RH's Q3 2026 Earnings Call Contradictions: Tariff Management, Pricing Strategy, Inventory, and European Markets

Date of Call: None provided

Financials Results

• Revenue: Up 9% in Q3 and up 18% on a two-year basis (no absolute dollar revenue disclosed)
• Operating Margin: Adjusted operating margin 11.6% (below the 12.5% midpoint of guidance) — adjusted EBITDA margin 17.6%; Q3 margin shortfall attributed to higher-than-forecasted tariff expense on prior-period special order/backorder sales and tariffs opening expenses; free cash flow $83M in Q3 and $198M YTD; net debt $2.427B, down $85M sequentially; inventory down 11% vs prior year and down $82M vs Q2.

Guidance:

• Q4: revenue growth expected 7%–8%; adjusted operating margin 12.5%–13.5%; adjusted EBITDA margin 18.7%–19.6%; includes ~200 bp drag from international investments/startup costs and ~170 bp impact from tariffs (net of mitigations).
• Fiscal 2025: revenue growth expected 9%–9.2%; adjusted operating margin 11.6%–11.9%; adjusted EBITDA margin 17.6%–18%; free cash flow $250M–$300M; includes ~210 bp drag from international investments/startup costs and ~90 bp impact from tariffs (net of mitigations).

Business Commentary:

* Strong Revenue Growth Despite Market Challenges: - RH reported revenue growth of 9% in Q3, with a two-year increase of 18%. - This growth was achieved despite the worst housing market in almost 50 years and the impact of tariffs, indicating the disrupting nature of the brand.

• Impact of Tariffs and Cost Management:
• Adjusted operating margin was 11.6%, below the expected 12.5% due to higher-than-forecasted tariff expenses and higher tariff opening expenses.

• The company is mitigating these impacts through investment in international expansion and strategic startup costs, affecting its margin outlook.

• Market Share Gains and Strategic Expansion:

• RH gained significant market share from fragmented to-the-trade design showrooms and regional high-end furniture stores, with share gains ranging from 12% to 28% over two years.

• This is attributed to strategic positioning and innovation, including the launch of new concepts and entrant into new markets like RH Paris, aimed at building a global luxury brand.

  

• Inventory Reduction and Cash Flow Management:

• Inventory was reduced by 11% year-on-year and $82 million from Q2, contributing to $83 million in free cash flow generated in Q3.
• The reduction in excess inventory and effective cash flow management reflect the company's ongoing efforts to optimize operations and maintain financial stability in a dynamic market.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized industry-leading growth (Q3 revenue +9%, two-year +18%), on-track FCF guidance ($250M–$300M), strong international rollout (RH Paris ramping) and a major product launch planned in Milan; but warned of material risks from tariffs and the worst housing market in decades, noting tariffs disrupted supply chains and pressured margins.

Q&A:

• Question from Steven Forbes (Guggenheim Securities): Can you give color on how the demand book is building for RH Paris and how that influences expectations ahead of RH Milan and RH London?
  Response: RH Paris demand has ramped quickly—core goods weekly demand rose ~62% after initial weeks—providing strong international validation and operational learnings to inform Milan and London openings.

• Question from Max Rakhlenko (TD Cowen): How did customers respond to recent price increases given tariffs, and what is the timing and potential scale of the new collection you plan to roll out next year?
  Response: Customers have largely absorbed price increases while RH pursues price, sourcing and vendor mitigations for tariffs; the new collection will launch at Salone in Milan and is expected to be a multi-year, material growth initiative targeting high-end architecture.

• Question from Michael Lasser (UBS): Given the dynamic environment, should RH slow the pace of initiatives to gain predictability/profitability, or continue prioritizing top-line growth; and does Q4 guidance signal limitations in passing through tariffs?
  Response: Management will not slow strategic initiatives—continuing to invest for long-term brand and market separation rather than trading growth for short‑term predictability.

• Question from Simeon Gutman (Morgan Stanley): How did furniture demand and customer behavior look in the quarter, and can we assume free cash flow stays positive going forward?
  Response: Company expects free cash flow to remain positive supported by inventory reduction (~$300M targeted) and lower capex, but cautioned macro and tariff volatility mean outcomes are not guaranteed.

• Question from Jonathan Matuszewski (Jefferies): Can you quantify the dislocation/market-share gains coming from fragmented design showrooms, regional high-end stores and independents?
  Response: Most share gains are coming from fragmented design showrooms, regional high-end retailers and independents; while exact measurement is difficult, RH reports clear outsized share gains at the high end.

Contradiction Point 1

Tariff Management and Pricing Strategy

It highlights a shift in the company's approach to managing tariffs and pricing, which could impact profitability and investor perceptions of the company's financial management.

What drove your first significant price increase and how are customers responding? What's your future pricing strategy? - Max Rakhlenko(COWEN)

2026Q3: We've taken several price increases due to tariffs. The market is adapting, and there's a need to make tariffs fair. Our focus remains on offering a fair value for our products. - Gary Friedman(CEO)

How should we think about revenue per market or gallery over the medium term? - Maksim Rakhlenko(TD Cowen)

2025Q2: We have not taken a price increase, and we've absorbed the tariff. We're providing fair value to the industry. - Gary Friedman(CEO)

Contradiction Point 2

Inventory Reduction and Turnover Rates

It involves differing statements regarding inventory reduction and turnover rates, which are critical for managing operational efficiency and cash flow.

How is the furniture market affecting RH's performance, and will free cash flow stay positive? - Simeon Gutman(Morgan Stanley)

2026Q3: We expect to run in the mid to high 2s and we're very excited about the progress we're making with that. - Jack Preston(CFO)

With the change in average tariff rates and excess inventory, how much room remains for continued net inventory reduction? How much visibility do you have on the planned spring launch of the new brand extension? - Steven Forbes(Guggenheim Securities)

2025Q2: We expect to see good improvement, we'll probably be down to mid-2s and possibly mid-3s. - Jack Preston(CFO)

Contradiction Point 3

Pricing Strategy and Tariffs

It highlights a significant shift in RH's pricing strategy and approach to managing tariffs, which directly impacts profitability and market positioning.

What was the impact of your first significant price increase? How are customers responding to recent price changes, and what's your strategy for future pricing? - Max Rakhlenko(TD Cowen)

2026Q3: We've taken several price increases due to tariffs. The market is adapting, and there's a need to make tariffs fair. Our focus remains on offering a fair value for our products. - Gary Friedman(CEO)

Did you face headwinds in the quarter from reciprocal tariffs? - Andrew Carter(Stifel)

2025Q1: The company has delayed the launch of a new brand extension and expects a 6-point revenue deferral from Q2 due to reciprocal tariffs. However, the outlook reflects confidence in market recovery post-disruption. - Jack M. Preston(CFO)

Contradiction Point 4

Development of European Markets

It involves differing perspectives on the development and expectations for RH's expansion into European markets, which are critical for future growth.

How is RH Paris affecting performance expectations before RH Milan and RH London? - Steven Forbes(Guggenheim Securities)

2026Q3: RH Paris is quite different from our previous openings. It's designed to be aspirational, and the demand is building. The high traffic indicates significant interest. The Milan and London openings will follow Paris, aiming to build brand awareness in key luxury markets. - Gary Friedman(CEO)

Can you provide an overview of how your demand planning and forecasting for Paris, London, and Madrid have evolved, particularly as part of your advertising investments to boost European growth? - Steven Paul Forbes(Guggenheim)

2025Q1: The data shows that European galleries have been more productive than expected, despite choppy execution in business operations. Three headline areas for improvement include being in stock, having the right fabrics, and optimizing special order timelines. - Gary G. Friedman(CEO)

Contradiction Point 5

Inventory and Tariffs Strategy

It involves differing approaches to managing inventory and tariff-related pricing strategies, which directly impact operational decisions and financial performance.

How are customers responding to the first significant price increase, and what is your strategy for future pricing? - Max Rakhlenko (TD Cowen)

2026Q3: We're positioned well with inventory. We'll adjust pricing, negotiate with vendors, and consider domestic sourcing. - Gary Friedman(CEO)

Have you started adjusting prices due to tariffs, and when will you implement adjustments for the recently announced tariffs? - Michael Lasser (UBS)

2025Q4: We're not going to react quickly. This is a time to think, not panic. We saw tariffs go up and down before. - Gary Friedman(CEO)