Arhaus, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. This is an annual filing, not a standalone fourth-quarter report. Arhaus is a premium home-furnishings retailer operating showrooms and eCommerce. It completed its IPO in November 2021.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $796.9 million | $507.4 million |
| Gross margin | $329.9 million; 41.4% | $199.5 million; 39.3% |
| Income from operations | $33.4 million; 4.2% of revenue | $30.9 million; 6.1% of revenue |
| Net income | $36.9 million | $17.0 million |
| Adjusted EBITDA | $122.9 million; 15.4% of revenue | $69.4 million; 13.7% of revenue |
| Net cash from operating activities | $146.2 million | $148.3 million |
| Net cash used in investing activities | $47.9 million | $13.0 million |
| Cash and cash equivalents at year-end | $123.8 million | $57.1 million |
Revenue increased 57.1%. Comparable growth was 51.0%, versus 0.9% in 2020; demand comparable growth was 45.3%, versus 24.7%. eCommerce revenue rose approximately 60% to $144.1 million, about 18% of total revenue. Retail revenue was $652.8 million.
Gross margin improved 210 basis points, principally from fixed-cost leverage, including showroom occupancy. SG&A rose 75.6% to $296.1 million and increased to 37.2% of revenue from 33.2%. Higher selling and corporate costs, marketing, IPO costs, share-based compensation and the term-loan exit-fee remeasurement contributed to the increase. Operating margin declined despite higher revenue and gross margin.
Operating cash flow was nearly flat year over year: inventory investment of $100.3 million was largely offset by a $110.8 million increase in client deposits. Capital expenditures, net of landlord contributions, were $29.8 million, compared with $3.1 million in 2020. Year-end client deposits were $264.9 million.
The company had no borrowings on its $50 million revolving credit facility at year-end. The prior term loan had been repaid in 2020; a $64.1 million exit fee tied to the IPO was paid in 2021. Year-end capital lease obligations were $50.5 million. The filing also disclosed $320.6 million of future minimum operating lease payments before adoption of the new lease standard.
Material changes and unusual items
- Revenue growth reflected strong demand, reopening effects after 2020 showroom closures and improved ability to convert orders as parts of the supply chain recovered. The filing cautions that pandemic-related demand may not persist and that supply constraints continued.
- Net income included a $10.1 million income-tax benefit, primarily associated with the corporate reorganization. Net income attributable to Arhaus, Inc. was $21.1 million; reported basic and diluted EPS were $0.18.
- SG&A included $44.5 million of derivative expense from revaluing the former term-loan exit fee, $9.7 million of one-time IPO and reorganization costs, and a $4.6 million charge for shares transferred by the CEO to long-tenured employees. The filing reports a further $2.8 million withholding-related expense associated with that transfer.
- The company recorded a $1.5 million loss on extinguishment of debt related to terminating its prior revolving facility.
- Management recorded immaterial out-of-period adjustments in 2021, including a $3.0 million depreciation-related correction. The filing says previously issued 2019 and 2020 statements were restated, principally for SG&A, other long-term liabilities and classification matters.
- The November 2021 IPO sold 12.9 million Class A shares at $13 per share and generated approximately $151.4 million in net proceeds, before the separately disclosed use of proceeds and certain cash-flow statement presentation.
Outlook, risks and contingencies
- Management said operating cash flows should be sufficient for working capital and other needs for at least the next 12 months. The filing does not provide formal revenue or earnings guidance.
- Management planned five to seven new showrooms and one relocation in 2022. The North Carolina distribution and manufacturing facility opened in late 2021 and was expected to become fully operational in 2022; a Dallas distribution center was planned to open in 2022. Ohio facility expansion was also planned.
- Management expects COVID-related supply-chain conditions to continue affecting vendor and logistics capacity in 2022. Freight inflation, port congestion, vendor capacity, delivery delays and elevated backlogs could constrain sales or pressure margins.
- Demand is exposed to consumer confidence, discretionary spending, the higher-end housing market, interest rates, inflation and changes in post-pandemic purchasing behavior. The company also faces execution risks from showroom expansion, new distribution facilities, sourcing concentration and competition.
- Material weaknesses in internal control over financial reporting remained outstanding at year-end, and disclosure controls were deemed ineffective. Remediation had begun, but management gave no specific completion date. The auditor issued an unqualified opinion on the financial statements; no auditor attestation of internal controls was included.
- There were no legal proceedings identified as likely to have a material adverse effect. Several state and local tax audits were ongoing; recorded liabilities for probable and estimable non-income-tax matters were $1.2 million.
- Governance risks include a dual-class share structure concentrating voting power with the founder and family trusts, and controlled-company status under Nasdaq rules. No common-stock dividends had been declared, and the company did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether demand and comparable growth remain strong as pandemic-related home spending normalizes, and whether backlog converts to delivered revenue.
- Whether supply-chain delays, freight costs and vendor concentration—one vendor represented approximately 18% of merchandise purchases in 2021—affect product availability, customer cancellations or gross margin.
- Progress and costs in bringing the North Carolina and planned Texas distribution facilities fully online, and the returns from planned showroom expansion and capital investment.
- Whether internal-control material weaknesses are remediated and whether future filings require further corrections.
- The impact of client deposits and substantial lease obligations on liquidity, particularly if cancellations rise or operating cash flow weakens.
- The effects of dual-class voting control, post-IPO share sales and related-party arrangements on public shareholders.