Arhaus(ARHS) - 2025 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In 2025, the company achieved record net revenue of $1.38 billion, an increase of 8.5% year-over-year, reflecting the strength of its business model [7][20] - Gross profit reached $536 million, up 7% from the previous year, while gross margin decreased by 50 basis points to 38.9% due to higher showroom occupancy costs [20][21] - Net income was $67 million, a decrease of 1.9% year-over-year, primarily due to showroom expansion and ongoing investments [21] - Adjusted EBITDA was $145 million, an increase of 8.9% year-over-year, with an adjusted EBITDA margin remaining flat at 10.5% [21] Business Line Data and Key Metrics Changes - Upholstery recorded the highest total written sales in the company's history, indicating strong demand for its craftsmanship and product assortment [8][9] - Customization services saw significant growth, with record written sales from clients working with interior designers [9][10] - The company serves clients through three primary demand channels: affluent homeowners, interior designers, and trade channels, with the U.S. interior design market valued at approximately $27 billion [10][11] Market Data and Key Metrics Changes - The company noted that approximately 90% of total sales came from clients living within 50 miles of an Arhaus showroom, emphasizing the importance of showroom locations [17] - The showroom footprint grew by more than 50% since 2019, ending 2025 with 107 showrooms [18] Company Strategy and Development Direction - The company is focused on long-term growth through artisan craftsmanship, personalized service, and a differentiated product offering [5][6] - Strategic investments in technology and distribution are aimed at improving operational efficiency and enhancing customer experience [30][31] - The company plans to continue expanding its showroom presence, with expectations to complete 10-14 total showroom projects in 2026 [29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of the business model despite macroeconomic uncertainties, noting that high-end clients continue to invest in quality products [10][19] - The outlook for 2026 includes projected net revenue between $1.43 billion and $1.47 billion, reflecting a year-over-year growth rate of 3.7% to 6.6% [35][36] Other Important Information - The company declared a special cash dividend of $0.35 per share, marking the second special dividend since its IPO [28] - The company remains debt-free with substantial liquidity, supporting its long-term growth strategy [28][36] Q&A Session Summary Question: Guidance for EBITDA margin leverage - Management highlighted that the guidance for EBITDA margin leverage is driven by gross margin improvements and the ramping of new showrooms, with some softness expected in Q1 due to weather and promotional timing [38][39][42] Question: Tariffs and pricing strategies - Management discussed the impact of tariffs and the strategies implemented to protect margins, including selective pricing actions and vendor negotiations [45][48][50] Question: Obsolete inventory context - Management explained the decision to take losses on obsolete inventory to focus on healthier inventory management, emphasizing improvements in inventory turnover and overall health [54][56] Question: Trade program growth - Management noted the significant growth potential in the trade business, emphasizing the company's one-stop-shop model for interior designers and the luxury customer segment [62][66]