Executive Summary / Key Takeaways

• Vertical Integration as a Defensive Moat: Arhaus's 70%+ domestically sourced upholstery provides a structural cost advantage and tariff shield that competitors cannot easily replicate, translating to more stable margins and faster lead times in an industry plagued by supply chain volatility.

• Omnichannel Execution Driving Market Share Gains: The company's showroom-centric model (103 locations with a path to 165 traditional showrooms) combined with accelerating e-commerce growth is capturing share in a fragmented $100 billion market where Arhaus holds less than 2% penetration.

• Margin Expansion Through Operational Leverage: Despite macro headwinds, Q3 2025 adjusted EBITDA margin expanded 180 basis points to 9.1% while SG&A as a percentage of revenue declined 120 basis points, demonstrating that fixed cost absorption from new showrooms and digital investments is beginning to flow through.

• Material Weaknesses Represent a Binary Risk: Four identified material weaknesses in internal controls over financial reporting remain unremediated, creating potential for future restatements and undermining management credibility—a risk that could overshadow operational progress if not resolved by 2026.

• Valuation Reflects Measured Optimism: At $10.54 per share, Arhaus trades at 1.32x EV/Revenue and 12.65x EV/EBITDA—reasonable multiples for a company delivering high-single-digit revenue growth with a clear path to 50 basis points of SG&A improvement by 2030, though execution risks on the $30 million digital transformation remain.

Setting the Scene: The Premium Furniture Retailer That Controls Its Supply Chain

Arhaus, Inc. was founded in 1986 by John Reed in Boston Heights, Ohio, with a philosophy centered on responsibly sourced, heirloom-quality home furnishings. This origin story is important because it established a DNA that differs fundamentally from most furniture retailers: a commitment to vertical integration and direct relationships with artisans that today provides a competitive advantage in an era of tariff uncertainty and supply chain disruption.

The company operates as a premium retailer specializing in "livable luxury," offering furniture, outdoor, lighting, textiles, décor, and bath products through an omnichannel model that positions its 103 showrooms as physical brand extensions of its e-commerce platform. As of September 30, 2025, 94 of these showrooms offer in-home interior designers—a service that generates order values roughly 4x higher than standard transactions. This isn't merely a sales tactic; it's a high-touch customer acquisition engine that creates switching costs and brand loyalty in a category where most competitors compete on price and convenience alone.

Arhaus sits in a highly fragmented industry with an estimated total addressable market of approximately $100 billion, holding less than a 2% share. This white space opportunity is the foundation of the investment thesis. While competitors like Restoration Hardware (RH) target the ultra-luxury segment with 50%+ gross margins and Wayfair (W) dominates the mass-market online channel with thin 25-30% margins, Arhaus occupies a middle ground that is both accessible and defensible. The company's long-term strategy targets 165 traditional showrooms and 50 design studios across the U.S.—a footprint that would triple its current presence while maintaining disciplined unit economics.

The macro environment remains challenging. Management acknowledges that "conditions remain uncertain" and that "the macro environment remains uneven." Yet Arhaus's high-end client base has demonstrated resilience, prioritizing quality and craftsmanship over price. This dynamic is critical: it suggests that demand may be deferred during periods of volatility but not destroyed—a pattern evidenced by September 2025 achieving the highest total demand month in company history despite choppy monthly comps throughout 2025.

Technology, Products, and Strategic Differentiation: The 70% Domestic Sourcing Advantage

Arhaus's core differentiator is its vertical integration in upholstery, with over 70% sourced domestically as of Q3 2025, primarily from its North Carolina facility. This approach provides three distinct advantages that competitors cannot quickly replicate: control over design and quality, reduced lead times, and insulation from tariff policy volatility. While peers like Williams-Sonoma (WSM) and Wayfair face 10-25% tariff exposure on imported goods, Arhaus's domestic manufacturing base acts as a natural hedge.

The Fall 2025 Collection launch represents the strongest in company history, resonating deeply with clients and reinforcing design leadership. This isn't marketing hyperbole—it translates to tangible financial results. New product introductions achieved the highest September total demand in company history, while custom orders across more than 600 fabrics and over 90 leathers also hit record levels. The ability to personalize at scale drives higher average order values and creates a premium pricing umbrella that protects gross margins.

The in-home designer program achieved its highest total demand in company history for September 2025. This service layer is a powerful moat: clients working with designers generate order values roughly 4x higher than those without, and the relationships create repeat purchase opportunities and referrals. In a fragmented market where customer acquisition costs are rising, this program delivers higher lifetime value and lower churn.

Product innovation extends to the new Bath Collection, launched in Q3 2025. This represents a thoughtful expansion into a new home category, following a multi-year development process. Early performance is meeting expectations, with management comparing its potential to the outdoor business launched five years prior. Expanding into categories like bath increases share of wallet among existing clients and provides incremental revenue streams without requiring new customer acquisition.

The digital transformation initiative, a $30 million investment through 2030, aims to modernize workflows and remediate identified material weaknesses. This 18-month program includes a new ERP, order management, and transportation management system. While ERP implementations "have a tendency to spook investors" due to historical examples of business disruption, management emphasizes that software selections are made, consulting partners are engaged, and the scope is tighter with a faster timeline than initial estimates. The promised payoff—50 basis points of SG&A improvement by 2030 plus transportation and logistics benefits—could add $6-7 million to annual EBITDA, representing meaningful leverage on a $1.4 billion revenue base.

Financial Performance & Segment Dynamics: Operational Leverage Emerging

Arhaus reported record third-quarter net revenue of $344.6 million in Q3 2025, an 8% year-over-year increase. This growth was driven by $14.7 million from new showrooms opened in 2024 and 2025, with the remainder from increased demand. The composition is key: showroom expansion contributed 57% of the growth, indicating that the physical footprint remains the primary engine, while same-store demand growth demonstrates the concept's durability.

Gross margin held steady at 38.7% in Q3 2025, up 10 basis points year-over-year. This stability is impressive given $12 million in incremental tariff costs net of mitigation. The margin expansion was driven by a 100 basis point increase in product margin and a 30 basis point decrease in delivery and transportation costs, partially offset by a 70 basis point increase in showroom occupancy costs. The product margin improvement reflects successful "surgical" price increases on select SKUs rather than broad-based hikes—a strategy that management confirms has not correlated with sales impact, indicating healthy price elasticity among the target demographic.

SG&A expenses decreased to 34% of net revenue in Q3 2025, down 120 basis points from 35.2% in the prior year. This leverage is critical as it demonstrates that fixed costs from new showrooms and technology investments are being absorbed by higher revenue. For the nine months ended September 30, 2025, SG&A was 32.4% of revenue, down 50 basis points year-over-year. The trend suggests that the inflection point for operational leverage has arrived, with each incremental dollar of revenue flowing through at higher margins.

Adjusted EBITDA margin expanded 180 basis points to 9.1% in Q3 2025, and 90 basis points to 10.9% for the nine-month period. This improvement, combined with revenue growth, drove net income up 23% to $12.2 million in Q3. The leverage is evident: 8% revenue growth translated to 23% net income growth, demonstrating the operating leverage inherent in the showroom model once fixed costs are covered.

The balance sheet remains pristine. As of September 30, 2025, Arhaus held $262.2 million in cash and cash equivalents with no debt. This liquidity provides strategic optionality to fund the $30 million digital transformation, continue showroom expansion, and weather macro volatility without diluting shareholders or taking on financial risk. Net cash provided by operating activities was $127.5 million for the nine months, while capital expenditures of $59.7 million (net of landlord contributions) represented 5.9% of revenue—a reasonable reinvestment rate for a growth retailer.

Inventory increased 10.7% to $328.7 million, reflecting investment in best sellers and new product introductions. While some investors may view this as a risk, management frames it as strategic positioning to improve in-stock availability and capture demand. In a category where lead times can extend to months, having inventory on hand drives conversion and customer satisfaction.

Outlook, Management Guidance, and Execution Risk: A Measured Path Forward

Arhaus updated its full-year 2025 outlook, raising the low end of prior ranges while maintaining the high end. The company now expects net revenue between $1.35 billion and $1.38 billion, representing 6.2% to 8.6% growth. This guidance reflects Q3 momentum balanced against continued macro uncertainty. The midpoint of $1.365 billion implies acceleration from the 5.5% growth achieved in the first nine months, suggesting management expects a solid holiday season.

Comparable growth guidance of flat to +2.5% for the full year implies Q4 comps of -7% to +1%, a wide range that acknowledges the "choppiness" in monthly demand trends. Management candidly admits that "every month this year, it's been up and down," with October demand comps down 14.8% due to promotional calendar timing. This volatility creates uncertainty for investors, but the underlying trend suggests demand is deferred rather than lost—a critical distinction for a premium retailer where purchase decisions can be delayed but not eliminated.

The tariff impact remains a key variable. Management estimates $12 million in net incremental costs for 2025, rising to $50-60 million in 2026. This represents approximately 0.9% and 4.3% of revenue, respectively—a meaningful headwind but one that Arhaus believes it can mitigate through vendor negotiations, sourcing diversification, and operational efficiencies. The company's three-point playbook—protect margins, maintain deep vendor relationships, and remain nimble—has proven effective as the gap between China and other sourcing locations has narrowed, making China productive again on a total delivered cost basis despite high tariffs.

Showroom expansion continues at a disciplined pace. The company expects to complete 12-15 total projects in 2025, consisting of 4-6 new openings and 8-9 relocations, renovations, or expansions. Traditional showrooms target at least $10 million in net revenue with 32% contribution margins and under two-year payback periods. Design studios target lower revenue but higher 35% contribution margins with similar payback. This capital allocation framework ensures that each dollar invested generates measurable returns, a stark contrast to retailers that expand recklessly.

The digital transformation timeline carries execution risk. The 18-month initiative is led by a team of high performers, with software selections made and consulting partners engaged. Management acknowledges that "ERPs have a tendency to spook investors" but emphasizes the tighter scope and faster timeline. The promised 50 basis points of SG&A improvement by 2030 is a tangible benefit that would flow directly to operating income, but any delays or cost overruns could pressure margins and distract management from core operations.

Risks and Asymmetries: What Could Break the Thesis

Four material weaknesses in internal control over financial reporting represent the most significant risk to the investment thesis. These include an ineffective control environment, inadequate accounting policies and procedures, ineffective controls for non-routine transactions, and ineffective IT general controls. While management states it has "made progress and continues to implement our remediation plan," the weaknesses are not considered remediated until controls are tested and deemed operating effectively. This creates a binary outcome: successful remediation by 2026 would remove an overhang and likely drive multiple expansion, while failure could lead to further restatements and loss of investor confidence.

The multi-year digital transformation introduces execution risk. ERP implementations have historically caused business disruption, budget overages, and operational inefficiencies at other companies. While Arhaus's $30 million investment is modest relative to its scale and the timeline is compressed, any missteps could impact financial reporting, inventory management, and customer experience during a critical growth phase.

Tariff policy remains fluid and unpredictable. The Section 232 investigation into imported furniture creates uncertainty, and management's estimate of $50-60 million in 2026 impact could prove conservative if trade tensions escalate. While the company's diversified sourcing model and domestic manufacturing provide insulation, a severe trade war could compress gross margins by 200-300 basis points, offsetting operational improvements.

Macroeconomic volatility continues to weigh on consumer sentiment. Management notes that "stock market volatility may be weighing on consumer sentiment more broadly," and the high-end client base, while resilient, is not immune to wealth effects. If housing market weakness persists or a recession materializes, discretionary furniture purchases could be deferred for extended periods, compressing revenue growth to low single digits and making fixed cost leverage harder to achieve.

Competitive pressure from larger players is intensifying. Williams-Sonoma and Wayfair are launching earlier and more aggressive promotional campaigns, with Black Friday deals starting in October. While Arhaus maintains its premium positioning and has not seen correlation between price increases and demand softness, a prolonged promotional environment could force margin-diluting discounting to maintain market share.

Valuation Context: Reasonable Multiples for a Differentiated Growth Story

At $10.54 per share, Arhaus trades at an enterprise value of $1.80 billion, representing 1.32x trailing twelve-month revenue of $1.27 billion and 12.65x adjusted EBITDA. These multiples appear reasonable for a company delivering high-single-digit revenue growth with expanding margins and a debt-free balance sheet.

The price-to-operating cash flow ratio of 9.34x is particularly attractive, as it values the business on its ability to generate cash rather than accounting earnings. With $147.1 million in annual operating cash flow and $39.7 million in free cash flow, Arhaus is converting revenue to cash at a healthy rate while reinvesting in growth. The price-to-free-cash-flow ratio of 18.40x reflects the growth investment phase but remains below the 20-25x typical for retailers with similar growth profiles.

Comparing to peers provides context. Restoration Hardware trades at 2.07x EV/Revenue and 30.05x P/E, reflecting its luxury positioning and higher gross margins but also its leveraged balance sheet and mature growth. Williams-Sonoma trades at 2.78x EV/Revenue and 19.75x P/E, with superior 16.95% operating margins but slower growth. Ethan Allen (ETD) trades at just 1.01x EV/Revenue and 12.98x P/E, reflecting its declining revenue and limited digital presence. Wayfair, at 1.22x EV/Revenue, remains unprofitable with negative margins.

Arhaus's 20.27x P/E and 45.58% gross margin sit in the middle of this peer group, but its debt-free balance sheet and domestic sourcing advantage provide downside protection that isn't reflected in the multiples. The 20.38% return on equity demonstrates efficient capital deployment, while the 4.64% return on assets reflects the asset-intensive nature of the showroom model.

The valuation implies modest expectations. If Arhaus achieves its 2025 adjusted EBITDA guidance of $135-145 million, the forward EV/EBITDA multiple is 12.4-13.3x—reasonable for a company with clear margin expansion drivers. The 50 basis points of SG&A improvement promised by the digital transformation would add approximately $7 million to annual EBITDA by 2030, representing 5% upside to current guidance that isn't priced into the stock.

Conclusion: A Premium Retailer With Margin Leverage in a Fragmented Market

Arhaus has built a differentiated position in the $100 billion home furnishings market by combining vertical integration in upholstery with an omnichannel showroom model that drives higher customer lifetime value. The company's 70%+ domestic sourcing provides a structural cost advantage and tariff shield that competitors cannot quickly replicate, while its in-home designer program generates 4x higher order values and creates switching costs.

Financial performance demonstrates that operational leverage is emerging. Q3 2025's 180 basis points of adjusted EBITDA margin expansion and 120 basis points of SG&A leverage prove that fixed costs from showroom expansion and technology investments are being absorbed. The debt-free balance sheet with $262 million in cash provides strategic flexibility to fund growth without dilution or financial risk.

The investment thesis hinges on two factors: successful remediation of material weaknesses in internal controls by 2026, and execution of the $30 million digital transformation to deliver promised SG&A improvements. If management delivers on these initiatives while continuing disciplined showroom expansion, Arhaus is positioned to compound earnings at low-teens rates, driven by high-single-digit revenue growth and 50-100 basis points of annual margin expansion.

Risks are tangible but manageable. Tariff headwinds of $50-60 million in 2026 represent a 4.3% revenue drag that can be mitigated through sourcing shifts and vendor concessions. Macro volatility may cause monthly demand choppiness, but the high-end client base's resilience suggests deferred purchases rather than lost sales. Competitive pressure is real, but Arhaus's premium positioning and customization capabilities provide differentiation.

At 1.32x EV/Revenue and 12.65x EV/EBITDA, the stock trades at reasonable multiples for a differentiated growth story with clear margin expansion drivers. The path to 165 traditional showrooms and 50 design studios represents a tripling of the footprint in a fragmented market where scale and brand recognition create durable competitive advantages. For investors willing to accept execution risk on the digital transformation and control remediation, Arhaus offers an attractive risk-reward profile in a category where few players combine growth, profitability, and balance sheet strength.