Arhaus, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Arhaus is a premium home-furnishings retailer operating 85 Showrooms at quarter-end, up from 80 a year earlier. It reports one operating segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $312.9 million | $306.3 million | $617.5 million | $552.6 million |
| Gross margin | $140.1 million; 44.8% | $133.0 million; 43.4% | $268.4 million; 43.5% | $230.7 million; 41.8% |
| Income from operations | $54.0 million; 17.3% | $50.3 million; 16.4% | $99.4 million; 16.1% | $73.1 million; 13.2% |
| Net income | $40.2 million | $36.6 million | $74.3 million | $52.7 million |
| Diluted EPS | $0.29 | $0.26 | $0.53 | $0.38 |
| Adjusted EBITDA | $63.8 million; 20.4% of revenue | $60.4 million; 19.7% | $118.6 million; 19.2% | $91.6 million; 16.6% |
Q2 revenue rose 2.2% year over year, while first-half revenue rose 11.7%. Comparable growth was down 0.8% in Q2 and up 8.9% for the first half; demand comparable growth was up 11.6% and 8.5%, respectively. Management attributed first-half revenue growth primarily to demand in Showrooms and eCommerce. Retail and eCommerce first-half revenue were $506.8 million and $110.6 million, respectively.
Gross margin improved year over year in both periods. Management cited favorable product costs (including $4.0 million lower costs in Q2) and, for the first half, favorable product and transportation costs. Higher Showroom costs and credit-card fees partly offset these benefits. SG&A increased 4.1% in Q2 and 7.2% for the first half, with corporate and selling costs partly offset by lower warehouse expenses.
Cash, debt and liquidity
- Cash and cash equivalents were $176.8 million at June 30, 2023, versus $145.2 million at December 31, 2022; restricted cash was $4.6 million.
- First-half operating cash flow was $61.8 million, compared with $41.1 million a year earlier. Investing cash outflow was $32.5 million, including property and equipment purchases; financing cash outflow was $0.5 million.
- Company-funded capital expenditures, net of landlord contributions, were $23.6 million in the first half, up from $13.3 million. Management expected fiscal 2023 company-funded capital expenditures of $70–$80 million, primarily for new Showrooms.
- The $75 million revolving credit facility, expiring November 2026, had no borrowings at June 30. The company reported compliance with its covenants and expected to remain compliant over the next 12 months. Management believed operating cash flow would meet working-capital and other capital needs for at least 12 months.
- Total lease liabilities were $449.2 million, including $394.4 million of operating leases and $54.8 million of finance leases. Approximately $108.7 million of minimum rent payments on signed leases not yet commenced were excluded from that amount.
Outlook, risks and notable items
- The filing gives a capital-expenditure expectation but no revenue, earnings or comparable-growth guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Risks highlighted include consumer confidence and spending, sourcing and supply-chain constraints, vendor quality, distribution-center integration, freight costs, Showroom traffic, competition, cybersecurity and privacy, and inflation. Management said it had historically recovered inflation-related cost increases through pricing but could not estimate its ability to do so in the future.
- Disclosure controls were not effective at the reasonable-assurance level because of four material weaknesses in internal control over financial reporting: finance staffing and control environment; accounting policies and period-end controls; accounting for certain complex transactions; and IT general controls. Remediation was underway, but the company could not give a completion timeline or assure that the plan would be sufficient.
- The company reported no material off-balance-sheet arrangements and no legal proceedings expected to have a material adverse effect. Tax audits were ongoing in several jurisdictions; recorded non-income-tax liabilities were $0.3 million.
- Related-party leases include properties associated with the CEO and a director. In July 2023, a CEO-associated warehouse lease was extended to April 2034, after the reporting date.
- On August 9, 2023, the company announced that COO Tim Kuckelman had separated effective August 8.
Investor verification points
- Assess whether Q2 demand comparable growth of 11.6% converts into delivered sales, given Q2 comparable growth of negative 0.8% and the order-to-delivery lag described by management.
- Verify progress against the $70–$80 million 2023 capital-expenditure expectation and the returns from Showroom and distribution investments.
- Monitor product, freight, Showroom and credit-card costs for effects on gross margin, as well as corporate and selling costs relative to revenue.
- Track remediation and independent testing of the four material weaknesses; management said they remain unremediated until controls are implemented and shown to operate effectively.
- Review lease commitments, including leases not yet commenced, and the terms and governance of related-party leases.