Arhaus, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021, unless otherwise noted. Arhaus is a premium home-furnishings retailer operating 78 showrooms and one reportable segment. The company adopted lease accounting standard ASC 842 on January 1, 2022; this materially changed balance-sheet presentation, so lease-related year-over-year balance comparisons are not directly comparable.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $246.3 million | $171.3 million | Up 43.8% |
| Gross margin | $97.7 million; 39.7% | $70.3 million; 41.1% | Margin down 140 bps |
| SG&A | $74.8 million; 30.4% of revenue | $59.0 million; 34.5% of revenue | Expense up 26.8%; ratio down 410 bps |
| Operating income | $22.9 million; 9.3% of revenue | $11.3 million; 6.6% of revenue | Up |
| Net income | $16.1 million | $9.2 million | Up |
| Net income attributable to Arhaus, Inc. | $16.1 million; $0.12 diluted EPS | $3.9 million; $0.03 diluted EPS | Prior period included $5.3 million attributable to noncontrolling interests |
| Adjusted EBITDA | $31.2 million; 12.7% of revenue | $25.5 million; 14.9% of revenue | Up 22.4%; margin down 220 bps |
| Operating cash flow | $35.2 million | $73.1 million | Down $37.9 million |
| Capital expenditures, net of landlord contributions | $8.4 million | $3.6 million | Up $4.8 million |
Balance sheet and liquidity
- Cash and cash equivalents were $148.8 million at March 31, 2022, versus $123.8 million at year-end 2021. Including restricted cash, cash totaled $156.0 million.
- Inventory was $246.5 million, up from $208.3 million at year-end. Client deposits were $306.2 million, up from $264.9 million; deposits are collected on orders before delivery and are expected substantially to be recognized as revenue within 12 months.
- Total assets were $814.2 million and total liabilities $727.6 million. ASC 842 recognition included $315.7 million of lease liabilities at quarter-end; the company also disclosed approximately $136.3 million of minimum rentals for leases not yet commenced.
- No borrowings were outstanding on the $50 million revolving credit facility. The facility expires in November 2026, bears a variable rate, and includes financial and other restrictive covenants. The company reported compliance with applicable debt covenants.
- Management said operating cash flows should be sufficient for working capital and other capital needs for at least the next 12 months. The filing notes that operating cash generation includes client deposits.
Material changes and management commentary
- Revenue growth was attributed primarily to more deliveries from the order backlog as the supply chain improved, along with strong showroom and eCommerce demand. Retail revenue was $202.6 million and eCommerce revenue $43.7 million.
- Comparable growth was 40.3%, versus 37.6% a year earlier; demand comparable growth was 8.3%, versus 90.3%. Management cautioned that 2021 demand comparisons were affected by pandemic-related showroom closures, and that order demand can precede recognized revenue because of delivery lags.
- Gross margin rate fell to 39.7%, mainly from higher product and transportation costs and variable rent. Management cited higher product costs, transportation costs, variable rent, and credit-card fees as dollar-cost increases, partly offset by leverage on fixed showroom occupancy costs.
- SG&A increased by $15.8 million. Higher corporate and warehouse expenses and public-company costs were partly offset by the absence of the prior-year $11.5 million derivative expense related to a former term-loan exit fee.
- Operating cash flow declined primarily with higher inventory, a smaller increase in client deposits as backlog deliveries improved and demand growth moderated, and the absence of prior-year noncash items. Investing cash outflow was $10.2 million, mainly for showrooms, technology, and supply-chain expansion.
- The company operated one fewer showroom than at year-end, closing one location and opening none during the quarter. It anticipated total company-funded fiscal 2022 capital expenditures of $60 million to $70 million, principally for distribution-center expansion, showrooms, and technology.
Outlook, risks, and contingencies
- No revenue or earnings guidance was provided. Management expected supply-chain and vendor-capacity constraints related to the pandemic to continue affecting fiscal 2022, while noting that timing and operating conditions remained uncertain.
- Risks discussed include supply-chain disruption, product availability and freight costs, consumer spending and confidence, inflation, showroom traffic, growth execution, COVID-19 developments, and delays or costs associated with distribution centers and showroom construction. The company said future recovery of inflation-related cost increases through pricing could not be estimated reliably.
- The company disclosed ordinary-course litigation and ongoing tax audits or inquiries. It recorded $1.2 million of liabilities for probable and reasonably estimable non-income-tax matters; management did not expect pending litigation to have a material adverse effect.
- Management concluded disclosure controls were not effective at the reasonable-assurance level because of material weaknesses in internal control over financial reporting, including staffing and segregation-of-duties deficiencies, financial close and complex-transaction controls, and IT general controls. Remediation had begun, but no completion timeline was specified and effectiveness had not yet been established.
Important facts for investors to verify
- Whether backlog deliveries and supply-chain capacity continue to improve, and how demand comparable growth translates into recognized revenue.
- Whether product, freight, and variable-rent cost pressures persist and what effect they have on gross margin.
- How inventory growth, customer deposits, and delivery timing affect working capital and operating cash flow.
- Execution and funding of the stated $60 million to $70 million fiscal 2022 capital-expenditure plan, including distribution-center projects and uncommenced leases.
- Progress in remediating the disclosed material weaknesses and whether controls are subsequently tested and determined to operate effectively.
- Lease obligations, variable-rate facility terms, covenant compliance, and the company’s liquidity assumptions, including reliance on customer deposits.