magnitude?
  Response: Expect broad furniture inflation in H2 2025; most players must raise prices, including U.S. assemblers impacted by imported parts/fabrics; pressures may persist into 2026.

• Question from Steven Zaccone (Citi): Will the ~200 bps international drag ease next year?
  Response: Not immediately; London and Milan will carry heavy start-up costs, with improvement dependent on Paris ramp.

• Question from Brian Nagel (Oppenheimer): Can tighter inventory become a sales headwind?
  Response: There are trade-offs, but new concepts, major gallery openings (e.g., London/Milan), and potential partnerships/licensing should support growth.

• Question from Brian Nagel (Oppenheimer): Are pricing actions synchronized with tariff impacts?
  Response: A mix—RH adjusts prices judiciously and uses its established tariff playbook and membership levers, balancing margin protection with demand.