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Arhaus, Inc. (ARHS)

Q2 2025 Earnings Call· Fri, Aug 8, 2025

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Transcript

Operator

Operator

Good morning, and welcome to the Arhaus Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded, and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Tara Atwood, Vice President of Investor Relations. Please go ahead.

Tara Louise Atwood

Analyst

Good morning, and thank you for joining us for the Arhaus Second Quarter 2025 Earnings Call. Joining me on today's call are John Reed, our Founder, Chairman and Chief Executive Officer; Michael Lee, our Chief Financial Officer; and Jennifer Porter, our Chief Marketing and eCommerce Officer. After our prepared remarks, we will open up the line for a Q&A session. [Operator Instructions] We issued our earnings press release and 10-Q for the quarter ended June 30, 2025, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours. I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent Annual Report on Form 10-K and subsequent 10-Q as such factors may be updated from time to time in our filings with the SEC. The forward-looking statements are made as of today's date and except as may be required by law, the company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliations. Now, I will turn the call over to John.

John P. Reed

Analyst

Good morning, everyone, and thank you for joining us. We appreciate your continued interest and support of Arhaus. I'm excited to kick off today's call by welcoming our new Chief Financial Officer, Michael Lee. Mike has hit the ground running, bringing deep operational and financial expertise that has strengthened our leadership team. I'm thrilled to have him on board. He's playing an important role as we continue to advance our long-term strategic priorities, which are as follows: increasing brand awareness to drive net revenue; growing our Showroom footprint with discipline, enhancing the omnichannel client experience and investing in scalable infrastructure to support long-term growth. Now, let's turn to our business and operational updates. Like many companies, we've experienced a highly dynamic and uncertain backdrop this quarter with shifting tariffs, ongoing macro pressures and broader geopolitical tension, all weighing on the consumer. These are factors outside our control. What is within our control is how we show up for our clients. And we continue to focus on what we do best, delivering exceptional product, deepening our client relationships and growing the business with discipline. I'm incredibly proud to share that we achieved the highest quarterly net revenue in Arhaus' history. Driven by the early ramping of our Dallas Distribution Center that transitioned in-house, this enabled us to convert strong first quarter demand into net revenue more efficiently and at a higher volume than expected. As a result, comparable growth was up 10.5%. While demand comparable growth declined in the second quarter due to ongoing macroeconomic pressures, we've seen strong momentum heading into the third quarter. July demand comparable growth increased 15.7%, reflecting the resilience of our high-end client base and enduring appeal of our products. Year-to-date, including July, demand comparable growth is up 2.2%. Our results this quarter are a testament…

Jennifer E. Porter

Analyst

Thank you, John, and good morning, everyone. At Arhaus, we continue to drive high-quality growth through a differentiated value proposition, educating clients on what makes our brand unique, artisan crafted design, heirloom-quality craftsmanship and a premium highly personalized client experience. Despite a more volatile backdrop, we delivered a strong quarter and our omnichannel strategy continued to drive engagement and conversion across every touch point. As John shared, product is where Arhaus begins and storytelling is what brings it to life. Every collection is grounded in craftsmanship, thoughtful innovation and a narrative that captures the meaning behind each piece. Our goal is to create emotional connection and lasting value, whether a client is discovering us for the first time or returning to furnish the next room in their home. Our fall catalog launching at the end of the month has an exciting and extensive presentation of newness, including our new bath collection. This season's assortment is globally inspired, richly textured and emotionally resonant, all designed to feel curated, lived in and deeply personal, reflecting how real families live with pets, children and the rhythm of everyday life. As always, catalog remains one of our most powerful tools for driving engagement and conversion, especially when paired with immersive digital and Showroom experiences. But more than that, it's how we tell the story. Because at Arhaus, we believe it's not just about what we make, it's about how it makes you feel. And that feeling is what keeps clients coming back again and again. That same storytelling extends across our digital and content platforms, grounded in the belief that home is more than a place. It's a lifestyle. This philosophy shapes how we engage with clients and inspires curated brand partnerships that bring the Arhaus aesthetic to life beyond the home. This quarter,…

Michael Alan Lee

Analyst

Thanks, Jen, and good morning, everyone. I'm excited to be here for my first earnings call at Arhaus. It's a sincere privilege to step into this role and partner with John and the broader team as we continue to execute against our long-term strategy. Today, I will cover both our second quarter financial performance, as well as our latest outlook for the remainder of the year before turning it over to Q&A. As John noted previously, we operate against a challenging macroeconomic and geopolitical backdrop that weighed on consumer sentiment during the quarter. Despite this, we remain focused on what sets Arhaus apart, bringing exceptional products to market, deepening our client relationships and executing our plans with discipline and precision. Our collective efforts resulted in a record quarter with net revenue exceeding $358 million, which is up 15.7%. Comparable growth was up 10.5%, driven by the successful conversion of strong first quarter demand. Given the sizable beat on net revenue versus our prior guidance, it's important to highlight a notable operational win that contributed meaningfully to our outsized performance this quarter. As previously disclosed, Arhaus had utilized a third-party operated distribution center in Dallas. Earlier this year, we made a strategic decision to in-source the distribution center as a tactic to enhance productivity and customer service. During the quarter, we successfully brought operations of our Dallas Distribution Center in-house that ramped ahead of schedule. And this transition enabled us to convert strong first quarter demand into net revenue more efficiently and at a higher volume than expected. This operational win, combined with strong execution across our teams played a major role in delivering record net revenue for the quarter. While our delivered results exceeded expectations during the quarter, demand comparable growth, which is a measure of written orders decreased 3.6%,…

Operator

Operator

[Operator Instructions] Our first question comes from Steven Forbes with Guggenheim Securities.

Julio Rodolfo Marquez

Analyst

This is Julio Marquez on for Steve. It's for John. Given the Bath Collection launch, can you expand on where the greatest product opportunities are as you see them today? And if your consumer is asking you for like anything in specific that you currently don't assort? And then just a quick follow-up after that.

John P. Reed

Analyst

Yes. So first of all, customers always ask for everything. So that's a given. But we're focusing on our core products. It's a great, great time right now in the product side because customers -- consumers' tastes have changed in the last year or so and are continuing to change. Things are getting softer, warmer, more color, more prints. And that stuff is just right down our alley. We love all that. And it's really in the core of Arhaus to begin with. So, we're focusing on all the categories to just continue to update them. The upholstery business, of course, drives a huge part of the business because that's kind of what most people start when they're remodeling their living room or family room. And we're doing some great things as, I think, we mentioned we've got 600 fabrics, 90 leathers. And we think we're the leader in having our decorators for sure and consumers come in and pick something that's unique to them. Nobody else has. Nobody down the street has and it's something they love. So, we're going to continue to focus on that.

Julio Rodolfo Marquez

Analyst

Excellent. And then as a quick follow-up, as we approach the anniversary of the 3-tier Buy More Save More program, can you expand on any like key learnings, discounts thresholds that you've explored? And is the current campaign the right value proposition to think about for the consumer on a go-forward basis?

John P. Reed

Analyst

Yes. We started that in early fall of last year, and we're going to continue it. It's working. People love to feel like they're getting a good deal in the home business. And if they buy more, we reward them with a little more of a discount. So, we're going to stay with that strategy and we're not deviating from it anytime soon.

Jennifer E. Porter

Analyst

Yes. And [ Marq ], I'll just add to that. As we talked on the last few calls, we've really been pleased with the increase in the orders over 5,000 and 10,000. I've spoken a lot about the strength of our interior designer program, which driving those higher order values as well. So to John's point, our clients are really coming to us looking to furnish and update entire rooms, entire homes. And so the strength of that program has just been really exciting, seeing that really play and support into that very nicely.

Operator

Operator

Our next question comes from Andrew Carter with Stifel.

William Andrew Carter

Analyst · Stifel.

Wanted to ask about in terms of the implied fourth quarter, it implies really an extremely weak fourth quarter in terms of kind of the demand -- in terms of the comparable. Therefore, I guess, the demand comparable from August through October. So, could you just speak to that? And I guess I'm assuming that, that would also timing-wise, be the tariff headwind you outlined, the brunt of that would be in 4Q, which would be one more pressure point.

Michael Alan Lee

Analyst · Stifel.

Yes, Andrew. Look, I mean, year-to-date, it's been very choppy. We know that we've had up and down months, as I cited in all of my remarks a few minutes ago. We're up 2.2% through July. And we know we've got a very resilient consumer base. They've proven to be the last to exit our category when things like stock market shocks occur, and then they're the first to return. When we think about our back half, we're very excited about the catalog. We're very excited about the biannual store-wide sale that's coming. And then as we also talked about, the bath launch was announced this morning. But we do expect continued choppiness in the second half of the year. And this is the greatest uncertainty is that every month this year, it's been up and down. On a year-to-date basis, we've seen solid growth, but we have seen a lot of choppiness. So admittedly, the guide, the implied guide for Q4 as well as the guide for Q3 reflects some of that uncertainty.

William Andrew Carter

Analyst · Stifel.

And just a little bit more longer-term question, Mike. Given you just got there, you did a great job outlining the investments in the supply chain to date, kind of reiterated what's happening this year, including that $10 million. At this point about -- part of the story here is building a supply chain that can fully support this growth agenda. What's your characterization of incremental things that are needed here, potentially those incremental investments? You also outlined the long-term growth algorithm, which has high single- digit sales, low double-digit EBITDA. Do you think you're in a place where that leverage can start to take hold over the next couple of years? Is there going to be more incremental investments? Just any help on that front since you have a fresh set of eyes here.

Michael Alan Lee

Analyst · Stifel.

Yes, for sure. Well, let me first take a step back because we've mentioned some of the investments that we're planning to make during my remarks. But I also want to just acknowledge that ERPs have a tendency to spook investors, right? We're very, very well aware of that. And we know that these systems tend to be poorly understood, and there's been notable headlines in the past as companies have gone down this path, headlines around business disruption and budget overages and things like that. But I think it's important to highlight these systems have come a long way over the last few years, and the sponsors of these technologies have worked to really simplify the deployment. So when I came to Arhaus, Andrew, I knew that the company was quickly outgrowing many of its systems and capabilities, and I was hired to really help deliver on this business transformation. And I believe this business transformation is going to position us for success. I've led many of these transformations during my career. I'm confident we can deliver on the team's aspirations. And my role here is to help guide this business transformation in a way that doesn't take us our eyes off the business, but helps us to guide this transformation methodically and responsibly. We recently hired a new CIO, Allison Sutley, who I am partnering with on this project. And we will be applying both financial and business rigor every step of the way on this project, including things like vendor selection and team formation and project visioning and how we phase the scope of this project. But when we think about your key question, Andrew, around how will we measure success of this project, in my view, and I know we're very aligned as a leadership team…

Operator

Operator

Our next question comes from the line of Seth Sigman with Barclays.

Seth Ian Sigman

Analyst · Barclays.

I wanted to talk about the benefit in the second quarter from the quicker ramp in Dallas. That was obviously a nice win on the execution side. It would seem like that should also help the full year if you're pulling forward deliveries quicker than expected. Obviously, you didn't change the full-year guidance. So, I'm just curious, is that logic wrong? Or is that just the uncertainty and maybe some conservatism? And then if you could also just remind us when do you think demand and reported comps start to align again?

Michael Alan Lee

Analyst · Barclays.

Yes. Well, in terms of your logic, I don't want to question your logic, but I will say that there is a lag effect between written and delivered orders, as you know. And that lag effect varies depending on the product category. I would think of Q2 is a big catch- up to our order backlog. In terms of the way I like to look at it is look at Q1 written orders versus delivered and our written orders were about 20% higher than what we delivered in Q1, creating a backlog that was then fulfilled in Q2. And we still have a bit of that backlog that will carry over into Q3 and Q4, but that's just the nature of our business. So, we've had a lot of choppiness in the first half and we expect that to continue, but that backlog item is key in the modeling. In terms of the convergence of the demand comp number and the comparable growth number, we've said many times that they're tough to reconcile as an analyst without having all of the sales numbers on a comparable basis, which we don't disclose. But as we sit here today and look at the full-year forecast, they do converge by the end of the year based on our current forecast.

Seth Ian Sigman

Analyst · Barclays.

Okay. Great. And then just thinking about that demand inflection in July, I appreciate the commentary on the choppiness that clearly you've seen year-to-date. But anything more you can tell us about the flip from June to July? What really changed there? And then if you sort of look past the volatility and smooth it out over the last several months, I guess, maybe just discuss trends across price points, big ticket versus small ticket. I'm mostly just curious if consumers are starting to engage in bigger projects.

Jennifer E. Porter

Analyst · Barclays.

Yes. Great question. I'm going to answer your second question first and then go back to your first question. So, we are seeing that strength in the orders above 5,000 and 10,000 continuing, which is driven by the strategy we've been talking about over the last few years of growing interior designer program, driven by the volume discounts that we've been seeing really great success on and also just the focus on, to John's point, the product and the way our clients are choosing to engage with us, where it's really starting maybe with that big piece of an upholstery, but expanding into the full room, the full home. So, we're definitely continuing to see engagement and conversion on those higher purchases. Looking at the inflection point between June and July specifically and then the choppiness, I think that's the big question. And to the comments in the call earlier, the choppiness is -- really feels related to a lot of what's going on with the macro and all the noise happening in the market. We are focused very clearly on what we can control, and we're continuing to execute and feel really great about what we're putting out there, the product that we're delivering and getting into stores, the marketing that we're doing to support that, the new Showrooms that we're opening. June to July specifically is really interesting. I mean, if you think about promotional periods, the July 4 promotional period, for example, spans end of June into July. If you're looking at the summer months, June and July really both feel like they're part of that summer season. I think we can point to there being a little bit more noise in June with everything going on than what was happening in July. But I think also…

Operator

Operator

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum.

Jeremy Scott Hamblin

Analyst · Craig-Hallum.

First, just wanted to clarify. In the demand comps, just going back to last year, I think on the Q3 report last year, you'd indicated a pretty significant change in your demand comps, which I think July '24 might have been down like high-teens and August down mid- teens before things improved a lot in September. So, just wanted to confirm that kind of back story in terms of maybe part of the math change in demand comps. Could you clarify?

Jennifer E. Porter

Analyst · Craig-Hallum.

Yes. Jeremy, that's a great question and you are correct. As we look at our comps that we're up against from last year, if you remember, we started to talk to some tough business in May and June. We did see that get softer in July of last year and August and then really started to pick up as we got into the end of Q3 and Q4. So, I think that is a really good call out and it's something that we are watching very closely as well. Again, with choppiness this year, there's also a little bit of a choppiness last year that we are just countering.

Jeremy Scott Hamblin

Analyst · Craig-Hallum.

Okay. Great. And then just wanted to ask a little bit about your SG&A, your margin performance, which was really strong in Q2. And as we progress through the year, Mike, the step down from Q1 to Q2 on SG&A was fairly significant given the sales level. I know that demand comps were negative in the quarter, and that might impact the commissions paid out. But just thinking about what the base cost structure in place is, has there been any meaningful change? And then just in terms of the gross margin performance, which was also strong in Q2, can you give us a little bit of visibility into the back half of the year? Does the transformation with the DC in Dallas inherently improve your gross margin rate kind of structurally on a go-forward basis?

Michael Alan Lee

Analyst · Craig-Hallum.

Yes. Thanks, Jeremy. So, couple of callouts. I would look at the second half relative to some of our remarks that I'll break it up into a couple of pieces. On the impact of tariffs, we're modeling about a $12 million impact for the year. A lion's share of that will be impacting our H2 results. So, I would certainly factor that into your estimates. And then the second piece is being mindful of the SG&A investments that are planned for the year. We talked about $10 million investments for the strategic initiatives. A lion's share of that is happening in H2 and a lion's share of that is happening in Q4 as we start to ramp up. Another way to think about the overall impact of these investments is I would look at prior year adjusted EBITDA on a full-year basis in terms of adjusted EBITDA margin and take these 2 impacts into account. And I think you get a pretty good lens into how we expect to land the year and what that means for Q3 and Q4 as well.

Operator

Operator

Our next question comes from the line of Max Rakhlenko with TD Cowen.

Maksim Rakhlenko

Analyst · TD Cowen.

So first, what's your take on the direction of your market share? Do you think you're gaining or losing share? And just any color on how you think the business is positioned to compete against some of your key peers? How do you think you're performing head-to- head against them?

John P. Reed

Analyst · TD Cowen.

Well, no question, we're taking market share, in my opinion. It's a $100 billion business, and our sales continue to increase as if it's comparable stores or new stores and the e-com business, we're growing. So if you look at the big picture, of course, we're taking market share. That's the way I do the math on it. As far as our competitors, we don't follow, track exactly what they're doing. But we know we've got the best product in the United States. And nobody is doing what we're doing. It is so unique. We've got proprietary vendors who make things just for us and it's a product that you just can't find anywhere else. So as long as we stay on top of our game, which I know we have been and I think we're on top of our game more than ever right now and especially going into the fall and into next year, we're going to take our share of it and be very happy doing it. And we'll see where the competitors fall. I know for a fact, in times like this where everything is just so up and down, consumers can get worried and so forth. They come into a store like ours and see the freshness and the gorgeous displays, it's just -- it's another ball game where they want to fix up their homes. They have the money to do it. They see our product, and they want their home to be an amazing place for their family. So, we're going to get our share, and we're going to continue to get our share and win some.

Maksim Rakhlenko

Analyst · TD Cowen.

Got it. Appreciate the color. And then you guys nicely grew your product margins in the quarter. Can you just provide some puts and takes around what drove that? And then your outlook for product margins the rest of the year? I assume Dallas was potentially a big piece of it, but just what's driving that and then the expectation ahead?

John P. Reed

Analyst · TD Cowen.

Yes, I can just throw part of it and Jen can finish up. But in anticipation of all this craziness, we did adjust prices a little bit in the spring. We did it quietly. We didn't hear any feedback from our clients. And that has helped the margin. And then certainly, the execution of the warehousing, the Dallas part certainly helps all that. So, we are in a good shape margin-wise. We felt we were proactive even before Liberation Day, and now we're enjoying the better margins.

Michael Alan Lee

Analyst · TD Cowen.

And just to add some color in Q1, we did have some headwinds on occupancy in our margin that eroded in Q2. The comments around product margin increasing 30 basis points from my earlier remarks really driven by some of the product mix across geographies, but also driven by some of the concessions that we've gotten from a sourcing perspective. The transportation cost certainly is a result of fixed cost being spread over larger volume. We had a big quarter from a top line perspective. And then just as you think about the go forward, we've got several new locations opening up in Q4 of this year that will also help in terms of our occupancy costs getting leveraged as those stores move into operations.

Operator

Operator

Our next question comes from the line of Jonathan Matuszewski with Jefferies LLC.

Jonathan Richard Matuszewski

Analyst · Jefferies LLC.

My first question was on B2B. Maybe if you could update us on the playbook Jill is pursuing in trading contract. And maybe on the trade side, how does your brand awareness with the interior design community compare with maybe awareness among end consumers?

Jennifer E. Porter

Analyst · Jefferies LLC.

Yes. So great question, Jonathan. Yes, we're really excited to have Jill join us. I'm not really ready to go into any specifics yet as to what she has planned for that business, but it's been a great onboarding getting her in here and already looking at the success of our current program and also how we can shape it and continue to grow it moving forward. So, look out for more info from us on that in the next couple of calls. In terms of your question on brand awareness between trade designers and our clients and consumers, we haven't broken that down specifically. But what we are -- what we do know is that there's a huge awareness opportunity within trade designers similar to what we're seeing with our clients. And I think I might have mentioned this before, but one of the things that we are really excited about with Jill onboarding and with the future of trade is that growing awareness, growing the strength of the trade program not only is a great revenue driver in and of itself with the trade business, but all of those trade designers are then working as advocates and influencers and communicators to clients and then those clients' friends in the future. So it turns into a nice halo effect on our overall brand awareness as well. So a lot of opportunity there, a lot more information to come once Jill has a little bit more time under her belt within the organization.

John P. Reed

Analyst · Jefferies LLC.

Yes. And just to add to that, like we say, we're in a $100 billion business. A big part of that is the trade. They do a ton of that $100 billion. And there's designers in every city that have their own businesses and so forth. And as we get more and more of them, we see this as a tremendous growth avenue and we're focusing on it. As Jen said, we just brought a new person in to head it up. We've got some very exciting plans to roll out in the future. And I see this as a great, great growth avenue for us.

Jonathan Richard Matuszewski

Analyst · Jefferies LLC.

That's helpful. And then just a quick question, a follow-up on the Bath Collection. Congrats on that. I think it was described as one of the most comprehensive extensions in company history. So is there any kind of parallel you can point to in history in terms of how launches like this have scaled in the past? I'm not sure if kind of outdoor is a good case study or if you'd point to something else.

John P. Reed

Analyst · Jefferies LLC.

Yes. I guess the closest one would be outdoor that we did about 5 years ago and continue to grow and grow. But yes, I mean, there's more bathrooms than any other room in the house, typically, and they need to be furnished. So, we studied this business. And we feel we could be a big significant player in it. So we're very, very excited. We put together a really talented team that went out and did all the specs and faucets and sinks and so forth. And it's a full collection from towels to sinks to everything in between. So, we're very, very excited about it. We think we did a nice job having a big enough assortment that it's a meaningful business to us. And we'll see how that goes. But I'm very, very bullish on it. And yes, the biggest comparison, I guess, in our category in the last 5 years would be to the outdoor business. And we started small. Every year, we're growing and growing, and it's been a nice growth business as well.

Operator

Operator

Does that answer your question, Jonathan?

Jonathan Richard Matuszewski

Analyst

Yes.

Operator

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor over to Tara Atwood for closing comments.

Tara Louise Atwood

Analyst

Thank you, everyone, for joining the call. We appreciate your time, and have a great day.

John P. Reed

Analyst

Thanks, everybody.

Operator

Operator

Thank you, everyone. You may now disconnect.