Yahoo Finance Arhaus, Inc. (NASDAQ:ARHS) Q1 2024 Earnings Call Transcript
Arhaus, Inc. (NASDAQ:ARHS) Q1 2024 Earnings Call Transcript May 9, 2024
Arhaus, Inc. beats earnings expectations. Reported EPS is $0.1074, expectations were $0.02. Arhaus, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Arhaus First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to Wendy Watson. Wendy Watson, please go ahead.
Wendy Watson: Good morning and thank you for joining the Arhaus first quarter 2024 earnings call. And with me are John Reed, Co-Founder, Chairman and Chief Executive Officer; and Dawn Phillipson, Chief Financial Officer. After your prepared remarks, they will be joined by Jen Porter, our Chief Marketing and eCommerce Officer, for the Q&A session. During Q&A, please limit to one question and one follow-up. If you have additional questions, please return to the queue. We issued our earnings press release for the quarter ended March 31, 2024 before market opened today. As a reminder, 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. Forward-looking statements are made as of today's date and except as may be required by law, the company undertakes no obligation to revise or update these statements. We will also refer to certain non-GAAP financial measures in this morning's press release includes the relevant non-GAAP reconciliations. A replay of this call will be available on our website within 24 hours. Now I will turn the call over to John.
John Reed: Good morning, everyone, and welcome to the Arhaus first quarter conference call. I wanted to begin the call today by congratulating our team on a solid start to 2024 and for staying focused on executing our key priorities, both large and small, that are driving and supporting our four-pronged strategic growth strategy. The market opportunities we have is substantial, and we have a proven strategy with established initiatives to capitalize on it. We are highly motivated to execute on these initiatives, increasing brand awareness, expanding our showroom base, enhancing our omnichannel capabilities and technology, and investing to upgrade our infrastructure, improve our business tools and support our growth. Our ongoing commitment to build on our progress across these initiatives is paying clear dividends through sustained results quarter after quarter.
At the same time, our debt-free balance sheet and the flexibility it affords us remains a competitive advantage as we maintain our focus on expense control and prudent capital deployment. In the current environment, I get a lot of questions about how we are continuing to do so well with luxury home sales well below pre-pandemic levels, and mortgage interest rates expected to stay higher for longer. The answer, as we see it, is many of our clients are staying in their home and they want to enjoy them. So they're remodeling, refreshing or simply replacing their furniture. Our in-home and trade designers have never been busier with projects ranging from small to large. Our clients' appetite to make their home a better place to live continues to be strong.
And given our clients' demographics, our clients are going on their European holidays or summer or enjoying a cruise, but they are also improving their homes at the same time. Many of our design projects include assisting our clients with their second and third homes as well. So we are very pleased with the state of our consumer and with the latest data showing both luxury home sales and listings increasing in this quarter. We are optimistic for the balance of this year and into 2025. As you know, I'm very enthusiastic about expanding our showroom footprint and how that continues to drive brand awareness and our long-term growth. Since our last call, we opened a new design studio in a wonderful location in Greenwich, Connecticut. It's already performing exceptionally well.
Later this year, we are adding design studios in Peach Tree, Georgia and Huntersville, North Carolina near Lake Norman. We are proving out our design studio concept and it's working very well. We develop the concept before the pandemic, a smaller footprint showroom, perfect for second home markets in affluent pockets such as Princeton, New Jersey within or outside large markets, locations where a lower square footage is preferred, staffed with in-home designers, and the latest high-tech design tools to assist clients in managing their home. In October of 2020, we opened our first design studio in Carmel, California. We expect to have 11 by the end of this year with a long runway ahead of us. We also recently opened Arhaus The Loft outlet in Pittsburgh.
We are adding two more of Loft locations this quarter, one in Denver and one in Florence, Kentucky, just outside of Cincinnati. And in just a few weeks, we'll be opening an amazing new showroom at The Grove and Los Angeles. We expect it to be one of our flagship locations and cannot wait for clients to see it and experience it. As we have discussed, we have significant growth opportunities on the West Coast. In addition to the growth, we are opening three more showrooms in California this year, Carlsbad, Palo Alto and Corte Madera. We are also opening our first Oklahoma showroom this year. What is so gratifying and exciting for me and the Arhaus team is how well our showrooms perform in such a varied locations across United States, and we are not quite halfway through our goal of 165-plus traditional showroom locations.
Turning to products. Product is one of our key competitive advantage and a big differentiator. Our design, merchandising, and sourcing teams continues to delight our clients with incredible new products. Our product reflects our livable luxury aesthetics and then simultaneously eclectic family friendly and full of warmth and comfort. Our pieces have a unique handcrafted steel and are designed using the best materials and an unparalleled focus on quality. This confidence in our product comes from both client reaction and consistent performance. Clients are loving our spring new product introductions, with newness this year outperforming the incredible reception we had last year's new spring product. We are also very proud of the depth of our styles and selections.
I mentioned that our showrooms perform well across regions, but one of the keys to this is the breadth of our product across traditional, transitional, and modern aesthetics. Alongside our new products, our iconic bestsellers continues to be well bestsellers. We are able to consistently improve refresh these designs with beautiful new fabrics, shapes, finishes and sizes and present them in new inspiring ways across all channels. We believe our product is an incredible value. And based on our demand trends, our clients seem to agree, and we cannot wait for you to see and experience the new product we are coming up with this fall in our showrooms catalog in arhaus.com. On our strategic growth initiative fronts, there are two areas I want to call out.
One, we just launched the new warehouse management system in our Ohio DC, representing a tremendous amount of work across several of our functional areas. This is a key piece of the system upgrades that will enable us to improve our operational efficiencies and mostly set the foundation for long-term growth. Congratulations to our team. Second, I also want to call out our Final Mile team. Over the past year, we have made several improvements to our Final Mile and in-home delivery processes that are evident in better execution and delivery performance with some of the highest client survey scores we have ever received. We are extremely busy delivering our consistent results and client first service while growing and investing in the business requires unrelenting commitment, and I am extremely grateful for the hard work our team put in each day and every day.
In the first quarter, we delivered net revenue of $295 million, net income of $15 million, and adjusted EBITDA of $29 million. As we reported this morning, we are pleased to have exceeded our top and bottom-line outlook for the quarter as teams executed well and first quarter benefited from the shift in our new warehouse management system implementation to April from March. We are on track to deliver on our first half and full year outlook. Moving to demand. It's truly remarkable what our teams are achieving in the current macro environment. As we continue to meaningfully outpace the industry, our first quarter results are highlighted by February's mid-single digit and March's high single digit demand comp growth, more than offsetting January's weather related high single digit demand comp decline.
Our demand comp in April was up mid-single digits. Before I turn the call over to Dawn to discuss these results and our full year outlook in more detail, I wanted to reiterate our confidence in the outlook for our company for the balance of 2024, which we reaffirm this morning. Our future is bright. We believe our strategic competitive advantage positions us to continue to capitalize on the aspiration of our clients to live in beautiful and curated spaces with our unique artisans crafted furniture, I'd like to extend a warm welcome to John Moran, who joined us as Chief Operating Officer on Monday. Prior to joining us, John was Chief Operating Officer of Canada Goose and brings a wealth of experience in operational execution and supporting transformation growth across the functions.
He is an important addition to our leadership team as we scale the business and realize the significant potential for growth. As I said last quarter, I generally feel there are no collections like our collections. There are no people like our people. There's no potential like our potential. Arhaus stands out. Arhaus stands alone. When I founded Arhaus almost 40 years ago, I could not imagine the Arhaus we have today with the incredible potential we still have. Now I'll turn it over to Dawn.
Dawn Sparks: Thank you, John, and good morning, everyone. Net revenue in the first quarter was $295 million with a 9.5% comp decline against the comp growth comparison of 21% in the first quarter last year. Our prior year included significant abnormal backlog deliveries that did not repeat this year as we caught up on deliveries in 2023 and have returned to a normal backlog. We were pleased with our demand comp growth of 1.3% in the quarter as we continued to see strength in average order value and in orders over $5,000 and $10,000. We're also pleased the demand penetration of our in-home designer program continues to increase. Our first quarter gross margin decreased to $115 million, driven primarily by lower net revenue and higher showroom costs as we continue to expand our footprint.
Gross margin as a percent of net revenue decreased to 39%, driven primarily by the higher showroom cost, deleverage related to lower revenue, and increased transportation costs. First quarter SG&A expense increased $14 million to $97 million, primarily driven by increased selling expenses related to new showrooms and demand strength, increased corporate expenses as we invest in our strategic initiatives to support and drive the growth of the business, and increased warehouse expense as our Dallas location continues to increase productivity. First quarter 2024 net income was $15 million. Adjusted EBITDA in the quarter was $29 million versus $55 million in the first quarter of 2023. First quarter net revenue of $295 million and adjusted EBITDA of $29 million resulted in a 9.9% adjusted EBITDA margin in the quarter.
Next, as we reported this morning, we are pleased to reaffirm our outlook for full year 2024. Our expectations for how the year will progress have not changed since we initially provided our outlook in March apart from the warehouse management system going live in April rather than in March. As a reminder, we expect full year adjusted EBITDA margins to be lower than 2023. We expect about 85% of the deleverage to come from SG&A with a lesser amount of deleverage in gross margin. Deleverage is driven by comping prior year backlog delivery and strategic investments we are making this year. Strategic investments include corporate strategic investments of $10 million to $15 million to enhance our operational capabilities and drive our success long term, as well as investments in other growth initiatives such as e-commerce and our in-home designer and trade program.
The $10 million to $15 million in corporate strategic investments includes our new warehouse management system, planning and allocation software, and new manufacturing ERP at our upholstery facility, and our in-home delivery experience. To add further color, we also wanted to note that we expect to have higher expense at our distribution centers this year as productivity improves in Dallas. In the second quarter of 2024, we anticipate net revenue in the range of $310 million to $320 million. We expect approximately 900 basis points of adjusted EBITDA deleverage in the second quarter. Approximately one-third is from a gross margin pressure, primarily due to higher short-term costs related to growing our showroom footprint, investments in in-home delivery program, and to a lesser extent, the impact of price action product in our P&L.
The balance of the deleverage in SG&A primarily due to new showrooms, strategic growth investments, and supply chain costs from the continued ramp of our Dallas distribution center. Given the new warehouse management system implementation shift from March to April, we expect the earnings upside relative to original expectations in Q1 to be offset in Q2, with our anticipated first half financial performance in line with full-year expectations we shared in March. As I noted last quarter, we continue to expect the net revenue growth in the balance of this year. We expect the deleverage in both gross margin and SG&A in the first half of the year to inflect in the second half. As the P&L impact from the June 2023 price action product is complete, revenue and earnings from new showrooms positively impact our P&L, and we continue to expand our brand awareness and drive market share expansion.
We will update you on our third quarter expectations when we report second quarter financial performance in August. For all other details related to our 2024 outlook, please refer to our press release. In closing, I want to thank our team for their focus and execution of our strategic growth priorities and investments. I'm so proud of what we are accomplishing while delivering solid financial performance and retaining our balance sheet strength. We believe our four-part strategic growth strategy and our strong debt-free balance sheet are compelling competitive advantages, enabling us to make the necessary investments to build on our share gains in the highly fragmented $100 billion premium home furniture market. We are navigating the current environment from a position of strength, and we believe we are well positioned to delight our clients while maintaining our unwavering commitment to driving value for all stakeholders.
This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning and we are happy to take your questions.
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