Arhaus, Inc. Q3 FY2024 earnings call

• Launched compelling new product collections like the Astor Collection, which combines globally sourced materials and sophisticated elements. - On track to meet high-end 2024 showroom opening goals with 10 new showrooms opened, including a new one in Corte Madera, CA, and expecting to open five more traditional showrooms by year-end, bringing total to 85. Also opened three new design studios and three Arhaus Loft outlet locations. - Implemented a new warehouse management system and is focusing on design and build phases of new planning system and ERP at upholstery manufacturing facility, expecting implementation in 2025. - Excited about upcoming spring launch with highlights like expanding motions selection within upholstery collections and introducing exotic wood collections across various categories.

In the third quarter, Arhaus delivered a net revenue of $319 million, net income of $10 million, and adjusted EBITDA of $23 million. There was a 11.3% decline in demand comparable growth during the quarter, but demand trends improved meaningfully as the quarter progressed. September set a new record as the biggest total demand month in Arhaus history, up 10% compared to last year's strong comparable period. Net revenue in the third quarter was $319 million with a 9.2% comp decline, and gross margin decreased to $123 million, with gross margin as a percent of net revenue at 38.6% driven by lower net revenue and higher Showroom costs.

• Lowered full-year sales and earnings outlook: expects net revenue in the range of $1.23 billion to $1.25 billion and adjusted EBITDA in the range of $115 million to $125 million for 2024. - Anticipates net revenue in the fourth quarter of 2024 to be in the range of $306 million to $326 million and adjusted EBITDA in the range of $23 million to $33 million, with a low double-digit demand comp decline expected. - Expect to invest approximately $10 million in strategic investments in 2024, with about 80% in SG&A and 20% in gross margin, and approximately $15 million to $20 million in strategic investments in 2025, including subscription fees for system enhancements deployed in 2024.

• Macro pressures and continued tempered consumer environment posing challenges. - Potential impact of tariffs on offshore products, though a big part of production is in the United States, and strategies to offset cost impacts would involve working with partners and potentially raising prices if needed.

Q: Good morning, John, Dawn, Jen. Curious if you could expand on how the more recent store cohorts are performing relative to the internal pro forma model and how the current environment or performance of those stores are impacting your 2025 real estate plans.

A: Sure. We've been thrilled with the new stores. They have opened very solid. Some are super home runs and others are right on projections. We're sticking with our plan, looking at new locations and moving existing stores to better locations, like opening a renovated store in Fairfax, VA tomorrow.

Q: Thanks for taking my question. And just a quick follow-up in terms of thinking about the kind of the investments that are being made and the systems changes. I wanted to get a better sense of the timing of each of the different systems components that you're going to be touching here, both FY '25 into FY '26? And then in terms of -- I wasn't sure if it was $15 million to $25 million or $15 million to $20 million of spend? And how much of that was really kind of staffing requirements that you need or support teams versus kind of the software licensing fees and et cetera?

A: Yes, lots of moving pieces here. The planning software is anticipated to launch in the first half of next year, same timing as the manufacturing ERP. The financial platform and order management system will be kicked off next year but not deployed. The $15 million to $20 million is for next year, and the split between subscription fees, implementation costs, and personnel is still being fleshed out. Longer-term efficiencies are expected once deployed.

Q: In terms of the kind of the pricing presentation and coming back to demand trends. September, in terms of online and even in stores, the presentation looked a bit more like kind of traditional Arhaus over the last few years as the company kind of migrated away from pricing presentation to look like things around sale all the time. Is there any kind of linkage to September, you saw a pretty notable improvement in your demand trends? You're running your kind of typical September promo in which you had percentage off storewide and online. Is there any kind of linkage to where you've seeing degradation in overall demand comps that's kind of based on that presentation? And is there any thought to potentially going back to how it was before?

A: Hi, good morning. Yes, we shifted to more consistent pricing to reflect product value. September's improvement was due to the biannual store-wide sales promotion. We're seeing similar trends in October, and we're paying close attention to pricing, but we're happy with our current strategy and constantly evaluating it.

Q: Good morning, and thank you, for taking my question. The first one was just on demand complexion. Can you help us understand how that trended throughout 3Q maybe relative to the first half I'm thinking of things maybe like traffic, conversion, AOV? Any insights would be helpful.

A: Across the board has been choppy this year. Comp traffic and comp transactions were down, but average order units per transaction were up nicely. Orders over $5,000 and over $10,000 declined year-over-year but had higher penetration relative to total. We're actively tracking and slicing data to understand underlying consumer behavior.

Q: Good morning, and thank you, for taking my question. The first one was just on demand complexion. Can you help us understand how that trended throughout 3Q maybe relative to the first half I'm thinking of things maybe like traffic, conversion, AOV? Any insights would be helpful.

A: Across the board has been choppy this year. Comp traffic and comp transactions were down, but average order units per transaction were up nicely. Orders over $5,000 and over $10,000 declined year-over-year but had higher penetration relative to total. We're actively tracking and slicing data to understand underlying consumer behavior.

Q: Good morning. I wanted to see if you can give more color on the change in the outlook for 2024, particularly as it relates to demand. On the last call, you talked about the demand assumption for the back half being down low double digit. Third quarter came down 11%. Fourth quarter outlook is also down low double digits. So, it seems to be the same. So, I'm just trying to understand where are things falling short of the prior outlook.

A: Great question. Low double digit has a range. There's flexibility in the promotional cadence for the balance of the year, and there's a timing component to considering November and December sales trajectories, which adds conservatism to the outlook.

Q: Good morning. Apologies, I got on the call a little bit late. But John, you had just mentioned in our recent response that you stumbled a little bit in Q3. And I guess with the benefit of hindsight, you look at those negative mid- to high teen demand comp declines for July and August, was there anything internal that you've identified that you were able to fix or that you maybe did wrong that now gets you back on track?

A: Yes. We were up against big numbers from the prior year and a lot of markdown products. We probably should have been more promotional in those couple of months, and the big things were the prior year's big comps and clearing out cold product.

Q: Good morning. My first question is just thinking about the relative success you had in terms of sales over $500, $10,000. What do you think drove that? Was it because of bigger discounts or any other factors that you can point to?

A: We have been concentrating on remodeling stores to be beautiful, which helps with sales. Our internal interior designers triple the average sale, and our trade business with outside designers has been booming. The combination of these factors drives larger sales.

Q: Good morning. My first question is just thinking about the relative success you had in terms of sales over $500, $10,000. What do you think drove that? Was it because of bigger discounts or any other factors that you can point to?

A: We have been concentrating on remodeling stores to be beautiful, which helps with sales. Our internal interior designers triple the average sale, and our trade business with outside designers has been booming. The combination of these factors drives larger sales.