Restoration hardware holdings Inc (NYSE: RH) Q3 2025 Earnings Call dated Jan. 03, 2026
Corporate Participants:
Allison Malkin — Investor Relations
Gary Friedman — Chairman and Chief Executive Officer
Jack Preston — Chief Financial Officer
Analysts:
Steven Forbes — Analyst
Max Rakhlenko — Analyst
Michael Lasser — Analyst
Simeon Guttman — Analyst
Jonathan Matuszewski — Analyst
Presentation:
Operator
Good day, everyone, and welcome to the RH Third Quarter 2025 Earnings Call. As a reminder, this call is being recorded. I would now like to hand the call over to Ms. Allison Malkin. Please go-ahead Ma’am.
Allison Malkin — Investor Relations
Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter fiscal 2025 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 filing 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 only as of the date of this call, and we undertake no obligation to revise or publicly release the results 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 also available on the Investor Relations section of our website at ir.rh.com.
With that I will now turn the call over to Gary.
Gary Friedman — Chairman and Chief Executive Officer
Great. Thank you, Allison. Good evening, to those of you on the East Coast, and good afternoon on the West Coast to our people, partners and shareholders. We continue to generate industry leading growth with revenue increasing 9% in the third quarter and up 18% on a two-year basis demonstrating the disruptive nature of our brand, despite the worst housing market in almost 50 years, and the polarizing impact of tariff. Adjusted operating margin of 11.6% was below the 12.5% midpoint of our guidance due to higher than forecasted tariff expense on prior period special order and back-order sales delivered in the quarter and higher than expected tariffs opening expenses.
Adjusted EBITDA was 17.6% and we generated $83 million of free cash flow in Q3, year-to-date free cash flow reached $198 million and we are on track to achieve our outlook range of $250 million to $300 million for the year. Net debt at the end of the quarter was $2.427 billion, down $85 million from Q2. We ended Q3 with real estate assets that we believe have an estimated equity value of approximately $500 million and that we plan to monetize opportunistically as market conditions warrant.
Additionally, we are making progress on our goal of reducing excess inventory estimated at. $300 million, with inventory down 11% versus last year and down $82 million versus the second quarter. While a meaningful portion of our market share gains are coming from the fragmented to the trade design showrooms, regional high end furniture stores, and local independent boutiques, we are also gaining share from the better furniture based national brands as you can see from the table below.
I would point out that our share gains on a two-year basis range from a low of 12 points to a high of 28 points. We find it fascinating that the market chooses to reward companies that set remarkably low expectations and slightly beat them versus setting high expectations as we do and at times miss them while still meaningfully outperforming our industry. Let me turn to our outlook. We are providing the following updated financial outlook reflecting our year-to-date performance and our current trends. For the fourth quarter revenue growth of 7% to 8%, adjusted operating margin of 12.5% to 13.5%, adjusted EBITDA margin of 18.7% to 19.6%. The above outlook includes an approximate negative 200 basis point operating margin impact from investments in startup costs to support our international expansion, and 170 basis point impact from tariffs net of mitigations.
Fiscal year 2025. Our current outlook now is revenue growth of 9% to 9.2%, adjusted operating margin of 11.6% to 11.9%, adjusted EBITDA margin of 17.6% to 18% and free cash flow of $250 million to $300 million. The above outlook includes an approximately negative 210 point basis point operating margin impact from investments in startup costs to support our international expansion and a 90 basis point impact from tariffs net of mitigations. In the short run the market is a voting machine, but in the long run it is a weighing machine. Benjamin Graham we are a company that is playing the long game, historically innovating and investing during net certain times. We also believe post this high investment cycle and historically low housing market, the Wayne Machine, as it has done over our 25 year history will accurately reward us for the truly unique high-performance brand we are building.
On the other hand, there is no denying what an unusual time it is in our industry, and we also believe it’s not a time to underestimate risk. We’re in the third year, the worst housing market in almost 50 years. In 1978, there were 4.09 million existing homes sold in the US when the US had a population of 223 million people. We were on track to average 4.07 million existing homes sold over the three years from 2023 to 2025, with a population of 341 million, or 53% higher than 1978, this is a market we’ve never seen before.
Not a time to underestimate risk. Tariffs are disrupting supply chains and driving higher prices. There have been 16 different tariff announcements over the past 10 months, that have resulted in significant resourcing, product delays, out of stocks, and driven multiple rounds of price negotiation and increases. Despite the chaos, we continue to demonstrate our ability to gain meaningful market share while aggressively investing in strategies that we believe will create long term strategic separation. While not a time to underestimate risk, also not a time to run from it. It’s important to separate the signal from the noise and remember, necessity is the mother of invention.
Our most important innovations were birthed during the most challenging and uncertain times. Our strategic separation is a result of innovating and investing during those uncertain times, and this time is no different. Launching the most prolific product transformation in history of our industry and believe the launch of our new concept in the spring of next year will re accelerate our growth and create another step change in our business. We’re building an iconic global selling platform that will likely never be duplicated in our lifetimes. Construction costs post Covid have doubled across the industry, making it very difficult to emulate our immersive platform. At the same time, we’ve created new equally immersive physical experiences that are massively more capital efficient that we plan to unveil on our next call. On our call next quarter.
We just opened what might be the most beautiful and talked about retail experience in the world[Phonetic] and arguably the most important city in the world. Especially if your vision is to build a global luxury brand, which one I’m talking about? RH Paris. You have to see it to believe it. Developing a global hospital. We’re developing a global hospitality business that generates significant brand awareness, traffic, and cash flow. We have built a powerful restaurant company that is seamlessly integrated into our core business that will generate operating income that represent on average 65% the aggregate galleries rent they reside in.
The RH Ocean Grill at RH Newport Beach is our first 20 million plus restaurant that we believe will reach the mid-twenties in its second full year. And its cash flow next year might cover the rent for the entire 90,000 square foot gallery. We’re establishing a global interior design firm that is moving the brand beyond presenting and selling products to conceptualizing and selling spaces. We opened our first freestanding RH interior design office in Palm Desert, California with no product except for two small sitting areas in front of our designers’ offices. There’s four offices in the building and a workspace with clients.
It’s a real freestanding customer facing design firm which really don’t exist in the world. If you think about it, it’s like finding a dentist. You move to a new area, you buy a new home, you need a dentist, what do you do? You Google it, you ask a friend, like where do you find an interior designer? I mean you can go online. I don’t know how that’s going to really help. Yeah, but if you think about it. The world of interior design is not a customer facing business. And we opened our first freestanding interior design office in Palm Desert with no product. It’s a real freestanding customer facing design firm and it’s generating a. million dollars a month in design business.
In 3,000 square feet which with rent of 200,000 a year, you can do the math. All of which is resulting in building a brand with no peer while generating industry leading growth with high teens adjusted EBITDA margin. Imagine what our performance will look like in a robust housing market as we cycle and leverage these investments. Never underestimate the power of the few good people who don’t know what can’t be done. Especially these people. Carpe diem. Operator will now open the call to questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Steven Forbes from Guggenheim Securities.
Steven Forbes
Good afternoon, Gary. Jack. Gary, you obviously mentioned RH Paris, but curious if you can maybe give us some color on how the demand book is building. Noting it’s early and the reason I asked is just curious if you can maybe help inform us how RH Paris has influenced your performance expectations ahead of RH Milan and RH London.
Gary Friedman
Sure. Well RH Paris is one, it’s really quite different. While we did open our first gallery with hospitality, it was really, we’re two hours out of London at Arch England. There’s not a lot of traffic out there. Known how our businesses develop. We kind of talked about it last quarter. But many of the other galleries as I’ve spoken about, we didn’t open in particularly the way we believe we should open. To acquire the, RH Paris and RH London, which we think are one-of-a-kind locations. We had to take a kind of a portfolio of galleries and open some of those before we wanted to. That’s why we opened London at RH [Indecipherable]. Excuse me. To open something that kind of set a tone. I think people know in Europe, Americans aren’t really known for building luxury brands.
We’re not really looked upon by the Europeans that have a great taste or style. And really all the luxury brands are from Paris or Italy. The UK has couple and you can argue that we have a couple argue that Ralph Lauren’s luxury brand. A very small part of Ralph Lauren’s business is luxury. The biggest part of the business is more of a department store based higher end business and not luxury and a giant outlet business. And that’s not to say anything bad about Ralph Laurent. It’s an incredible company, incredible brand. It’s just not a real focused luxury brand.
And you can argue that the only one we really had pure luxury brand in many ways was Tiffany and now the French own it. So, the road we’re on, the path we’re on, it’s a tricky one. It’s a tricky one to travel. We use the metaphor of climbing the Luxury Mountain and Eric coined the phrase, if you get higher and higher in the mountain, it’s where the air gets thin and the odds get slim. No one really made this climb, especially from the level we started at 25 years ago. And so, the next few moves we’re making are really important moves.
I heard several years ago that someone asked probably the most famous guy in the luxury world and I didn’t hear him say this, so I’m not going to say who said it. But you can imagine only a couple people have built really the best luxury platforms in the world. But I heard someone asked a question, how do you build a luxury brand in China? And the response was you build great stores in Paris, London, and New York. And I heard that years ago and I’ve always thought about that as thought about RH and how do we unveil this brand? And we built RH Nework and we opened it in 2018 and we said that was our bridge to Europe.
So, we did it a little backwards. And as we think about it for our business, it’s really probably Paris, London, Milan and New York. Because Milan is really the, one of the design capitals of the world. Not only for design, but also for fashion, but it’s where the biggest design show in the world is, Salone, where 500,000 people go once a year. Yeah. And it’s also the time we’re going to open RH Milan, but Paris, we pushed ourselves to another level and it’s not a particularly large gallery, but it’s very unique.
And I can describe it on the last call and if you haven’t seen it, we’ve, we had a video. The video on the website or no. Yeah, it’s a video. We’re also making a kind of a documentary video. Like we have some of our other iconic buildings and you’ll see that come out probably next couple of weeks. But I don’t sound like, we’re bragging about it, but it might be one of the most beautiful and aspirational and inspiring retail stores that was ever created. And there’s a lot of natural things that we loved about it.
One, it’s the only building on the Champs-Elysees that doesn’t have a, an entrance on the Champs-Elysees. You can’t enter the building. You enter through these 22 foot gold leaf gate and go down 195 steps to the front door. And we built a freestanding interior design office there. We’re able to get a building approved and there’s so many elements of it. It’s where we built the first world of RH, which is a, it’s an immersive experience that brings to life all our, all the places and spaces that we’ve built around the world. And, we think it’s an important part of communicating who we are connecting with consumers.
We, well, we only totally, I think in hot probably have about 150, 155 seats. So, it’s really like a normal restaurant, but it’s really two, because it’s in two smaller spaces, one on a terrace. It’s Laserdin[Phonetic] restaurant, and we invented some very new dishes there that we’re going to be rolling out in the US because they’re so good. And also, Le Petit, which is on the top floor on the rooftop. And the rooftop was so happy we figured out how to work with Fosters and Partners. And when we saw the building, we went up the side stair ladder thing to get on the rooftop.
We couldn’t believe we could see the Eiffel Tower and the Grand Palais and Louvre and everything like that. Like, if anyone would use this rooftop, and there’s no way to get to the rooftop. You said you’d have to build an elevator. But you’ll never get an elevator approved because it’ll block people’s views of the Eiffel Tower, Foster and partners, why want to work with the best people? They said, well, maybe we can design a rooftop. I could design an elevator that a hatch opens in the roof and a glass elevator pops up and then it disappears.
And I said, well, you ever done that before? They said, no, but we love to do things that haven’t been done before. But like once you see the rooftop, you couldn’t unsee it. Once you’re up there, you’re saying, we’ve got to figure out how to activate this. And what’s interesting, we have 40 seats, I think, on the rooftop. And unfortunately, right now the rooftop’s closed because weather in Paris gets pretty grim in the winters, and we can’t evacuate the roof if it starts to rain and pours. It’s not enough seats to relocate everybody to the level below.
But the rooftop, when it was open, the first few months we were open, it is the highest grossing part of the restaurant operation. And the two restaurants were doing more there per seat than anywhere else. So, just again, learning about creating incredible spaces that has made us rethink some of the work in Milan and some of the work in London, and some tweaks there. And then we found out that, we’re building this world of our age. And we had this, space where the building Paris backed. And we thought, like, God, well, I don’t know, what if we put a bar in here and, like, try to make it a lounge? And so, we put a bar in there. Then we said, like, well, we found out you couldn’t have a bar in Paris unless you had food, and you couldn’t just have nuts and snacks. So, we had to have, like, a small menu. So, we had a small menu.
The day we opened, we served our first meal in a place that in our mind wasn’t even a restaurant. And on opening night, place that was packed, and now we actually had to kind of retrofit it and put real tables in there that were big enough. And now we’re serving most of the menu, aren’t we, Casey? Yeah. Yeah. And it’s a great offset as we’ve lost, the seats on the roof. But there’s just been so many lessons and, so much we’re learning about the customer and who knows us and who doesn’t know us and how truly international the business in Paris is. I mean, I’ve said the list in front of me right now, like, of all the design jobs we have in, Mallorca and Morocco and like, you name it, like the Middle East.
And we’re like the design jobs that the team working on, like, truly a global store. And the clientele is incredible, but so many people don’t know us. And yes, the team’s walking people up to the world of RH and walking people through and people, I think, are kind of shocked by our body of work, because they many still don’t know us. And so just the thought of, how important that world of RH is and what a tool that is for our teams to kind of not just try to explain who we are, try to pull it up on the website, but walk people into a really immersive experience that brings our spaces and places to life and, speaks to our authority and architecture, interior design, and landscape architecture, because all of our, buildings are representatives of those kind of core competencies.
And we put, at the last minute, we decided the entry with this small little entry, and we didn’t think it was communicating enough about our truth. And so we, what, I don’t know, we had four weeks to go or six weeks to go, decided to build an architecture and design library, like in England. And now you can’t unsee it. It’s so incredible. You walk in, you look through the main doors, and if you’ve seen pictures of the gallery, you’ve seen the Vitruvian man and the artist design ethos, you have to interact with.
Yeah, I think most people stop and read it and take pictures in front of it. And then left and right, we have these fountains, beautiful fountains. And, above the fountain, we came up with this line, actually my wife came up with the line. I thought I wrote a really great letter to Paris. And she read it and she said, give me a day. And I said, what do you mean? Like, you don’t like it? Got insecure. And then she wrote that last night, the last line, if any of you got the invite to our party, we used the letters, an invite with music and so on and so forth, and used it for the opening of our video.
And it says, in Paris the measure is eternity. This we know and have built accordingly. And you walk into that entry and you can’t help but read that as you go left and right around the design ethos. And then you go into this submersive architecture and design library, yet there’s no product. You don’t see a. It just like, doesn’t look like a furniture store at all to anybody. Right? You actually see. We now own two copies of De architectura, 10 books on architecture, where the first modern printings were in 1521. And we’ve got one in French, and we have three iconic French architects, Delorme, Housman and Lucy III.
And then we’ve got Vitruvius, da Vinci and Palladio, displayed with bust and historic books and so on and so forth. And it’s something you’ve never seen anywhere. Like, I’ve never even really seen one, but we built our first one in Arch England because there was a library there. And we came up with the idea and we created something, I think, really meaningful. And I remember telling the team, the night before we open, we were in the architecture design library, said this might be the most important work we did here.
And, because it really communicates our truth, and why we do this and what we believe in. And, so now we went back and we’ve now you’re walking to the entry of Milan, which kind of looked like a lobby of a building. Look beautiful, but we didn’t know what to do. A couple couches and a couple chandeliers and like, it didn’t really, like, you might it like, interact with the first person and go, oh, excuse me, but is this a condominium building? Is this because it doesn’t look like stork you walk in and you immediately look through this kind of loggia into a backyard.
And you have to kind of go up and left, left and right. It doesn’t have a grand staircase, except for that goes down underground. We did our first underground restaurant. Like, everybody’s going to go, oh, well, they have a rooftop restaurant. Like this place or that place. No, we have a restaurant that’s underground, that’s got a skylight in the middle of the park. But we’re putting an architecture and design library now in the entry. And all of a sudden, you’re going to kind of go, wait, who are these people? Like, look at this.
Vitruvius and da Vinci and Palladio and Scamozzi and Alberti. And all the Italian iconic architects that shaped the way that most of the world was designed and built very early on, that’s going to come to life there. We’re going to have a world of RH in Milan on, in a place in a space that we probably wouldn’t have done anything with. It’s kind of like a, I don’t know, an attic, but the team re concepted it as this incredible lounge. And I think it’s going to be an iconic place that’ll help people understand who we are and what we believe in.
And also, these are great spaces that we can rent out and do events in that bring the right people into our galleries. And we’re trying to test the event business because we’ve got these incredible spaces. And I’ve said no for, I don’t know how many years now, 15, 20. If my line was always, our galleries are our homes and we don’t rent our homes. I turned down Oscar parties and Grammys parties, like the top artists and everything. And I thought we finally did an event.
We did. I go to a lot of warriors games and I’m friends with Joe Lakoff and Nicole Lacop, and Peter Guber, the owners of the warriors. And they hosted the NBA All Stars and they wanted to use RH San Francisco to do the owners, the owner’s party, the opening party for the NBA All Star weekend. And we did it and, and we just got tremendous response and all the right people there and made us think like maybe we should for the right to track the right clientele.
We have such incredible spaces. So, in Tara so far, like right away, Chanel wanted to take the world of our age to hold a dinner. And we’ve been contacted now about like can so and so do their fashion show here, and take over your gallery for the evening. And yeah, and so I think, we’re learning about, this idea of like doing these iconic spaces and ability to actually we have these unique, architectural masterpieces and the ability to bring the right people, because we have the right place, and I think it’s even more important if you think like everything’s moving online.
Like, I think people are dying for experiences. They’re dying for authentic connections not only with people, but with places, and with history and with beauty and with food and like, I mean, how many nights can you order DoorDash or Grubhub. But I mean, I love the services when I had no time and I, he wanted to have some delivered, but I don’t know about anybody else on the phone. But I’d much rather go somewhere and, see people and feel like I’m somewhere and connected, and I think, that’s why people still, congregate and aggregate and maybe they’re not going to movie theater so much anymore because, that experience is, not as unique and differentiated and, maybe we don’t want to be in a place where someone’s coughing behind you and so on and so forth. So that one I get. But I just think the places that we’re building, people like to see and they like to be there. There’s not a lot of places that are public like ours that you can get a meal in and experience that.
So, what we’re learning in Paris, we’re having all these people coming from all to the world going, seeing it and we’re thinking about like, gosh, we have to have more people fluent in more languages. We need to ramp the design teams faster. Our design team in Paris kind of got overwhelmed. Like, we had no idea that we’d have the traffic we had to Paris. Like, it was just so many people that came in and we were just overwhelmed. I mean, and even finding out how early you have to hire people because people give long tenures, they can’t just give a two week notice and come to work for you.
We kind of got behind in hiring to the restaurants and like we were behind. We had to fly people from America to kind of help, run the restaurant and cover the shifts. And they didn’t speak French and, that was important. There’s just so many things we’re learning, especially bringing hospitality into the high volume space. So. But just a little about the builds. I did my own little math and I was trying to understand, try to isolate the hospitality business because the hospitality business lost 25% of its seats after the first couple months.
Expect that to be a little off. And it’s only a tiny bit off with all the seats we launched and the highest productive seats. But we’re thinking that we might be able to tent that rooftop and actually do events there and maybe make, bring in just as many people, if not more, because you only see 40, I think 44 people max there. But the, just about the staffing, about design. We’re learning a ton and we’re way ahead of, we’ve done, team sent some incredible recaps and learnings and yeah, we’re going to be so much more prepared and so much more efficient.
But the builds are really interesting. So, the, math I was looking at, I kind of looked at the first eight weeks because well, September was a five week month. We didn’t, we lost, it didn’t open the first week opened on the fifth, which is, kind of a day and then the next week started. But, and I kind of try to isolate just our business because when you open cold in a market like this, right, you’re not shipping to anyone here. You’ve got no revenues happening.
And it’s interesting what we’re learning all around. But this one with high volume, high traffic, high traffic, iconic location, international people coming from all over the place. And the first eight weeks, I looked at the first eight weeks and so I kind of got the four weeks of September, the four weeks that we were open in the four weeks of October, and then I looked at that in the next really almost six weeks. I had to estimate the last three days just to kind of. Because we, they haven’t had a business. But when you look at the demand on the core business and we haven’t seen ramps like this, the six weeks, the average per week is 62% higher than the first eight weeks.
And the first eight weeks actually had more traffic as we, I think we were, still that, like the fall and there was a lot of people in Paris and yeah, you had a lot of people coming in. We still have very good traffic. But you can tell the team starting to kind of get their feet underneath them. We, started. People are starting to kind of figure out who we are and can I trust them? Can I buy furniture from them? And we have some people that know us because we’re, they either live in America or they travel internationally and they know us from America.
But I didn’t expect like the ramp on the core goods that because we opened with such good traffic. But I wouldn’t have thought It’d be a 62%, 63% ramp those weeks of the other weeks. So, when you start to think about that and how that might build, I think it’s going to take a while to really understand it because we got to get our arms around the divine opportunity. There’s. I mean, when you look at all the places we’re doing work, and you think, oh, man, our designers are going to have to fly here and fly there.
And, and our customers pay for that. Like, we’ve been flying people from America to, all the major cities in the world. So many of the major cities, we’ve had customers flying our people to Sydney, Australia, to Melbourne to Shanghai, to, all over Italy. I mean, I can’t. I told us every country, yeah, Middle east, you know. Yeah, we did. For the. Let’s see, the Prince of Qatar, right? Four homes on his compound, and like a $3 million job or something, like. But we’re doing jobs, like hundreds of thousands into the millions.
Like, we just got a famous building in New York. I can’t talk about it, to disclose it, but we’re just. We’re doing a $3 million design project in one of the most famous mansions in New York City. And then another $1.8 million project for someone I can’t talk about very famous. And that’s why I think I made the point about the design firm. And so, this. So much that we’re learning about Europe and so much we’re learning about, just the potential of our brand. It’s just evolving. So, long rambling answer, but you started with, with a question. I could talk about Paris for a long time.
Steven Forbes
Thank you, Gary. I’ll actually pass it on. Thanks so much.
Operator
The next question comes from Max Rakhlenko from TD Cowen.
Max Rakhlenko
Great. Hi, everyone. So, Gary, this is the first time that you guys have taken the pretty outsized price in a while. Can you just talk about how the customer responded in three Q, and the elasticity that you’re seeing from the higher price points? What are the learnings and how are you thinking about the right price points for the brand ahead? And depending on where tariffs go, can we actually see RH continue to take prices further?
Gary Friedman
Max, can I just ask clarifying extract, like you’re saying you observed Q3 was the first time we raised prices for a while, Is that what you’re saying?
Max Rakhlenko
Not necessarily the first quarter, but you have taken prices just given where tariffs have gone. So just curious what the elasticity looks like, how the customer is responding?
Gary Friedman
We’re, learning, we’ve taken a lot of price increases this year. We’ve had a lot of, movement in tariffs, and tariffs are set at one level and they went up and they, they. They’re moving around and, it takes a while. I mean, everybody, from manufacturers to product designers and everybody who’s involved in, the development process, and, yeah, it’s the first time we’re all trying to navigate this through the same-store.
I don’t know, maybe it’s going to stop moving for a while, but for a while that we. Yeah, we’re kind of frozen. And but I think so far, as long as it’s fair to everyone, I think that there’s some businesses that might be kind of violating the rules. Yeah, I think that there are some people that are coming in, and that there businesses in other countries that are, opening up in the US and they might be making the goods. So, they know, they might not be, bringing them in at the right price. They’re trying to. Yeah, I mean, there’s a lot of things going on, like, especially where there’s marketplaces and, you might have manufacturers bringing in goods and they’re figuring out how to get around tariffs, and we hope that any of those kind of things, get.
If we’re going to let tariffs, let’s just make it fair, don’t let some foreign manufacturer come in here. And, those are the people you’re trying to stop. And there’s actually loopholes. They’re kind of getting product in here and I think kind of next to nothing, and those. And that might be an advantage for certain people for a certain amount of time. But I think that stuff’s getting to the administration and, hopefully that it’ll become a fair playing field for everybody. And then if it is, it is, and, the market, will kind of conform to the reality.
I mean, the customer is going to have to conform. If things cost more, what happens? We’ve had inflation forever in this country, many times much worse than this. So, I think we just think about, hey, just make it a fair game. Don’t let [Indecipherable] manufacturers come in and open a US Entity and, their price is really a $1,000 for something. Don’t let them bring it in for a $100 and pay almost no tariff because they’re, shipping it to themselves. Yeah, so.
Max Rakhlenko
Got it.
Gary Friedman
Yeah.
Max Rakhlenko
No, that’s. That’s helpful. And then, Gary, just any more color on the new collection that you’re looking to rollout next year. Just how are you thinking about the timing and just what could it look like as we think about some of the building blocks for next year?
Gary Friedman
Yeah. We just got back from the trip that yeah, we work exclusively on that and I don’t think we’ve ever been more excited about anything, that we’ve worked on. I mean it’s, I don’t think we’ve worked any harder. Not because we had to, just because we wanted to. Like, it’s like I think Eric, Lisa, anybody who’s put this on the trip would that has any perspective of the big moves that we’ve made over the years, I think this is going to be the biggest incremental move we’ve ever made and I think it’s going to be a 10 year thing.
It’s not only is it part of our assortment that we’re way under penetrated and it’s if you look at the architecture that it’s targeting and the homes is targeting, it’s targeting the biggest architectural block, an aesthetic block, especially at the high end. Yeah, I mean some of our data says 60% of homes 5 million and above represent this kind of architecture. And it’s where we used to be strong and when the launch of modern and contemporary and really the, modern book, the modern book and modern’s — modern interiors kind of became contemporary, and that’s why it consolidated all together.
And then the kind of the, major look, that saying too much is and where we kind of built the company on more classic, it’s not only big, it’s the next trend. And what we’re doing is our best work and our partner’s best work. And I mean everybody is excited about it, especially after this last trip. And so, our target is to launch it at Salone in Milan, the biggest design show in the world. When we have probably the biggest opening parties that anybody’s had in Salone and have the world come see it and talk about it and try to get it into as many galleries we can as quickly as we can.
It’s what our interior designers and teams, getting the ask the most about what they’re most excited about. We don’t really represent it very well. So. And the work we’re doing is I think just incredible work and I, I think we can’t wait to jump back on a plane and go do some more. Like we just, it can be so big. So, I think it’s like I kind of look at it and I say, I don’t know, worth a few billion dollars over the next several years. I know it’s five years or 10 years, but it’s going to, if it could be the biggest part of the brand, it should be, especially with the trend that’s going to be powering it over the next.
And that trend should go 15 to 20 years, when you look at cycles. And this is the first time we’re going to actually kind of lead a cycle. Like, we usually, I just say like, don’t go too early on the wave. You’re like a surfer. If you get a false negative, the wave will go underneath you. Wait until the wave breaks, let a few people ride that wave, learn from it and then go own the wave. But this one it’s actually, the first cycle, I actually was a consumer, bought my first house.
My wife was a high-end material designer, which actually we did. I met her, she was an interior designer. It’s the first place I ever bought a, small condo in San Francisco. And I was the consumer for that look in my house in Belvedere for first half I built, and we did that house and that was the look. So, I kind of know this one. I actually was like, wow, I’m old enough to live through the cycle here. Like that’s good and a bad thing, right? But why we think we announced like who bought.
We don’t even, we didn’t even announce that stuff yet. Yeah, yeah. Okay. I got it, I got it, get off stage. It came out. Oh, came out of the business. You were interviewed. Oh, okay. Yeah. So, if you guys know we bought Michael Taylor, Michael Taylor Designs. It was, Michael Taylor was the godfather of the California look in, one of the most famous interior designers of his time in the 80s. And he did the [Indecipherable], and his famous diamond table was in the lobby of the Derek du Soleil. So, we, and I have the dining table in my Belvedere house.
It’s, I’ve had the Michael Taylor dining chairs and the snacks that really very cool, iconic pieces. So we bought the Michael Taylor brand. We own all the IP and you’ll see a fresh only thing coming. So given the competition a little heads up. I better shut up. Why? Didn’t do anything on earnings calls. I’m just going to kind of do this thing and I thought like, no way, in the world of AI, everybody’s going to drink copy, but we bought another company besides that. And so we, we’re well on our way. It’s going to be a big deal.
Max Rakhlenko
Awesome. Thanks a lot, guys. Best of luck.
Operator
Up next, we’ll take a question from Michael Lasser, UBS.
Michael Lasser
Good evening. Thank you so much for taking my question. Gary, you wrote in the letter that the way you offer your guidance is you have very high ambitions and at times you may fall short of that. Would it make sense to slow the pace of all the initiative and aim for a little bit more predictability in light of this very dynamic environment? And in that case, profitability might come a little higher as a result. Or is the, is your theory at this point we’re going to drive top-line grows at all costs and the profitability will eventually come.
Gary Friedman
I guess if I thought that, I would have wrote that, right? I think that’s what I wrote. I just think that, Wall Street’s the funny thing a lot of people said to me throughout my career, hey, I hate being a public company and you got to report quarterly earnings and it’s gets you to think small. And I said, I think that’s a choice. I actually like the discipline of being a public company. I actually like that we have to report earnings once a quarter numbers and it makes us stop and think and assess and prioritize and so on and so forth.
And I like that we have, quarterly board meetings. And I like that we, have to, go through that process and distill things down and simplify and assess everything, so yes, I don’t mind it. The thing I’ve learned and I’ve observed, I think so many people, they get so focused, like on quarterly results that, that becomes their whole mission as a CEO, or a leadership team is like, how do we make the quarter? And they do a lot of stupid things to make a quarter that aren’t brand building or business model building or anything, and I just, I think it’s not smart way to build something great, and we, one of our board members, grew up in Silicon Valley and she’s, early Facebook team member and everything.
And she always says we’re like a Silicon Valley startup; we’re semi mature public company. And I think that’s a good thing to be. It creates energy, it attracts great people, great people don’t want to come in and just like, oh, how are we going to make the next quarter? Oh, let’s lower our expectations, let’s make sure we make it. That’s like a downward spiral a lot of times. Yeah, I mean we want to do something great.
We want to do the best in the world at what we do. And that’s not for the faint of heart. It’s not for everyone, but we don’t need everyone to buy the stock and we don’t, our strategy is really simple here. From a business point of view. I say it’s; we do what we love with people that we love for people that love what we do. We don’t do focus groups; we don’t do stuff like that. We, it’s just very personal business to us and probably, yes, reflect the same way.
Shareholders, we have some people have been with us forever and some people are out of stock and that’s okay. They love us. Sometimes pretty much they don’t love us. That’s, it’s a free world. But I don’t know, like I, you know, it’s like sometimes, like in good markets, you know, we’re eating quarters and making quarters in a market like this. This is the time to, make moves and take market share and you create real strategic separation on the other side of it, ready for the, for the turn.
And I don’t think anybody’s going to be more ready than we are. I just like look out when the housing market comes back, you think we’re creating, you look at our two year numbers, like, just the handful, it’s not that many publicly reported people, but if you look at furniture based retailers and lot of those people, even on the list they sell a lot of accessories and other things. There’s not too many that are just focused on furniture that are even, that I every, it’s been a source and we said like they’ll put this company there.
Well, are they even in California? Like, why would we think about them, editor[Indecipherable] like, they don’t sell anything like us, not, they’re not at our price point or anything. But we, took, kind of national public players and they have, at least price 50% furniture, we’re 80% furniture. And so, we’re going to be more cyclical because of the furniture content. But furniture is the biggest part of the business. And so, should we lower our ambition? Like, no, I don’t think so.
I mean.
Michael Lasser
My question was not on [Speech Overlap]
Gary Friedman
Be more stable, I don’t know, like, are we not stable? I don’t know, like we’re going to make it seems EBITDA.
Michael Lasser
Yeah, my question wasn’t on the ambitions. It was more, about the pace of initiatives and slowing down to eventually speed up. And you’re not going to love my follow up question in light of that. So, I apologize in advance. But.
Gary Friedman
Like, I like you, Michael, you ask good questions. It makes me think.
Michael Lasser
Thank you. My second question is, in light of the guidance that call for the fourth quarter, that calls for a slowdown in the top line as well as some absorption of the tariffs, is this a signal that you’re running into limitations on being able to manage the tariffs with price and we should consider that as we factor our models for next year, not only could that put a little bit of a drag on the top line, but also we should consider that you may have to absorb some more tariffs into next year. Thank you.
Gary Friedman
And you want to take that, Jack.
Jack Preston
Yeah, I’m thinking, Michael, the tariff piece, I don’t, we didn’t materially change the impact from a basis point perspective. Obviously, that’s just representative cost alone. The other piece that’s not calculated on that is the price increase. Gary called out in the letter one of the Q3 items was just the tariffs on the backorder and special-order goods. Some of that was timing, right, because we experienced an increase and expected, have expected an increase in tariffs. We do our mitigation efforts, we do our resourcing efforts, but we, concurrently also change prices.
But you’re never perfect. You have some delays in the effectiveness of those, but you’re not going to call your customers back and say, oh, by the way, the thing you just bought, we’re going to be importing it at 20% tariff, so can you give us more money? So, as we thread that needle and get all that, dialed in, that was some of the things that surprised us in Q3 and it’ll flow a little bit into Q4. But I don’t know that we’re ready to say that make a statement like you’re describing. It’s dynamic situation. Not to mention looking at competitors, what do competitors do? We don’t lose sight of that. So, as far as what 2026 looks like, obviously we’re a little early for that.
I understand the question and the desire to know. Well, we’ll talk about that at the end of March. But I think, we’re proud of how we’ve been navigating the tariff situation, with price, with mitigation, with resourcing, with vendor partnerships, with price increases, everything that you would expect us to do. So,
Gary Friedman
Yeah, I mean, plus, we probably had the most, difficult situation from, based on, where we were sourcing from and what we did. And, yeah, we, read it wrong. We, thought, the president was going to like, moving goods to Vietnam, and Vietnam is, a smart place for us to move goods into. And all of a sudden Vietnam got hit with a 47% tariff or 46% tariff, and we’re like, oh, that was costly to move it to Vietnam. And it was a lot of work and a lot of effort, and we’re just getting ramped up and then, okay, now where are we going to put it? And then China’s going from one tariff to another, and, there’s other places we’re moving goods to and moving to the US and, it’s that’s a bit chaotic right now.
Like, I don’t know. I, Again, I kind of look at it all in context and I say everything that we’re investing in, we’re, building a restaurant company. I don’t know name, somebody’s ever done restaurants of our quality integrated into a retail experience, especially a furniture store. Now you’ll say, well, here or something, sell meatballs or something, right? And, but. And actually, we’re, generating cash. We’re paying for 65. It’s an offset, 65% of the rent of the buildings that on average, some are higher, some are lower.
And, we. I think we’re one of what is one of seven global luxury hospitality companies that own and operate their own business. A lot of people go like, who’s your chef? what hospitality companies run your restaurants? We run them. We’re the chefs. We have, obviously, we have culinary leaders and chefs, and we all get together and collaborate, but they’re, they’re a reflection of, what we love and what we do. And we’re getting good at it. We’re getting better and better. And like, I have an interesting point for case when what was our, our average ticket was $38. $38 in ’19. In 2019.
Yeah. So, I mean, here’s interesting fact. We just had our 10 year anniversary in October being in the restaurant business, we opened, in Chicago. And that restaurant did get like, the partner we, that we did it with is a great guy, still a good friend and, and super successful. It’s, a lot of times you really want to do something, someone who’s full time, they’re doing this. And we just realized most of the chefs, driven businesses that are doing hospitality for other people, it’s, kind of a license, the name thing, they’re not there.
And we had a deal with Brendan and he was, we had half his time for a while, but then he, he had so many other opportunities and we realized, this is turning into a real thing for us. We need to make it a core competency. So, we, we’ve invested now many years and it’s like, but that restaurant in Chicago that we opened, it did $5 million its first year. I mean, the estimate was going to do about a million bucks first year. And it did $5 million. It does $9 million or $10 million now, case.
Yeah, just shy of $10 million. Just shy of $10 million. And we opened a second restaurant, a second gallery, in a suburb not too far from that that’s doing $11 million. So, you think it would been cannibalized more. And we’re, yeah, our team is growing and maturing and, collaborating and we’re getting better and better and but if someone would have said 10 years ago that, hey, how many people want to wake up in the morning and go to furniture store for dinner, or for lunch? Like, I don’t think anybody would have, so think about that one.
Like, I don’t know, should we not have done it? Because you could have said like, Gary, that was like really hard. Why did you do that? Well, we do hard things, and we do things that are unique and differentiated. And I think because we’re more ambitious than others, we think more deeply than others. And we’re not just managers of something. Managers arrange and organize the status quo. We, we’re leaders. And leaders are leading people somewhere. They’ve never been doing things they’ve never done. And leaders have to be comfortable making others uncomfortable. Because that’s what leaders do.
And starting with the leader, the leaders can be somewhat uncomfortable. So I’m an ally. Sorry if I’m making you uncomfortable. Just what I do. That’s how I know I’m leading. That’s how you know you’re on the right path. But if you can build things that other people haven’t built, and if you can lead, you can create a lot of value. And we believe we’re going to create a lot of value. Like maybe not at this moment. We look really risky, I guess, because we have debt. But we said we’re comfortable with paying down the debt. There’s lots of things we can do, heck, we’ve done more zero convertible notes than anybody in history I think, we did four. I think anybody’s done four. And then we’re. Yahoo. Had done two, and at some point, we might tap the convert market. At some point we may refinance some of the debt. At some point, like, who knows? We got, we, we’ve got a lot of real estate and we think we can monetize that over time. And, our inventory has been high. We’re, turning inventory into cash and,but we’re, I’m pretty comfortable. Like hell. I lived on the edge of bankruptcy my first 10 years.
This is nothing like.
Michael Lasser
Thank you for all the insight and I wish you all a very happy holiday season. Thank you.
Gary Friedman
Great. Happy holidays to you. Michael.
Operator
The next question comes from Simeon Guttman from Morgan Stanley.
Simeon Guttman
Hey, Gary. Hey, Jack. Maybe one question. Maybe let’s talk furniture. Can you talk about the backdrop? I know it’s been a tough overall market. Can you just talk about how the quarter, how the customer changed the demand for furniture, how your current lines are resonating. And then barring anything in the backdrop getting worse, can we assume that free cash flow stays positive from here on out? Thank you.
Gary Friedman
I don’t know if this is the time to assume anything will be a certain way. Right. We just, had China and Russia fly bombers over Japan, like, hello, was anybody expecting that? And, then we rallied bombers with Japan or fighter jets or whatever. Like, who knows what’s going to happen in this world right now. I mean, there’s a lot of discord and there’s a lot of noise and, so, I mean, we expect free cash flow to remain positive, but did we expect at any time early in the year that we were going to have all the tariff announcements, such a unpredictable, chaotic way, and have to delay our interiors book by eight weeks.
Did we think we were going to launch estates this year? Yeah, we did. And I said the name of that. Okay, sorry about that. But we, it’s a really unusual time and, we’re not trying to be flat or up three right now. Like, if we’re trying to be flat or up three, would we be more predictable? We might. I know. Would that be really good for the long term? I don’t think so. I love what we’re doing right now. I love that the moves we’re making right now, I think nobody even going to, I think people are going to be shocked.
I think competition’s going to go, oh, now what? I love our strategy in Europe, but is it more expensive than we thought? Yeah, it is. We build these things during and post Covid, and they’re way more expensive and put pressure on short term cash flow and. Yeah, sure, but wait till you see what we invented. And again, necessity is the mother of invention. Put us into a corner, make things tough for us. We’ll vent our way out of it. We’ve designed, I think, some of the most exciting retail concepts coming, like new versions of RH that I think are mind blowing and they cost half as much.
And we have other ones that are equally creative that will take probably less than half the time. It costs less, and, we’ve got design ecosystems, we have design compounds, we have, interior design office. Yeah, we just got a lot of things and that’s, and they’re all make a ton of sense. And so we’re, I think we’re pretty responsive strategically. We just don’t like to get stuck in the weeds and not see the bigger picture. And but we’re, really excited about where we are. We’re super positive. But can you say things are going to be super predictable in what we’ve just seen in the last six to 12 months? I’d say it’s going to be predictably unpredictable. Like just what we’ve all had to navigate, deal with. And I mean, there’s still changes. Like, who knows, there could be a whole new round of tariffs.
I mean, the, Supreme Court could say, hey, this is illegal. And then all of a sudden, it’s going to be, if you read the news there’s going to be these things happen. These things happen. Those things happen. This changes that. Like, well, we’ll improvise, adapt and overcome. That’s what we do.
Jack Preston
Simeon on free cash flow, just so, like talked about the $300 million of inventory coming down. So that this year is a kind of a $200 million figure we talked about. So, there’s still that element to come.
There’s, we talked about reduction in cap, cap capital spending, last call a little bit here. So just there’s building blocks to maintain. Positive cash flow going forward. But obviously, there’s a lot of unknowns and a lot of uncertainty. So, we’ll be talking a lot about that and try to drive that results as well.
Simeon Guttman
Right said. Thank you.
Operator
Up next, we’ll take a question from Jonathan Matuszewski from Jefferies.
Jonathan Matuszewski
Oh, great. Good evening and thanks for the time. Appreciate the color on market share, Gary. And it’s easy for us to track the public players you outlined in the table, but less easy for us to assess the health of the fragmented design showrooms, those regional high-end stores, some of the local independent boutiques. Curious if you could give us a sense of what you’re seeing from a dislocation standpoint with the majority of your share gains coming from those channel. Thanks so much.
Gary Friedman
Yeah. I mean, harder for any of us to measure, but yeah, I mean, the feedback we get from, some of the people that we’ve acquired and people that we know that, believe we’ve been the biggest disruptive force at the high end of the business over the last, 10 years, not more.
And so especially with what we’ve done, with the new galleries and with the assortment and moving up market and taking that, the quality up and the level of design up and so, I think you could, I mean, we used to track how many independent high-end boutiques there were, right. There used to be 32 between Sausalito and Santa Rosa, county in Healdsburg and stuff in Napa. And, we always said, that, that they all exist because, RH had a 6,000 square foot gallery in Corte Madera and most of those boutiques were, I don’t know, 3,000 to 15,000 square feet, all the majority of them kind of close to the size we are. And yeah, it wasn’t obvious, the assortment, if you didn’t get our book, you didn’t know how big our assortment was if you didn’t go to our website, you didn’t know.
And we always said like when we have the assortment in physical marketplace there will be a lot less. And you’re making me want to go do the latest math. I mean we know, that it went from like 32 to about 18 or 20, over X number of years. And go do the math again. But I mean I think, we’ve went from $300 million to $3.5 billion and some of it’s hospitality and contract business and we own waterworks and but we believe most of the share came from the higher end and came from like it came from the showrooms and they came from the independents and they came from the regional furniture stores and they came from, the Ethan Allens of the world or people like that.
Not to pick on Ethan Allen or anything but I mean Ethan Allen, back when I that our age, earlier days they were like $1.2 billion or something. And we looked up to them and I think they, I don’t know if they do today $500 million or $600 million or $700 million. So, there’s always going to be those shifting dynamics, they’re sometimes hard to measure. But we like how our business has been performing from a market share point of view. And there’s enough data to say we’re one of the leading share gainers right now at a certain size, especially furniture based.
Again, there’s other people that have a big tabletop business, they have big accessories business. So, they’re in seasonal businesses like Halloween and Easter and this and Christmas and we’re not in any of those businesses anymore. So you got to compare us to the right kind of people. And so, we don’t have some of those other businesses that might make us a little less cyclical. There’s some of the businesses I think we exited too far. Yeah, we ought to probably have some more home accessories or some layer, designers, would like to have more things to complete a home.
And so, we’re considering those things. We used to have a book called the Objects and Curiosity and we may re relaunch that at some point and you might see us. I don’t know, I wouldn’t even rule out would we be in the tabletop business, but just in our own way. And I don’t think I would be in the chase the holiday businesses, but doesn’t mean we can’t have, beautiful candles and that are, like our branded stuff, we, and then we can’t have like our maid’s blanket or things like that, and that are really high end and aspirational and can be great gifts and things you really want in your home to identify, that identify your status and where you are in life.
So, we think we build the brand correctly. There’s going to be other opportunities like that. But yeah, hard to. It’s that fragmented. Right. It’s like not easy to exactly know.
Jonathan Matuszewski
Helpful. Thank you, Gary.
Operator
And that does conclude our question-and-answer session. I’ll hand the conference back over to Mr. Gary Friedman for any additional or closing remarks.
Gary Friedman
Great. Thank you, operator. Thank you everyone for your interest. Want to thank our teams, that bring our brand to life each and every day throughout our galleries or hospitality or distribution centers or, every aspect of the company, everybody in, every location around the world and everybody who’s all of our partners around the world that, work so hard to bring these beautiful products to life. We appreciate everyone and your efforts and your collaboration, and we wish everyone a wonderful holiday and we look forward to talking to you in the next year. Thank you
Operator
[Operator Closing Remarks]