Arhaus, Inc. — FY2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023. Arhaus is a U.S. premium home-furnishings retailer operating showrooms and eCommerce. At year-end it had 92 showrooms in 29 states. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net revenue | $1,287.7 | $1,228.9 | +4.8% |
| Gross profit / margin | $540.4 / 42.0% | $525.1 / 42.7% | +2.9% / −70 bps |
| Operating income / margin | $164.3 / 12.8% | $184.7 / 15.0% | −11.0% / −220 bps |
| Net income / margin | $125.2 / 9.7% | $136.6 / 11.1% | −8.3% / −140 bps |
| Diluted EPS | $0.89 | $0.98 | −9.2% |
| Adjusted EBITDA / margin | $203.5 / 15.8% | $222.5 / 18.1% | −8.6% / −230 bps |
| Operating cash flow | $172.3 | $73.2 | +$99.1 |
| Capital expenditures, net of landlord contributions | $74.8 | $35.2 | +$39.6 |
Revenue growth reflected higher demand in showrooms and eCommerce and continued supply-chain recovery. Demand comparable growth was 7.6%, versus 13.8% in 2022; delivered comparable growth was 1.4%, versus 51.6%. eCommerce revenue was $242.6 million, up approximately 17%, and represented about 19% of revenue.
Gross margin contracted mainly because showroom, transportation and credit-card costs rose; favorable product costs partly offset these pressures. SG&A increased 10.5% to $376.1 million, faster than revenue, and rose to 29.2% of revenue from 27.7%. Cash from operations improved substantially, helped by a $32.1 million inventory reduction; it also included working-capital outflows, including lower client deposits.
At year-end, cash and cash equivalents were $223.1 million and restricted cash was $3.2 million. The company had no borrowings under its $75 million revolving facility, which matures in November 2026, and reported compliance with its covenants. Client deposits were $173.8 million. Lease liabilities totaled $462.9 million, including $408.2 million of operating lease liabilities and $54.8 million of finance lease liabilities; these are distinct from drawn debt.
Material changes and notable items
- Showrooms increased from 81 to 92, including 14 openings in 2023; the company plans five to seven new traditional showrooms annually, plus additional design studios.
- FY2023 SG&A included a $10.0 million commitment to The Nature Conservancy, with $5.0 million still recorded as a liability at year-end.
- Interest expense (income), net shifted to $3.4 million of income, principally reflecting $8.8 million of interest income on cash investments, compared with $3.4 million of net expense in 2022.
- The company revised prior-period financial statements for errors involving the classification of certain leasehold and landlord improvements and related cash flows. It said the errors were not material to those prior periods. The 2023 filing also revised or restated interim-period information; investors should consult the accompanying revision tables for the periods and amounts affected.
- The board declared a $0.50-per-share special cash dividend on both share classes on February 29, 2024, payable April 4, 2024. This was declared after year-end and is not a FY2023 operating result.
Outlook, risks and contingencies
The filing provides no specific FY2024 revenue or earnings guidance. Management says operating cash flows are expected to meet working-capital and other capital needs for at least the next 12 months. Its stated plans include showroom expansion, investment in eCommerce, technology and distribution capacity, and continued development of its product assortment. The company cautions that results may vary with consumer demand, housing and financial-market conditions, seasonality, showroom openings, sourcing and delivery timing, and the costs and benefits of growth initiatives.
Important risks include sensitivity to premium consumer spending and housing conditions; dependence on international vendors and third-party carriers; product availability, quality and cost pressures; execution of showroom and distribution expansion; and cybersecurity and privacy threats. The company reported no current legal proceeding expected to have a material adverse effect; it is subject to ordinary-course claims and state and local tax inquiries/audits. No material off-balance-sheet arrangements were reported.
Financial reporting control warning: Management and the independent auditor concluded that internal control over financial reporting was ineffective at December 31, 2023 because of material weaknesses in staffing and accounting expertise, financial-close and transaction controls, segregation of duties, and IT general controls. The auditor gave an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control effectiveness. Remediation had begun, but the weaknesses were not considered remediated and no completion date was specified.
Investor verification checklist
- Review the prior-period revision and restatement disclosures, including impacts on interim statements and cash-flow classifications.
- Track remediation and independent testing of the material weaknesses, and assess whether future filings report effective controls.
- Monitor comparable demand versus delivered growth, margin trends, SG&A leverage, and operating cash conversion as showroom investment continues.
- Assess liquidity against client deposits, lease commitments, capital spending and the special dividend; distinguish lease liabilities from revolver borrowings.
- Verify execution and returns from planned showroom openings and distribution investments, alongside supply-chain, vendor-concentration and consumer-demand risks.