Executive Summary / Key Takeaways

• Arhaus (NASDAQ:ARHS) demonstrates resilience and strategic growth in the premium home furnishings market, leveraging its artisan-crafted products, expansive showroom footprint, and evolving omnichannel capabilities.
• The company achieved record Q2 2025 net revenue of $358.4 million, up 15.7% year-over-year, driven by efficient demand conversion from the successful in-sourcing of its Dallas Distribution Center and new showroom contributions.
• Strategic investments in operational technology, including new Warehouse Management Systems, a payment platform, and a foundational ERP, are enhancing efficiency, improving financial reporting, and positioning Arhaus for long-term P&L leverage.
• Despite macroeconomic choppiness and tariff headwinds, Arhaus maintains a debt-free balance sheet with $234.8 million in cash, providing flexibility for continued disciplined showroom expansion and technology investments.
• The reaffirmed full-year 2025 outlook, with net revenue between $1.29 billion and $1.38 billion and adjusted EBITDA of $123 million to $145 million, reflects a cautious yet confident approach to sustained profitable growth.

The Artisan's Edge: Arhaus's Enduring Business Model and Market Position

Arhaus, founded in 1986 in Boston Heights, Ohio, has cultivated a distinctive niche in the premium home furnishings market. The company specializes in "livable luxury" merchandise, distinguished by its artisan-crafted, heirloom-quality design and a direct-to-consumer model that bypasses wholesale markups. This approach allows Arhaus to offer exclusive assortments at attractive values, fostering deep, long-standing relationships with global artisans, some spanning over three decades. The home furnishings industry is highly fragmented, with an estimated total addressable market of approximately $100 billion. Arhaus currently holds less than a 2% share, indicating substantial white space for continued expansion.

Arhaus's overarching strategy centers on increasing brand awareness, disciplined showroom expansion, enhancing its omnichannel client experience, and investing in scalable infrastructure. The company's foundational strengths lie in its unique product curation, a diversified sourcing strategy, and a resilient, affluent client base. This demographic has historically shown less reactivity to macro volatility, often being the last to pull back and the first to return when economic conditions stabilize.

The competitive landscape for Arhaus includes direct rivals such as RH (Restoration Hardware) (RH), Williams-Sonoma, Inc. (WSM), Wayfair, Inc. (W), and Ethan Allen Interiors, Inc. (ETD). Arhaus differentiates itself through its emphasis on approachable luxury and an extensive showroom network, which positions it as a versatile player. While RH is known for ultra-luxury aesthetics and exclusivity, Arhaus offers broader accessibility and a personalized touch through its in-home designer services. Compared to Williams-Sonoma's diversified brand portfolio, Arhaus's focus on artisanal and customizable elements caters to clients seeking personalized projects. Against online-focused Wayfair, Arhaus provides a hands-on value proposition, though it may lag in digital innovation speed. Ethan Allen shares a focus on custom furnishings, but Arhaus's wider distribution and omnichannel model offer greater market accessibility.

Arhaus's competitive advantages, or moats, include its strong brand identity, unique distribution channels, and an omnichannel model. The company believes its proprietary products, many of which are handmade and cannot be easily copied, set it apart. Over 70% of its upholstery business is sourced from the United States, including its own North Carolina manufacturing facility, providing a significant competitive edge in cost control and quality. This domestic production also mitigates some geopolitical and tariff risks. Arhaus's showroom team is considered its "secret sauce," providing best-in-class service that elevates the client experience and drives engagement.

Technological Foundation: Powering Efficiency and Client Experience

Arhaus's "technology" is not defined by a single, groundbreaking scientific invention, but rather by a strategic suite of operational systems and digital platforms designed to enhance efficiency, improve the client experience, and support scalable growth. These technological differentiators are foundational to its omnichannel strategy and competitive positioning.

Key technological advancements and their benefits include:

• Warehouse Management Systems (WMS): Arhaus has implemented new WMS across its three distribution centers, including Ohio and Dallas. The successful in-sourcing and early ramping of the Dallas Distribution Center in Q2 2025, supported by its WMS, "enabled us to convert strong first quarter demand into net revenue more efficiently and at a higher volume than expected." This operational achievement directly contributed to Arhaus achieving its highest quarterly net revenue in history.
• New Payment Platform: Rolled out across showrooms and e-commerce, this system supports mobile options like Tap2Pay, Apple Pay, and Google Pay. It has "enhanced both our client experience and internal controls," while also driving "operational and expense efficiencies."
• Inventory Forecasting System: This new system aims to "improve forecast accuracy and improve inventory turnover," optimizing inventory management and reducing carrying costs.
• New Manufacturing System: Planned for the North Carolina upholstery manufacturing team, this system will "unlock new production and cost accounting capabilities while supporting continued growth." This directly enhances the efficiency and profitability of Arhaus's significant domestic upholstery production.
• Foundational ERP System: This critical future investment is designed to "streamline many of our workflows, allowing us to scale more efficiently while improving the quality of our financial reporting." Management anticipates this ERP will drive "P&L leverage," with "SG&A load improving" by not requiring headcount to grow at the same rate as revenue. It will also provide "cleaner data to make better decisions" and make the supply chain "much more nimble" to minimize out-of-stocks and maximize inventory turnover.

For investors, these technological investments are crucial. They are "foundational to expanding long-term margin potential and enhancing client experience," positioning Arhaus to "amplify the EBITDA margins" as the business grows by 30-40% over the medium to long term. Furthermore, these systems are critical for remediating the material weaknesses identified in the company's internal control over financial reporting (ICFR), a key focus for management and the Audit Committee. The strategic intent is to build economies of scale, allowing Arhaus to maintain its competitive edge in product delivery and customer service while driving operational leverage.

Strategic Expansion: Showrooms, Product, and Client Engagement

Arhaus's growth strategy is multifaceted, focusing on expanding its physical footprint, innovating its product offerings, and deepening client relationships through its omnichannel model. The company operated 103 showrooms as of June 30, 2025, with 93 offering in-home interior designers. Since 2020, Arhaus has grown its showroom footprint by nearly 50%, with approximately 90% of its clients living within 50 miles of a showroom. This proximity is key to delivering a high-touch, service-led experience.

In 2024, Arhaus achieved a record 11 new showroom openings and 5 strategic relocations. Year-to-date through Q2 2025, the company completed 8 showroom projects (1 new, 6 relocations, 1 renovation). The long-term strategy targets opening 5 to 7 new traditional showrooms annually, aiming for a total of approximately 165 traditional showrooms and 50 Design Studios across the U.S. These new showrooms are expected to generate at least $10 million in net revenue with a 32% contribution margin and a payback period of under two years. Relocations and renovations are also strategic, enhancing brand visibility and elevating the client experience, as evidenced by the "phenomenal" sales growth post-remodel in Naples, Florida.

Product strategy is central to Arhaus's appeal. The Fall 2025 assortment is "globally inspired, material-rich and distinctly Arhaus," featuring warm wood tones, mixed materials, and architectural forms. Upholstery remains a core driver, with extensive customization options (over 600 fabrics, 90 leathers). A significant product innovation is the launch of the Arhaus Bath Collection in Fall 2025, a "multi-year effort" to expand into a deeply personal space within the home, offering vanities, storage, faucets, and towels. This thoughtful expansion into new categories, akin to the successful Outdoor Collection launched five years prior, represents a meaningful growth avenue.

Sourcing and supply chain agility are critical. Arhaus maintains a diversified sourcing footprint across North America, Europe, and South Asia. Its China sourcing exposure is projected to be closer to 5% by year-end 2025, a testament to proactive planning and vendor collaborations to mitigate tariff impacts. The successful in-sourcing of the Dallas Distribution Center in Q2 2025 further exemplifies operational effectiveness.

Client engagement is amplified by the in-home design program, where designer-led orders boast an Average Order Value (AOV) nearly 4x higher than average. This program, coupled with the "Buy More Save More" promotional strategy, encourages larger purchases, contributing to meaningful growth in orders above $5,000 and $10,000. Lifestyle-driven collaborations, such as the Arhaus Terrace at L'Ermitage Beverly Hills and partnerships with White Elephant Nantucket/Aspen, reinforce the brand's aspirational lifestyle positioning and generate rich digital storytelling.

Financial Performance: Resilience in a Dynamic Environment

Arhaus's recent financial performance reflects both its strategic execution and the challenging macroeconomic backdrop. In the second quarter of 2025, the company achieved record net revenue of $358.4 million, a 15.7% increase year-over-year. This growth was primarily driven by increased demand and $19.8 million in revenue from new showrooms opened in 2024 and 2025. A key operational win was the successful in-sourcing and early ramping of the Dallas Distribution Center, which efficiently converted strong first-quarter demand into revenue.

Gross margin for Q2 2025 increased 19.1% to $148.2 million, with gross profit expanding 130 basis points to 41.4%. This improvement was attributed to a 50 basis point decrease in showroom occupancy costs, a 30 basis point increase in product margin (benefiting from proactive price adjustments and warehousing efficiencies), and a 30 basis point decrease in transportation costs. Selling, general and administrative (SG&A) expenses grew 6.8% to $101.5 million, primarily due to corporate and warehouse expenses and strategic growth investments. However, SG&A load decreased 240 basis points to 28.3% of net revenue, demonstrating operational leverage. Net income surged 57.7% to $35.1 million, reflecting over 3x earnings leverage on net revenue growth. Adjusted EBITDA increased 51.2% to $60.3 million, representing 3.1x adjusted EBITDA leverage and an adjusted EBITDA margin of 16.8%, up 390 basis points.

This strong Q2 performance contrasts with Q1 2025, where net revenue grew 5.5% to $311 million, but gross margin decreased 190 basis points to 37.1% due to higher showroom occupancy costs (120 basis points) and a 40 basis point product margin decrease. SG&A expenses in Q1 rose 13.9%, leading to a 36.2% decrease in adjusted EBITDA to $19 million. For the full year 2024, net revenue declined 1.3% to $1.27 billion, with comparable growth down 8% due to lapping abnormal backlog fulfillment. Gross margin for FY24 declined 260 basis points to 39.4%, and adjusted EBITDA fell 34.5% to $133 million, resulting in a 10.5% adjusted EBITDA margin. These trends highlight the impact of macro pressures and the company's strategic investments on profitability in earlier periods.

Arhaus maintains a robust liquidity position, ending Q2 2025 with $234.8 million in cash and cash equivalents and remaining debt-free. Operating cash flow for the six months ended June 30, 2025, was $81.4 million. Net merchandising inventory increased 4.7% from December 31, 2024, to June 30, 2025, reflecting investments in best sellers, new product introductions, and preparations for the outdoor season. The company's debt-free balance sheet provides significant financial flexibility, a competitive advantage in a capital-intensive industry.

Comparing Arhaus's TTM financial ratios to its competitors reveals its positioning. Arhaus's Gross Profit Margin (39.30%) is lower than RH (44%) and WSM (46%) but higher than Wayfair (30%). Its Operating Profit Margin (6.85%) and EBITDA Margin (11.97%) also trail RH (10% Operating, 10% EBITDA) and WSM (19% Operating, 19% EBITDA), suggesting room for operational leverage as its technology investments mature. Arhaus's P/E ratio of 23.18 is higher than Ethan Allen (13.84) but lower than WSM (22.94) and RH (107.00), reflecting market expectations for its growth trajectory. The debt-free status and strong cash position are notable advantages compared to competitors with higher debt loads.

Outlook and Risks: Charting the Path Forward

Arhaus has reaffirmed its full-year 2025 outlook, reflecting a cautious yet confident stance amidst ongoing market dynamics. The company expects net revenue between $1.29 billion and $1.38 billion, representing a year-over-year growth rate of 1.5% to 8.6%. Comparable growth is projected to range from negative 5% to positive 1.5%. Net income is guided between $48 million and $68 million, with adjusted EBITDA anticipated to be $123 million to $145 million. Capital expenditures, net of landlord contributions, are expected to be $80 million to $100 million, a modest reduction from prior outlooks due to updated timing on certain investments.

For the third quarter of 2025, Arhaus anticipates net revenue between $320 million and $350 million, with comparable growth ranging from down 4% to up 5%. Net income is projected at $7 million to $17 million, and adjusted EBITDA at $23 million to $33 million. This outlook assumes normalized delivery timing supported by seasonal drivers, but critically, it accounts for continued macro uncertainty and an estimated $12 million impact from incremental 2025 tariffs, net of mitigation efforts. No targeted pricing increases are currently embedded in this guidance, indicating a focus on volume and operational efficiency to offset cost pressures.

Key risks to this outlook include persistent market volatility and demand choppiness. Management noted that April 2025 demand comparable growth was down 10% due to "the shock of the tariff news and the stock market," while July rebounded with a 15.7% increase. This "month-to-month demand trends to remain choppy in the short term due to external volatility" is a significant factor. The implementation of a new foundational ERP system, while strategically vital, carries inherent risks of business disruption and budget overages, which management is actively working to mitigate through disciplined planning and a new CIO. Furthermore, the identified material weaknesses in internal control over financial reporting (ICFR) pose a risk until fully remediated, potentially affecting the accuracy and timeliness of financial reporting.

Arhaus is actively addressing these challenges. Tariff impacts are being mitigated through a diversified sourcing model, strategic shifts to other countries, and vendor cost concessions. The ICFR remediation plan includes hiring additional accounting personnel, enhancing segregation of duties, formalizing financial close processes, and modernizing IT infrastructure. These efforts, alongside the strategic investments in technology and showroom expansion, are designed to strengthen the company's competitive position and drive long-term value creation.

Conclusion

Arhaus stands as a compelling investment narrative, rooted in its unique position within the premium home furnishings market. The company's unwavering commitment to artisan-crafted, heirloom-quality products, coupled with a sophisticated omnichannel strategy, forms the bedrock of its enduring appeal to an affluent and resilient client base. Recent financial results, particularly the record Q2 2025 net revenue and significant earnings leverage, underscore the operational effectiveness of strategic initiatives like the Dallas Distribution Center in-sourcing.

Looking ahead, Arhaus's strategic roadmap, including disciplined showroom expansion towards 165 traditional locations, continuous product innovation like the new Bath Collection, and foundational technology investments, positions it for sustained profitable growth. These technological enhancements are not merely upgrades; they are critical enablers for operational efficiency, improved financial reporting, and long-term margin expansion, directly contributing to a stronger competitive moat. While macroeconomic uncertainty and demand choppiness remain pertinent risks, Arhaus's debt-free balance sheet and proactive mitigation strategies for tariffs and internal control weaknesses provide a robust foundation. The company's ability to consistently deliver a differentiated product and elevated client experience, supported by its evolving digital and operational capabilities, suggests a continued trajectory of market share capture and value creation for shareholders.