Arhaus, Inc. (NASDAQ:ARHS), the premium home furnishings retailer, has reported its first quarter 2024 results, showcasing resilience in the face of broader macroeconomic challenges. The company delivered impressive financial performance, exceeding analyst expectations on both the top and bottom lines.

Financials

For the full year 2023, Arhaus reported annual net income of $125,239,000 and annual revenue of $1,287,704,000. The company's annual operating cash flow was $172,299,000, while its annual free cash flow reached $75,244,000. These strong financial metrics demonstrate Arhaus' ability to navigate the current environment and continue delivering value to its shareholders.

In the first quarter of 2024, Arhaus reported net revenue of $295.2 million, down 3.1% year-over-year. This decline was primarily driven by the non-recurrence of prior year abnormal backlog deliveries and a weather-related impact on deliveries in January, partially offset by favorable demand versus the prior year. Gross margin decreased to $115.1 million, or 39.0% of net revenue, compared to 42.1% in the prior year quarter. The decrease in gross margin was primarily due to higher Showroom costs, deleverage on fixed expenses, and increased transportation costs.

Selling, general, and administrative (SG&A) expenses increased $13.9 million, or 16.8%, to $96.7 million, driven by a $6.6 million increase in selling expenses related to new Showrooms and demand strength, a $5.6 million increase in corporate expenses due to strategic investments, and a $1.4 million increase in warehouse expense as the company's Dallas location continues to increase productivity. As a percentage of net revenue, SG&A expenses increased 560 basis points to 32.8%.

Net and comprehensive income for the first quarter of 2024 was $15.1 million, compared to $34.1 million in the prior year quarter. The decrease was primarily due to the factors mentioned above. Adjusted EBITDA for the quarter was $29.1 million, or 9.9% of net revenue, compared to $54.8 million, or 18.0% of net revenue, in the prior year quarter.

Recent Developments

Despite the macroeconomic headwinds, Arhaus remains focused on executing its strategic growth initiatives. The company opened two new Showrooms during the quarter, bringing its total Showroom count to 92 as of March 31, 2024. Arhaus is also making progress on key internal system investments, including the implementation of a new warehouse management system and enhancements to its e-commerce capabilities and in-home designer program.

Outlook

Looking ahead, Arhaus has reaffirmed its full-year 2024 outlook. The company expects full-year adjusted EBITDA margins to be lower than 2023, with approximately 85% of the deleverage coming from SG&A and a lesser amount from gross margin. This deleverage is driven by lapping prior year backlog delivery and strategic investments in areas such as corporate initiatives, e-commerce, and the in-home designer and trade programs.

For the second quarter of 2024, Arhaus expects net revenue in the range of $310 million to $320 million. The company anticipates approximately 900 basis points of adjusted EBITDA deleverage in the second quarter, with one-third coming from gross margin pressure and the balance from SG&A, primarily due to new Showrooms, strategic growth investments, and supply chain costs from the continued ramp-up of the Dallas distribution center.

Conclusion

Arhaus' strong brand positioning, diverse product assortment, and focus on strategic initiatives position the company well to navigate the current macroeconomic environment. The company's debt-free balance sheet and flexible capital deployment strategy provide a competitive advantage as it continues to invest in growth and enhance its operational capabilities.

Overall, Arhaus' first quarter 2024 results demonstrate the resilience of its business model and the company's ability to execute on its strategic priorities. As the company continues to expand its Showroom footprint, enhance its omnichannel capabilities, and invest in its infrastructure, Arhaus remains well-positioned to capitalize on the growing demand for premium home furnishings and deliver long-term value for its shareholders.