Arhaus, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Arhaus is a premium home-furnishings retailer operating 86 Showrooms, up from 80 a year earlier. It reports one operating and reportable segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $326.2 million | $320.0 million | $943.7 million | $872.6 million |
| Gross margin | $130.9 million; 40.1% | $136.3 million; 42.6% | $399.2 million; 42.3% | $367.0 million; 42.1% |
| Operating income | $23.9 million; 7.3% | $47.1 million; 14.7% | $123.3 million; 13.1% | $120.3 million; 13.8% |
| Net income | $19.7 million | $36.9 million | $94.0 million | $89.6 million |
| Adjusted EBITDA | $33.7 million; 10.3% | $56.7 million; 17.7% | $152.2 million; 16.1% | $148.4 million; 17.0% |
- Q3: Revenue rose 1.9%, while comparable growth was negative 2.1%; demand comparable growth was 11.7%. Basic and diluted earnings per share were $0.14, versus $0.27 and $0.26, respectively, a year earlier.
- Nine months: Revenue increased 8.1%; comparable growth was 4.8% and demand comparable growth was 9.6%. Basic and diluted EPS were $0.67.
- Revenue channels: Q3 retail revenue was $261.8 million versus $269.0 million; eCommerce was $64.4 million versus $51.0 million. Nine-month retail revenue was $768.6 million versus $728.0 million; eCommerce was $175.1 million versus $144.6 million.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $236.9 million at September 30, 2023, compared with $145.2 million at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $240.4 million at quarter-end.
- Nine-month operating cash flow was $131.4 million, versus $58.2 million; investing cash outflow was $42.0 million, versus $37.0 million; financing cash outflow was $1.5 million, versus $0.1 million.
- Inventory was $269.0 million, down from $286.4 million at year-end. Client deposits were $212.4 million, up from $202.6 million.
- No borrowings were outstanding under the $75 million revolving credit facility. It expires in November 2026; the company reported compliance with debt covenants and expected to remain compliant over the next 12 months.
- Lease liabilities totaled $458.1 million, including $403.2 million of operating and $54.9 million of finance lease liabilities. The company also had approximately $148.3 million of minimum rent commitments for signed leases not yet commenced.
Material changes and management commentary
- Q3 gross margin fell $5.4 million and 250 basis points year over year. Management cited higher product costs, fixed Showroom costs, and delivery and transportation costs.
- Q3 SG&A rose $17.8 million to $107.0 million, including a $10.0 million donation to The Nature Conservancy, increased selling costs associated with new Showrooms and higher demand, and higher corporate expenses. The donation was recorded as an expense and accrued liability in Q3.
- For the nine months, gross margin percentage improved 20 basis points, primarily from favorable product costs, partly offset by higher Showroom, delivery, transportation, and credit-card costs. SG&A increased 11.8% to $275.9 million.
- Management attributed higher nine-month interest income to earnings on money-market investments. It stated operating cash flows should be sufficient for working capital and other capital needs for at least 12 months.
- The company opened seven Showrooms and closed two in the first nine months; both closures related to relocations. Capital expenditures net of landlord contributions were $31.1 million. The company forecast fiscal 2023 company-funded capital expenditures of $60–$70 million, primarily for new Showrooms.
Risks, contingencies, and controls
- Management cited risks including weaker consumer confidence or spending, supply-chain and vendor constraints, freight costs, competition, Showroom traffic, cybersecurity and data privacy, and inflation. The company said most international inventory purchases are denominated in U.S. dollars and it does not use derivatives to manage currency or interest-rate risk.
- The company disclosed ordinary-course litigation and tax inquiries and audits; management did not expect litigation to have a material adverse effect. It recorded $0.3 million of liabilities for probable and estimable non-income-tax matters.
- Disclosure controls were not effective at the reasonable-assurance level because of four material weaknesses in internal control over financial reporting, involving staffing and control environment, financial-reporting procedures, accounting for certain complex transactions, and IT general controls. Remediation had begun, but no completion timeline was provided; the weaknesses were not yet remediated.
- Related-party leases include a warehouse lease with an entity partly owned by the CEO, extended in July 2023 through April 2034, and a distribution/manufacturing lease with an entity partly owned by the CEO. The filing reports the related-party relationships and lease expenses.
- The filing provides no full-year revenue or earnings guidance. Interim results are not necessarily indicative of full-year or future results.
Important facts for investors to verify
- Whether positive demand comparable growth converts into delivered sales, given Q3 negative comparable growth and the stated time lag between orders and delivery.
- Whether Q3 margin and earnings pressure persists, including the effects of product, delivery, transportation, and Showroom costs.
- Execution and funding of the $60–$70 million 2023 capital-expenditure plan and the expansion of Showrooms and distribution capacity.
- Progress in remediating the four material weaknesses and whether additional deficiencies or adjustments arise.
- Cash generation and liquidity after considering lease obligations, uncommenced lease commitments, and the $10 million donation.