Company Overview - Arhaus, Inc. (NASDAQ: ARHS) has experienced declining earnings over the past couple of years, aligning with industry peers due to a weak housing market and consumer uncertainty [1] - The company has recently faced increasing uncertainty, leading to a reduction in its earnings forecast [1] Industry Context - The overall industry is struggling due to a challenging housing market, which has negatively impacted consumer spending and confidence [1]

Arhaus (ARHS) Q1 2025 Earnings Call May 08, 2025 08:30 AM ET Company Participants Tara Atwood - Vice President, Head of Investor RelationsJohn Reed - Founder, Chairman, CEO & Board of DirectorJennifer Porter - Chief Marketing & eCommerce OfficerRyan Brody - SVP - FinanceJulio Marquez - Equity Research AssociateW. Andrew Carter - Vice PresidentPeter Benedict - Managing Director - Equity ResearchSimeon Gutman - Managing Director Conference Call Participants None - AnalystCristina Fernández - Managing Director ...

Financial Data and Key Metrics Changes - Net revenue for Q1 2025 was $311 million, representing a 5.5% year-over-year increase, landing near the midpoint of guidance [34] - Demand comparable growth was 4.1%, driven by strong client engagement across retail and e-commerce channels [34][35] - Gross margin was $116 million, up 0.4% year-over-year, but as a percentage of net revenue, it decreased by 190 basis points to 37.1% due to higher occupancy costs [35] - Net income was $5 million, landing near the midpoint of guidance, while adjusted EBITDA was $19 million, at the lower end of guidance [36][37] Business Line Data and Key Metrics Changes - Showroom growth contributed significantly to net revenue, with five total showroom projects completed in Q1 2025, including one new traditional showroom and four strategic relocations [17][18] - The company plans to complete approximately 12 to 15 total showroom projects in 2025, increasing from the previous estimate of three to five new showrooms [18] Market Data and Key Metrics Changes - The U.S. represented approximately 36% of total receipts, with over 70% of upholstery business sourced domestically [10][11] - China accounted for about 13% of total product receipts in April, expected to decline to approximately 5% in Q3 and around 1% in Q4 [11] Company Strategy and Development Direction - The company is focused on long-term growth through disciplined execution, strategic investments, and expanding showroom footprint [5][6] - The management emphasizes a differentiated model based on high-quality design and premium client experience as a competitive advantage [6][17] - The company is investing in technology and e-commerce to enhance the client experience and strengthen omnichannel capabilities [15][30] Management's Comments on Operating Environment and Future Outlook - Management acknowledged near-term volatility due to tariff news and stock market fluctuations but remains confident in the long-term strategy [22][24] - The company is proactively managing tariffs through sourcing diversification and expects to mitigate some of the tariff impacts through strategic sourcing shifts [38][39] Other Important Information - The company remains debt-free with $214 million in cash and cash equivalents, providing flexibility for strategic investments [5][37] - A new Chief Financial Officer, Michael Lee, will join the company on May 12, bringing extensive financial leadership experience [7] Q&A Session Summary Question: How will the company manage its holistic value proposition and protect margins during 2025? - Management expressed confidence in maintaining margins and emphasized a long-term focus on healthy sales and executing their plan [44][46] Question: Are there any changes in consumer engagement trends since early April? - Management noted that while there was softness in April due to market conditions, overall demand remains strong, and clients continue to prioritize quality [50][52] Question: Can you provide perspective on the low end of the comps guidance? - The widening of guidance ranges accounts for potential continued volatility throughout the year, with management planning to adjust as needed [58] Question: How much of the $10 million tariff impact can be mitigated through strategic sourcing shifts? - Management indicated that they have worked with partners to absorb some costs and believe the remaining $10 million is manageable [62] Question: What is the strategy regarding showroom openings amid softening demand? - Management confirmed plans to continue opening new showrooms, viewing them as long-term investments that will capture market share when demand rebounds [96][98]

Core Viewpoint - Arhaus, Inc. reported quarterly earnings of $0.03 per share, missing the Zacks Consensus Estimate of $0.06 per share, representing a 50% earnings surprise [1] - The company posted revenues of $311.37 million for the quarter, which was 0.55% below the Zacks Consensus Estimate and an increase from $295.16 million year-over-year [2] Financial Performance - The earnings for the same quarter last year were $0.11 per share, indicating a decline in earnings year-over-year [1] - Over the last four quarters, Arhaus has surpassed consensus EPS estimates two times [2] - The company has not beaten consensus revenue estimates in the last four quarters [2] Stock Performance - Arhaus shares have declined approximately 11.1% since the beginning of the year, compared to a 4.3% decline in the S&P 500 [3] - The current Zacks Rank for Arhaus is 3 (Hold), suggesting the stock is expected to perform in line with the market in the near future [6] Future Outlook - The current consensus EPS estimate for the upcoming quarter is $0.15 on revenues of $329.52 million, and for the current fiscal year, it is $0.47 on revenues of $1.37 billion [7] - The outlook for the industry, specifically the Retail - Miscellaneous sector, is currently in the top 30% of Zacks industries, indicating a favorable environment for stock performance [8]

Financial Performance - For the three months ended March 31, 2025, Arhaus generated net revenue of $311.4 million, a gross margin of $115.6 million, and a net income of $4.9 million[77]. - Net revenue increased by $16.2 million, or 5.5%, to $311.4 million for the three months ended March 31, 2025, compared to $295.2 million for the same period in 2024[96]. - Gross margin increased by $0.5 million, or 0.4%, to $115.6 million, but as a percentage of net revenue, it decreased by 190 basis points to 37.1%[97][98]. - Net and comprehensive income decreased by $10.2 million to $4.9 million for the three months ended March 31, 2025, compared to $15.1 million for the same period in 2024[104]. - Adjusted EBITDA for the three months ended March 31, 2025, was $18.6 million, compared to $29.1 million for the same period in 2024[90]. - Adjusted EBITDA decreased to $18.6 million, or 6.0% of net revenue, down from $29.1 million, or 9.9% of net revenue, in the prior year[95]. Showroom Operations - As of March 31, 2025, Arhaus operated 103 Showrooms, maintaining the same total number as of December 31, 2024, with a total square footage of 1,711 thousand[76]. - The company opened 5 new Showrooms from January 1, 2024, to March 31, 2025, while closing 1 permanently, resulting in a total of 103 Showrooms at the end of the period[92]. Expenses and Costs - Selling, general and administrative (SG&A) expenses rose by $13.4 million, or 13.9%, to $110.1 million, representing 35.3% of net revenue, an increase of 250 basis points[100][101]. - Selling, general and administrative expenses (SG&A) are expected to increase as new Showrooms are opened and new product categories are developed[86]. - Gross margin is calculated as net revenue minus cost of goods sold, which includes direct costs associated with merchandise and logistics[85]. Cash Flow and Capital Expenditures - Cash and cash equivalents as of March 31, 2025, were $214.4 million, with operating cash flows expected to meet working capital requirements for at least the next 12 months[105][106]. - Net cash provided by operating activities was $46.5 million for the three months ended March 31, 2025, compared to $36.8 million in the same period of 2024[112][114]. - Total capital expenditures, net of landlord contributions, increased by $9.2 million to $22.1 million for the three months ended March 31, 2025[119]. - The company anticipates total capital expenditures, net of landlord contributions, to be between $90 million and $110 million in fiscal year 2025, primarily for new Showroom openings[120]. - Net cash used in financing activities was $1.9 million for the three months ended March 31, 2025, primarily due to share repurchases for equity-based compensation[121]. Risk Factors - Risks include supply chain constraints, changes in consumer preferences, and potential cyberattacks, which could materially affect business performance[73]. - The company cannot reasonably estimate its future ability to recover inflation impacts through price increases[128]. - A 100 basis point change in interest rates is not expected to materially impact the company's financial condition or results of operations[127]. Financial Management - The company utilizes non-GAAP financial measures to assess performance, which may not be comparable to similar measures disclosed by other companies[79]. - The company purchases the majority of its inventory from vendors outside the United States, primarily in U.S. dollars, minimizing foreign currency exchange risk[126]. - As of March 31, 2025, the company has not drawn upon its 2021 Credit Facility, indicating no current exposure to interest rate risk from this facility[127]. - The company does not currently use derivative instruments to manage foreign currency exchange risk[126]. - The company does not currently use derivative instruments to manage interest rate risk[127]. - The company does not currently use derivative instruments to manage inflation risk[128]. Demand and Market Strategy - Demand comparable growth is a key performance indicator, reflecting year-over-year percentage changes in demand from comparable Showrooms and eCommerce[82]. - The company emphasizes a direct-to-consumer approach, sourcing products directly from factories to offer exclusive assortments at attractive values[74]. - Inflation has historically increased costs related to labor, materials, and transportation, but the company has been able to recover these costs through price increases[128].

Financial Performance - First quarter 2025 net revenue increased by 5.5% to $311 million compared to the same period in 2024[4] - Net income decreased by 67.6% to $5 million in the first quarter 2025 compared to the same period in 2024[4] - Adjusted EBITDA for the first quarter 2025 decreased by 36.2% to $19 million compared to the same period in 2024[4] - Comparable growth for the first quarter was (1.5)%, while demand comparable growth was 4.1%[4] - Net revenue for Q1 2025 was $311,372, an increase of 5.1% compared to $295,162 in Q1 2024[20] - Net and comprehensive income decreased to $4,882 in Q1 2025 from $15,099 in Q1 2024, representing a decline of 67.7%[22] - Adjusted EBITDA for Q1 2025 was $18,572, down from $29,110 in Q1 2024, a decrease of 36.0%[22] Cash and Assets - As of March 31, 2025, cash and cash equivalents totaled $214 million, with no long-term debt[8] - Cash and cash equivalents at the end of Q1 2025 were $214,394, up from $197,511 at the end of Q4 2024, an increase of 8.9%[18] - Total current assets increased to $552,758 in Q1 2025 from $531,043 in Q4 2024, a rise of 4.2%[18] Client Deposits - Client deposits increased by 19.2% to $263 million from December 31, 2024, to March 31, 2025[8] - Client deposits increased significantly to $263,206 in Q1 2025 from $220,873 in Q4 2024, a rise of 18.9%[18] Expenses - Gross margin for the first quarter 2025 was $116 million, reflecting a 0.4% increase year-over-year[4] - Selling, general and administrative expenses rose to $110,058 in Q1 2025, compared to $96,693 in Q1 2024, an increase of 13.7%[20] Future Outlook - The updated full-year 2025 net revenue guidance is between $1.29 billion and $1.38 billion[10] - The company expects net income for Q2 2025 to be between $48 million and $68 million[10] - The company plans to complete approximately 12 to 15 total showroom projects in 2025, including 4 to 6 new showrooms[6][10]

Core Insights - Arhaus, Inc. reported first quarter 2025 results, showing resilience amid macroeconomic volatility, with a net revenue increase of 5.5% to $311 million compared to the same period in 2024 [6][27] - The company revised its full-year outlook due to broader uncertainties but remains confident in its business model and growth strategy [3][9] Operational Highlights - Comparable growth was (1.5)%, while demand comparable growth was 4.1%, indicating healthy client engagement and successful marketing initiatives [3][6] - The showroom footprint expanded to 103 showrooms across 30 states, with 5 showroom projects completed in the first quarter, including 1 new showroom and 4 relocations [4][6] Financial Performance - Gross margin increased by 0.4% to $116 million, while selling, general, and administrative expenses rose by 13.9% to $110 million [6][27] - Net and comprehensive income decreased by 67.6% to $5 million, and adjusted EBITDA fell by 36.2% to $19 million compared to the same period in 2024 [6][27] Future Outlook - The company plans to complete 12 to 15 total showroom projects in 2025, with expectations to reduce sourcing from China to approximately 1% of total receipts by the fourth quarter [2][4] - Updated guidance for full-year 2025 net revenue is projected between $1.29 billion and $1.38 billion, with comparable growth expected to range from (5)% to 1.5% [9][8] Balance Sheet and Liquidity - As of March 31, 2025, cash and cash equivalents totaled $214 million, with net merchandise inventory at $301 million, reflecting a 1.5% increase from the previous year [13][24] - Client deposits increased by 19.2% to $263 million, indicating strong customer engagement [13][24]

Company Overview - Arhaus, Inc. is a growing lifestyle brand and omni-channel retailer specializing in premium artisan-crafted home furnishings [3] - The company was founded in 1986 and operates over 100 showroom and design studio locations across the United States [3] - Arhaus offers a unique assortment of heirloom quality products that are sustainably sourced and built to last [3] Upcoming Financial Results - Arhaus will release its first quarter 2025 results on May 8, 2025, before the stock market opens [1] - A conference call to discuss the financial and operational results will take place at 8:30 a.m. Eastern Time on the same day [1] Investor Relations - Investors can participate in the live call by dialing the provided U.S. toll-free or international numbers [2] - A telephone replay of the call will be available for one week, and a webcast replay will be accessible for approximately 12 months [2][4]

Industry Overview - The Retail – Miscellaneous industry faces ongoing challenges such as evolving consumer preferences, fierce competition, and inflationary pressures impacting consumer spending habits [1][4] - Operational expenses, including wages and raw material costs, are expected to remain significant concerns [1] - Restoring consumer confidence and purchasing power is crucial for the industry's momentum, alongside strategic innovations and operational efficiencies [1] Key Industry Trends - Soft demand due to inflation and geopolitical concerns is affecting consumer spending, with a notable decline in U.S. consumer confidence, as indicated by a 7.2-point drop in the Conference Board index to 92.9 [4] - Companies are competing on price, product variety, and speed to market, leading to increased investments in digital ecosystems and shipping capabilities, which may pressure margins due to high costs [5] - There is a focus on expanding product assortments and enhancing online shopping experiences, with a noticeable increase in demand for personal care items and fitness-related products [6] Digital Transformation - Industry participants are balancing in-store and online roles, directing resources toward digital platforms and enhancing supply chains [7] - Initiatives such as curbside pickup, ship-to-home orders, and contactless payment solutions are being implemented to meet changing consumer shopping patterns [7] Industry Performance - The Zacks Retail – Miscellaneous industry currently ranks 156, placing it in the bottom 36% of approximately 250 Zacks industries, indicating bleak near-term prospects [8][9] - The industry's earnings estimate has declined by 11.5% since July 2024, reflecting a negative outlook for constituent companies [10] - Over the past year, the industry has underperformed the broader Retail – Wholesale sector and the S&P 500, declining by 9% compared to the S&P 500's rise of 8.5% [12] Current Valuation - The industry is trading at a forward 12-month price-to-earnings (P/E) ratio of 16.14X, lower than the S&P 500's 20.59X and the sector's 22.38X [15] Company Highlights - **Build-A-Bear Workshop**: Focuses on omnichannel expansion and digital innovation, with a Zacks Consensus Estimate suggesting revenue growth of 2.1% and EPS growth of 4% [18][19] - **DICK'S Sporting Goods**: Strengthening its position through strategic investments and digital transformation, with a Zacks Consensus Estimate indicating revenue growth of 3.1% and EPS growth of 1.9% [22][24] - **Arhaus**: Driving growth through showroom expansion and a focus on craftsmanship, with a Zacks Consensus Estimate suggesting revenue growth of 8.1% [27][28] - **Sally Beauty**: Emphasizing customer engagement and innovation, with a Zacks Consensus Estimate indicating EPS growth of 7.1% [31][32]

Core Viewpoint - The comparison between Arhaus, Inc. (ARHS) and SharkNinja, Inc. (SN) indicates that ARHS presents a better value opportunity for investors at this time [1]. Valuation Metrics - ARHS has a forward P/E ratio of 17.53, while SN has a forward P/E of 21.08, suggesting that ARHS is more attractively priced [5]. - The PEG ratio for ARHS is 1.39, compared to SN's PEG ratio of 2.02, indicating that ARHS has a better balance between its price and expected earnings growth [5]. - ARHS's P/B ratio is 3.83, significantly lower than SN's P/B of 7.48, further supporting the argument that ARHS is undervalued [6]. Earnings Outlook - ARHS currently holds a Zacks Rank of 2 (Buy), reflecting positive revisions to its earnings estimates, while SN has a Zacks Rank of 3 (Hold) [3]. - The stronger estimate revision activity for ARHS suggests an improving earnings outlook compared to SN [7]. Value Grades - ARHS has received a Value grade of A, while SN has a Value grade of D, indicating that ARHS is viewed more favorably by value investors [6].