Good morning, and welcome to the Arhaus Fourth Quarter and Full Year 2025 Earnings Conference Call. 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-Saja, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Arhaus Fourth Quarter and Full Year 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. Jennifer Porter, our Chief Marketing and E-commerce Officer, will join us for the Q&A portion of the call. We issued our earnings press release and Form 10-K for the year-ended December 31, 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, targets, 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 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, over to you.

Thanks, Tara. Good morning, everyone, and thank you for joining us. As we close out 2025, I'm proud of what we delivered. But more importantly, I'm energized by what I'm seeing firsthand across our showrooms, our design teams, our artisans around the world. I founded Arhaus 40 years ago on a simple idea that furniture and decor should be responsibly sourced, lovingly made and built to last for generations. That philosophy hasn't changed. It continues to guide many of the decisions we make today. We're building Arhaus for the long-term, and that begins with talent. I'm excited to welcome Michael Rengel as our new Chief Merchandising Officer. Michael is a proven merchant leader and operator with deep expertise in product strategy, assortment, architecture and building assortments that resonate with our customers. As we continue to build on our differentiated model rooted in artisan craftsmanship, timeless design and a highly personalized service experience, Michael will be instrumental in strengthening cross-functional collaboration, elevating our products and shaping the next chapter of our growth. Across Arhaus, our team remains our secret sauce. The Arhaus family is a key competitive advantage, one that consistently sets us apart. The fourth quarter marked a strong finish to 2025 and a strong year of execution across the business, reflecting the power of our brand, the strength of our product offerings and our disciplined strategy. I want to spend a moment putting 2025 in context because when I look at this year, I don't just see results, I see a business that has proven its resilience across cycles. Having led Arhaus through multiple cycles over the last 4 decades, perspective matters. If we go back to 2019, a more normalized pre-pandemic baseline, Arhaus was a very different company, smaller in scale and earlier in our growth journey. Over…

Thanks, John, and good morning, everyone. 2025 was a year of strong execution and continued progress against our long-term strategic priorities. Let me begin with the full year. In 2025, we delivered record net revenue of $1.38 billion, up 8.5% year-over-year and at the high end of our guidance range. This record net revenue reflects the strength of our model and the continued effectiveness of our showroom growth strategy and differentiated product offerings. Gross profit was $536 million, up 7% versus last year, primarily driven by higher net revenue. Gross margin decreased 50 basis points to 38.9% of net revenue in 2025, primarily driven by higher showroom occupancy costs associated with our continued expansion. Selling, general, and administrative expenses increased 7.7% to $447 million. The increase was primarily driven by higher corporate expenses and strategic investments to support and drive the growth of the business, including supply chain, technology, and warehouse-related investments, as well as higher selling expenses related to new showrooms. SG&A load decreased 30 basis points to 32.4% of net revenue, reflecting a modest improvement in operating leverage. Net income was $67 million, a decrease of 1.9% versus last year. This decrease primarily reflects our showroom expansion and our continued investment in the business. Importantly, adjusted EBITDA was $145 million, an increase of 8.9% versus last year, and adjusted EBITDA margin was flat versus last year at 10.5%, demonstrating disciplined expense management and healthy operating performance as we invest for the long term. During the fourth quarter, we delivered net revenue of $365 million, up 5.1% year-over-year and at the high end of our guidance range. This performance reflects continued execution of our showroom growth strategy and the strength of our differentiated product offerings. Gross profit was $139 million, up 0.3% versus last year, and gross margin was…

[Operator Instructions] Our first question is from Simeon Gutman with Morgan Stanley.

This is Pedro Gil on for Simeon. Nice quarter. My first question is on guidance. You've guided for full year EBITDA margin leverage of about 20 basis points, which is remarkable given some of the still tariff headwinds and some of the strategic investments that you're undertaking. I'd be curious to know what are the key drivers of leverage going into next year? Is it coming more from gross margin? Is it ramping of the new showrooms? And also for the first quarter guidance is a bit weaker than the rest of the year, both in comps and margin. Is there anything specific in the first quarter, perhaps some noise from the storms that you're seeing? And then I have a follow-up.

All right. Great. Thanks, Pedro. Look, I would start with just a quick overview of our Q1 guide, just to give you some perspective, really three things that I would highlight. Number one, our Q1 guide is really anchored on how we finished the year. We came in very strong on deliveries in December. And that obviously has a spillover impact into January, February as it relates to deliveries. But additionally, and more importantly, January did affect us in terms of weather. We saw some softness that we believe was really driven by the weather. We had a number of store closures during that January, early February time period. And that really led to low traffic during these peak winter events. I would say that we also had some delays on the issuance of our spring catalog mailing. It was isolated and it only affected certain markets. but we did have some production delays that I think further exacerbated the softness. So in response to that, we did issue some incremental promotions in the month of February is somewhat of a remedy to get people back into stores and to reengage. But we see the softness is demand deferred. John says it all the time. Clients are still engaged. We're still confident in our full year guide. Our full year guide really is anchored on growing the business between 3.7% and 6.6% and that's with EBITDA growth of between 3.2% and 10.9%, and that's while supporting all of the strategic investments that we've highlighted previously. So Pedro, to get to the bottom of your question on the full year guide in terms of what the drags and drivers are generally, we are looking to expand margins, and we continue to push on delivery efficiencies and operating effectiveness, continuing to improve…

Okay. Fantastic. And then my second question is on tariffs and pricing. It's nice to see you're making further progress in mitigating some of the tariff headwinds. You mentioned last quarter, you're taking a bit of pricing targeted selectively in October. You mentioned again on the call earlier today. So I'd be curious to know a little bit how much pricing was in effect throughout the fourth quarter and how you are thinking about price inflation into 2022?

Yes, Pedro, thanks for the question. I know it's top of mind. I just want to start off by taking a moment just to recognize the tremendous support from the entire extended Arhaus team over the past year as we've navigated through the tariff policies. And this goes all the way back to the beginning of our supply chain with our vendors and sourcing agents overseas to our logistics and sales teams across the U.S. and to even our headquarter teams that have helped us to navigate through this very challenging year of continuous policy changes. But as it relates to tariffs itself, we've been clear on our objectives from day 1, which is really to protect our margins, to maintain deep relationships with our suppliers and to be nimble. And if you take a step back and think about that, like from a margin perspective, we're exiting this year with solid margin performance. Our largest headwind on gross margins for the year really was elevated occupancy costs related to our showroom expansion. And when you peel that away, I think we did a tremendous job of managing margins through this dynamic situation. So I would call that a win for our organization. And then looking at the suppliers, we continue to invest in these relationships either through speeding up new product development or figuring out how to streamline our ways of working. We're certainly collaborating with all of our suppliers, but particularly the top -- the top tier. And given some of our commercial highlights that John highlighted in his remarks, this wouldn't be possible without the vendor partners across the world continue to support us through this dynamic situation. So I'd say that's also a win. But -- in the end, one of the things I'm most proud…

Our next question is from Jonathan Matuszewski with Jefferies.

One question and one follow-up. The first question, Michael, can you just add some more color on the reference to obsolete inventory? Just any more context there, the rationale and how you would assess the health of the inventory based after those actions? That's my first question.

Yes, sure. Jonathan Look, as you guys know, I'm fairly new in this business and continuing to get up to speed every single day. We made a lot of investments in our warehouse management systems over the last couple of years, and that has provided us with increasingly beneficial insights into every SKU across our network. And we knew coming into Q4 that we had some areas in inventory that were really on the border of being sellable through our clearance centers versus really just being obsolete. And given our strategy with the clearance centers, we made the business decision to really take the loss and move on and focus our clearance centers on other items. So that's what drove the Q4 impairment, call it. And when you look at overall inventory, in businesses like this, you always have challenges, right? You never have enough of what you want. You always have a little bit too much of what you don't want. But when we look at the overall health of our inventory, we're in quite a good spot. When you look at it almost on every measure, whether it's inventory turnover or inventory as a percentage of sales, we continue to work on further improving the health of inventory. But overall, we're in pretty good shape. Ultimately, our job is to make sure that we're marking that inventory at its lower cost to market, that we're keeping our inventory valuation in line with net realizable value, making sure that we have a good handle on shrink. And I can tell you that as part of all our focus on SOX controls and operating controls across the company, we've never had a better handle on inventory than we do today. And it's really through the work of dozens and dozens…

That's really helpful. And then a quick follow-up just on trade. It seems like a major growth platform for '26. You're stepping on the gas here. So what's embedded in the total sales guide for your efforts there? And how will the new trade program incentivize external designers to devote more of their clients' budgets to Arhaus going forward? Thank you.

Sure. Yes, the trade business is one that we -- as you all know, we're focusing on to grow. It's a massive business. I don't know how many billions of dollars it is, $27 billion out there in the United States. And our customer is a luxury customer. When they are redoing a room or a home, are moving, they want help. And we have our own interior designers, which have done an incredible job and have been growing like crazy. But there's also the exterior trade folks who have their own businesses who need a place to shop for furniture. And what's so great about us is it's kind of a one-stop shop for them. Instead of them having to go somewhere to buy the lamps, somewhere else to buy the rug, somewhere else to buy the sofa, someone else to buy the coffee table, somewhere else to buy the prints. We can do it all for them, and we do all the service for them as well. So we know we're in the right area here. And as we're changing, adjusting how we're compensating them and so forth, we're really going after building a new team. We think this is a big growth area. We shall see how much it grows, but we know it's going to be -- it's going to grow, and we're going to be very successful at it. We've already proven that, and we have a lot of trade members who just love working with us and adding more literally every day.

Our next question is from Steve Forbes with Guggenheim.

John, I wanted to talk about the real estate strategy here. So sort of a 2-part, first question here. One, given the recent opening of the 40,000 square foot store in Pasadena, California, I'm curious if the development of that gallery has changed your perspective around the most ideal showroom size? And if you could sort of maybe talk through what, if any, learnings you sort of are looking to gather, right, from operating a bigger box like that?

Yes. Yes, Steve, that box was what it was. It was an old Saks Fifth Avenue, and it was that size. It wasn't our ideal size from a standard box location, but we were able to do some -- a lot of fun things in there that we've never been able to do before. So we're testing a heck out of it. It's rather new. Response has been phenomenal so far. But we've been able to put in more design centers, more -- little offices for our designers to work out of. We're able to display a lot of our decor and accessories in a much, much bigger way than we did. We were able to put in a lot more really edgy furniture, test sectionals with large patterns on them, things like that, that we had never done before. And then that same sectional, which certainly is the best seller for us, we'll duplicate in a more neutral fabric somewhere else on the floor. So we're learning a lot. No -- we have no strategy to go to only 40,000 square foot stores in the future, but more to come on that. It's been fun to learn. The whole team has been out there going through what's working, what isn't. And so yes, working well. And then we've opened up smaller stores as well that have been doing well. We did one -- a little store in Bozeman, Montana, which is 100,000 people, just killing it there. And that store, I think, is 14,000 square feet. So again, we're so flexible. And depending on the markets, we can go from 14,000 to 40,000 square feet, and they all work, and they're all profitable. So we love our model. It's not just here's your standard box. It has to be this big sort of thing. And so we're learning a lot from both ends, the smaller size and the large ones.

That's great to hear. And then just a quick follow-up for Mike. If we back out the inventory reserve, 160 basis points in the fourth quarter, fourth quarter gross margin, I think, exceeded expectations and improved pretty nicely sequentially -- you gave us a nice sort of building blocks for next year. It seems like you're expecting further gross margin expansion. But maybe we could just focus on the fourth quarter. Like what happened in the fourth quarter that allowed you to outperform on gross at the...

I think the -- no, that's clear. Look, I would come back to some of the fundamentals in the business. AOV continues to improve. When you break down AOP -- AOV, excuse me, both price mix improved as well as units per transaction. I see a lot of that ties into the trade channel focus and the interior designer focus and really partnering with clients that are doing home refreshes and remodels, and that continues to drive bigger and bigger transactions. When you look at Q4, we also saw strong contributions from upholstery and decor, which tend to be margin accretive to the P&L and SPO, special order, was also quite strong during the quarter. So just a lot of things firing on all cylinders in that regard. And I think it's really what's the underpinning behind our 2026 guide as well as the investments that we're making to really build out this trade channel because it's just a massive opportunity for us.

Our next question is from Seth Sigman with Barclays.

Nice progress. I wanted to ask about written sales, which were up over 1% over the last 12 months. I think December or November and December exited better than that. So the question is, do you think you're starting to see an inflection in the business? And how are you thinking about demand and written sales for '26 embedded in the outlook?

Yes, I can kind of start in big picture. As always, our clients buy from us because we have unique product, incredibly quality, incredible design at a very, very reasonable price for what it is. And we have innovated more in the last 6, 8 months than we've ever done. So I am just thrilled with the new product rolling out. It's such a fun time in the business right now because customers tastes are changing. It came out of COVID. Everything was kind of monotoned. First of all, everything was gray, kind of plain, simple and things have gotten much warmer, warmer woods, more character in the woods, prints, fringes, -- and it's just an amazing time right now. So the folks that are on top of the trends are going to win. And I know we are on top of the trends more than anybody. I haven't seen anybody roll out anything anywhere close to what we're doing. So we're going to win. So we're very bullish on business because our product is unbelievable, and it's going to be getting better and better as the year goes on. Mike, if you want to add anything to that question.

No, I think that was comprehensive. The only thing I would say is the softness in January clouds the picture a little bit just from some of that softness, but we are pretty confident in our full year guide. I completely echo John's remarks around the momentum that we're building in the business. Is this a hard reflection point or not? Hard to say, but it certainly feels like we're building momentum.

Right. Okay. That's very helpful. And then my follow-up is around the long-term outlook for low double-digit EBITDA growth. So 2025, EBITDA was up 9%. This year, you're guiding 3% to 11%. So the high end does capture that. But to get to that run rate consistently, is it really just a matter of sales growth accelerating? Or how are you thinking about those other margin levers that could kick in? How do we think about the timing of some of those unlocks?

Yes. It's good question. And the way we're thinking about it is over the next 5 years, we do see leverage coming from a couple of areas in the P&L, namely SG&A costs where we've struggled to get significant economies of scale as we've grown because of the digital platform that we're operating with today, and this is one of the biggest pillars in the digital transformation when we think about the ROI is we should be able to grow this company in mid-single-digit top line growth and get economies of scale and leverage out of our SG&A. And that's a big part of our business case is improving SG&A load over time. I think we said in our last quarter that in the wake of this digital transformation with the leverage that we put out there, that should be worth $10 million a year to the P&L. We also think there's tremendous opportunity in our distribution network over time as we continue to achieve economies of scale and really thinking about and even reinventing in some regards how we get to our customers that -- things that you can do at a larger scale that you can't do necessarily when you're still early growth company. So we've built in some expectations. We have a road map around these initiatives, but I think that some of it's the transportation management system and getting economies of scale there. It's continuing to evolve our footprint to get closer to the customer and further optimize transportation costs and it's continuing to improve inventory turns to make sure that we're operating with the right square footage across the system. But we see margins over time creeping into the mid-40s, but 42-43% range, coupled with some SG&A leverage this business should be operating at 16%, 17%, 18% EBITDA margin versus where we are today. So that's the thing that I'm on the hook to deliver is how do we get -- how do we deliver the growth we're talking about over the next 4 to 5 years, but also have flow-through to the point where we can deliver the -- what we would view to be competitive margins in this space from an EBITDA margin perspective. So that 16%, 17%, 18% target is really out there for us to go and get.

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

Thanks, everyone, for your participation on our call and interest in Arhaus. Have a great day.

Thanks, everybody. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.