Arhaus, Inc. — Q1 2023 Form 10-Q
Business context and period. Arhaus is a premium home-furnishings retailer operating showrooms and eCommerce. This unaudited filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company operated 82 showrooms at quarter-end, versus 78 a year earlier.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenue | $304.6 million | $246.3 million |
| Gross margin | $128.2 million; 42.1% | $97.7 million; 39.7% |
| SG&A | $82.8 million; 27.2% of revenue | $74.8 million; 30.4% of revenue |
| Operating income | $45.5 million; 14.9% of revenue | $22.9 million; 9.3% of revenue |
| Net income | $34.1 million; diluted EPS $0.24 | $16.1 million; diluted EPS $0.12 |
| Adjusted EBITDA | $54.8 million; 18.0% of revenue | $31.2 million; 12.7% of revenue |
| Operating cash flow | $7.7 million | $35.2 million |
Revenue rose 23.7% year over year. Retail revenue was $250.1 million and eCommerce revenue was $54.5 million. Comparable growth was 21.0%, down from 40.3%; demand comparable growth was 5.6%, down from 8.3%. Gross margin increased 2.4 percentage points, with management citing favorable product costs and leverage on fixed showroom costs, partly offset by higher variable showroom and transportation costs. SG&A increased in dollars but declined as a share of revenue.
Cash, cash equivalents and restricted cash totaled $151.6 million at quarter-end, including $144.5 million of unrestricted cash. Cash and cash equivalents were $145.2 million at December 31, 2022. Operating cash flow fell year over year, primarily reflecting working-capital outflows, including lower accrued expenses, accounts payable and client deposits, and higher prepaid costs and inventory. Investing cash outflow was $8.2 million; financing cash outflow was $0.4 million.
The company had no revolver borrowings and reported a $75 million revolving credit facility, expiring November 2026. It reported compliance with debt covenants. Lease liabilities totaled $408.2 million, and approximately $121.7 million of minimum rent payments for leases not yet commenced were excluded from that amount. Total assets were $965.9 million and total liabilities were $720.8 million at March 31, 2023. The effective tax rate was 26.2%.
Changes, outlook and risks
Management attributed revenue growth to demand in showrooms and eCommerce and supply-chain improvement. It reported that supply constraints had delayed conversion of demand into revenue and expected the supply chain to catch up to demand in the foreseeable future, while noting that timing is uncertain. Client deposits declined to $197.9 million from $202.6 million at year-end; substantially all quarter-end deposits were expected to be recognized as revenue within 12 months as orders are delivered.
Management expects fiscal 2023 company-funded capital expenditures of $75 million to $85 million, primarily for new showrooms. It said operating cash flows should be sufficient for working capital and other capital needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
Risks discussed include consumer spending and economic conditions, supply-chain and distribution disruptions, vendor quality and availability, transportation costs, showroom traffic, inflation and the ability to pass on cost increases, cybersecurity and data privacy, and COVID-19-related disruption. The company also disclosed ongoing tax audits by state and local jurisdictions and ordinary-course litigation; management did not expect pending matters to have a material adverse effect.
Significant control issue: Management concluded that disclosure controls were not effective at the reasonable-assurance level due to four material weaknesses in internal control over financial reporting, involving the control environment and staffing, accounting processes and documentation, complex transactions, and IT general controls. The company has begun remediation but gave no completion timeline and cautioned that remediation is not complete until controls are implemented, tested and found effective.
Related-party leases include facilities associated with the CEO and a director. The company reported $1.0 million of rent expense in Q1 2023 for a distribution center lease with an entity partly owned by the CEO.
Important facts for investors to verify
- Whether demand and comparable-growth trends continue to weaken, and how delivery timing affects the conversion of orders into reported revenue.
- Whether operating cash flow improves as working capital changes, particularly client deposits, inventory, payables and accrued expenses.
- Execution and funding of the $75 million to $85 million capital expenditure plan, alongside existing and not-yet-commenced lease commitments.
- Progress, testing and effectiveness of remediation for the disclosed material weaknesses in financial reporting controls.
- Whether supply-chain, transportation, inflation and consumer-demand conditions affect margins and the company’s stated liquidity outlook.