Arhaus(ARHS) - 2024 Q3 - Quarterly Results

Executive Summary & Business Highlights Third Quarter 2024 Performance Overview Arhaus reported decreased net revenue and profitability for Q3 2024, primarily due to lower demand and the non-recurrence of prior year's abnormal backlog deliveries Third Quarter 2024 Key Financials: | Metric | Q3 2024 | Q3 2023 | | :-------------------------- | :---------- | :---------- | | Net revenue | $319 million | $326 million | | Comparable growth | (9.2)% | N/A | | Net and comprehensive income | $10 million | $20 million | | Adjusted EBITDA | $23 million | $34 million | Year-to-Date 2024 Performance Overview For the nine months ended September 30, 2024, Arhaus reported a slight decrease in net revenue and a significant decline in net income and Adjusted EBITDA compared to the prior year Year-to-Date 2024 Key Financials (through September 30): | Metric | YTD 2024 | YTD 2023 | | :-------------------------- | :---------- | :---------- | | Net revenue | $924 million | $943.7 million | | Comparable growth | (8.6)% | N/A | | Net and comprehensive income | $47 million | $94 million | | Adjusted EBITDA | $92 million | $152.2 million | Updated 2024 Financial Outlook Arhaus lowered its full-year 2024 outlook for net revenue, comparable growth, net income, and Adjusted EBITDA, reflecting a tempered consumer environment Updated 2024 Full Year Outlook: | Metric | Current Guidance | Previous Guidance | | :-------------------------- | :--------------------------------- | :--------------------------------- | | Net revenue | $1.23 billion to $1.25 billion | $1.25 billion to $1.29 billion | | Comparable growth | (12)% to (11)% | (11)% to (8)% | | Net income | $55 million to $60 million | $55 million to $75 million | | Adjusted EBITDA | $115 million to $125 million | $125 million to $145 million | Q4 2024 Guidance: | Metric | Q4 Guidance | | :---------------- | :--------------------------------- | | Net revenue | $306 million to $326 million | | Comparable growth | (22)% to (16)% | | Net income | $8 million to $13 million | | Adjusted EBITDA | $23 million to $33 million | CEO Commentary and Strategic Focus CEO John Reed affirmed commitment to long-term growth through premium offerings and showroom expansion, navigating a tempered consumer environment with a strong, debt-free balance sheet - Focus on long-term growth strategy grounded in premium, livable luxury offerings and exceptional client experience[1] - Committed to expanding presence with ten new showrooms opened year-to-date and an eleventh opening soon[1] - Adjusting full-year outlook to reflect a continued tempered consumer environment, which is believed to be temporary[2] - Strong, debt-free balance sheet enables continued prudent investment in strategic priorities[2] Detailed Financial Performance Third Quarter 2024 Results Arhaus's Q3 2024 results showed declines in revenue, gross margin, net income, and Adjusted EBITDA, primarily due to reduced demand and increased operating costs Revenue and Growth Metrics Q3 2024 Revenue and Growth: | Metric | Q3 2024 | Q3 2023 | Change (YoY) | | :-------------------- | :---------- | :---------- | :----------- | | Net revenue | $319 million | $326 million | -$7 million | | Comparable growth | (9.2)% | N/A | N/A | | Demand comparable growth | (11.3)% | N/A | N/A | - The decrease in net revenue was primarily related to the non-recurrence of prior year abnormal backlog deliveries and lower total demand[3] Profitability Analysis (Gross Margin, SG&A, Net Income, Adjusted EBITDA) Q3 2024 Profitability: | Metric | Q3 2024 | Q3 2023 | Change (YoY) | | :--------------------------------- | :---------- | :---------- | :----------- | | Gross margin | $123 million | $131 million | -$8 million | | Selling, general and administrative expenses | $112 million | $107 million | +$5 million | | Net and comprehensive income | $10 million | $20 million | -$10 million | | Adjusted EBITDA | $23 million | $34 million | -$11 million | | Adjusted EBITDA as % of net revenue | 7.2% | 10.3% | -3.1 pp | - Gross margin decrease driven by lower net revenue and higher Showroom costs due to expansion[4] - SG&A increase primarily due to legal costs, marketing investments, and strategic investments (supply chain, technology), partially offset by non-recurrence of prior year's donation[5] Year-to-Date 2024 Results For the first nine months of 2024, Arhaus reported a slight revenue decline and substantial reductions in profitability, with gross margin and net income significantly lower Revenue and Growth Metrics YTD 2024 Revenue and Growth (Nine Months Ended Sep 30): | Metric | YTD 2024 | YTD 2023 | Change (YoY) | | :-------------------- | :---------- | :---------- | :----------- | | Net revenue | $924.1 million | $943.7 million | -$19.6 million | | Comparable growth | (8.6)% | N/A | N/A | Profitability Analysis (Gross Margin, SG&A, Net Income, Adjusted EBITDA) YTD 2024 Profitability (Nine Months Ended Sep 30): | Metric | YTD 2024 | YTD 2023 | Change (YoY) | | :--------------------------------- | :---------- | :---------- | :----------- | | Gross margin | $362.5 million | $399.2 million | -$36.7 million | | Selling, general and administrative expenses | $304.1 million | $275.9 million | +$28.2 million | | Net and comprehensive income | $47.3 million | $94.0 million | -$46.7 million (49.7%) | | Adjusted EBITDA | $92.1 million | $152.2 million | -$60.1 million (39.5%) | | Adjusted EBITDA as % of net revenue | 10.0% | 16.1% | -6.1 pp | YTD 2024 Net and Comprehensive Income Per Share (Nine Months Ended Sep 30): | Metric | YTD 2024 | YTD 2023 | | :--------------------------------- | :---------- | :---------- | | Net and comprehensive income per share, basic | $0.34 | $0.67 | | Net and comprehensive income per share, diluted | $0.34 | $0.67 | Financial Position and Cash Flows Balance Sheet Highlights As of September 30, 2024, Arhaus maintained a strong financial position with no long-term debt, with total assets increasing while cash and cash equivalents decreased Balance Sheet Highlights (as of September 30, 2024): | Metric | Sep 30, 2024 | Dec 31, 2023 | Change | | :-------------------------- | :---------- | :---------- | :---------- | | Cash and cash equivalents | $177.7 million | $223.1 million | -$45.4 million | | Net merchandise inventory | $294.6 million | $254.3 million | +$40.3 million | | Client deposits | $224.1 million | $173.8 million | +$50.3 million | | Total assets | $1,209.3 million | $1,105.1 million | +$104.2 million | | Total liabilities | $888.7 million | $764.9 million | +$123.8 million | | Total stockholders' equity | $320.6 million | $340.2 million | -$19.6 million | - The Company had no long-term debt at September 30, 2024[7] Cash Flow Activities For the nine months ended September 30, 2024, operating cash flow decreased, while investing and financing cash outflows increased due to capital expenditures and a special dividend Cash Flow Activities (Nine Months Ended Sep 30): | Metric | YTD 2024 | YTD 2023 | Change | | :--------------------------------- | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $115.4 million | $147.9 million | -$32.5 million | | Net cash used in investing activities | $88.7 million | $58.5 million | +$30.2 million | | Company-funded capital expenditures | ~$62 million | ~$47 million | +$15 million | | Net cash used in financing activities | $72.1 million | $1.5 million | +$70.6 million | | Cash dividend payments | $70.1 million | $0 million | +$70.1 million | - Net cash used in financing activities was primarily due to the payment of a special dividend on Class A and Class B common stock[9] Business Operations and Strategy Showroom Expansion Arhaus continues strategic expansion, opening ten new showrooms year-to-date with an eleventh planned, bringing the total to 101 showrooms across 29 states - Ten new showrooms opened already this year, with an eleventh opening soon in Corte Madera, California[1] - The Company ended the third quarter with 101 total Showrooms across 29 states[10] Operational and Strategic Investments Despite a challenging consumer environment, Arhaus remains committed to prudent strategic investments in supply chain and technology to support long-term growth - Continued prudent investment in strategic priorities, enabled by a strong, debt-free balance sheet[2] - Strategic investments include supply chain and technology improvements to support and drive business growth[5] - Focus on long-term growth strategy grounded in premium, livable luxury offerings and exceptional client experience[1] Full Year 2024 Outlook Updated Financial Guidance Arhaus revised its full-year 2024 financial guidance downwards for net revenue, comparable growth, net income, and Adjusted EBITDA, reflecting a cautious consumer environment Updated Full Year 2024 Guidance: | Metric | Current Guidance | Previous Guidance | | :-------------------------- | :--------------------------------- | :--------------------------------- | | Net revenue | $1.23 billion to $1.25 billion | $1.25 billion to $1.29 billion | | Comparable growth | (12)% to (11)% | (11)% to (8)% | | Net income | $55 million to $60 million | $55 million to $75 million | | Adjusted EBITDA | $115 million to $125 million | $125 million to $145 million | | Company-funded capital expenditures | ~$80 million | $80 million to $100 million | | Depreciation & amortization | ~$40 million | $40 million to $45 million | Q4 2024 Guidance: | Metric | Q4 Guidance | | :---------------- | :--------------------------------- | | Net revenue | $306 million to $326 million | | Comparable growth | (22)% to (16)% | | Net income | $8 million to $13 million | | Adjusted EBITDA | $23 million to $33 million | Key Assumptions and Definitions The outlook defines key performance indicators like comparable growth and clarifies that Adjusted EBITDA guidance is not reconciled to GAAP due to unpredictable reconciling items - Comparable growth is defined as the year-over-year percentage change of delivered orders (net of returns) from comparable Showrooms and eCommerce[12] - Demand comparable growth is defined as the year-over-year percentage change of demand from comparable Showrooms and eCommerce[12] - Adjusted EBITDA guidance is not reconciled to the corresponding GAAP financial measure because the company does not provide guidance for various reconciling items, which are outside of its control and cannot be reasonably predicted[12] Company Information and Disclosures About Arhaus Founded in 1986, Arhaus is a rapidly growing omni-channel retailer of premium home furnishings, known for its proprietary sourcing, sustainable practices, and client-first service - Founded in 1986, Arhaus is a rapidly growing lifestyle brand and omni-channel retailer of premium home furnishings[15] - Utilizes a differentiated proprietary model to directly design and source products globally, offering an exclusive assortment of heirloom quality, sustainably sourced, and durable products[15] - Known for innovative design, responsible sourcing, and client-first service, with over 100 showrooms, design centers, complimentary in-home design services, and robust online capabilities[15][16] Non-GAAP Financial Measures Explanation The company uses non-GAAP measures like Adjusted EBITDA for performance assessment, providing a supplemental view by removing non-recurring items, but cautions they are not GAAP substitutes or comparable across companies - Non-GAAP measures, such as Adjusted EBITDA, are used to assess business performance, identify trends, formulate business plans, and make strategic decisions[18] - These measures provide an informative supplemental view by removing the effect of non-recurring items[18] - Non-GAAP measures are not a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP and may not be comparable to other companies' similarly titled measures[18] Forward-Looking Statements Disclaimer The report contains forward-looking statements, especially regarding the 2024 outlook, subject to risks and uncertainties that could cause actual results to differ materially, with no obligation to update - Certain statements, including those under '2024 Outlook (Updated)' and '2024 Outlook', are forward-looking statements[19] - These statements involve known and unknown risks, uncertainties, and other important factors beyond the company's control that could cause actual results to differ materially[20] - Risks include managing growth, merchandise quality, distribution disruptions, cyberattacks, data privacy, supply chain constraints, economic conditions, consumer preferences, competition, intellectual property, regulations, eCommerce, and transportation costs[20][21] - The Company assumes no obligation to update any forward-looking statement, except as may be required by law[21] Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets The balance sheet presents Arhaus's financial position as of September 30, 2024, detailing assets, liabilities, and stockholders' equity compared to December 31, 2023 Condensed Consolidated Balance Sheets (amounts in thousands): | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--------------------------------- | :---------- | :---------- | | Total current assets | $509,260 | $509,295 | | Total assets | $1,209,311 | $1,105,148 | | Total current liabilities | $415,675 | $342,347 | | Total liabilities | $888,666 | $764,910 | | Total stockholders' equity | $320,645 | $340,238 | Condensed Consolidated Statements of Comprehensive Income This statement details Arhaus's revenues, expenses, and net income for the three and nine months ended September 30, 2024, indicating a decline in profitability compared to prior year periods Condensed Consolidated Statements of Comprehensive Income (amounts in thousands): | Metric | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenue | $924,096 | $943,696 | $319,133 | $326,229 | | Gross margin | $362,498 | $399,215 | $123,072 | $130,857 | | Income from operations | $58,413 | $123,325 | $10,671 | $23,880 | | Net and comprehensive income | $47,256 | $94,023 | $9,923 | $19,741 | | Net and comprehensive income per share, basic | $0.34 | $0.67 | $0.07 | $0.14 | | Net and comprehensive income per share, diluted | $0.34 | $0.67 | $0.07 | $0.14 | Condensed Consolidated Statements of Cash Flows The cash flow statement details sources and uses of cash for operating, investing, and financing activities for the nine months ended September 30, 2024, showing a net decrease in cash and cash equivalents Condensed Consolidated Statements of Cash Flows (amounts in thousands): | Metric | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $115,426 | $147,870 | | Net cash used in investing activities | ($88,686) | ($58,475) | | Net cash used in financing activities | ($72,107) | ($1,527) | | Net (decrease) increase in cash, cash equivalents and restricted cash | ($45,367) | $87,868 | | Cash, cash equivalents and restricted cash, end of period | $180,938 | $240,395 | Reconciliation of Net Income to Adjusted EBITDA This section reconciles net income to Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023, detailing adjustments made to derive this non-GAAP measure Reconciliation of Net Income to Adjusted EBITDA (amounts in thousands): | Metric | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net and comprehensive income | $47,256 | $94,023 | $9,923 | $19,741 | | EBITDA | $86,755 | $145,502 | $21,107 | $31,257 | | Adjusted EBITDA | $92,107 | $152,246 | $23,108 | $33,660 | | Adjusted EBITDA as a % of net revenue | 10.0% | 16.1% | 7.2% | 10.3% |