1Q25 Update.

RH reported 1Q25 and revenues were +12% y/y, a +200bps q/q acceleration. Though operating margins compressed to just 6.9%, down from 7.5% in 1Q24. For full year 2025 they are still guiding to 10 to 13% growth, with adjusted operating margins of 14 to 15%.

2025 free cash flow is forecasted to be $250-350mn with capex falling off over the next few years. They still are aiming to open 7 to 9 new galleries and 2 to 3 design studios/ outdoor gallery concepts each year.

While RH continues to weather a slow housing market, which was exacerbated by the liberation day tariffs, they noted progress internationally with demand in Europe picking up. They also increased promotional activity in the quarter by increasing the discount on their Outdoor collection to 35% off for members. This was in addition to a permeant increase in the membership discount from 25% off to 30%.

Gary Friedman framed this discount increase as the result of a “5 year debate” to move their discount more in line with trade industry average discounts, which run 30-40%. Coupled with their elevated inventory and high interest costs, it is likely they felt pressured to increase sales velocity to improve cash flow, even if it came at the cost of margin.

Nevertheless, Gary Friedman continues to be as enthusiastic as ever about the long-term vision of RH. With their international push—and some of their most ornate galleries ever, particularly their Paris location, still yet to be launched—he firmly believes the brand is building up their long term desirability. This is key to positioning the brand to earn higher margins and more volume long-term.

Still though, all of the concerns about their high debt load remain (see last quarters update here). Even if you have full faith in Gary’s vision, this remains a key risk as they have $2.2bn in debt that will need to be paid down or refinanced in a couple years.

However, at $185 a share, or a market cap of ~$3.5bn, upside is very large too. Just achieving $5bn in sales (the low end of their goals for just North America) would yield a  $12bn enterprise value at 20x earnings. Their intention though is that the international business will be even larger than America. While there may be much to debate about RH, one thing is quite clear: the distribution of outcomes are quite large.  

Call Notes.

RH England (London Location)

• Demand is up +47% in 1Q25, reaching $37-39mn and online doing a further $8mn
• The RH gallery in the countryside is doing around $46mn now and they expect significantly more from the London Gallery

International

• “We’re also pleased to report that our business in Europe continues to accelerate, with demand growth of 60% in the first quarter across 2 comparable galleries, RH Munich and RH Dusseldorf.”
• “Continued demand acceleration in our noncomparable galleries, RH Brussels and RH Madrid.”
• “believe RH Paris, the gallery on the Champs Élysées, will be our most elegant and inspiring gallery yet.”
• Unit Economics: “over the next couple of years to levels that will drive four-wall profitability, four-wall cash contributions as good or better than the U.S. That’s what it’s starting to look like. And if we really kind of fix some of these things, you just start to get really excited of what this model can look like”

New Design Aesectic

• Japandi, “harmonizing elements of Japanese serenity and Scandinavian simplicity.”
• 3 Stand alone galleries and a new Sourcebook

Tariffs

• Chinese supply has dropped from 16% to 2%.

Stock Buyback/ Real Estate Timing

• “Do I wish I waited another year or 2 to buy our stock? Did I think the housing downturn was going to be 3 years? Yes, I wish I waited to buy the stock. Did I know the housing downturn is going to be 3 years? No. But then again, when we look back at the assets we have and what we can monetize and look at the momentum of the business that we have, we look at the cash flow potential of the business, when you think about cycling this time, we spent a lot of capital and it’s expensive to build today. I made a comment in the letter that I don’t think we’ll ever see someone build the kind of retail experiences we’ve built over the last 15, 20 years. They just won’t be able to afford to.”
• “Post-COVID, the cost of building one of our galleries is almost twice as much”

First RH freestanding Interior Design Studio

• “It’s 3,000 feet, it’s doing $1 million a month… And that’s just weeks, warming up.”

On Increasing the Discount

• “we’ve been thinking about taking membership from 25% to 30%, I don’t know, for 5 years. It’s not a new idea for us. It’s a long-term strategic move because we live in a really promotional world, and we’re a market leader and other people try to do things. I wanted to start with nobody sells furniture at granular price anywhere in the world. All furniture is on sale basically. And it’s just a sale industry. It’s just — it even starts at the highest end with interior designers. Every interior designer gets 20% to 40% off. Most of them get 30% to 40% off the design showrooms.”
• “But we just always thought at the trade level, the discount is more 30% to 40%. And we just think that will open up the market. It feels more compelling.”
• “we believe another washtub bet is to play offense in the current environment by increasing our membership discount from 25% to 30%. This incremental incentive will position us to capture increased market share and drive additional membership, which will serve us extremely well when the housing market recovers.”

Capital Raise

• “No. But I mean would we raise capital opportunistically, maybe. Not at this stock price. I mean we’re kind of famous for doing 0 coupon convertibles. I mean probably missed the window at [ 450 ]. We should have done one. And I mean the great thing is we’ve got a highly volatile stock, so we can monetize the volatility and raise capital in the convertible markets pretty easily but not at — where the stock is today. If it goes up to a much higher price, would we think about it? Of course, we would and because it would lower interest rates than — yes, so — but there’s nothing we’re not doing that we want to do right now.”

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*At the time of this writing, one or more contributors to this report has a position in RH. Furthermore, accounts one or more contributors advise on may also have a position in RH. This may change without notice.