Arhaus, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statement amounts below are in U.S. dollars; millions are rounded. Arhaus is a premium home-furnishings retailer operating 80 showrooms and one reportable segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $306.3m | $184.0m | $552.6m | $355.4m |
| Gross margin | $133.0m; 43.4% | $77.8m; 42.3% | $230.7m; 41.8% | $148.2m; 41.7% |
| Income from operations | $50.3m; 16.4% | $8.7m; 4.7% | $73.1m; 13.2% | $20.0m; 5.6% |
| Net income | $36.6m; 12.0% | $6.8m; 3.7% | $52.7m; 9.5% | $16.0m; 4.5% |
| Adjusted EBITDA | $60.4m; 19.7% | $34.3m; 18.6% | $91.6m; 16.6% | $59.7m; 16.8% |
Q2 revenue rose 66.4% year over year; first-half revenue rose 55.5%. Retail generated $256.4m and eCommerce $49.9m in Q2 (prior year: $151.7m and $32.3m, respectively). First-half comparable growth was 53.1% in both years, while demand comparable growth eased to 14.7% from 82.0%. In Q2, comparable growth was 65.2% versus 71.4%, and demand comparable growth was 22.5% versus 72.9%. Management attributed prior-year demand comparisons in part to pandemic-related showroom closures in 2020.
Gross-margin improvement reflected higher sales and fixed-cost leverage, partly offset by higher product, transportation and variable-rent costs. SG&A was 27.0% of Q2 revenue and 28.5% for the first half, down from 37.6% and 36.1%, respectively; the prior-year periods included $18.3m and $29.8m of derivative expense related to a former term-loan exit fee. The IPO-related derivative liability was paid in November 2021. Income-tax expense increased substantially year over year as the post-reorganization company became subject to federal and state corporate income taxes; prior-year comparisons reflect its former partnership tax status.
Cash, liquidity and obligations
- Cash and cash equivalents were $144.6m at June 30, 2022; cash, cash equivalents and restricted cash totaled $151.6m.
- First-half operating cash flow was $41.1m, down from $109.5m. The company cited inventory investment, a smaller increase in client deposits as backlog deliveries improved, and prior-year noncash items. Inventory was $272.5m, up from $208.3m at year-end; client deposits were $277.0m.
- Investing cash outflow was $20.4m; financing cash outflow was $0.05m. Capital expenditures, net of landlord contributions, were $13.3m for the half-year.
- No borrowings were outstanding on the $50m revolving credit facility. The facility expires in November 2026, carries variable rates and includes financial covenants; the company reported covenant compliance.
- Lease liabilities totaled $358.2m, including $305.7m operating and $52.5m finance lease liabilities. The company also disclosed approximately $148.4m of minimum rentals for signed leases not yet commenced.
Outlook, risks and notable matters
The company forecast fiscal 2022 company-funded capital expenditures of $55m–$65m, primarily for distribution-center expansion and openings, showrooms, and technology. It said operating cash flows should be sufficient for working capital and other capital needs for at least the next 12 months, while noting that future needs and plans may change. No revenue or earnings guidance is provided in the filing.
Management said supply-chain constraints continued to delay converting demand into revenue and expected vendor and supply-chain capacity issues to affect fiscal 2022. Risks also include freight and labor inflation, sourcing and transportation disruption, weaker consumer spending, showroom traffic and execution of distribution-center expansion, as well as COVID-19-related uncertainty. The company stated it has historically recovered cost increases through pricing but could not estimate its future ability to do so.
ASC 842 lease accounting was adopted January 1, 2022, adding $242.0m of right-of-use assets and $326.5m of lease liabilities at adoption; prior-year periods remain under the previous lease standard, limiting balance-sheet comparability. Management reported three material weaknesses in internal control over financial reporting, including finance staffing and segregation of duties, accounting/reporting procedures and complex transactions, and IT general controls. Remediation had begun, but no completion timeline was specified; disclosure controls were assessed as not effective. Ordinary-course litigation and tax inquiries/audits were disclosed; management did not expect litigation to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether demand growth and showroom/eCommerce order trends sustain revenue as the unusually strong 2021 comparison period rolls off, and how quickly supply constraints and delivery backlogs normalize.
- Whether product, freight, labor and occupancy costs pressure gross margin, and whether pricing can offset inflation.
- Inventory and client-deposit trends, operating cash conversion, and progress against the $55m–$65m capital-expenditure plan.
- Total lease exposure, including the $148.4m of rentals for leases not yet commenced, and the effect of new distribution facilities on cash needs.
- Progress in remediating material weaknesses and whether controls become effective; also monitor covenant compliance and any use of the revolving facility.