Arhaus, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. Arhaus is a premium home-furnishings retailer operating retail showrooms and eCommerce. It had 92 showrooms at quarter-end. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net revenue | $295.2 | $304.6 |
| Gross profit / gross margin | $115.1 / 39.0% | $128.2 / 42.1% |
| SG&A | $96.7 | $82.8 |
| Operating income / margin | $18.4 / 6.2% | $45.5 / 14.9% |
| Net income / diluted EPS | $15.1 / $0.11 | $34.1 / $0.24 |
| Adjusted EBITDA / margin | $29.1 / 9.9% | $54.8 / 18.0% |
| Operating cash flow | $36.8 | $10.9 |
| Cash used in investing activities | $25.9 | $11.4 |
At March 31, 2024, cash and cash equivalents were $233.2 million, and restricted cash was $3.2 million. Inventory was $268.4 million; client deposits were $202.9 million. The company had no borrowings on its $75 million revolving credit facility, which expires in November 2026, and reported compliance with its debt covenants. Lease liabilities totaled $481.0 million. The company expects operating cash flows to cover working capital and other capital needs for at least the next 12 months.
Changes versus the prior comparable period
- Revenue declined 3.1%. Management attributed the decrease mainly to the non-recurrence of unusually high prior-year backlog deliveries and weather-related delivery disruption in January, partly offset by favorable demand.
- Comparable growth was down 9.5%, while demand comparable growth was up 1.3% (versus 21.0% and 5.6%, respectively, in Q1 2023).
- Gross margin fell 3.1 percentage points. Management cited higher showroom costs, fixed-cost deleverage and increased transportation costs.
- SG&A rose 16.8%, driven by selling costs associated with showrooms and demand, strategic corporate investments including supply chain and technology, and warehouse expense.
- Net income decreased $19.0 million. Operating cash flow increased, partly reflecting a $29.1 million increase in client deposits; inventory, prepaid assets and other working-capital movements used cash.
Outlook, risks and unusual items
- Capital spending: Management anticipates fiscal 2024 company-funded capital expenditures of $80–$100 million, primarily for new showrooms. Q1 net capital expenditures after landlord contributions were $12.9 million.
- Dividend: The board declared a $0.50-per-share special cash dividend. The company paid approximately $69.9 million in April 2024; $70.6 million was recorded as current dividends payable at quarter-end, in addition to dividend equivalents.
- Lease commitments: Approximately $151.4 million of minimum rent payments relate to leases signed but not yet commenced and are excluded from recognized lease liabilities.
- Financial statement revisions: The company revised prior-period balance-sheet and cash-flow classifications relating mainly to showroom improvements and landlord reimbursements. Management said the errors were not material, individually or in aggregate, to the prior-period financial statements; further revisions are planned. The filing also describes related immaterial corrections.
- Controls: Disclosure controls were not effective at the reasonable assurance level due to four material weaknesses in internal control over financial reporting, including staffing and accounting-control deficiencies and IT general-control weaknesses. Remediation is underway, but no specific completion timeline is provided; the weaknesses are not considered remediated until implementation and testing demonstrate effectiveness.
- Other risks: Management identifies consumer spending and economic conditions, supply-chain and vendor risks, showroom traffic, transportation costs, cybersecurity and data privacy, competition, and inflation among relevant risks. The company says it cannot reliably estimate its ability to offset future inflation through price increases. No material litigation outcome or material off-balance-sheet arrangement was reported.
Important facts for investors to verify
- Whether demand trends translate into delivered sales and improved comparable growth, given the delivery timing effects noted by management.
- Whether gross margin and SG&A leverage recover as showroom, supply-chain, technology and warehouse investments continue.
- How operating cash flow develops after accounting for client-deposit movements, inventory needs and planned capital expenditures.
- Progress and testing of remediation for the four material weaknesses, and the effect of planned prior-period financial statement revisions.
- Execution of the $80–$100 million fiscal 2024 capital expenditure plan and the financial impact of the special dividend and lease commitments.