RH's Q2 2026: Contradictions Emerge on Real Estate Monetization, Inventory Management and Sales Targets, and Tariff and Inflation Impact on Margins

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

Date of Call: None provided

Financials Results

• Revenue: Not disclosed, up 8.4% YOY; two-year up 12%.
• Operating Margin: 15.1% adjusted, up 340 bps YOY; includes ~170 bps drag from Europe investments.

Guidance:

• FY25 revenue growth expected at 9%–11%.
• FY25 adjusted operating margin expected at 13%–14%.
• FY25 adjusted EBITDA margin expected at 19%–20%.
• FY25 free cash flow expected at $250M–$300M.
• Q3 FY25 revenue growth expected at 8%–10%.
• Q3 FY25 adjusted operating margin expected at 12%–13%.
• Q3 FY25 adjusted EBITDA margin expected at 18%–19%.
• ~$30M incremental tariff cost (net of mitigation) in H2 FY25.
• ~$40M revenue shift from Q3 into Q4 and Q1 FY26 due to delayed source book.
• FY25 outlook includes ~-200 bps operating margin drag from international and ~-90 bps from tariffs; Q3 drag ~-270 bps and ~-120 bps from tariffs.

Business Commentary:

• Revenue and Demand Growth:
• RH reported revenue of $2.2 billion for Q2, marking an 8.4% increase, with demand rising 13.7%, despite tariff impacts and a challenging housing market.

• The growth was driven by strong demand trends, strategic separation from competitors, and investments in international expansion, particularly in Europe.

• Operating Margin Improvement:

• RH's adjusted operating margin increased by 15.1%, and adjusted EBITDA rose to 20.6% for Q2, up 340 basis points from the prior year.

• This improvement was due to efficiencies in supply chain, reduced investment costs in European expansion, and effective cost management.

• Geographical Expansion and Hospitality Investment:

• The opening of RH Paris, with significant brand-building hospitality concepts, is expected to drive growth in Europe.

• This strategy is aimed at establishing RH as a global luxury brand, leveraging its investment in iconic locations and immersive customer experiences.

• Tariff Impact and Scenarios:

• RH expects an approximate 5.4% variance between demand and revenues due to tariffs, which will shift to revenues over the second half of 2025.
• The company is actively mitigating tariff impacts by shifting sourcing out of China and leveraging its own manufacturing capabilities in North America.

Sentiment Analysis:

• Management highlighted revenue up 8.4% YOY and adjusted operating margin at 15.1% (+340 bps), strong RH Paris launch, and $81M free cash flow. However, they revised FY25 guidance citing tariff uncertainty, a delayed brand extension, an 8-week delay to the Fall Interiors source book shifting ~$40M from Q3, and ~$30M incremental H2 tariff costs. They emphasized operating in the 'worst housing market in almost 50 years.'

Q&A:

• Question from Simeon Gutman (Morgan Stanley): With free cash flow improving to $250–$300M for the year, do you still need to monetize real estate? And is RH on the cusp of a stronger growth period?
  Response: Real estate monetization is opportunistic, not necessary; we’ll wait for favorable cap rates. The business is investment-ready, but macro risks (inflation, tariffs) temper timing; focus is on killing inflation over rate cuts.

• Question from Steven Forbes (Guggenheim Securities): How much room remains to reduce inventory, and is the spring brand extension at risk from tariffs?
  Response: Inventory turns should improve toward mid-2s with $200–$300M reduction; room to go higher over time. No material risk to the extension unless extreme new tariffs; RH’s scale and upholstery manufacturing footprint mitigate risks.

• Question from Maksim Rakhlenko (TD Cowen): How to think about Europe’s revenue per gallery and four-wall economics vs. the U.S.?
  Response: Paris off to a strong start; London (2026) should outperform Paris; Milan also significant. Four-wall margins should converge toward U.S. over time, though some sites have higher operating costs; brand awareness varies by market.

• Question from Maksim Rakhlenko (TD Cowen): What drove gross margin expansion, and how should tariffs affect the rest of the year?
  Response: Year-over-year expansion reflects less markdown activity versus last year; tariff headwinds intensify in Q3–Q4, with pricing/mitigation managed but unable to fully offset near-term.

• Question from Michael Lasser (UBS): Is discounting driving incremental sales, and can it ease as housing improves? Also, what explains the H2 margin phasing?
  Response: Luxury furniture is structurally promotional; RH’s membership model aligns to that reality amid a weak housing market. H2 operating margins reflect seasonality of catalog expense and embedded pricing/tariff timing in guidance.

• Question from Stephanie Zhadkevich (Citi): How do tariffs affect industry pricing into H2 and 2026, and will the 200 bps international drag ease next year?
  Response: Expect meaningful furniture inflation in H2 as peers take price; impacts likely extend into 2026. International drag persists with London/Milan openings, though Paris ramp could help offset over time.

• Question from Brian Nagel (Oppenheimer): Could tighter inventories constrain sales, and how are you timing tariff mitigation actions?
  Response: Inventory discipline is balanced with multiple growth drivers, so sales shouldn’t be constrained. Mitigation is a mix of judicious price increases and vendor support, applied strategically as with 2018 China tariffs.