Arhaus, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This filing reports full-year results; it does not provide a clear standalone Q4 income statement. Arhaus is a U.S. premium home furnishings retailer operating showrooms and an eCommerce channel. It had 81 showrooms in 29 states at year-end.
Financial performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net revenue | $1,228.9 million | $796.9 million |
| Gross margin | $525.1 million; 42.7% | $329.9 million; 41.4% |
| Operating income | $184.7 million; 15.0% of revenue | $33.4 million; 4.2% |
| Net income | $136.6 million; diluted EPS $0.98 | $36.9 million; diluted EPS $0.18 |
| Adjusted EBITDA (non-GAAP) | $222.5 million; 18.1% of revenue | $122.9 million; 15.4% |
| Cash from operations | $74.5 million | $146.2 million |
| Cash used in investing | $52.7 million | $47.9 million |
Revenue rose 54.2%; reported comparable growth was 51.6%, while demand comparable growth slowed to 13.8% from 45.3%. Management attributed higher revenue to continued demand and supply-chain recovery that helped convert orders into deliveries. eCommerce revenue grew approximately 43% and represented about 17% of 2022 revenue.
Gross margin improved 130 basis points, primarily from leverage on fixed showroom costs and favorable product costs, partly offset by higher variable showroom and transportation costs. SG&A rose 15.0% in dollars but fell to 27.7% of revenue from 37.2%; the prior year included a $44.5 million term-loan derivative expense and $9.7 million of IPO-related costs. FY 2022 income tax expense was $45.9 million, versus a $10.1 million benefit in 2021, in part reflecting the post-IPO change from partnership to corporate taxation.
Liquidity, cash flow and obligations
- Year-end cash and cash equivalents were $145.2 million, with $7.3 million of restricted cash. Merchandise inventory was $286.4 million, up from $208.3 million.
- Operating cash flow declined to $74.5 million, mainly reflecting working-capital use: inventory increased $78.1 million and client deposits declined $62.3 million, primarily as backlog orders were delivered. Client deposits were $202.6 million at year-end.
- Capital expenditures, net of landlord contributions, were $36.5 million. Cash used in investing was $52.7 million.
- The $75 million revolving credit facility was undrawn at year-end and matures in November 2026. The company reported compliance with its covenants and expects operating cash flow to cover working capital and other capital needs for at least 12 months.
- Lease liabilities totaled $382.0 million at year-end. A further approximately $148 million of minimum rental payments for signed leases not yet commenced was excluded from that amount. These lease commitments are significant despite no revolver borrowings.
Business developments and outlook
Arhaus opened or relocated four showrooms in 2022 and ended the year with 81 locations, versus 79 a year earlier. It opened a Dallas distribution center in July 2022 and expanded its Ohio facility; the North Carolina distribution and manufacturing facility had opened in December 2021. Management’s long-term plan is to open five to seven showrooms annually. The filing provides no specific financial guidance or quantified forecast.
Management cited economic and housing-market uncertainty, inflation and interest rates, consumer confidence, supply-chain capacity, freight costs and the timing of showroom and infrastructure investments as factors that may affect results. Demand growth was materially lower than in 2021, and the company cautioned that pandemic-related demand patterns and supply-chain recovery make comparisons difficult. Results are seasonal and quarterly performance may vary.
Material risks, contingencies and unusual items
- Financial reporting controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2022 because of material weaknesses involving staffing and segregation of duties, financial reporting processes and complex transactions, and IT general controls. The weaknesses remained unremediated; management gave no specific completion timeline. They had contributed to restatements of 2019 and 2020 financial statements and immaterial 2021 adjustments. The auditor did not audit internal controls.
- Supply and vendor exposure: Approximately 60% of 2022 revenue related to products sourced from foreign vendors. One vendor accounted for approximately 13% of merchandise purchases, and McCreary Modern supplied upholstery products representing about 15% of revenue. Disruptions, cost increases, or quality issues could affect deliveries and margins.
- Demand and execution: Sales depend on discretionary premium-furnishings demand and the health of higher-end consumers and housing markets. Expansion, new distribution centers, inventory management and timely delivery create execution and cash-flow risks.
- Governance: Class B shares carry ten votes per share, concentrating voting power with the founder and related trusts. The company is a controlled company under Nasdaq rules.
- Legal and tax matters: The company reported no legal proceeding expected to have a material adverse effect. It recorded $0.4 million for probable and reasonably estimable non-income-tax matters; several tax jurisdictions were conducting audits.
- Accounting change: Arhaus adopted lease accounting standard ASC 842 in 2022, recognizing $242.0 million of right-of-use assets and $326.5 million of lease liabilities at adoption; comparative periods were not restated. The auditor issued an unqualified opinion on the financial statements.
Investor facts to verify
- Whether demand comparable growth and order-to-delivery conversion sustain as backlog normalizes.
- Whether operating cash flow improves as inventory and client deposits change, and how cash needs compare with showroom and distribution investment plans.
- Progress in designing, implementing and testing remediation of material weaknesses in financial reporting and IT controls.
- Actual lease commitments, including the approximately $148 million tied to leases not yet commenced, and the economics of planned showroom openings.
- Exposure to key vendors, foreign sourcing, freight and product costs, and the effects on gross margin and delivery reliability.