Company Overview

Arhaus Inc, the premium home furnishings retailer, has carved out a distinctive niche in the highly competitive furniture market. With a focus on artisan-crafted products and an immersive showroom experience, the company has steadily built a loyal customer base and carved out a significant presence across the United States.

Founded in 1986 by John Reed, Arhaus started as a small furniture store in Ohio, with a vision to bring high-quality, globally-sourced home decor to discerning customers. Over the past three decades, the company has evolved into a multi-channel retail powerhouse, seamlessly blending its physical showrooms with a robust e-commerce platform to deliver a seamless shopping experience.

Product Strategy

Arhaus' success is underpinned by its focus on curation and craftsmanship. The company's design team scours the globe to source unique, handcrafted pieces that showcase the skills of artisans from around the world. From solid oak furnishings with natural stone tops to elegant curved upholstery and one-of-a-kind collectibles, Arhaus' product assortment is a testament to its commitment to quality and innovation.

Since its inception, Arhaus has positioned itself as a premium lifestyle brand in the U.S. home furnishings market, specializing in artisan-crafted furniture and decor with an emphasis on livable luxury. The company's direct-to-consumer approach allowed it to offer exclusive products at attractive values by bypassing wholesale and dealer markups. Over time, Arhaus expanded its merchandise categories beyond furniture to include outdoor, lighting, textiles, and other home decor items.

A key factor in Arhaus' growth has been its investment in building strong design capabilities and establishing direct relationships with global manufacturers and vendors. This strategy has enabled the company to maintain control over its product offerings and ensure consistent quality across its entire range.

Brand Experience and Omnichannel Strategy

Arhaus' commitment to creating immersive brand experiences extends beyond its physical showrooms. The company has invested heavily in its omni-channel strategy, developing its e-commerce platform as a virtual extension of its signature theater-like showroom environment. This approach, combined with personalized client service, has been instrumental in driving strong brand loyalty and customer engagement.

Despite experiencing a temporary slowdown in sales and profitability in 2016, Arhaus demonstrated resilience by focusing on product innovation, marketing, and operational improvements. This strategic response proved successful, leading to impressive comparable sales growth in subsequent years and allowing Arhaus to outpace many of its competitors in the home furnishings industry.

Financials

The company's financial performance has been impressive, although recent macroeconomic challenges have impacted results. In the fiscal year 2023, Arhaus generated $1.29 billion in total revenue, a 4.9% increase compared to the prior year. Net income for the period stood at $125.24 million, reflecting the company's ability to maintain profitability amidst ongoing challenges. Operating cash flow (OCF) was $172.30 million, while free cash flow (FCF) reached $75.24 million.

For the nine months ended September 30, 2024, Arhaus reported net revenue of $924.10 million, a decrease of 2.1% compared to $943.70 million in the prior year period. Gross margin for this period was $362.50 million (39.2% of net revenue), down from $399.21 million (42.3% of net revenue) in the prior year period. Selling, General & Administrative (SG&A) expenses increased to $304.08 million (32.9% of net revenue) from $275.89 million (29.2% of net revenue) in the prior year period. Net and comprehensive income for the nine-month period was $47.26 million, compared to $94.02 million in the prior year period.

In the third quarter of 2024, Arhaus reported net revenue of $319.13 million, a decrease of 2.2% compared to $326.23 million in the prior year period. Net income for the quarter stood at $9.92 million, down from $19.74 million in the same quarter of 2023. The decline in revenue was attributed to the non-recurrence of prior year abnormal backlog deliveries and lower total demand. The 49.8% decrease in net income was due to lower gross margin and higher SG&A expenses. Operating cash flow for the quarter was $31.12 million, with free cash flow of $4.59 million.

Liquidity

As of September 30, 2024, Arhaus maintained a strong liquidity position. The company reported cash and cash equivalents of $177.72 million. Its debt-to-equity ratio stood at 1.63, while the current ratio was 1.23 and the quick ratio was 0.52. Arhaus also has access to a $75 million revolving credit facility, which remained undrawn as of the end of the third quarter.

Expansion Strategy

Arhaus' success can also be attributed to its strategic approach to expansion. The company has steadily grown its physical footprint, with 101 showrooms across the United States as of the end of the third quarter of 2024. These showrooms serve as immersive brand experiences, allowing customers to engage with the products in a visually stunning environment.

In addition to its brick-and-mortar presence, Arhaus has also invested heavily in its e-commerce platform, which accounted for approximately 17% of its total revenue in the latest quarter. The company's omnichannel strategy has allowed it to reach a wider customer base and provide a seamless shopping experience, regardless of the chosen sales channel.

Future Outlook

Despite the challenging macroeconomic environment, Arhaus remains committed to its long-term growth strategy. The company has outlined plans to expand its showroom footprint to 165 traditional locations, while also investing in strategic initiatives to enhance its operational efficiency and customer experience.

Recent Performance

In the third quarter of 2024, Arhaus reported a net revenue of $319 million, with a 9.2% decline in comparable growth. The company's net income for the quarter stood at $10 million, while adjusted EBITDA reached $23 million. While the quarter's results were impacted by softening demand, the company's long-term growth prospects remain intact.

Guidance

Looking ahead, Arhaus has provided updated guidance for the full fiscal year 2024, lowering its outlook to reflect the continued tempered consumer environment. The company now expects net revenue in the range of $1.23 billion to $1.25 billion and adjusted EBITDA between $115 million and $125 million. For the fourth quarter of 2024, Arhaus anticipates net revenue in the range of $306 million to $326 million and adjusted EBITDA between $23 million and $33 million. The company also expects a low double-digit demand comp decline for the fourth quarter of 2024.

Arhaus plans to invest approximately $10 million in strategic initiatives in 2024, with about 80% allocated to SG&A and 20% to gross margin. In 2025, the company expects to increase these strategic investments to approximately $15 million to $20 million, including subscription fees for system enhancements deployed in 2024.

Industry Trends

The home furnishings industry has experienced softening demand in 2023 and 2024 as consumers pull back spending amid macroeconomic pressures. However, the premium home furnishings segment that Arhaus operates in has shown more resilience. Despite the overall industry slowdown, Arhaus achieved 4.8% and 9.2% comparable growth in 2023 and the first nine months of 2024, respectively, demonstrating its ability to outperform the broader market.

Conclusion

Arhaus' unique value proposition, strong brand loyalty, and prudent financial management have made it a standout player in the highly competitive home furnishings industry. Despite facing challenges in the current macroeconomic environment, the company's strategic investments in product development, showroom expansion, and operational enhancements position it well for long-term success. As Arhaus continues to innovate and expand its reach, it remains well-positioned to capitalize on the growing consumer demand for high-quality, artisanal home furnishings once market conditions improve.