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 [8][23] - 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 [23][24] - Net income was $67 million, a decrease of 1.9% year-over-year, primarily due to showroom expansion and ongoing investments [24] - Adjusted EBITDA was $145 million, an increase of 8.9% year-over-year, with an adjusted EBITDA margin remaining flat at 10.5% [24] 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 [9][10] - Customization services saw significant growth, with record written sales from clients working with interior designers [10][11] - The company reported a written sales mix focused on home refreshes and renovations, rather than solely on home turnover, reinforcing the durability of its model [11][12] Market Data and Key Metrics Changes - The U.S. interior design market is approximately $27 billion, presenting a significant opportunity for the company to expand its reach within this channel [11][18] - Approximately 90% of total sales came from clients living within 50 miles of an Arhaus showroom, highlighting the importance of showroom locations [19][20] Company Strategy and Development Direction - The company is focused on long-term growth through artisan craftsmanship, personalized service, and a differentiated product offering [5][8] - Strategic investments in technology and distribution are aimed at improving operational efficiency and enhancing the client experience [33][34] - The company plans to continue expanding its showroom footprint, having grown by over 50% since 2019, with 107 showrooms at year-end 2025 [21][32] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of its high-end clients and the company's ability to navigate macroeconomic uncertainties [11][22] - The outlook for 2026 includes expected net revenue growth between $1.43 billion and $1.47 billion, with a year-over-year growth rate of 3.7% to 6.6% [38] - The company anticipates continued revenue and profit growth while funding strategic investments [27][39] Other Important Information - The company declared a special cash dividend of $0.35 per share, reflecting its disciplined capital allocation strategy [31] - The company remains debt-free with substantial liquidity, supporting its long-term growth strategy [31][39] Q&A Session Summary Question: Guidance on 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 [41][42][45] Question: Tariffs and pricing strategies - The company has taken selective pricing actions to mitigate tariff impacts and is focused on maintaining margins while being nimble in its pricing strategy [48][50][54] Question: Obsolete inventory context - Management explained that the decision to address obsolete inventory was based on insights from warehouse management systems, and overall inventory health remains strong [58][60][63] Question: Trade program growth - The trade business is identified as a major growth platform, with efforts to incentivize external designers to allocate more budgets to the company [67][70] Question: Real estate strategy and showroom sizes - Management discussed the learnings from operating larger showrooms and the flexibility in showroom sizes, indicating that both large and small formats can be profitable [78][81]