The Greek philosopher Epictetus said, "It's not what happens to you, but how you react to it that matters." Our misfortunes of late are well-known and widely documented. The launch of RH Modern, while a success on many levels, has suffered from difficulties ramping production. We continue to face headwinds in the markets impacted by energy and currency. There is a clear slowdown across the luxury market where we compete. Additionally, our decision to push out the mailing of our spring Source Books to fall, the move from a promotional to a membership model, and efforts to rationalize our SKU count are all weighing on our current performance. While the combination of these factors have made our business difficult to forecast in the short term, we are making strategic investments to position the brand for accelerated long-term growth.
We plan to aggressively step up our investment in RH Modern as we correctly predicted the opportunity to create a new and incremental market. RH Modern has enjoyed strong demand since its inception and continues to gain momentum with in-stocks now reaching 80%. Our first freestanding Modern gallery in Los Angeles is on track to generate $25 million annually. The full floor presentations in our design galleries are performing exceedingly well. We believe the most important data point is the conversion of the first floor of our New York gallery, where we've experienced a sales increase of 35%. Based on these results, this fall, we will launch RH Modern across the entire retail fleet and believe we can create a meaningful positive arbitrage.
This will be the most significant new product launch at retail in our history. It will be supported by an expanded mailing of our RH Modern Sourcebook. Here's a preview of the new collection. Not all of the excitement this fall is Modern. We will also be unveiling a dramatic refresh of our RH Interiors collection as the brand evolves to reflect a more contemporary point of view. The Interior Source Book is being completely redesigned by famed art director, Fabien Baron, who designed the RH Modern Source Book and will feature a bold new logo, new layouts, new photography, and several new furniture and lighting collections. Here's a sneak peek at what you'll see this fall. Additionally, the test of our first Design Atelier in Chicago, a fully integrated workspace for architects, designers, and customers, has been a huge success.
We plan to begin rolling out Design Ateliers to all of our retail galleries beginning this fall, supporting our efforts to expand design services and position RH as a leading interior design firm. These strategic investments move the brand from beyond creating and selling product to conceptualizing and selling spaces. That same thinking led us to our partnership with Waterworks. Waterworks has long been the definition of the well-appointed bath. It is the only complete bath and kitchen business offering fittings, fixtures, lighting, and surfaces under one brand in the market. We are thrilled to add this prestigious brand to our platform and welcome the dynamic Waterworks team to our family. It not only positions RH as an authority in the two most important rooms of the home, the bath and the kitchen, but also creates the first fully integrated luxury home platform in the world.
Our recent move from a promotional to a membership model with the introduction of the RH Grey Card further supports the evolution of our business from selling products to facilitating projects. While we are learning that the selling cycle with members is longer, as transactions are not closed with the urgency of artificially imposed sale deadlines, we are pleased with the early adoption rate and growth in average order size. At this point, we have every reason to believe membership will prove to be a success, elevating our brand, improving the customer experience, and streamlining our business. Last month, we announced a new leadership structure promoting Eri Chaya, DeMonty Price, and Karen Boone to Co-Presidents of RH. This new leadership structure is designed to increase collaboration and improve execution across the company.
These three leaders have already begun working together to break down silos, remove inefficiencies, and engineered a leaner organization that will result in cost savings of approximately $20 million annually. We also plan to simplify the network design of our supply chain. By holding product in fewer locations, we will reduce inventories and improve in-stocks while simplifying execution for our teams and our vendor partners. We continue to invest in the customer experience and have several initiatives we are working against. We are making significant investments to expand and elevate our design services, including adding additional designers and providing enhanced education, training, and support. All of these efforts will be amplified by the installation of Design Ateliers in all of our galleries this fall.
We recently rolled out the Salesforce CRM system across all of our galleries and will continue to add capabilities that enable us to better serve our clients. We're in the early stages of rolling out our final mile home delivery system, designed to improve the customer experience and give us visibility of orders throughout our entire network. We are also testing taking more control of the customer experience by insourcing delivery with our own trucks and drivers. We are investing in a next generation digital experience and have hired a new Chief Digital Officer to lead that effort. Despite our recent difficulties, we remain the leading luxury home brand in the world with a clear path to $4 billion-$5 billion in North American revenues with mid-teens operating margins.
The two fundamental strategies to get us there, the expansion of our product offer and the transformation of our real estate, remain on track. If you look back historically at what we've accomplished, it paints a clear picture of what lies ahead. We began as a retailer of nostalgic discovery items with a $20 million market cap and an 84-page catalog, and transformed into a $2 billion-plus luxury home platform with 2,500 pages of inspired design. As it relates to our product strategy, there are three key points to remember. One, product of this quality has never been made in these quantities. Two, we've built a product platform that amplifies the work of the best designers, artisans, and manufacturers in the world, creating a powerful competitive advantage.
three, design of this quality was only available behind the iron curtain of the to-the-trade design centers, a highly fragmented market with a lack of accessibility, transparency, and scale. As it relates to our real estate transformation, it's important to understand we spent the last decade sizing our assortments to the potential of the market versus limiting them to the size of our stores. The vast majority of our legacy stores display less than 10% of our current assortment, and the key to unlocking the value of our company is to transform our real estate. We like to say it's not about the Internet, as only 10% of retail sales are done online. It's about the lack of imagination at retail. Mall and anchor stores are archaic windowless boxes that lack any sense of humanity.
There's no fresh air or natural light, and most like this one look like bomb shelters. This happens to be a picture of a former Saks Fifth Avenue that was torn down to build RH Denver, a gallery at Cherry Creek. We're building inspiring spaces that blur the lines between residential and retail, indoors and outdoors, physical and digital, spaces that are more home than store. The next logical step was to blur the lines between home and hospitality. That's what we've done at RH Chicago, the gallery at the historic Three Arts Club. We've integrated a courtyard cafe under a soaring atrium filled with natural light, where you sit under olive trees and listen to the sound of trickling fountains while enjoying brunch, lunch, or dinner.
There's a dramatic wine vault with gold leaf groin vaults and sparkling chandeliers, where guests can choose from a curated selection of wines from around the world. The gallery also has a pantry and coffee bar where customers enjoy handcrafted coffee drinks, fresh baked pastries, and award-winning donuts from Chicago's famous Doughnut Vault. The gallery at the Three Arts Club activates all of the senses: sight, sound, smell, taste, and touch. It's an experience that can't be replicated online, but it is one that customers line up for every weekend before the gallery opens to get a table for brunch. We're not the first retailer to have a cafe or restaurant, but we are the first to seamlessly integrate the experience where the whole becomes more valuable than the parts.
Based on the success of Chicago, we plan to integrate hospitality into several of our new galleries beginning in 2017, including RH San Francisco, the gallery at the historic Bethlehem Steel Building RH Nashville, the Gallery in Green Hills, RH Palm Beach, the Gallery at CityPlace, and RH New York, the Gallery in the historic Meatpacking District. With only five markets of next-generation design galleries today, and all exceeding plan, we are at the very beginning of what we believe is the most significant retail transformation in the history of our industry. While our missteps in investments to transform our brand and business have depressed results in the short term, in the context of our long-term vision and strategy, I believe they'll be recalled as brave bumps along the road less traveled. One that will be paved with innovation and leadership and long-term value creation for our shareholders.
While we are experiencing headwinds and missteps as it relates to our near-term performance, we believe that our long-term growth prospects are very strong and continue to see a clear path to generating $4 billion-$5 billion in revenue with the mid-teen operating margin, once our North American real estate transformation is complete. Let me start with our recent results and first quarter performance. Comparable brand revenue growth was 4% in Q1 on top of 15% last year. Total revenues during the first quarter increased 8% on top of 15% last year. We continue to experience weakness in markets impacted by currency and energy-related consumer spend, as well as overall softness in spending by the luxury consumer.
We invested approximately $18 million during the first quarter in customer accommodations and related expenses, largely as a result of RH Modern production delays, as well as our overall initiative to elevate the customer experience. Approximately $14 million resulted in a direct offset to revenue. This was higher than our original expectation of $8 million-$10 million, as improvements in our Modern in-stock levels allowed us to fulfill more Modern demand than anticipated, which drove higher accommodations during the period. We've also seen our cancel rates improve as a result of these efforts. Excluding the impact of the incremental customer accommodations, revenues increased 11% during the first quarter. Adjusted gross margin decreased 460 basis points to 29.7%. Gross margin is being impacted by several one-time factors that are important to understand.
Costs associated with accommodations due to RH Modern production delays and our efforts to elevate the customer experience are causing a drag of 300 basis points to gross margins. This consisted of approximately $14 million of customer accommodations that were a direct offset to revenue, as well as $4 million of expedited shipping charges and other product costs. These investments had a negative impact to gross profit of $18 million in the first quarter. While over the course of the annual membership period, the Grey Card will be margin neutral, the membership fee is amortized on a monthly basis over the membership period and therefore a drag to margin in the short term.
During the first quarter, this resulted in deleverage of approximately 80 basis points, as we collected approximately $6 million of membership revenue, of which approximately $5 million was deferred and will be recognized over the next 12 months. We have not yet wrapped the higher supply chain occupancy related to our new DC in Northern California, which was opened in the third quarter last year. Partially offsetting this was modest leverage of our fixed retail occupancy costs. SG&A leveraged slightly during the first quarter, largely driven by advertising leverage and offset by higher employment costs and other general and administrative expenses. We reported an adjusted net loss per share of $0.05. This includes approximately $0.34 related to the one-time cost and investments impacting gross margin. Excluding these costs, EPS would have been $0.29 per share. Inventory at the end of the first quarter was up 27%.
We continue to expect inventory growth to moderate substantially this year as we do not plan to introduce any new businesses. Our newness will be introduced during the second half consistent with 2015 and based on our plans to optimize our current product assortment and improve our inventory terms. We are pleased to announce that we recently closed the acquisition of Waterworks. This transaction was valued at $118 million and was funded from our existing cash balances. Following this transaction, we have approximately $230 million in cash on hand. Waterworks has a double-digit EBITDA margin and will be accretive to earnings this year.
Turning to our outlook, as Gary discussed, there are a combination of factors that are impacting our business in the short term, including the launch of the RH Grey Card, headwinds in energy and currency-impacted markets, moving the annual Source Books mailing and newness introductions to the fall, and our efforts to rationalize and optimize our inventory. RH Modern in-stocks at the end of the first quarter were higher than anticipated, and we were able to ship more RH Modern demand during the first quarter than in our original plan. This resulted in a slight pull forward of revenue from the second quarter into the first quarter. We now expect to invest $2 million-$3 million during the second quarter due to customer accommodations related to RH Modern and our overall efforts to elevate the customer experience, below our original estimate of $5 million-$7 million.
Including this investment, as well as the integration of Waterworks, revenue is expected to be in the range of $505 million-$520 million. As we look to the second quarter, we do expect gross margins to delever at a more significant rate than the first quarter. We estimate a decline of 600-700 basis points due to several factors. First, we are now planning a much more significant rationalization of our SKU count and reduction of inventory during the second quarter, which will result in an approximate 250 basis point impact to gross margins. Second, we expect deleverage of approximately 100 basis points related to deferred membership revenue, which will not be recognized in the period collected. Third, we expect an approximate 40 basis point drag from accommodations due to RH Modern production delays and our efforts to elevate the customer experience.
These investments are not expected to continue into the back half of the year, as RH Modern will be substantially in stock and we will c ontinue to experience deleverage in our DC occupancy costs given the ramp of our Northern California DC, which opened last year in Q3, and outlet occupancy due to four new outlets opening during the second quarter. We expect the decline in gross margin to moderate in Q3 and begin to expand in Q4 as we lap the significant promotional activity from the prior year. Second quarter adjusted EPS is expected to be in the range of $0.28-$0.33, including the one-time factors impacting gross margin.
As a result of the continued weakness in energy and currency-related markets, as well as the slowdown in luxury consumer spend, in addition to the investments we're making in our customer experience and accommodations, our efforts to rationalize our inventory this year at a more accelerated pace and the ramping of the Grey Card, we are lowering our fiscal 2016 outlook. We now expect revenue growth in the range of 1%-3%, inclusive of Waterworks. We are lowering our fiscal 2016 earnings growth outlook and now anticipate diluted EPS in the range of $1.60-$1.80. Let me recap the previously discussed one-time costs, investments, and margin-related factors that are impacting our fiscal 2016 earnings. First, accommodations largely due to RH Modern production delays during the first half are resulting in an approximate $0.30 negative impact to fiscal 2016 earnings.
Second, an approximate $0.30-$0.35 negative impact related to deferred membership revenue, which will not be recognized in the period collected. Third, our more aggressive approach to rationalizing our SKU count and optimizing inventory is expected to result in a $0.30-$0.35 reduction to fiscal 2016 earnings. Excluding these short-term margin and cost items, fiscal 2016 EPS guidance would be in the range of $2.50-$2.80. We've begun to see some of the improvements in our operating model that were expected from the transition to a membership model. These have allowed us to redesign and architect many areas of our business to be more efficient. We believe there is a broader opportunity to streamline many processes and have aligned our headcount accordingly. These actions are expected to result in over $20 million of savings annually and will result in one-time severance charges in the first half.
We have also taken some aggressive actions to reduce discretionary spending and manage expenses in light of the current headwinds. As we look ahead to next year, we expect to cycle many of these one-time costs and investments and expect sales to re-accelerate and operating margins to expand. Additionally, new store months are expected to accelerate from 40 in fiscal 2016 to a range of 60-70 in fiscal 2017. While we have experienced near-term headwinds and missteps, our long-term strategies are intact, and we have tremendous confidence in the long-term opportunity to reach $45 billion in North American sales, mid-teens operating margins, improved returns on invested capital, and significant shareholder value creation over time.