Arhaus, Inc. Q4 FY2025 earnings call

• John Reed, the founder, chairman, and CEO, expressed pride in the 2025 results and was energized by the activities across showrooms, design teams, and artisans. He introduced Michael Rungel as the new Chief Merchandising Officer. 2025 was a strong year with record total written sales, where upholstery had its highest written sales ever, customization experienced significant growth, and there were strong performances in areas such as showroom footprint expansion and interior design services. Product renovation in 2025 was robust, with a shift towards richer colors, patterns, and textures. Since 2019, the showroom footprint has expanded by over 50%, and in 2025, 13 total showroom projects were completed, ending the year with 107 showrooms. - Michael Lee, the CFO, presented the financials, highlighting that 2025 was a year of strong execution but saw a decrease in gross margin due to showroom expansion costs. He discussed comparable metrics, the balance sheet and liquidity, showroom growth and real estate, strategic investments in distribution and technology, and sourcing and tariffs.

In 2025, Our House achieved a record net revenue of $1.38 billion, marking an 8.5% year - over - year increase. Gross profit stood at $536 million, up 7% compared to the previous year, yet gross margin decreased by 50 basis points to 38.9% of net revenue. Selling general and administrative expenses went up by 7.7% to $447 million. Net income was $67 million, a 1.9% decrease from the prior year. Adjusted EBITDA reached $145 million, showing an 8.9% year - over - year rise. For the fourth quarter, net revenue was $365 million, a 5.1% year - over - year growth. Gross profit was $139 million, up 0.3% versus the prior year, but gross margin dropped 190 basis points to 38.1%. Selling general and administrative expenses increased by 6.8% to $119 million. Net income in the fourth quarter decreased by 29.1% to $15 million, and adjusted EBITDA fell 15.1% to $35 million. Comparable written sales grew by 1.3% throughout 2025 but declined by 2.8% in the fourth quarter. Comparable delivered sales saw a 3.6% full - year increase and a 1.4% rise in the fourth quarter.

For the full year 2026, Our House anticipates net revenue to be between $1.43 billion and $1.47 billion, representing a year - over - year growth of 3.7% to 6.6%. Comparable delivered sales is expected to be flat to up by 3%, net income is projected to be between $66 million and $75 million, and adjusted EBITDA is estimated to be between $150 million and $161 million. For the first quarter of 2026, net revenue is expected to be between $300 million and $320 million, with a year - over - year growth range of down 3.7% to up 2.8%. Comparable delivered sales is forecasted to be down 5% to up 1%, net income is expected to be between $0 million and $5 million, and adjusted EBITDA is predicted to be between $13 million and $20 million.

Trade policy is unstable, especially with tariff impacts estimated to be in the range of $30 to $40 million in 2026. There could be delays in product launches and promotions that might affect sales. Weather conditions in January can lead to reduced traffic and sales. In the fourth quarter, obsolete inventory led to inventory reserves, which had an impact on the gross margin.

Q: Regarding guidance, what are the key drivers of leverage for the full year 2026 and the reason for the first - quarter weakness?

A: The first - quarter guide is based on the year - end performance and weather - related softness. The full - year guide is anchored on growing the business within the range of 3.7% to 6.6% with EBITDA growth. The drivers of full - year leverage include expanding margins, improving delivery efficiencies, enhancing operating effectiveness, and optimizing product mix. Although SG&A load has some leverage, it is affected by funding strategic investments.

Q: Concerning tariffs and pricing, how much pricing was implemented in the fourth quarter and what are the thoughts on price inflation?

A: Pricing was taken in October, and the company is nimble with price and promotion strategies. The latest tariff range has decreased from previous levels, and the strategy focuses on protecting margins and being flexible.

Q: About obsolete inventory, what is the rationale and the current state of inventory health?

A: The fourth - quarter impairment was due to inventory areas that were near the threshold of being sellable through clearance centers. Overall, inventory is in a good state with improved inventory control measures.

Q: Regarding the trade strategy, provide details on the sales guide and how to incentivize designers.

A: Trade is a growth platform with significant business potential. The company is changing compensation to build a new team to tap into this large opportunity.

Q: On the real estate strategy, share the perspective on showroom size from the Pasadena store and follow up on the fourth - quarter gross margin.

A: The Pasadena store tested new concepts, and lessons are being learned from different - sized stores. The fourth - quarter gross margin outperformance was due to an improvement in average order value, focus on the trade channel, and strong contributions from upholstery, decor, and special orders.

Q: On written sales inflection and the long - term EBITDA growth outlook, what are the insights?

A: There is momentum in the business, although January's softness has an impact. The long - term EBITDA growth outlook comes from SG&A cost leverage, economies of scale in the distribution network, and the ROI from digital transformation.