Arhaus, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2021. The operating results are those of Arhaus, LLC and subsidiaries; Arhaus, Inc. was formed in July 2021 as the holding company for the November IPO and reorganization.
Business context
Arhaus is a premium home-furnishings retailer selling through showrooms and eCommerce. It operated 77 retail locations at quarter-end, up from 73 a year earlier. The company reported one operating and reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $203.3 million | $120.5 million | $558.7 million | $344.6 million |
| Gross margin | $84.8 million; 41.7% | $45.2 million; 37.5% | $233.0 million; 41.7% | $129.8 million; 37.7% |
| Operating income | $16.2 million | $4.2 million | $36.3 million | $24.7 million |
| Net income | $14.4 million | $0.8 million | $30.6 million | $14.4 million |
| Adjusted EBITDA | $30.5 million; 15.0% of revenue | $9.7 million; 8.0% | $90.4 million; 16.2% | $40.9 million; 11.9% |
Q3 revenue rose 68.7% year over year; nine-month revenue rose 62.1%. Comparable growth was 61.3% in Q3 and 56.0% for the nine months. Demand comparable growth was 28.3% and 58.4%, respectively. Management attributed sales growth to stronger demand across showrooms and eCommerce and some supply-chain recovery. Gross-margin gains primarily reflected leverage on fixed showroom occupancy costs. Q3 operating margin was 8.0%, versus 3.5% a year earlier; nine-month operating margin was 6.5%, versus 7.2%.
SG&A increased to $68.1 million in Q3 and $196.2 million for the nine months. The nine-month increase included a $29.4 million derivative fair-value expense, higher selling and support costs, IPO-related expenses, and a $3.0 million out-of-period depreciation adjustment. Adjusted EBITDA is a non-GAAP measure; the company’s reconciliation includes adjustments for derivative expense, incentive compensation and other expenses.
Cash, liquidity and obligations
- At September 30, 2021, cash and cash equivalents were $149.2 million; including restricted cash, cash totaled $155.1 million. Current assets were $346.4 million and current liabilities were $336.7 million.
- Nine-month operating cash flow was $142.6 million, investing cash outflow was $29.5 million, and financing cash outflow was $15.6 million. Operating cash flow benefited from $106.1 million of increased client deposits, while inventory growth used $62.5 million of cash.
- Client deposits were $260.2 million at quarter-end, compared with $154.1 million at December 2020. The company generally collects deposits of at least 50% of order value and expects quarter-end deposits to be recognized as revenue within 12 months as orders are delivered.
- No borrowings were outstanding under the old revolving facility, but the company reported no availability under its borrowing-base formula at September 30. The old facility was terminated in November. A new $50 million revolving credit facility was then established, with variable rates and financial covenants.
- Capital lease obligations were $50.6 million; operating-lease commitments totaled $324.0 million. Management said operating cash flows should be sufficient for working capital and other needs for at least 12 months.
Outlook, events and risks
- Management forecast fiscal 2021 company-funded capital expenditures of $32–$34 million, primarily for a North Carolina facility, showrooms, an airplane, and technology and systems. The filing provides no specific revenue or earnings guidance.
- Supply-chain constraints and vendor capacity continued to delay conversion of demand into delivered sales. Management expected these conditions to affect fiscal 2021, while noting uncertainty around when supply would catch up. Risks also include transportation costs, COVID-19 disruptions, consumer demand changes, and showroom construction or operating delays.
- The November 8 IPO issued 12,903,226 Class A shares at $13.00 per share and generated approximately $151.4 million in net proceeds. The company used $64.1 million to settle the former term-loan exit-fee liability; the remainder was designated for general corporate purposes. It expected to record a further $14.6 million SG&A charge in Q4 from the exit fee’s fair-value change associated with the IPO.
- The company reported three material weaknesses in internal controls over financial reporting, including deficiencies in financial reporting resources and processes, accounting for complex transactions, and IT general controls. It had begun remediation but could not provide a completion timeline. A prior-period restatement and an immaterial $3.0 million out-of-period adjustment were disclosed.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The filing also describes a related-party lease and other long-term lease commitments.
Key facts for investors to verify
- Whether supply constraints ease and how order demand translates into delivered revenue, cancellations, and client deposits.
- Whether margin performance holds as product, freight, and other costs change; distinguish reported results from adjusted EBITDA and its exclusions.
- Use of IPO proceeds, the final exit-fee accounting, and the terms, covenants, and availability of the new credit facility.
- Capital expenditure execution, showroom expansion, and commitments under operating and capital leases, including related-party arrangements.
- Progress in remediating the disclosed material weaknesses and whether further financial-reporting adjustments are needed.