RH (NYSE:RH) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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The full earnings call is available at https://events.q4inc.com/attendee/612645671
Summary
RH reported net revenues of $922.2 million, exceeding guidance, with a 2.6% increase year-over-year and a 4.2-point acceleration from the first quarter.
The company achieved a normalized adjusted EBITDA margin of 13.4% and generated $72.3 million in cash, including a $42 million distribution from Aspen joint ventures.
RH revised its fiscal 2026 outlook, projecting revenue growth of 5.5% to 7% and an adjusted EBITDA margin of 15% to 16.2%.
The introduction of RH Estates is expected to significantly expand the brand’s total addressable market, potentially doubling it.
The company plans to aggressively expand the RH Estates assortment, with a fourth-quarter revenue growth outlook of 16.1% to 21.2%.
RH’s international expansion continues, expecting the drag on EBITDA margins from international operations to decrease in 2027.
New RH Compounds and single-story Design Galleries are expected to enhance return on invested capital and decrease construction timelines.
Management emphasized the strategic importance of RH Estates and the potential for it to become a significant revenue driver, similar to the launch of RH Modern.
The earnings call highlighted ongoing efforts to protect the exclusivity of RH Estates through intellectual property rights.
Full Transcript
OPERATOR (Operator)
Hello everyone. Thank you for joining us and welcome to the RH second quarter fiscal 2026 earnings call. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Alison Malkin of ICR. Alison, please go ahead.
Alison Malkin, ICR
Thank you. Good afternoon everyone. Thank you for joining us for our second quarter fiscal 2026 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions and only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.
Also during this call we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today’s financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com and now I’d like to turn the call over to Gary.
Gary Friedman, Chairman & CEO
Good afternoon, everyone. We’re coming live from New York City today. We got in last night for the opening of our first RH Estates Gallery in Greenwich, Connecticut. I know I saw some of you there last night, and those who haven’t seen it, I would encourage everyone to get there—our newest, latest, greatest work. So let me start with the letter to our people, partners and shareholders. Net revenues of $922.2 million exceeded the high end of our guidance, increasing 2.6% versus last year and accelerating 4.2 points versus over the first quarter as our momentum begins to build from the significant growth strategies we have recently put into motion.
Normalized adjusted EBITDA margin of 13.4% also exceeded the high end of our guidance for adjusted EBITDA margin and we generated $72.3 million of cash in the quarter, inclusive of free cash flow and a $42 million distribution from our Aspen joint ventures, excluding tariff refunds of $69.2 million. We recognized a tariff benefit of $55.1 million in the second quarter and expect to recognize an additional $13.9 million tariff benefit in the second half of the year, which we plan to use to offset $50 million of unplanned cost increases across our supply chain due to a significant and sustained spike in oil prices as a result of the continued conflict in the Middle East. The remaining $19 million of tariff proceeds will benefit earnings and it’s included in our updated adjusted EBITDA margin outlook for fiscal 2026. Updated fiscal year 2026 outlook: revenue growth of 5.5% to 7%; adjusted EBITDA margin of 15% to 16.2%; free cash flow, asset sales and distribution of equity method investments of $300 million to $400 million. The above outlook includes an approximate negative 340 basis point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion.
Third Quarter 2026 Outlook: revenue growth of 5% to 6%, inclusive of backlog reduction of 2.5 points, RH Estates of 2 points, new galleries and other 1 point; adjusted EBITDA margin of 12.5% to 13.5%. The above outlook includes an approximate negative 310 basis point adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. Fourth Quarter 2026 Outlook: revenue growth of 16.1% to 21.2%, inclusive of backlog reduction of 6.5 points, RH Estates growth of 8 points, new galleries and other of 4 points; adjusted EBITDA margin of 19.7% to 22.9%. The above outlook includes an approximately negative 190 basis points of adjusted EBITDA margin impact from pre-opening and startup costs to support our international expansion. Expanding the brand and doubling the TAM: we believe the introduction of RH Estates, our latest brand extension, introduced with a 268-page source book that arrived in homes late June through mid-July, has the potential to double the total addressable market of the RH brand.
Over 60% of luxury homes across North America have traditional or classic architecture, with a higher concentration in Europe. A home’s architectural vernacular is generally the driving factor influencing stylistic direction for both interior designers and consumers. Additionally, we believe traditional and classic furniture will anchor the next major style trend across the industry over the next 20-plus years. As the dominant trends from the 1980s through 2010, such as eclecticism based on classic design and antiques highlighted with contemporary modern pieces, and the California look pioneered by Michael Taylor—who Architectural Digest called one of the 20 greatest designers of all time and who twisted eclecticism towards a more rustic yet refined point of view, blurred the lines between indoors and outdoors. Michael Taylor’s California look was amplified and refined by Richard Hallberg, Daniel Cuevas and Barbara Wesley, designers who together launched Formations, one of the most admired and respected design firms to-the-trade luxury furniture showrooms in the United States, recognized and respected globally.
The three later acquired Dennis & Leen, giving them authority in authentic classical European furniture and antiques, blending them masterfully and creating a stylistic vocabulary that was layered and looked to have been collected over time. Their flagship showrooms on Melrose Avenue and the West Hollywood Design District have been the first stop for many of the best interior designers and collectors from around the world. Our acquisitions over the past six years of Michael Taylor Designs, Formations, Dennis & Leen, Joseph Jute and Dimitri, plus our decades-long relationship with many of the world’s distinguished antique collectors such as Ed Hardy of San Francisco, Ludovic Messenger—who set the tone and trends at the world-famous Paris flea market—and Rebecca Hill of London, and Gino who now leads product curation for RH Upholstery, plus designers such as Anoushka Hempel—the inventor of Blake’s, the first and most famous boutique hotel in the world, who also designed the World of RH Bar & Lounge and the Perch Restaurant at RH London—plus the many designers, artisans and manufacturers who are all part of the intricate and inspiring RH ecosystem of design have come together to lead, form and ride this next wave with the launch of RH Estates.
This is a collective effort with a level of talent, experience and scale unseen before in our industry. While we launched RH Estates with a conservative initial mailing, our plan is to aggressively expand the assortment and circulation in November, where we will have Estates on the main floor of our galleries that represent 80% of our business, and in-stocks will be at an adequate level to meet and fill demand, hence the fourth quarter acceleration in our outlook.
You can expect us to continue to rapidly expand the assortment over the next five years, and we predict it will represent 50% of our offering at that time. We also believe Estates will be margin accretive on multiple levels: one, we believe the quality, design and exclusivity of the offering will command higher margins; and two, the average price point is currently 45% higher than our existing assortment, thus creating cost leverage and margin accretion throughout our operating model.
It’s also important to note that we will aggressively protect the exclusivity of our products and the integrity of our brand. Almost the entirety of the RH Estates collection is currently protected by trade dress or has design patents pending due to the acquisitions of Michael Taylor, Formations, Dennis & Leen and Dimitri, as well as pieces developed with internal and external designers. You will note on the back of the source book it reads: RH vigorously protects and pursues appropriate legal remedies against unauthorized copying, imitation or misuse worldwide of its product designs, photographs and collection names through intellectual property rights, including design patents, unregistered design rights, trade dress, trademarks, copyrights and pending applications. Extraordinary takes more time, costs more money, involves more people doing more things in a more complicated manner. But it’s worth it. Over the entrance of RH Center of Innovation it reads: RH, the home of the extraordinary, the remarkable and the amazing. I’m sure there are people who visit or come in for an interview and think the above is some corporate nonsense.
I’m here to tell you it’s not. It’s logic, experience and, I would argue, common sense. What we’ve learned on our 26-year journey of transforming Restoration Hardware—a nearly bankrupt company with a $20 million market cap and a box of Oxydetergent on the cover of its catalog—into RH, the leading luxury home brand in the world with almost $4 billion in annual revenues, is that we always figured out how to monetize extraordinary and remarkable work.
And we found it very hard to monetize ordinary and unremarkable. And yes, it has taken more time, cost more money, involved more people doing more things in a more complicated manner. And yes, it has always been worth it. And this time will be no different. If you’re a long-term shareholder, an owner like I am, thank you for your belief and patience. While we’ve been running through the mud for the past four years of the worst housing market in four decades, we’ve also made some amazing investments, done remarkable work and expect extraordinary results over the next several quarters and years.
Let me take you through a few of them. RH International: we expect the drag from International to decrease from 450 basis points in half 1 of this year to 250 basis points in half 2, or 340 basis points for the year. We further expect the drag from International to decrease from 340 basis points in 2026 to 150 basis points in 2027 as we cycle the significant investments of opening our three global flagships in Paris, Milan and London over a 10-month period from September 2025 to July 2026.
On June 27th, we opened what I believe is our most innovative and extraordinary brand experience yet, RH London—The Gallery in Mayfair. If you want to see our very best work, and maybe the best work in the world of retail, it’s at 7 Burlington Gardens in the heart of Mayfair. I’m happy to report the design pipeline reached almost $7 million in the first eight weeks, rivaling the design pipelines of RH Newport and RH New York. It will take several months to turn these high-caliber, complex design jobs—some in the million-dollar range—into demand and revenue, but the response to RH London has been nothing short of spectacular.
As I mentioned on our last call, I believe RH London will be the amplifier of the RH brand recognition across Europe and the Middle East. Our record investment cycle is now post-peak, which will result in lower capital spending and higher returns on invested capital. We expect adjusted capital expenditures to decrease from $240 to $260 million in 2026 to $175 to $200 million in 2027. We expect new gallery opening costs to decrease from $48 million in 2026 to $18 million in 2027.
We have cycled through our real estate pipeline that included three global flagships and several multi-story galleries with rooftop restaurants where construction costs doubled post-COVID. We have one multi-story gallery left to complete in Houston in 2027. Our new real estate strategy includes RH Compounds, a multi-building shopping experience with connecting garden courtyards and a central atrium restaurant, under construction in Naples, Florida—scheduled to open at the end of 2026 or the beginning of 2027—and another RH Compound that should be under construction soon in Aventura, Florida, opening in 2027.
Growth projects are projected to have a payback in the 12- to 18-month range with return on capital metrics we were accustomed to prior to the pandemic. Additionally, as previously mentioned, we have developed a single-story RH Design Gallery with integrated restaurants with similar expected 12- to 18-month payback ranges, and we are confident that our multiple go-to-market retail strategies of RH Compounds, RH Ecosystems, RH Design Galleries single-story, and RH Interior Design Offices will significantly increase our return on invested capital and decrease construction timelines.
Our long-term success and strategic separation is the result of innovating and investing during uncertain times, and this time is no different. Launching RH Estates—the most compelling collection in the history of our industry that has the potential to expand the brand and double the TAM. Opening three of the most innovative global flagships that will likely never be duplicated in our lifetimes. Developing a global hospitality brand with restaurants that drive significant traffic, brand awareness, and generate on average 65% of the aggregate galleries’ rent they reside in.
Building the world’s largest residential interior design firm that is moving our brand beyond presenting and selling products, to conceptualizing and selling spaces—all during the darkest days and most prolonged housing downturn in four decades—is not for the faint of heart. Never underestimate the power of a team of people who don’t know what can’t be done. Especially these people. Onward, team. Carpe diem. Operator will now open the call to questions.
OPERATOR (Operator)
We will now begin the question-and-answer session. We kindly ask that you limit yourself to one question and return to the queue for any additional. If you would like to ask a question, please press star one. To raise your hand and to withdraw your question, press star one again. We ask that you pick up your handset when asking a question for optimum sound quality and, if muted locally, please unmute your device. Please stand by while we compile the Q&A roster.
Your first question comes from the line of Steven Zaccone with Citigroup. Your line is currently opening. Please go ahead.
Steven Zaccone, Analyst at Citigroup
Great. Good afternoon. Thanks so much for taking my question. Fun party last night in Greenwich. Congrats on the opening. Maybe we could start there. Gary, could you talk a little about the early demand trends for estates? Are you seeing new customers? Maybe how this launch has played out relative to ones in the past? And then the price point premium of 45%, that seems sizable. There was a point in the past you talked about pricing being a bit too high.
Why is estates different in terms of pricing?
Gary Friedman, Chairman & CEO
Thank you, Stephen. Thanks for coming to our opening last night. Let’s… I’ll kind of try to take the questions backwards. Why is 45% reasonable and why is this different? Well, the one that the product’s completely different. So start there. If you think about that kind of pricing mis-cues, we did with Contemporary. That was more of a simple, modern aesthetic. A contemporary aesthetic that was a product that was simpler to make. And I don’t think there’s anything like RH Estates in the market today.
At least nowhere we can find. If you try to do a reverse Google search on any of our product, you’re not going to find it. You might find a foreign website that tried to pick up some of our pictures and pop them on a, you know, no-name kind of location. So it has to do a lot with the exclusivity and the quality and the desirability of the product. These products were being sold for two to three times our retails. You know, I don’t know anybody selling this level of quality, these kind of finishes.
If you look at the Estates book and what we did with the product, you know, you open and you see, you know, the pictures of the photos are very close, tight shots showing that level of detailing and carvings and the hardware details, the finish details. You see two full pages of finishes up close, the size of, you know, real-life finishes. No one’s ever done anything like that in this industry because no one’s ever had finishes like this in this industry.
It’s available to a consumer, right, that wasn’t a design showroom, only available to the trade and, you know, with long lead times and special-order finishes and, you know, where you might have to wait, you know, four to six months or longer. You know, my first wife was a high-end interior designer and that’s why I understand this industry. I was her client on two projects and then someone business partner for 11 years and saw the inefficiencies in the industry, and that really framed the opportunity I think for RH as we see it today is that experience.
So when you’ve got, when you’re the only one with the level of design and quality in a marketplace, you know, you demand a premium. Like, the price is too high? I think they’re incredible value. You can’t find this kind of product at these kind of prices. So we don’t think about price so much as we think about value. Right? We think about design, quality, and value in that order. If nobody likes the design, nobody cares about the price. So first you have to, with a consumer, if they love the design, they love the design, they’ll look closer.
They’ll either click on the website or they’ll walk up to the product. And then the second thing a consumer generally does is they perceive the quality. So they’ll walk up to it in a gallery, in a store, they’ll zoom in on a website, look closer at a page if it’s a source book or catalog, and they’ll make a perception about quality. And then they’ll look at the price, and at that point the consumer will make a decision about that design at that quality: is that price a good value?
So it’s not a one-dimensional price discussion; it’s always a design, quality, value discussion. We don’t care about the price of anything if we don’t love the design. Right. And neither does the customer. So I think you’ve got to start with where, if you’re a consumer, what do you think about the design? You know, how do you think about the quality? Walk up to it, touch it, open a drawer, look at the details, look at the hardware, look at the finishes, and then look at the price.
And I think that’s the hierarchy everybody should look at any product with. So for this design, this quality, we believe this is a tremendous value. I should probably read it. Maybe the next call, I’ll read some of the letters we’re getting about RH Estates because they’re incredible. We have people that have never bought from us, were never a customer, and all of a sudden they stumbled into Estates, they got the book or they walked into an RH, and now we’ve got a large design job.
We just recently had someone in RH London who, their interior designer was going to augment, you know, a million-plus design job with probably about 50 to 80,000 of RH and brought her client into RH London. And now we’re doing 95%, about a $1.1 million design job. So I think this is—I think you asked me about incrementality or what was it really? Demand, transit, new customers. Yeah. Our people in the galleries will tell you it’s almost entirely a new customer.
And I think that makes sense. Like I said, I think we turned the company over the last eight years or so too modern, too contemporary, too one-dimensional. But we’re quick learners here. And as we mature and understand the industry and the consumer even more, I think if you watch the earnings video I think I did two quarters ago, I tried to outline how we think about RH and the opportunity and how we see kind of three major kind of design vernaculars—call it kind of traditional, classic, which we call Estates; contemporary, which we call Interiors; and modern, which we call Modern. We kind of think about ourselves now as kind of a juggler, if you will. But there’s still three balls, and then there’s always one ball in the air. And that ball that’s in the air is generally the ball that’s the major trend. You know, for anywhere in our industry, a short trend might be seven to ten years. The major trends are more 15 to anywhere, 15 to as long as 25 or 30 years.
And, you know, people have asked me before, they’ll ask me, where do the trends come from? And I think I’ve said it on conference calls that the trends come from the dead. Right. Generations pass away. Their belongings go into estate sales. The estate sales feed the high-end antique markets. The high-end antique markets feed and inform the high-end interior design market. The high-end interior design market then informs the high-end reproduction market, and then it kind of trickles down, you know.
And so the next trends I outline, I talk about pretty fulsomely in the letter to try to help people see why we’re so excited about Estates, because it’s a, you know, like almost a magnifying opportunity. So one, we’re not addressing the traditional classic market today very well at all. I’d say hardly at all. I think we’re dominant in Contemporary/Modern. So, you know, if you have 60% of the luxury homes in America that are classic and traditional, we’re probably not addressing that customer.
We might—maybe we’re getting 5% of that market, maybe we’re getting 10. You know, we have a few older collections. So, you know, the math would tell you that this could and should be half our business or more than half our business. And the data, you know, all the data we look at, you know, once we start digging and thinking about it—I mean, we’ve been working on this now, God, I’m seven years been conceptualizing this opportunity—and we’re getting smarter and smarter and seeing a bigger and bigger market.
And we think this is as incremental or more incremental than when we did RH Modern. When we did RH Modern, no one was waking up in the morning saying, hey honey, we need some modern furniture. We just got a modern condo or new house, and it was modern. Nobody was thinking about going to RH for modern furniture in 2012, ’13 or ’14, until we launched RH Modern in 2015. And RH Modern was highly incremental, one of the most incremental things we’ve done.
And it very quickly went from zero to a billion dollars. And we think this is as incremental, might be more incremental. And we were in Greenwich last night for our party and, you know, I mean, I don’t know how—like, we had to take some back roads. We’re coming from the airport and, you know, you’re going through the neighborhoods and you realize, like, you could drive around here for hours, might not see a modern home. Yeah. And some of the homes might have been remodeled, but yeah, some people contemporized interiors and that might play.
But when you really look at the bones of the houses and look at exteriors of houses, my sense is the market of Greenwich, Connecticut, Westport, Canaan, you know, that whole area, I gotta believe it’s like 90/10, 85/15, somewhere like that. By the way, we have—I’m going to—we don’t talk about our store volume—let our competitors know. This one, like we do like 47 million in Greenwich, right? We have 14,000 of interior selling space in the Post Office, and we have about 4,500 in the outdoor gallery today.
Right. And it’s all contemporary. And so I think if we’re doing $47 million in Greenwich, Connecticut, with 14,000 feet of interior selling space, what could Estates do? We have, I think, 12,000 feet of interior selling in the new former Ralph Lauren building, which is a perfect building for Estates, by the way. Thank you, Ralph. We didn’t have to build that one. And so it’s highly capital efficient for those of you who are going to ask me that question.
So this is a big deal. It’s a big deal. We’ve been working on this for a long time. We’ve never made so many acquisitions to set ourselves up, you know, for a business. You know, Michael, like, if you saw my projects that I did early on, whether it’s my condo in San Francisco or the home I still have in Belvedere that has a Michael Taylor diamond table in the kitchen. I let the team reproduce the 17th-century antique monastery table I have in the dining room, and it’s almost identical.
I mean, somebody could switch. My daughter saw it at our Center of Innovation. They grew up at that dining table. And they’re like, Dad, why is our dining table here at the Center of Innovation? I go, it’s not our dining table. They go, Dad, this is our dining table. I mean, they didn’t know, but it’s a very expensive antique. I mean, I guess I could say it. I bought it 27 years ago for $58,000. Statement dining table. Built a nice house in Belvedere.
Never spent that much on any piece of furniture or anything. And I’m not saying that to show off, to put it into context. It’s an 11-foot table that has two extensions, extends, I think, to 14, 15 feet, you know, can seat up to 16 people because it’s, I think, almost 50 inches wide. You can sit two people at the end. So it’s really great if you entertain and have a big family. And I don’t think anybody addresses that business very well. You know, those are the kind of businesses that we’re addressing with Estates.
We said, you know, initial goal when we’re launching, we want to dominate the primary bedroom, the primary living room, and the primary dining room. That’s where we’ll start. And then we’ll continue to expand and dimensionalize the assortment. But that table today, if you take that $58,000 dining table and you just did natural inflation over 27 years, I think it’s about a $140,000 dining table today, somewhere like that. And if you looked on 1stDibs, you looked at dining tables, they go up to about $250 to $300,000.
That table would probably get somewhere between $100 to $200,000 if it was on 1stDibs today. So we got that. We finally landed. We were going back and forth. That one’s $14,995, and that’s for the 12-foot one or the 11-foot one, which is fine, I think. And, you know, it’s an incredible value. I mean, it’s—I think a lot of people—again, are we talking about a higher-end customer? Of course we are. Should that scare anybody? No. We’ve moved this brand up over 27 years.
Right. The way we built this brand is we went from selling knickknacks and tchotchkes and had an average order value of $125, to an average order value somewhere around $10,000. And so—and that’s with our order split, if you really look, because we split a lot of design orders, we deliver them. So our true average order is much higher than that. But we, you know, we kept elevating the brand, we kept shedding lower-value customers, acquiring higher-value customers.
And yeah, we’ll continue to do so until we kind of say we’ve hit the right spot. That doesn’t mean we won’t sell bedroom furniture that’s appropriate for second, third, fourth bedrooms, you know, in houses and second homes and things like that. But we think we’re going to be, like, alone in the market for a while here. I mean, I challenge anybody. Take the RH Estates book, go scan it, go scan the Internet, tell me who’s going to compete with this.
And then look at this second drop, which is really kind of like the first drop, you know, because it’s basically the same book with about 30% more items in it and product in it. But we’re just going to an increased number of customers. We’re not mailing the same people; we’re just broadening the contacts, which will significantly lift the business. And when we do that, we’re going to do that in concert with the product that will be unveiled in the galleries.
It’ll take over the first floor in all of our big galleries. It’ll be the main thing, it’ll be well represented, it’ll be in stock. So November’s, you know, transition time—like, you know, early mid-November. We’ll have galleries transitioned that are somewhere between 75% and 85% of the business. And then it’ll continue to go to the rest of the galleries and I think all galleries by December. Right? Yes, 15% to 20% of our volume. So that’s when it’s really meaningful.
I think these products will get an even bigger lift when the customer sees them as the finishes are so intricate and the detail and the quality is, I think, important to see. And data would say that, you know, when you look at the furniture industry today, about 80% of furniture is done in retail stores. When you look at the luxury furniture industry, it’s like 95/5. And that’s just because the customer is more discerning, they’re spending more money.
It’s more of an investment and has everything to do with comfort, sit, finish, color, scale, and all the things that you don’t want to get wrong. It’s one thing if you’re an internet shopper today, you order five things and you return three, or some people order ten things and they keep one or, you know, send all ten back. You really can’t do that with the furniture business. You’ll bankrupt, you know, people. And most people charge for restocking fees.
We haven’t yet. We’re going to probably change that because we do think some people take advantage of, like, ordering stuff and then just go, oh, we’ll just—this is what we keep, this is what we’ll send back. But it’s very expensive to make mistakes when you’re buying furniture.
Steven Zaccone, Analyst at Citigroup
Okay, thanks for all that detail. Appreciate it. The follow-up I had is just international. It was helpful to get the context of where you see the drag going in 2027. Can you talk a little about the assumptions there? Because you’ll be, like, you’ll be cycling flagship openings. Right. And I guess we haven’t really gotten the revenue. But curious, when you think about the UK versus Continental Europe, are we at the point where the UK can be much larger from a revenue perspective?
And that’s really helping from a profitability perspective. Thanks very much.
Gary Friedman, Chairman & CEO
Yeah. One of the biggest things is just the cost to open in Europe. Right. The number of people that we have to have fly from America, put up in Europe for months. You’re training. The three global flagships were the first hospitality experiences. Yeah. RH England we did. But you know, there’s not a very high-volume hospitality experience out in the countryside. These were real complex hospitality experiences. So you have, you know, a typical gallery for us, we might employ 30 to 40 people on the gallery side and we’ll employ 120 to 130 people on the hospitality side.
And so when you’re opening restaurants in hospitality, it’s longer training, it’s more complex, more people and just the support that you’re needed. From America, we had a lot of people on the road for a long time making sure we’re opening these right. You don’t get a second chance to make a first impression. And you know, we’re not the most popular people on the continent right now. Right.
Jack Preston, Chief Financial Officer
You know, so want to open correctly, be respectful, you know, a lot of things that. They’re important. But assumptions-wise, Steve, again, it’s, you know, obviously the drag of the opening cost that Gary just mentioned, you have to build up the revenue that’s helping to reduce the drag. Obviously the absence of these large costs, we have no more European openings in ’27. So you know that those are the building blocks and they’re just kind of self-evident.
But just point them out.
Steven Zaccone, Analyst at Citigroup
Okay, thanks for all that detail. Best of luck.
Gary Friedman, Chairman & CEO
Thank you.
OPERATOR (Operator)
As a reminder, we kindly ask to limit yourself to one question and return to the queue for any additional follow-ups. Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.
Simeon Gutman, Analyst at Morgan Stanley
Hi, guys. Hi, everyone. I guess maybe more of a math question. So if you look at the progression within your back half guideline, it looks like there is a bit of a stair step to the third quarter in terms of the underlying stacks and then another step up into the fourth quarter. Is that explicitly Estates or. And can you speak to the momentum you’re seeing within that, that brand? And then what else is it if it’s not. If it’s not just Estates to me,
Jack Preston, Chief Financial Officer
And it’s listed right there so you have it in front of you, the press release. If you look at it, yes, as inclusive of backlog reduction is 6.5 points, RH Estates at 8 points and new galleries, you know, another at 4 points and that was Q4, obviously 3 there as well. So you get that in, you see the quarter-over-quarter increases in this.
Simeon Gutman, Analyst at Morgan Stanley
Okay, I guess if I may restate, I guess what gives you confidence and I get the backlog reductions, but you know, can we talk about the confidence in, you know, in that, in that acceleration?
Gary Friedman, Chairman & CEO
Yeah, I mean that’s what we do, right? That’s how we built this company is expanding product and mailing books and setting products in galleries and you know, we have a lot of math around this and you know, the big important launch we think is meaningful and we’ve done meaningful things a lot. I mean even if we, if you look back at, you know, product transformation, we went and accelerated into, after we kind of stumbled on the first contemporary round, we doubled down and we were able to move business 15 to 20 points.
Right. So this could be conservative. I mean if you look at our history, like if you think about modern, how modern moved the business, when you think about when we accelerated product transformation in contemporary, I mean we moved, you know, looked at the prior two and a half years. Yeah, I don’t think this is that aggressive.
Simeon Gutman, Analyst at Morgan Stanley
Okay, thanks guys. Good luck.
OPERATOR (Operator)
Your next question comes from the line of Stephen Forbes with Guggenheim Securities. Your line is open. Please go ahead.
Stephen Forbes, Analyst at Guggenheim Securities
Hey Gary and team. So Gary, maybe just following up on RH Estates as all of us try to gauge your conviction here and the 8% net revenue growth contribution in the fourth quarter, can you confirm whether that’s based on sourcebook-only demand and, or maybe just comment on how much footage you’re dedicating to the collection in the fall and would love to just hear how weekly demand scaling at the collection level is telling you where that 8% can go over a relatively short period of time versus that 50% sort of five-year target.
Gary Friedman, Chairman & CEO
We have data right now with Estates building just in the mail and just, you know, on the website with, you know, long lead times and, you know, not in stock. So, you know, we, we know what, you know, when, if something has a four-week wait, a six-week wait, an eight-week wait, if something’s running back orders of X, Y, Z, there’s math around all of that that we can forecast demand, right, based on what we’re seeing. Then there’s, you know, so there’s in-stocks, there’s wait times, then there’s, then the big move is when the product goes into the galleries.
You know, and I think we’ve said publicly lift factors like—no, maybe not. We don’t—our competitors know all that. Okay, I can’t remember. I’ve been doing this a long time. You know, the lift factor for putting something on the wall. Yeah, yeah, we’ve said that. Yeah, 50 to 100%, you know, and it can go as high as 150. Yeah. So, yeah, so we have that and then, and then the other thing, like when we say other and stuff like that, just think about we’re going to make a big transformation.
Like think of our big galleries that are mostly two-floor galleries. So when we do a flip and we’re bringing newness onto the main floor, one, not everything that’s on the main floor leaves. What we do is we look at what are the best sellers. Everything’s ranked and we take the bottom stuff off the top floor. Right. So you take the least productive goods on the floor and you’re better. And hopefully again, this is, you know, why we don’t put it on the floor right away.
We generally like to look at things for three to six months here because we believe it’s so incremental. And we have data of classic things we’ve sold and still sell, things that we, we, we didn’t realize we couldn’t kill it. Right. So we just know the market’s still there. I mean, we’ve been selling St. James for, since 2008. You know, we still have St. James. Can’t stop selling St. James, you know, or some of our other, you know, just classic things like that.
And we realized that we, you know, we transitioned the business too far. And if you look at most specialty brands, most specialty brands are built around an aesthetic point of view. Whatever category, apparel or this or that, it’s got a stylistic point of view and usually stay within the stylistic point of view. And I think we saw about the furniture business, most of us here started in apparel. And so, you know, Armani looks like Armani, Ralph Lauren looks like Ralph Lauren.
Gap’s got their point of view, American Eagle’s got theirs, or Abercrombie, whoever you’re looking at, right. And Chanel’s got their point of view, Rage has a point of view. So most of us come from that. And the longer we’re in this, the more we learn. And again, if you go back and look at the video, I think I outlined it very clearly about what we want to do is own the kind of seven major product categories and the three major aesthetics. And we think that if we do that really well, we can be relevant to all the customers at that level in the market across, you know, all the architectural vernaculars and major, you know, major stylistic points of view. There might be some stuff like, you know, I’m likely not going to let the brand go after grandma chic, right. It’s a little trend. I mean, you know, Kendall Jenner, you know, saw an Arch Digest and did a tour of her new cabinet and, you know, Kendall Jenner, like great for a brand, right? She’s got clout and, you know, this and that took people to her home then. And you know, I, I don’t know, maybe it’s just because it’s me and I’m like, I don’t like flower sofas and stuff like that.
But, you know, so you do have to kind of keep your brand a little disciplined, you know, so we’re gonna let everybody else have grandma chic or things like that. And I don’t know what some of the other weird trends that we’re seeing right now that we’re not, you know, like we don’t have to own everything, you know. And I mean to this day people think that, you know, we’re going to go bankrupt because we don’t sell enough color. Yeah, it’s—those are the same people that, you know, haven’t really looked at that many homes.
Like if you just go into Zillow or Redfin and go look at 100 homes and find out how many have a red sofa, you’ll realize like not a lot of people in the world have red sofas. So if you want to be in the red sofa business, go right ahead. Want to be in the flower grandma chic, you know, printed sofa business? Go for it. Like I’m happy for you. You’re not going to see us in those things. So. But you know, I think the, you know, when you think about just the, you know, revenue for Estates and it’s, you’re going to see the big ramp happen when the goods get in the galleries, the in-stocks start to peak and we expand the circulation meaningfully.
Right. So we have a lot of customers lined up right now just waiting. When can I see this in the gallery? When can I see this in the gallery? So there’s pent-up demand. People waiting just want to know when they can see it in person because again the data will tell you at the luxury end of the market, it’s like 90/10 or 95/5. People want to see the goods.
Stephen Forbes, Analyst at Guggenheim Securities
Thank you, I’ll pass it on.
OPERATOR (Operator)
Your next question comes from the line of Max Raklenko with TD Cowen. Your line is open. Please, go ahead.
Max Raklenko, Analyst at TD Cowen
Hey guys, thanks a lot. So first question. When we think about the 4Q contribution from Estates, that’s on a delivered basis. So just curious how we should think about how much higher the demand could be. And then given how your demand builds and sort of some of the color that you’ve given us in the past couple questions. 4Q is obviously just a jumping off point for 1H27. So curious if you could just provide a little bit more color on how we should think about how big Estates can get into next year.
Gary Friedman, Chairman & CEO
I don’t know, Max, I was going to ask you how did you like the pizza with any of the pastas last night? Because I saw you in the restaurant. How do we think about demand relative? I mean, clearly, Max, demand is in excess of the revenue growth as this business is building and ramping. And you know, you’re leading us to the same conclusion that’s evident that in Q1 that that continues, especially with the investment, you know, presentation of product in the galleries and newness that Gary talked about. 30%, the book and whatnot. So we don’t talk about demand growth — at least at the moment we don’t. Yeah, we stated during that transition we do, but today we’re down. And so, you know, this is a growing business. So clearly demand growth rates, as we build in stocks, as we present product, et cetera — everything Gary’s talked about — are some level higher than this. When you ask about, when you think about how half one versus half two looks, Max, maybe leaning into H1 2027, how does that 8 points growth from the states, how that continues.
But clearly there’s a stepping stone for elevated growth. Yeah, I would say there’s, I mean, a good five years of building here. Like a, you know, it’s going to be like a new business and a growing business. I think the most similar thing is RH Modern. I mean, we weren’t known for modern. We didn’t have that aesthetic. No one was coming to us. They were going to Design Within Reach or going somewhere else. But we hopped on it because we saw an explosion of modern architecture happening around the world.
We saw the verticalization of cities. We saw the influence of technology influencing customers that have incorporated a modern point of view. We’re all walking around with iPhones. You know, the big commercial architectural trends were all modern. And if you look back in the 1950s at mid-century modern, it wasn’t really that big. I mean, you had the Bird Streets in LA, you had different places — Miami, Florida, places like that. But you probably didn’t have too much mid-century modern — Boston, New York, Philadelphia, places like probably down in Greenwich.
Maybe there’s a collector or two. And then you saw a lot of places being remodeled. A big boom in LA. That’s why we opened the first RH Modern, I guess the first and the only freestanding RH. We’re building the big one in Dallas briefly. Oh yeah, yeah, we had Dallas for a little while. So yeah, that’s why we wanted to open in Greenwich. Right. To really get a sense for, okay, here’s a market. We do a lot of volume for a 14,000 square foot main gallery with a 4 or 5,000 square foot outdoor gallery.
It was 47, the right number. Okay. Yeah. And like, I don’t know, like, could we do another. I mean, could we comp up 50 or 70 in a market like that? I don’t think that the customer who’s looking and buying contemporary or modern is all of a sudden jumping up and down at the estates. And I think the people buying estates are, you know, they’re looking for something like that. And then right now that something like that doesn’t exist. I mean, there’s a lot of classic, traditional, like really, you know, I mean, like, you know, not good-looking furniture out there.
Yes. It’s not like there’s not. There’s a lot. I mean, you go look at a lot of the classic furniture stores that, you know, look the same for 40 years or something, and there’s a lot of them out there, you know. So the market share, I mean, people doing business — I mean, go to High Point, North Carolina — a lot of classic furniture. Go to the Furniture Mart in Nebraska — you know, the Berkshire Hathaway thing. They do like $700 million out there.
Gotta be 85% classic traditional. So it’s there. You know, I think in a lot of ways we’ll create a new high-end market for the aesthetic the way we’re going to build it out. And the whole point of view and the aesthetic point of view will evolve and change. We will shape part of it. We’re going earlier than we normally go on a trend. So I used to like to let the wave break and kind of see who’s riding it and how we can exploit it. I think because of the platform we have, because we — this is, I mean, good and bad for me, right.
I lived through this trend. I was a consumer. So first trend I actually participated in as a consumer. That’s really good news. I’ve got a — I mean, yeah, I have the Michael Taylor diamond tables. I have a lot of the things and stuff, you know, so I got a point of reference, like on all this stuff. And you know, that’s good and bad too, by the way, you know, because it’s never — the trends never come through exactly the same. They always, you know, it’s shaped, you know, by designers and, you know, you know, it always comes through fresh yet familiar.
But it has to be fresh and it has to be familiar. And so. But I think, you know, I think we can help shape this one. But, you know, we’re going to evolve it. We’re going to be inspired by other people, they’re going to be inspired by us. You know, other small furniture businesses that are run by highly aesthetic people will do some really great things and the market will evolve and we’ll hopefully get a very good share of this evolving new trend and be a permanent player in classic traditional.
Max Raklenko, Analyst at TD Cowen
Got it. That’s helpful. And then just quickly, I appreciate the color in the compounds and the design galleries. Can you just compare and contrast how unit economics could look compared to the legacy gallery formats that you’ve opened for the past decade? Should revenues and margins be pretty similar, or could the margin profile actually be a little bit stronger given maybe less SG&A associated with the new format compared to what we’ve seen previously?
Gary Friedman, Chairman & CEO
Yeah, like we think what happened, we were building our multi-level Design Galleries with a restaurant and roof pre-COVID anywhere from, you know, a lower-cost market. I think we hit a low of like 27 million in a couple of Charlotte. Yeah, yeah, yeah. So some of the lower costs, 27 to 30. A more expensive market to build might have cost us 35 and, you know, the cost of those went to 40 to 60. I mean, with just all the inflation costs that happened in construction, especially better-quality, higher-end construction.
So that, you know, necessity is the mother of invention, right? We were already pregnant with a lot of real estate we had to build. We were committed, under construction, or too far down the pipeline to change course. But we invented a new concept. We said, look, if you say what’s really good about one of our multi-level galleries with a restaurant and that whole breed, there’s really a lot of good things about it. What are the bad things about it?
Multiple floors require grand staircases. They require elevators, generally two. They require two sets of exit stairs. Those are not cheap to build. You know, so you’ve got multiple stairways that, by the way, do $0 per square foot. There’s no transactions happening in the elevators or the stairways or the grand stairwells. There’s a lot of square footage. And then when you take that and start compounding floors, then you put furniture on the roof, then all of a sudden you’ve got a whole different coding.
You need different footings and foundations and steel gets upsized. And with all the inflation, steel—that was a big problem for us—and those just became very expensive. And then everything you do on a multi-floor building, right, you’ve got cranes and pickers, you’ve got guys trying to put metal awnings on windows on the second floor or the third floor and get cranes and everything all around, and you’re trying to plaster the whole building, multiple floors.
So if you think about a compound, we disaggregated one of those big galleries and we said, okay, what can we get rid of? And, you know, there’s some fortunate real estate opportunities because of, you know, I think Saks went bankrupt first, right. And then Saks came out of bankruptcy and then Norsewood went bankrupt. Yeah, then Saks back, Nordstrom, Neiman. Yeah, Neiman’s going back too. So, you know, different opportunities were coming up as far as real estate.
We think more will come up. You know, high-end cabs. Also, if you think about what’s happening with transportation and driverless cars—you know, even Uber and driverless cars—there’s going to be a lot of parking lots in very good shopping centers that have way too much parking very, very soon. Right. And that’s already happening now; the zoning laws are changing. So, you know, we said, how could we be opportunistic with which we think is the, you know, reduction of real estate like Saks.
And they didn’t come out of—Saks did. Yeah, yeah they did. Oh, they did? Okay. Yeah. But I got to think they’re not going to keep the same footprint. So there’s going to be opportunities with luxury department stores kind of closing. We took one of them. We’re taking just a parking lot space in Aventura, and then Naples was a Nordstrom closed. And, you know, and so they’re relatively big pads. And what we did is we said, hey, what, you know, what can we build that’s really interesting and design is really interesting?
And we said, well, what if we build multiple small buildings connected with beautiful garden courtyards and pathways and fountains and fire pits, and we put a restaurant in the middle and, you know, it’s beautifully landscaped, and so we have a fraction of the square footage under roof. When you really look at all under roof, we have individual buildings that don’t have to have connected mechanical systems. So much less complex. You know, mostly the buildings are 4,000 to 5,500 square feet.
I think we have 1, 2, 3, 4, 5, 6, kind of seven connected—seven, you know, independent structures in Naples. And, you know, they’re designed in a way that it’s designed for our outdoor furniture. Outdoor and designed. The rooms are designed very efficient ways. We actually get more product per square foot. But I think it’s going to feel just as elegant and brand. Doesn’t take any cranes, doesn’t take any stairways, doesn’t take any exit stairs, doesn’t take any elevators, doesn’t take big footings or this, that.
In fact, most of them, even in—I think in Naples, right—it’s all wood, no steel. Yeah, 100% wood. Some of these we believe we can prefab, build the walls and just tilt them up, you know, plaster the outsides. We designed them so they only have a couple of kind of windows because we could, you know, manufacture the windows and do a lot of things. So, you know, they’re going to cost us—we were hoping the price was going to be half, and it’s half—and we get more product density, and I think they’re going to be more exciting to shop.
I mean, you’re really walking—it’s like a resort. I call it like a design resort—walking through. Depending on where you are in the U.S., in Florida you’re going to have palm trees and banana palms, all kinds of, you know, tropical foliage and stuff. In California you’ll have olive trees and other things. And they’re going to be cool. They’re going to be very interesting. And I think the restaurants are going to be beautiful. It’s like a glass box in the middle of an atrium.
Indoor, outdoor. We’re going to do indoor seating, outdoor seating. So we’re super excited about it. Everybody who’s kind of seen them—Dave Beach got back from Naples, right, like walk through—it’s like feels good. Like even though it’s a construction site still, you know, you get the feeling of like it’s nothing. Nobody has anything like it. And what else is, you know, Dave and I were talking about what’s good about it for the landlords. You know, they’ll take more risk on these and I think participate more financially because we’re building all these smaller buildings.
So, you know, they’re always worried like, oh, what if something goes wrong with RH? I’m stuck with this three-story building with a restaurant on top. Like who’s gonna lease that from you, right? Not a lot of people. But you know, you sell them on, hey, look, I built you a little village. You know, you can put eight retailers in here. You know, beautiful. They all connected. It’s just an extension of, you know, your shopping experience. So I think we have a good selling point.
You know, I think we’re gonna, you know, be really good partners for developers. So we’re excited. And the single-floor galleries that we’re doing that are anywhere from 18 to 20, right? 23,000 or 24,000 square feet with, you know, beautiful courtyard restaurants in the middle. We have our new Italian concept that we just opened in Greenwich, Cucina Angelina. So it’s named in honor of my Italian mother. Now, some of you are going to ask if my mom a good Italian cook, and she wasn’t, as in I can’t honor.
Right. She did like to eat. But my Uncle Gino was the cook of the family. So I also talk about him if you see the menu and stuff. But some of these compounds we’re doing really fine. You can see a big pizza oven, and we think we have the best pizzas in America. If any of us here really want to take a flyer, I think you could take our pizzas on the road and you might have the best pizza concept in America. I wouldn’t want to be any of those Papa John’s or anything competing against our pizzas.
They’re so good. We have this pizza expert that works for us in Europe, Matteo. He’s perfected the crust. Didn’t you have pizza last night? Next. Did you eat last night? I saw you. Or you just—you’re trying to get information on the gallery? I know, like—anyway, these compounds are going to be great, and I think the returns are going to be as good or better than anything we’ve ever done. And I think single-floor galleries will be as good as better than anything we’ve done. And so I think you’re going to see capital spending go down, returns go up, and I think you very quickly see our return on invested capital return to where it was at our peak.
Thank you.
OPERATOR (Operator)
Your next question comes from the line of Chris Nardone with Bank of America. Your line is open. Please go ahead.
Chris Nardone, Analyst at Bank of America
Great. Thanks, guys. Good evening. Can you guys elaborate on the health of your core inventory? And can you talk about whether you foresee a need to step up promotional activity to help clear way for the Estates rollout? As we look into 2027,
Gary Friedman, Chairman & CEO
It’s not really clearing away for Estates. Right. Estates is going to be incremental to the assortment. So we’re not really clearing out Estates. I mean, we’re going to—some of the things that are in the galleries today will come out of the galleries. And, you know, we’ve got a pretty good outlet network and ability to, you know, rotate through that. But Estates isn’t going to cause—it’s not going to cause markdowns. I mean, the environment in our category is very promotional right now and has been.
Right. So there’s, I mean, there’s a lot of data out there. You know, people are coming down to the, you know, by week—how many, you know, how promotional, how many, you know, SKUs does RH have versus Pottery Barn, versus Arhaus, versus this, you know, like—I mean, everybody. When you’re in the home business like this and you get a down housing market, you know, 4 million homes, 4 straight years, unless you want to lose market share, you’ve got to be competitive.
So it’s been somewhat of a promotional environment. Margins are holding up fine, you know, and I mean, if you just take our model and extract, you know, a lot of these drags. Our underlying model on RH is a really good model. It’s a really good model. Like, we weren’t—we didn’t have the drags from international and, you know, I don’t know, like, right up there with anybody’s. Right. So that’s the word. Yeah, we’re happy that we’re cycled through here. Estates is going to be incremental. Think of Estates like a new category.
It’s like when you’ve got a new aesthetic like that, it’s really like a new category. It’s like a new business almost. But we get to sell it on our platform. So it becomes very incremental and it’s very leverageable. I mean, this is—the things like this are the biggest drivers of profitability, right? They’re like, yeah, we spent some capital here, we bought some businesses and things like that to build this, but you only have to do that one time and built a freestanding Estates store here.
We bought Formations. We also bought the Formations real estate, Formations in Los Angeles. And we’re going to transform that property to an RH Estates Gallery in the design district in West Hollywood on Melrose Avenue. So, you know, Melrose Avenue, we will have the RH Interior Gallery, we’ll have the RH Estates Gallery. And then we—three doors down from the RH Estates footprint, which is almost 195 ft of frontage right on Melrose. And our current gallery is 145 ft.
And then we took another smaller location for RH Outdoor. So a freestanding RH Outdoor. And then on Beverly Boulevard, a couple blocks away, we have an RH Modern freestanding. So the question is, do we need to keep Modern? Does Modern consolidate into the kind of core building that’s had Modern, had some Modern and Contemporary that, you know, we may keep the whole footprint, we may consolidate some of it. But I think you’ll see, you know, you’ll see us test that.
Like we—I think we’ve talked about in the past about RH ecosystems, where one of the capital-efficient ways to deploy the brand, especially if we’ve got a presence like in Greenwich, we don’t want to leave the historic post office, probably the best location in Greenwich. We were able to get the second best location in Greenwich, the Ralph Lauren building. And so we call that an ecosystem. So we’ll have, you know, the historic post office, we’ll have RH Contemporary and RH Modern.
Estates will be in the former Ralph Lauren building. And then we’ve got a 5,000 square foot, 4,000 square foot RH Outdoor Gallery. You know, Outdoor is a very important business to us. And so a lot of the key markets, we might have a freestanding Outdoor presence. But instead of trying to get rid of our real estate that we’re in and going out and having to build a big new thing or, you know, we never find a big enough location, I’m running chaff.
We have to go kind of off the beaten track. And I don’t know if we want to. We call that an ecosystem. We’ve got an ecosystem in Palm Desert. We’re doing one in West Hollywood, as I just described, and just a much more capital-efficient way to continue to deploy the brand and dimensionalize the brand. Thank you.
OPERATOR (Operator)
Your next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Your line is opening. Please go ahead.
Cristina Fernandez, Analyst at Telsey Advisory Group
Great. Thanks for taking my question. I wanted to see if you can expand more into the trends you’re seeing in Europe. It looks like London’s off to a very good start. Are you seeing, you know, the end consumer shop more there or is it more geared towards the trade like what you’re seeing at the other European locations? Maybe an update on how Paris and Milan are ramping up. Thank you.
Gary Friedman, Chairman & CEO
Yeah, you’re asking at a funny time, right? In August, it’s not usually the best month. Everybody’s on vacation. So people are just getting back, especially in Milan. Like, we’d fire a cannon down the streets in most cities in Italy. But same thing with Paris. I mean, everybody in Europe is on vacation in August, and everybody starts getting back in September. And business will ramp. Yeah. Our focus is how to build the brand in each of those countries.
I think they’re all different. It’s interesting. Each one’s culturally somewhat different and shopping behavior is different. I mean, obviously the languages are different. I think that surprised us a bit, just how unique they are. So how do we market? How do we build awareness? How do you build the business with the trade? We have a lot of learnings. We’re flying early tomorrow morning to Paris, and so we’ll be in Paris tomorrow night and Saturday.
And Saturday evening we fly to London. We’ll be in London Saturday evening and Sunday. We’ll be in Europe a lot this year and connecting with our teams, listening, learning, finding out what we’re doing smart, finding out what we’re doing dumb. No different than, you know, building businesses in kind of new markets. These are very different. Right. Like, I mean, London—London had a running head start for multiple reasons. One, the country speaks English, right, as primary language.
Two, it has the most expats, and we had the most customers over there. So we ship—London’s the number one place. We don’t ship to other countries, but customers can buy from us, and we help them get their goods containerized, right, and they take control of the shipping. But London, we have the most shipping to. And then we’ve had RH England open for three years, right. And, you know, RH England kind of ramped up by around $38 million in demand. So you see an awareness that’s been built up there over three years. And, yes, that’s why we expected London. We wanted to open London first. It’s just that was the most complex of the deals, and it was going to take the longest and so on and so forth. And that’s why we did RH England to kind of get, you know, get positioned in the marketplace. So, yeah, but we’re happy. We’re learning about the business and lots and lots of opportunity. And the key is, you know, you can’t be an absentee leadership team.
Like, we can’t leave everybody on an island in these individual geographics. So wherever I’m going to be on the East Coast, likely we’re going to hop over to Europe, and then we’re going to go to Europe at least four times a year just to go to Europe, you know, spend half a week or a solid week and really spend time with our teams. You know, like they say inside of a company: the smartest people in the company are the people closest to the customer.
And those of us that have gotten promoted generally get farther and farther away from the customer and we get dumber and dumber, right. So the only way you can lead is if you first listen, second learn, and then you can effectively lead. So we’re in listening and learning mode and trying to be better leaders of our business. But we have to do a lot of listening, spend a lot of time. They’ve been very helpful. We’ve learned a lot. So we’ve got to get in stocks, we’ve got to deal with the different raw material issues and different flammability issues.
Upholstery, lighting, things like that have been a little bit more complicated for us. And so we’re, you know, we’re working through our supply chains to be more responsive and compete better. But, you know, I like the direction we’re going, you know, and I think we’re going to get better and better. And, you know, this drag’s going to go away. Yeah. And so—and London’s, yeah, very exciting. I mean, like we were, you know, we had our fingers crossed.
And I want to say, what should this be? What could it be? I mean, to see the first eight-week ramp there, it was really exciting for us. And we’ve got a great team. We’ve got a great leader building a great design team there. And I’ve never seen customers like that. How many days was I there? Nine days or something like that. I was in the gallery quite a bit, the opening, and I’ve never seen a level of customer and a level of wealth like that in our galleries.
These are really important, big projects. So I would say it wouldn’t surprise me in two years, maybe by year three, that London is not the number one RH in the world, you know, unless we open the Middle East, you know, sometime before then. Because the more we’re learning about the Middle East, a lot of people believe that will be our number one gallery, you know, in Dubai.
OPERATOR (Operator)
Your next question comes from the line of Marius Moorer with Zelman. Your line is open. Please go ahead.
Marius Moorer, Analyst at Zelman & Associates
Good evening. I’m just curious, Gary. You mentioned that most of the Estates is protected by IP and obviously, you know, the furniture industry is notorious for knockoffs. And there’s a long history going back probably 150 years of mixed success in defending designs in court. So I was just curious. I wanted to ask if you could give us maybe a bit more insights into what you think will make Estates easier to defend. Is it maybe, you know, that the finishes are more intricate and just easier to defend than Contemporary, or is there something else?
Gary Friedman, Chairman & CEO
Well, there’s a lot of levels to it. So in cases where we bought the brands, you know, brands have IP and, you know, that’s pretty strong that we think is good. But a lot of the businesses we bought were more item-focused. You know, we dimensionalized our assortments and so used our design teams to dimensionalize things and so on and so forth. So those become original RH designs. And so we, you know, filed for design patents on almost everything.
And, you know, we’re pretty big in our industry. I think if you get a letter from us that we’re patent pending on a design, I don’t know if you want to go to court with us. I don’t like to go to court with people. Like, my people screw up and we’ve been influenced by something, we get a letter here—I usually hold the tent. Like, why do I want to fight in court and spend a lot of money? So we don’t—it doesn’t happen to us often, but I tell people, like, let’s not waste our time.
We don’t want to spend time with that. But we think the work we’ve done with the Estates is very defendable. I don’t think we’ve ever invested this much into design patents. So, you know, we’ll see. Maybe no one’s ever invested in protecting, you know, intellectual property in this industry that well. I mean, look, go try to knock off a Giacometti table. There’s a reason we haven’t. They will take your ass to court. So unless you want to go spend millions of dollars fighting over it—like, we don’t have any Giacometti-influenced coffee tables, even though I’d like to.
I think they’d sell great. So, you know, a lot of it is, I just don’t think—yeah, the furniture business hasn’t really been a sophisticated industry. Hasn’t been well-capitalized. You know, a lot of mom and pop stores, you know, so nobody really had, you know, a legal department. We’ve got our new chief counsel sitting next to me here. Ryan. Yeah, yeah. He’s going to help get us all teed up and not to play defense—play offense. So that’s why we’re, you know, we’re moving like that.
I don’t think people want to get sued by RH.
Marius Moorer, Analyst at Zelman & Associates
Thank you.
OPERATOR (Operator)
Your next question comes from the line of Brian Nagle with Oppenheimer. Your line is open. Please go ahead.
Casey McKenzie, Analyst at Oppenheimer
Hi, this is Casey McKenzie on behalf of Brian Nagel. You mentioned tariff refunds will help offset the $50 million of unplanned subsidies supply chain costs across the full year. Do you think that amount is still ramping as fuel costs remain increasingly volatile? What do you think fuel costs persist into the next year? How do you think about possible mitigation efforts as we lap next year’s oil price spikes in the absence of refunds?
Gary Friedman, Chairman & CEO
I think everybody’s mitigating where you can mitigate. Like, world today, it broke 109. Yeah, okay. So yeah, you’re at 109. Like, I mean oil is 63, like beginning of the war. Like, you’re not going to be able to mitigate that. You know, costs are going up, inflation’s going to go up. There’s a reason why the administration said that the world, you know, was ending and we’re going to have a deal in a day or two. Thirty-eight times there was an urgency to end this war and end this conflict because it’s likely not good for the election.
You know, now it might be too late, you know, so now the administration, what I saw, offered voters $5,000 to every American, you know, votes for the President and administration. That’s interesting. So, yes, I think we’re in it. We’re in a time of conflict. We’re going to be in a time of inflation. I don’t think they’re going to be able to keep the lid on interest rates. I keep thinking, gosh, my entire career—and I’ve been doing this a long time—I never saw a housing market that was down longer than 18 months.
So it looks like we’re going to go to year five. So I like the game we’re playing. I mean, we’re playing offense. We’re building our own bigger market. So I think we’ll be able to grow pretty well through any kind of market as we look forward. But there’s going to be costs. I don’t know, like what was it? Walmart had $2 billion tariff refund. And it’s all going to increase cost at some lower prices. Home Depot, like 700, 700-something million. All going to increased costs.
Yeah, there’s massive increased costs. Nobody’s got a magic wand. Nobody’s going to get that much better price than somebody else. If you have leverage, you’ll use your leverage, but you can’t make your partners go bankrupt. Or you have no partners. So it’s gonna—we’re gonna be in a higher-cost world for probably at least the next six to 12 months. I mean, even if tomorrow they end the war, you know, there’s too much, too much inflation in the pipeline. I mean, all the raw materials are going up everywhere on everything. Everything is impacted by oil. So. Yeah, that’s why, I mean, you’re seeing crazy things, right? We’re trying to manipulate currencies, buying back things like this.
It’s a crazy time.
OPERATOR (Operator)
Your next question comes from the line of Jonathan Matazzewski with Jefferies. Your line is open. Please go ahead.
Jonathan Matazzewski, Analyst at Jefferies
Oh, great. Good evening, and thanks for taking my question. Gary, it was on the recent revamp of your trade program. I was curious if you could speak to any indications of early success, how the trade community is embracing it. And relatedly, are you doing anything to activate the interior design community with the Estates launch that’s perhaps maybe different from how you’ve sought to build awareness for prior brand launches in the past? Thanks so much.
Gary Friedman, Chairman & CEO
Really good question. Yeah. Our teams—our trade teams—are over the moon that we launched a new program. I think designers are happy, firms are reengaging us. We’ve seen an acceleration of our business, a meaningful acceleration that we’re already at a level that offsets the discount, you know, so we’ve hit the volume levels we needed to kind of offset the discount. So. And the pipeline is building, so it’s been fantastic. And our teams are working on different engagement methodologies.
We’re looking at doing more events in our galleries. We have very nice spaces, so—even smaller events—if designers want to come and do things, we’re going to be a lot more open on multiple levels with the trade. And I think the trade’s very happy that we’re doing bespoke and couture, right? That we’re doing CLM, we’re doing bespoke furniture, custom sizes they can specify. So that’s a big deal. And I even met a gentleman, his family, last night that we talked for about 30 minutes, and we’ve done three homes for him, and they were building a big new contemporary homes.
And he didn’t think that we were going to be able to do it. And then he said, like, I thought it was great that you guys just launched this bespoke thing because now you’re going to get the fourth home from me. I thought that that was very good. And so. And they’re huge fans. Talking to the family. And last night I was like, I mean, just right there, I mean, you know, you don’t want to lose customers like that, that building their fourth home and might not have been able to do it less.
So. Yeah, so we’re, again, we’re learning. You know, we’ve got to stay close to our trade teams and our leaders, and, you know, there’s more we can do, but I think—I don’t think that anybody offers the trade more support and services than we do. Right. We support them with doing floor plans, doing renderings. We work inside the back office, not just supporting them with product, but supporting them with design, supporting them with installation. You know, when you think about the hard part of competing with us in the design world is that we’ve got such a broad assortment and we’ve got such good experience and tenure in our interior design business and the services we offer, and just the logistical ease of working with us—getting a home design, getting it all delivered at one time, getting it installed. We have a lot of resources supporting that part of our business. And I think, as far as someone who also is a furniture retail business, at our core, I think we have real strategic separation from the next best person.
OPERATOR (Operator)
There are no further questions at this time. I will now turn the call back to Gary Friedman for closing remarks.
Gary Friedman, Chairman & CEO
Thank you, everyone. Appreciate your participation and all the questions, and we look forward to talking to you next quarter. Thank you.
OPERATOR (Operator)
This concludes today’s call. Thank you for attending. You may now disconnect.
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