Good morning and welcome to the Arhaus Third Quarter 2025 Earnings Call. [Operator Instructions] I will now turn the call over to your host, Tara Atwood-Saja, Vice President of Investor Relations. Please go ahead.

Good morning. And thank you for joining us for the Arhaus third quarter 2025 earnings call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman and Chief Executive Officer; and Michael Lee, our Chief Financial Officer. After our prepared remarks, we will open the line up for a Q&A Session. Jennifer Porter, our Chief Marketing and eCommerce Officer, will join us for the Q&A portion of the call. [Operator Instructions] We issued our earnings press release and 10-Q for the quarter ended September 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-Qs, as 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.

Thanks, Tara. Good morning, everyone, and thank you for joining us. We appreciate your continued interest in and support of Arhaus. I am very pleased to report another strong quarter, reflecting the strength of our brand, the appeal of our product offering and the disciplined execution of our long-term strategy. Net revenue for the quarter was $345 million, up 8% year-over-year and near the high-end of our guidance range, marking the highest third quarter net revenue in our company's history. This performance was driven by growth in our showroom footprint and increased demand for our products. Comparable growth of 4.1% reflects healthy, underlying client demand and strong, operational execution across our distribution network. I'm also very pleased to share that the demand comparable growth was 7.4% for the quarter, highlighting the strength of our brand and the continued momentum of our high-end clients. I'll share a few highlights on demand, including the success of our Fall Collection in a moment, and then Mike will walk you through the details driving quarterly and year-to-date demand performance. Turning to products. Our Fall 2025 Collection represents our strongest launch in company history, resonating deeply with clients across our catalog, website and showrooms and reinforcing our design leadership and highly differentiated, artisan crafted products. The collection embodies the essence of Arhaus, warm, inviting and timeless, blending modern and traditional silhouettes with natural materials and artisan craftsmanship. From warm wood, to stone, to tailored upholstery and refined finishes, each piece is designed to feel layered and personal, reflecting our belief that home is a feeling. Our fall product collection translated directly into record performance supported by newness, upholstery, customization and our in-home design program, core differentiators that create a powerful growth engine driving demand. September marked the highest total demand month in Arhaus history. Let…

Thanks, John, and good morning, everyone. Today, I will cover both our third quarter financial performance, as well as our latest outlook for the remainder of the year, before turning it over to Q&A. This quarter, we focus on what sets Arhaus apart, bringing exceptional products to market, deepening client relationships and executing with discipline. Our team's efforts drove record third quarter net revenue of $345 million, up 8% year-over-year and near the high-end of our guidance range, supported by showroom expansion and strong demand from our high-end clients. Comparable growth was 4.1%, reflecting healthy, underlying client demand and strong operational execution across our distribution network. Our Dallas D.C., which we successfully brought in-house last quarter, continues to ramp effectively and drive meaningful improvements in delivery performance. Our continued investments in our distribution network and our technology infrastructure, are translating into stronger efficiency and are strengthening the overall client experience. Demand comparable growth, which measures written orders, was up 7.4% in the quarter, reflecting the strength of our high-end client base and the ongoing appeal of our product offering. I'm incredibly proud of our teams for their creativity and execution, which fueled the strength of demand this quarter. I'm also pleased to share that year-to-date through the third quarter, demand comparable growth stands at plus 2.8%. While demand remained strong in the quarter and year-to-date, as we've discussed previously, near-term demand can fluctuate with macro and geopolitical conditions, as well as our own promotional calendar. Monthly demand volatility is not uncommon for our business. When we do experience short-term softness, demand is typically deferred rather than lost, and this quarter was a clear example of that dynamic. Following temporary softness in the second quarter, we saw a strong rebound in the third quarter, followed by moderation in October. July demand…

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

This is Julio on for Steve. Just given the recent launch of the Bath collection, curious you could comment on the initial feedback and engagement from your customers and update us on how the Bath collection experience has informed the product expansions into 2026. And then I have a quick follow-up.

Yes, I'd be glad to answer that. Yes, we launched the Bath, what 3 months ago? And yes, we're very excited about it. It's doing what we think it's going to do, and we're learning a ton of new ideas that we think are really going to be able to grow it, already working on the next wave of new products, and so forth. And we think it's going to be a good, stable part of our business, and it's going to continue to grow and be more and more important.

Then as a follow-up, just given the recent expansion in states like California and just the size of this Pasadena opening, can you comment on if and how the average store model is evolving as we think through the 2026 class of stores, what will be the average cost and then like the productivity ramp, maybe any cannibalization or productivity that you might see from densifying?

Yes, I think Mike can answer some of that if possible. But as far as the evolution of our stores, we continue to evolve our stores, we reinvent our stores, our design team is incredibly creative at coming out with new ways to enhance our stores to enlighten our consumers. And Pasadena is a perfect example. You walk in there, it is truly magical. It is a place that you walk in and say, geez, this is how I want my home to look. And we've done a lot of new things, creative things to re-merchandise things and so forth, new furnishings new flooring, new ceilings, different objects, that we're putting in the stores to really enhance the shopping experience. And then we'll continue that. But Pasadena just blew us away and it's blowing the customers away. I don't know Mike, if you have --

Yes. Just as a reminder, we've talked about the benefits that come with new showrooms. 90% of our clients tend to come from locations that are within 50 miles of the showroom. We get not just in-store benefits, but also e-com benefits from that as well. And then, Steve, just as a reminder, like when we think about the ramp-up of the stores, every store has got a little bit of a different ramp life cycle, but we don't bring them into the comp for 13 months for good reason, really just driven by the fact that these things take time to build. We are building our presence in Los Angeles, we're building our presence in California. The West Coast will continue to be a priority. And as we continue to learn more and more about our business, one of the things that we think is a critical success factor, not just in existing locations, but also in new locations is really ramping that trade business as quickly as possible as we enter new locations because that's really a source of fuel to really build awareness and overall customer loyalty. So we'll leave it with that for now.

Our next question comes from the line of Andrew Carter with Stifel.

So I want to dig in on that October number, the down 14.8%. I know you had a promotional shift. Correct me if I'm wrong, you did put some tactical prices in there. So I guess I wanted to ask is as you've teased it out, do you have a good feel of what the underlying comparable demand number is, the simple average between September and October is minus 4.8%. Do you think it's better, worse than that? Just something to think about as an exit rate we have out of October going into the final 2 months of the year.

Maybe I'll jump in on just the macro side of that question, and then I'll invite Jenny to come in on more of the customer side. But look, just taking a step back, we are very proud of the performance through Q3. Our total demand comp is up 2.8% and we are hitting records along the way. Our Q2 net revenue was the biggest quarter we've ever had at 15.9% growth, our Q3 net revenue was the highest Q3 we've ever had with growth of 8%. Our Q3 demand comp was up 7.4%. Our total demand, including new showrooms was at 10.9%. When you drill into September, September was also record demand with a demand comp of plus 5.2%, really driven by many elements of our strategy. We had record levels of newness in September. We had our second largest upholstery month ever, up 15%. We had strong interest in our newness elements of our upholstery as well, and we hit a customization record during the month. And then our designer business, which I mentioned a few minutes ago, continues to grow share of overall sales. So we're very, very encouraged by the momentum that we've seen. And in Q4, looking forward, to your point, we did expect October to be a little bit soft. We made intentional changes to the promotional calendar in October, which we talked about during my remarks. We did have some pull forward into September just in recognition of the success that we had during the storewide sale. And again, as you think about this, all of these purchasers or at least most of these purchases are well thought-out purchases, much of our business has not come from a customer walking into the store for their first visit and making big purchases, they're working with…

Yes. Andrew, I think Mike really, pretty much covered it there. The one thing that I would add is specifically to your question about price we took in October. As we look at our business, we're not seeing correlation between the sales impact and the select SKUs where we took price going into October. So we don't see that being the primary driving factor. As Mike mentioned, we were expecting the softer October, we really see it predominantly being the pull forward into September and that shift in promotional calendar. I think as we look at our consumer as well, we are not seeing any shift in demo of our consumers as we go throughout the year. We didn't see any shift as we went from Q3 into October. But what we have talked about, which Mike touched on, is that our client this year is being very considered. As they always have been with Arhaus, they're drawn to the product, they're drawn to the quality, they're drawn to the product and the aesthetics that they like. We're seeing higher engagement in those interior designer orders, which are those larger projects that take a little bit more time. We're seeing strong engagement with that custom upholstery, which is a more considered purchase as well. And we continue to be really pleased with how people are engaging with the product, with the marketing, with our teams, as they are really enthused going into the next few months here. I'd also call out we're in November. So we have Black Friday coming up. You're already starting to see those promos coming. So as we're just looking at that choppiness, and engagement and the pull forward versus what's happening there, we'll be looking forward to November and December.

Second question I wanted to ask, you gave a $50 million to $60 million annualized tariff number. I want to make sure, number one, that's an annualized number. Therefore, the $12 million you're eating this year is in that base, the net of mitigation. And just to be clear, that number is a currently net of mitigation number, i.e., you have additional arrows in your quiver to mitigate that through pricing or whatever? Or is this something you would consider as a potential profit hit, probably not all of it, but any comments on that would be helpful.

Yes, I can jump in. And then, John, you could obviously jump in as well if you have anything to add here. But I would just go back to some of the remarks we made a few minutes ago around the 3-point plan. We are laser-focused on protecting our margins. And as we work with all of our suppliers, we're looking at things like sourcing, productivity savings, every quiver, as you said, in the bag because this is a challenging dynamic that we're working through. I think one thing that has served as a tremendous advantage is John's relationship and engagement throughout this process. John is directly engaged with all of our top suppliers. In fact, we just had one that you've known for 30 years here in the building this week, where we were talking about more productivity opportunities in the business. But we have made it clear. John has made it clear that as we navigate through this, we are not sacrificing quality and/or design at all. It's a nonstarter. So we're really focused on finding ways to navigate through productivity, sourcing changes and quite honestly, asking more of our suppliers in some cases as they are benefiting from, I'll call it, the economies of scale of Arhaus growth. As we grow, their fixed costs get spread over more and more product, and we're asking to participate in some of that. So as you think through this, we've talked about this being continuous negotiations. I would call it continuous collaboration as we're working with all of our suppliers. These relationships remain strong even through this very challenging dynamic. And I would say we're very happy about the insulation that we get from our U.S. sourcing, particularly as upholstery continues to set new records, our U.S. sourcing provides a…

Yes. I just want to add that the new product that we launched this fall and an incredible amount of new product we're going to be launching into next year, is really priced with tariffs in it and everything else. So it's not this game of let's take this and raise pricing or not raise pricing and so forth. And it's been amazing. Our partners around the world have worked so well with us at hitting sharper price points without compromising any kind of quality. And I'm excited about that, because as we get this new product in, it's going to be at a fantastic price. We think we blow the competition away with our model, with our pricing. And that's just going to kind of just keep going. And we're hitting on some really, really hot products that we know are just at the tip of the iceberg because a lot of them are just testing and say a select number of stores or so forth. So when we roll it out and roll a collection out a new collection, it's going to be a huge hit. And they're going to be at a price that has already got the tariffs and everything else factored into it. The other thing I've really been pushing our team to do is continue to grow our domestic upholstery business, which has no tariffs. I think it's 70% of the business now in our upholstery business. I'm pushing to grow that for next year coming up, because we can. And again, with the tariffs and so forth, we can have some of this product made in the states. We're doing some incredibly creative, innovative things that we don't think anybody else is doing to offer new frames that typically couldn't be made in the United States that are now going to be made here, and that's going to be exciting. So going forward, the future is incredibly exciting. And that's what I'm focusing on, is to bring out all this new product and these new trends that are just happening like crazy right now that -- well, the tariffs are what they are, and we'll live with them and move forward.

I would offer just one final comment. With the growth that we're seeing in upholstery, our manufacturing teams are continuing to hit new levels of productivity as well. So just a shout out to that team, because we're doing a really good job of driving productivity across our entire manufacturing. And then the other element here, Andrew, that's important to highlight is that when we zoom out of the year and kind of look at how we've managed through just a massive amount of transition, we've executed really well. Our buying teams, our merge teams, our sourcing teams, our planning teams, it has been continuous rework throughout the year. And I know that John is not happy with how we performed in a couple of categories in terms of just inventory levels, even with that, the disruption has been minimal from a commercial perspective. So I think it just goes to the strength of the Arhaus team and how we've been able to remain nimble during a very challenging backdrop.

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

Congrats on a strong quarter. You reduced your CapEx guide by quite a bit, I think, $90 million to $70 million at the midpoint. And just wanted to get an understanding of that. Obviously, various projects that are going on with systems, and so forth. But you didn't have really any meaningful change here in the showroom plans. So just wanted to understand the dynamic that's going on with your CapEx expectations, both for this year and then as we kind of look forward, kind of a range of where we should be thinking?

Look, I'd start with the fact that in our original guide, we had our technology initiatives kicking off sooner in the year. And with some of the management changes that occurred earlier in the year, some of that was put on hold until we had some of the new members of the management team put in place. So that was a big part of the change in the capital guide or the CapEx guide. The other thing is on new showroom. Showroom projects, as you know, are ultimately a function of the timing of the buildouts. And earlier in the year, we had a little bit of a different plan in terms of the timing. And as certain projects have moved more toward the end of the year, that's impacted some of the spend as well. But what I would highlight is our showroom pipeline, our guidance of [ 5 to new ] showrooms annually still remains our target. And we're on pace to finish a record number of showroom projects this year at between 12 and 15. And I know we sit here in the middle of November and say, okay, you still got a big range there, but it just goes to show you how tight some of this is in terms of the calendar. But our long-term plan is really anchored in the 5 to 7 new showrooms a year. Some years are going to be higher than that, some years are going to be lower, we're coming off of a really busy year. And next year, we'll be, I think, right in that long-term range that we provided. We've got a couple of things, again, moving around where some things might spill over from a December of 1 fiscal to the January of the other. But our overall capital allocation strategy hasn't changed. Building out the showroom pipeline continues to be our number one focus in terms of capital investment.

Great. And then just a separate question here coming back to pricing and how you are thinking about it really within the industry. So we've seen that some peers are getting a bit more promotional, maybe have not had as good a demand. Overall, industry is still relatively sluggish, but wanted to see if you could provide some commentary on what you're seeing from some peers who are also -- some of them have responded a bit more with setting initial pricing a bit higher related to the tariffs, we think. But wanted to get your assessment of what you're seeing in the industry.

It's a great question. And I think it continues to be what we're honestly asked every call and what we're very focused on and trying to understand as well. We pay very close attention to what other people are doing in the industry. And like you mentioned, you're seeing a lot, you continue to see elevated promotions. I think you could argue that we're seeing those get even more elevated recently, starting to see Black Friday promotions launching in October by some brands and getting early and earlier in November, just as one example. I think what we've always said is that, while we pay very close attention to what everybody else is doing, we are really focused on what we are doing, and how our clients are responding and what's working for our business. And so our approach to promotional strategy really hasn't changed. Earlier on the call, Mike mentioned that we have for the last 18 months, really been testing and learning about our pricing and promotional strategy. That has been continued. We continue to really like our buy more, save more volume discounts. I have spoken to those engaging clients and being really pleased with our higher average order value purchases. We have spoken about how we are continuously evaluating how we message our promotions and the specifics of timings of those details, and we plan to continue to do that. But I think it's really, just a continuation of we need to pay very close attention. We're constantly getting feedback not only within our data but also speaking to our store teams and having direct conversation with our clients as well to see how people are actually responding. We were just on a call last week with some of our top interior designers hearing about how…

Our next question comes from the line of Robbie Ohmes with Bank of America.

This is Mattie Chick on for Robbie Ohmes. Just first, I wanted to circle back to the expected $10 million related to systems investments and the $12 million in net tariff costs this year. Given revenue came in towards the higher end of your expectation in 3Q, how did tariff costs flow through in the third quarter? And what's your expectation for 4Q?

Yes, Mattie, around 20% to 30% of the tariff impact for the fiscal year is behind us in Q3 with the balance being in Q4. And then sorry, what was the second part of your question? You were faint at the beginning of your question.

I apologize. Maybe just how the systems investments are broken down between the third quarter and the fourth quarter?

Yes. So there is a couple of buckets here, so maybe we talk about both of them. We talked about a technology initiative at the beginning of the year of $10 million, about $5 million of that will be in Q4, the other balance is behind us. And then just taking a bigger step back on the technology side, because this is something I want to make sure that the analysts take away from this call. We talked about the spend that we've built into the program. But one of the things that I also want to highlight is that we've done a lot of work on this program to identify where the benefits are going to come from. And we don't take this term digital transformation lightly. Like this is really an opportunity for Arhaus to change the way it works. And it's not just across the finance team or the operations team, but across the organization. So we'll talk about this more in the future. But we do see a lot of savings from a transportation efficiency perspective, from a productivity perspective across our G&A lines. As we rationalize our technology ecosystem, there's going to be benefits in IT from a staffing and licensing cost perspective. So this is one of the more compelling business cases I've come across in business when you think about a technology program like this. But it's also important to highlight some of the capabilities we're getting in terms of just how we operate. When we think about pricing, which we just talked about, having a single source of truth to make quick, nimble decisions is really important. When we think about dealing with the hundreds of suppliers we have around the country, how we onboard vendors and manage vendors through our supply…

Our next question comes from Seth Sigman with Barclays.

So I wanted to follow-up on demand. Demand was obviously very strong this quarter, but it's been quite volatile month-to-month. Year-to-date demand running up 3%. I mean it's pretty encouraging. I'm just curious, is that the right run rate to be thinking about the business going forward or the 7% in Q3, do you think that's more representative because it's normalizing -- or I guess, we normalize for the event shifts, or is it somewhere in between? How are you thinking about that?

Yes, Seth, I can start and Jen can jump in. We don't guide on demand is the first answer but we have had a lot of choppiness, and that's the one flag that we continue to raise when we talk about why is our guide what it is. There is still uncertainty. And the macro backdrop is a big part of it. When we take a big step back and you think about what's going on with housing, housing is starting to show some signs of life, but it's really from, I'd say, coming from a weak perspective. Mortgages are starting to come down, but they're still high. Refinancings are up, which is encouraging, but only 22% of all mortgages are above the current borrowing rate. So you just go down all of -- the S&P 500 is at a 23x forward earnings. And when we think about what drives volatility in our business, it's the wealth effect in some regards as well. So really hard to predict at times, Seth, and it is choppy. We can't get into the guide of what's normalized demand for us. But we are mindful of the choppiness. We do want the choppiness to settle down over time, but a big part of this is that macro backdrop. Jen, is there anything you would add?

Yeah. The only thing that I would add is just as a reminder, we do have high-end clients. And I think Mike mentioned this earlier in the prepared remarks, even when we see softening in demand, we see that as being deferred demand, not lost demand. And I would just go back to how excited we are about our September results, which reflects the product that we're launching and the execution that our teams are doing, how excited we are about spring, which is just a couple of months away here going into January and all that new incredible product that John was mentioning. There is so much enthusiasm and excitement about what we can control around the organization. And So we are continuing to focus on that. And I would second Mike's call out, we would love for some of this choppiness to go away, but we feel really good about controlling what we can control in the meantime.

Okay. And then I guess somewhat related, the select price changes that you made this quarter, I think, this is the first time you've done that since tariffs have gone into effect. I think your competitors have been a little bit more aggressive in raising prices this year. Can you just elaborate on the scope and the magnitude of the changes you've made to date? And then I'm just trying to think about of that $50 million to $60 million of net tariff next year doesn't include price offsets. How much could be offset by pricing? Just given, to your point, strength of your product and the newness, feels like it would only require a 4% increase in prices across the assortment to offset that and many of your competitors are already doing that. So I guess, how are you thinking about that?

Yes, Seth, I'll start. First of all, it's being very disciplined and pragmatic and making sure that we really engage with our showroom personnel on where the opportunities are. So it's a very collaborative process. When you get to that $50 million to $60 million range, our expectation is to cover 100% of that, whether it's through operational savings that hits the margin line or vendor concessions or pricing actions. But our goal is to protect margins. In terms of the scope and magnitude, it is an item-by-item approach. We have 9,500 SKUs that we keep in stock, and we're looking at every one of those SKUs on a continuous basis with our merch teams to really identify areas of opportunity. And sometimes we take prices down to be competitive. But we've got merch teams that are all over this that are really guiding where we think we have the ability to inch upwards and making sure that we keep our customers in mind along the way. So to your point, when you scale this back and think about the scope of our business, the tariff impact appears to be something that's digestible. We believe it is. But we just have to be mindful that we got to keep customers in mind as we do this. The other thing to be mindful of is that it's not just a pricing decision, but it's also a promo decision. So all of these things work together in unison to make sure that we're providing the right value.

Yes. The only thing I'd add to that, Seth, and we've spoken about this not so much this year, but a lot in prior years is our focus is always on providing a great value to our clients. And our clients, as we mentioned, are that high-end clientele, they can afford to pay for what they want, they want what they want. And we believe in delivering the most comfortable, the highest quality, the most beautiful, the most innovative product that we can. And so all of these decisions are very much we have margin in mind and profitability in mind, but we also have our clients in mind, and we want to make sure that they are always getting a great value and that we are building that long-term relationship with those clients.

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.

Thank you, everyone, for your participation in the call and interest in Arhaus. Have a great day.

Thank you. Everyone, you may disconnect your lines now. Thank you.