Market Overview

RH Reports Record First Quarter Fiscal 2018 Results

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RH (NYSE:RH) today announced first quarter fiscal 2018 results and
Chairman & Chief Executive Officer, Gary Friedman, provided an update on
the Company's continued evolution and outlook.

RH Leadership will host a Q&A conference call at 2:00 p.m. PT (5:00 p.m.
ET) today.

FIRST QUARTER HIGHLIGHTS

Q1 GAAP DILUTED EPS $1.11 vs. ($0.09) LY
Q1 ADJUSTED DILUTED EPS
$1.33 vs. $0.05 LY

Q1 GAAP NET INCOME $28.1M vs. ($3.4M) LY
Q1 ADJUSTED NET INCOME
$33.5M vs. $1.8M LY

Q1 GAAP OPERATING MARGIN 9.6% vs. 1.2% LY
Q1 ADJUSTED OPERATING
MARGIN 9.6% vs. 1.5% LY

Q1 COMPARABLE BRAND REVENUE +1% vs. +9% LY
Q1 NET REVENUES -1% vs.
+23% LY

ON FEBRUARY 4, 2018, RH ADOPTED ASU 2014-09 (TOPIC 606) REVENUE
RECOGNITION ACCOUNTING STANDARD. THE COMPANY'S PREVIOUS AND CURRENT
GUIDANCE CONFORMS TO THE NEW POLICY. WHILE TOPIC 606 HAS NO MATERIAL
IMPACT ON THE COMPANY'S FINANCIAL RESULTS FOR FISCAL 2018, WE HAVE
PROVIDED A TABLE SHOWING THE ESTIMATED EFFECT BY QUARTER BELOW.

To Our People, Partners and Shareholders,

We articulated at the beginning of the year that we will be managing the
business with a bias for earnings versus revenue growth in fiscal 2018.
We will restrain ourselves from chasing low quality sales at the expense
of profitability like many in our industry, and instead focus on
building an operating platform that will enable us to compete and win
over the long-term.

Our first quarter adjusted diluted earnings per share of $1.33 versus
$0.05 last year reflects that focus and demonstrates the power of our
new membership model, our unique and proprietary product offering, our
efforts to revolutionize physical retailing, and our work designing a
massively more efficient operating platform.

We achieved record adjusted operating margins of 9.6% in the first
quarter versus 1.5% last year, more than double our previous Q1 record
of 4.4% in the first quarter of fiscal 2015 when adjusted operating
margins reached an all-time high of 9.7% for the full year.

Adjusted gross margins increased 750 basis points to a first quarter
record of 38.0%, compared to 30.5% last year reflecting strong full
price selling, lower outlet revenues, and a more streamlined
distribution and reverse logistics network.

First quarter adjusted net income reached $33.5 million versus $1.8
million last year, and up more than three times our previous record of
$9.8 million in the first quarter of fiscal 2015.

Comparable brand revenues grew 1% in the quarter, despite a 4 point drag
from cycling last year's inventory reduction efforts. Adjusted for last
year's inventory reduction efforts, comparable brand revenues increased
5% versus a 9% increase last year.

While first quarter net revenues of $557 million decreased 0.8% as a
result of cycling the approximate 4 points of revenue drag from SKU
rationalization, and a 2 point drag from incremental outlet sales last
year, adjusted gross margin dollars increased 23.5% versus a year ago
demonstrating the true underlying strength of our business.

Our work this past year to consolidate our distribution center network
from four facilities to two while streamlining operations throughout our
supply chain, has resulted in a significantly more efficient cost and
working capital model. We believe this new model will prove to be a
long-term competitive advantage that will separate and distinguish RH's
operating results for years to come.

Raising Fiscal 2018 Guidance, Providing Second Quarter Guidance and
Updating Long-Term Financial Targets

As a result of our strong first quarter
performance and accelerating revenue trends in the second quarter, we
are raising our fiscal 2018 guidance for a second time this year.
We
are providing the following updated guidance for fiscal 2018:

  • Adjusted net revenues in the range of $2.53 - $2.57 billion, an
    increase of 5% - 7% on a comparable 52-week vs. 52-week basis.
  • Adjusted gross margin in the range of 39.3% to 39.6% and adjusted SG&A
    as a percentage of revenue in the range of 28.6% to 28.9%.
  • Adjusted operating margin in the range of 10.4% - 11.0%.
  • Adjusted net income in the range of $168 - $181 million versus our
    previous range of $145 - $165 million.
  • Adjusted diluted earnings per share in the range of $6.34 - $6.83
    based on a fully diluted share count of 26.5 million shares.
  • Net capital expenditures in the range of $75 million to $85 million.
  • Merchandise inventories in the range of $450 to $475 million, down 10%
    to 15% versus last year.
  • Free cash flow in excess of $260 million versus previous guidance for
    free cash flow in excess of $250 million.

We are providing the following guidance for the
second quarter:

  • Adjusted net revenues in the range of $655 - $662 million, an increase
    of 6% - 7% versus last year.
  • Adjusted gross margin in the range of 40.5% to 40.7% and adjusted SG&A
    as a percentage of revenue in the range of 29.6% to 29.8%.
  • Adjusted operating margin in the range of 10.8% - 11.1%.
  • Adjusted net income in the range of $45 - $47 million.
  • Adjusted diluted earnings per share in the range of $1.70 - $1.77
    based on a fully diluted share count of 26.5 million shares.

Last quarter, we introduced an Intermediate and Long-Term Outlook with
expectations for accelerated revenue growth and continued margin
expansion with line of sight to adjusted operating margins in the
low-to-mid teens by 2021.

Based on investor feedback we are providing the
following margin and leverage opportunities that would bridge to
low-to-mid teens adjusted operating margins by Fiscal 2021:

  • 150 - 200 basis points of expense savings and margin enhancement from
    our new operating platform.
  • 150 - 200 basis points of margin expansion and SG&A leverage from our
    real estate transformation.
  • 50 basis points from cycling the start-up costs from RH Hospitality.
  • 50 basis points from neutralizing the earnings drag from Waterworks.

Additionally, we are updating our long-term targets to include a return
on invested capital1 (ROIC) goal. As a result of our rapidly
improving profitability and capital efficient operating and real estate
strategies, we are now forecasting ROIC in excess of 30% by fiscal 2021,
an increase from 22% expected in fiscal 2018 and 10% in fiscal 2017

We see a clear path to $4 to $5 billion in North American revenues
long-term. We also believe there is tremendous potential for the RH
brand internationally, and we continue to explore opportunities to open
our first Gallery in London.

Our long-term targets remain revenue growth of 8% - 12% and earnings
growth of 15% - 20% annually

2018 - A Continued Focus on Execution, Architecture and Cash

As communicated, we will continue to focus on executing our new business
model, architecting a new operating platform and driving significant
cash flow by increasing revenues and earnings, while decreasing
inventory and capital spending.

We expect revenues to accelerate into the second quarter and through the
second half of 2018 as we cycle last year's inventory optimization
efforts. Additionally, the new RH Interiors and RH Modern Source Books
have been arriving in customer's homes over the past several weeks. We
expect to benefit from the introduction of several innovative new
collections, and the incremental customer contact this year of RH
Interiors in the Spring and RH Modern in the Fall.

RH President, Chief Operating, Service and Values Officer, DeMonty Price
and his team are leading a movement within the Company to build an
operating platform and customer culture that will leapfrog us far beyond
the customer experience and operating results that currently define our
industry.

DeMonty has infused the Supply Chain and Call Center organizations with
dynamic new leadership from our Gallery teams. New Senior Vice President
of Customer Delight Centers, Sandy Pilon, a 10 year RH veteran, and new
Vice President of Home Delivery & Delight, Stefan Duban, a 17 year RH
veteran, are quickly shifting the focus from orders to customers, and
from deliveries to delight. They are infusing their teams with an energy
and passion that is echoing throughout our Company and into the homes of
our customers.

The work in home delivery includes a complete redesign of the network
which will significantly increase the time product remains in its
original packaging, reducing returns and damages, and in the majority of
our markets, doubling the productivity of our delivery teams. We are
also redesigning our call center network, closing a call center in
Dallas, and opening a new Customer Delight Center at our headquarters in
Corte Madera, CA ensuring the voice of the customer rings through the
corridors of our corporate campus daily.

We expect our work to architect a new operating platform, inclusive of
our distribution center network redesign, the redesign of our reverse
logistics and outlet business, and the reconceptualization of our home
delivery and customer experience, will drive lower costs and inventory
levels, and higher earnings and inventory turns throughout the balance
of fiscal 2018. Looking forward, we expect our ongoing efforts to result
in a dramatically improved customer experience, continued margin
enhancement and significant cost savings over the next several years.

Regarding our balance sheet and leverage ratios, we fully expect future
cash flow will be adequate to repay the outstanding principal of our
$650 million of zero coupon convertible notes at maturity in June 2019
and June 2020, respectively. As a reminder, we purchased a bond hedge
that is designed to protect us against dilution on the 2019 notes up to
$172 per share, and up to $189 per share for the 2020 notes.

Over the last three quarters, we have substantially reduced our net debt
to trailing twelve months Adjusted EBITDA from 5x at the end the second
quarter fiscal 2017 to 3x at the end of the first quarter fiscal 2018.
Based on the continued strong financial performance of our business
driving higher Adjusted EBITDA, we are in a position to reduce this
ratio to less than 2x at the end of fiscal 2018.

The strength of our business and the reduction in leverage we have
achieved during the past three quarters puts us in a strong position to
take advantage of the positive conditions in the capital markets. We
currently have multiple financing alternatives available to us on
favorable terms that could provide us with additional financial
flexibility with respect to capital allocation.

Looking back, had we not been opportunistic in responding to the
favorable market conditions through our convertible notes financings in
2014 and 2015, we would not have been in a position to repurchase $1
billion of our stock when it was undervalued last year, which has proven
to be an excellent allocation of capital for the benefit of our
shareholders. We are regularly evaluating various low interest rate
financing alternatives and expect to follow the same opportunistic
capital allocation approach in the future regarding both sources and
uses of capital.

As we did in fiscal 2017, we will once again hold ourselves back from
adding new businesses in fiscal 2018 outside of ongoing investments in
RH Hospitality as we remain focused on optimizing the profitability of
our new operating platform. We will continue to manage the business with
a bias for earnings versus revenue growth, and will restrain ourselves
from chasing low quality sales at the expense of profitability like many
in our industry.

It remains clear to us as we witness the failures of high growth - no
profit, online pure plays and the declining operating margins of
traditional retailers who are driving an unnatural shift online, that
the complexities and costs of scaling a furniture business will favor
those who control their brand from concept to customer, offer an
immersive and inspiring physical and digital experience, and have a
superior logistics network that extends the brand into the customer's
home. The road of endless promotions, free shipping, and a shrinking
store base is resulting in broken and unsustainable retail models. We
prefer the road less traveled by, and like Robert Frost, believe it will
make all the difference.

We plan to continue our quest to revolutionize physical retailing in
fiscal 2018 and will open four new Galleries this year in Portland
(opened in March), Nashville, Yountville, and New York, the latter three
with our integrated hospitality experience.

The Nashville Gallery is inspired by the historic architecture and
design of RH Chicago, with a central courtyard cafe that features a
soaring steel and glass atrium where you can dine under heritage olive
trees while listening to the sound of trickling fountains, enjoy a glass
of wine in our dramatic wine vaults or explore the gallery with a
handcrafted coffee drink from our barista bar. The Gallery displays full
presentations of RH Interiors, Modern, Outdoor, Baby & Child and Teen,
plus a Design Atelier to support our efforts to build the largest luxury
design firm in North America. RH Nashville opens this Friday, June 15.

With a modern steel and glass industrial structure rising up five floors
through the original historic brick facade, RH New York, the Gallery in
the Historic Meatpacking district, is an architectural masterpiece
located on what is becoming one of the most iconic corners of the city.
The 90,000 gross square feet of indoor and outdoor space is connected by
a soaring central atrium with stacked cast iron columns, a grand
staircase that features the art installation "Rain" by the renowned Los
Angeles-based artist, architect, and designer Alison Berger, and a
transparent elevator which lifts you up to a glass encased rooftop
restaurant with retractable doors that open out to a beautiful
landscaped park with all-day sunshine and incredible views of downtown
and the Freedom Tower. The Gallery also features a barista bar, an
outdoor wine terrace where you can enjoy a glass of wine or a morning
coffee, full floors of RH Interiors, Modern, Outdoor, Baby & Child and
Teen, plus an expansive Design Atelier with private presentation rooms.

RH New York provides us the rare opportunity, in arguably the most
important city in the world, to develop a ground up retail experience
like no other. Currently, our plan is to open in September pending the
city completing the infrastructure and street work that has been
massively disruptive to businesses in the neighborhood. Long-term - with
the recent opening of the Whitney Museum; the redevelopment of
Gansevoort Street where our first RH Guesthouse will open in the Summer
of 2019; the expansion of Google's headquarters in Chelsea Market; the
multiple new buildings under development in the neighborhood; all of
which will be tied together by new beautifully landscaped Belgian brick
streets and connected by the landmark High Line - we believe our new
Gallery will become a global destination and positions RH well for
future international expansion.

RH Yountville, scheduled to open early Fall, will be an integrated
compound of food, wine, art and design. Reflective of the local culture,
and intended to engage the global luxury clientele who visit and
vacation in the Napa Valley, RH Yountville includes the Historic
Ma(i)sonry Building, which we are transforming into a two story dramatic
stone wine vault with beautiful outdoor trellis covered living rooms
that can be reserved for exclusive wine tastings from some of the
Valley's rare and hard to acquire wines. We are finishing construction
of three new pavilions on the property, including an indoor - outdoor
restaurant with a glass roof and retractable steel and glass doors where
you will dine under heritage olive trees while listening to the sound of
trickling water from dramatic central fountains. The pavilions will be
connected by lush garden courtyards with outdoor fireplaces and walking
paths of crushed granite with bluestone pavers. Two of the new pavilions
will feature rotating artistic installations of RH Interiors and RH
Modern, plus a Design Atelier to work on design projects with our
guests. The five building compound will also include a Doughnut Vault.
This Chicago based icon from President of RH Hospitality, Brendan
Sodikoff, is consistently recognized as one of the best doughnut shops
in America. Complete with the vintage and iconic Doughnut Vault Truck,
an Instagram favorite, that will reside in our parking lot and be
cruising the local streets of Yountville on weekend mornings. RH
Yountville will be a unique and immersive brand experience, one that
will continue to position the brand as a taste, style and creative
leader in our industry.

2019 - A Pivot to High Quality, Sustainable Growth

We plan a return to our product and brand expansion strategy in 2019,
which has been on hold as we focused on our move to membership and the
architecture of our new operating platform. We have several new brand
extension plans in our development pipeline, and look forward to
unveiling them as we pivot back to growth next year.

We plan to increase our investment in RH Interior Design, with a goal of
building the leading Interior Design Firm in North America. We believe
there is a significant revenue opportunity by offering world class
design and installation services as we move the brand beyond creating
and selling products to conceptualizing and selling spaces. You will
notice the expanded presence of RH Interior Design in our RH Interiors
and RH Modern Source Books, and our IMAGINE advertising campaign in many
of the leading shelter magazines.

We have developed a new prototype Design Gallery that will enable us to
more quickly place our disruptive product assortment and immersive
retail experience into the market. The new prototype is based on key
learnings from our recent Gallery openings and will range in size from
33,000 square feet inclusive of our integrated hospitality experience to
29,000 square feet without. These new Galleries will represent our
assortments from RH Interiors, Modern, Baby & Child, Teen and Outdoor.
Due to the reduced square footage and efficient design, these new
prototypes will be more capital efficient with less time and cost risk,
but yield similar productivity. We anticipate these new Galleries will
represent approximately two thirds of our target markets and enable us
to ramp from 3 to 5 new Galleries per year, to a pace of 5 to 7 new
Galleries per year.

We will continue to develop and open larger Bespoke Design Galleries in
the top metropolitan markets, and indigenous Bespoke Galleries in the
best second home markets where the wealthy and affluent visit and
vacation. Examples include the Hamptons, Aspen, Palm Beach and the Napa
Valley, among others.

We continue to evolve from a leasing to a development model that will
reduce occupancy costs and increase our return on capital. We currently
have two projects, Yountville and Edina, under construction using this
new model, and have an additional five development projects in the
pipeline. In the case of Yountville and Edina, we expect to do a
sale-leaseback that would allow us to recoup all of our capital,
possibly more. In some cases we are pre-selling and structuring the
transaction where the capital to build the project is advanced by the
buyer during construction, which would require zero upfront capital from
RH.

Additionally, due to the productivity and proof of concept of our recent
new Galleries, we are able to negotiate capital light traditional
leasing deals, where 65% to 100% of the capital requirement will be
funded by the landlord, versus 50% previously. All of the above
mentioned deal structures lead to lower capital requirements, and
significantly higher returns on invested capital.

Building a Brand with No Peer and a Customer Experience That Cannot
Be Replicated Online

We do understand that the strategies we are pursuing - opening the
largest specialty retail experiences in our industry while most are
shrinking the size of their retail footprint or closing stores; moving
from a promotional to a membership model, while others are increasing
promotions, positioning their brands around price versus product;
continuing to mail inspiring Source Books, while many are eliminating
catalogs; and refusing to follow the herd in self-promotion on social
media, instead allowing our brand to be defined by the taste, design,
and quality of the products and experiences we are creating - are all in
direct conflict with conventional wisdom and the plans being pursued by
many in our industry.

We believe when you step back and consider: one, we are building a brand
with no peer; two, we are creating a customer experience that cannot be
replicated online; and three, we have total control of our brand from
concept to customer, you realize what we are building is extremely rare
in today's retail landscape, and, we would argue, will also prove to be
equally valuable.

In closing, we are deeply grateful for our people and partners whose
passion and persistence bring our vision and values to life each day, as
we pursue our quest to become one of the most admired brands in the
world.

Carpe Diem,

Gary

Gary Friedman
Chairman & Chief Executive Officer

1 Return on invested capital (ROIC): We define ROIC as
adjusted operating income after-tax for the most recent twelve-month
period, divided by the average of beginning and ending debt and equity
less cash and equivalents as well as short and long term investments for
the most recent twelve-month period. ROIC is not a measure of financial
performance under GAAP, and should be considered in addition to, and not
as a substitute for other financial measures prepared in accordance with
GAAP. Our method of determining ROIC may differ from other companies'
methods and therefore may not be comparable.

Q&A CONFERENCE CALL INFORMATION

Accompanying this release, RH leadership will host a live question and
answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested
parties may access the call by dialing (866) 394-6658 (United
States/Canada) or (706) 679-9188 (International). A live broadcast of
the question and answer session conference call will also be available
online at the Company's investor relations website, ir.rh.com.
A replay of the question and answer session conference call will be
available through June 25, 2018 by dialing (855) 859-2056 or (404)
537-3406 and entering passcode 1575188, as well as on the Company's
investor relations website.

ABOUT RH

RH (NYSE:RH) is a curator of design, taste and style in the luxury
lifestyle market. The Company offers collections through its retail
galleries, Source Books, and online at RH.com, RHModern.com and
Waterworks.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated financial statements, which are
prepared and presented in accordance with Generally Accepted Accounting
Principles ("GAAP"), the Company uses the following non-GAAP financial
measures: adjusted net revenue, adjusted net income, adjusted diluted
earnings per share, free cash flow, adjusted operating margin and
Adjusted EBITDA (collectively, "non-GAAP financial measures"). We
compute these measures by adjusting the applicable GAAP measures to
remove the impact of certain recurring and non-recurring charges and
gains and the tax effect of these adjustments. The presentation of this
financial information is not intended to be considered in isolation or
as a substitute for, or superior to, the financial information prepared
and presented in accordance with GAAP. The Company uses these non-GAAP
financial measures for financial and operational decision making and as
a means to evaluate period-to-period comparisons. The Company believes
that they provide useful information about operating results, enhance
the overall unde

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