Arhaus Announces Third Quarter 2023 Financial Results
Robust Demand Comparable Growth Continues in the Third Quarter
Raises Midpoint of Full Year 2023 Outlook
BOSTON HEIGHTS, Ohio, Nov. 02, 2023 (GLOBE NEWSWIRE) -- Arhaus, Inc. (NASDAQ: ARHS; “Arhaus” or the “Company”), a rapidly growing lifestyle brand and omni-channel retailer of premium artisan-crafted home furnishings, reported financial results for the third quarter ended September 30, 2023.
*Third Quarter 2023 Highlights *
· Net revenue of $326 million
· Comparable Growth^(1) of (2.1)%
· Net and Comprehensive Income of $20 million
· Adjusted Net Income of $20 million
· Adjusted EBITDA of $34 million
*Year-to-Date 2023 Highlights, through September 30*
· Net revenue of $944 million
· Comparable Growth^(1) of 4.8%
· Net and Comprehensive Income of $94 million
· Adjusted Net Income of $95 million
· Adjusted EBITDA of $152 million
*2023 Outlook Updated*
· Net revenue of $1,265 million to $1,285 million
· Comparable Growth^(1) of (1)% to 1%
· Net and Comprehensive Income of $112.5 million to $117.5 million
· Adjusted EBITDA of $192.5 million to $197.5 million
*CEO Comments*
John Reed, Co-Founder and Chief Executive Officer, commented,
“We are very pleased with our third quarter financial performance and are raising the midpoint of our full year outlook for net revenue, net income and adjusted EBITDA. We had another exceptional quarter of demand comparable growth^(2) in the third quarter, up 11.7%. We experienced strong demand across all regions, products and channels. Our new product launches in September have been incredibly well received by our clients, and these industry-leading product designs elevated both our fall catalog and the look and feel of our inspirational Showrooms.
“Our new Showroom expansions continue to progress this year. To date, we have opened six new Showrooms, most recently a location in West Hartford, Connecticut. Tomorrow, we are opening showrooms in Coral Gables, Florida and Huntington Station, New York, followed by three new California Showroom locations in December. We are thrilled with the strong performance of our new Showrooms and excited to add these great new locations to our Showroom portfolio.
“As we close out this year and begin to look to 2024, we are focused on continuing to expand our collections of heirloom quality, artisan-crafted furniture, growing our Showroom footprint with several more exciting new locations to come in 2024, and improving our systems and making the necessary investments to support our growth for many years into the future.”
*Third Quarter 2023 Results *
Net revenue increased 1.9% to $326 million, compared to $320 million in the third quarter of 2022.
Comparable growth^(1) was (2.1)% and demand comparable growth^(2) was 11.7% in the third quarter of 2023.
Gross margin decreased 4.0% to $131 million, compared to $136 million in the third quarter of 2022. The gross margin decrease was primarily driven by the sale of price-actioned products that were receipted with higher container costs, increased fixed Showroom costs as we expand our Showroom footprint, and higher delivery costs.
Selling, general and administrative expenses increased 20.0% to $107 million, compared to $89 million in the third quarter of 2022, primarily driven by the $10 million donation to The Nature Conservancy, higher selling expense related to new Showrooms and strong demand, and higher corporate expenses to support the growth of the business.
Net and comprehensive income was $20 million compared to $37 million in the third quarter of 2022. This decrease was driven by the factors described above. Adjusted net income was $20 million in the third quarter of 2023 compared to $38 million in the third quarter of 2022.
Adjusted EBITDA decreased 40.6% to $34 million compared to $57 million in the third quarter of 2022. Adjusted EBITDA as a percent of net revenue declined 740 basis points to 10.3% in the third quarter of 2023, compared to 17.7% in the third quarter of 2022, with 310 basis points of the decline attributable to the donation to The Nature Conservancy and the balance due to the factors described above.
The Company ended the quarter with 86 total Showrooms across 29 states.
*Balance Sheet and Cash Flow Highlights, as of September 30, 2023*
Cash and cash equivalents totaled $237 million, and the Company had no long-term debt at September 30, 2023. Net merchandise inventory decreased 6.1% to $269 million, compared to $286 million as of December 31, 2022. Client deposits increased 4.8% to $212 million.
For the nine months ended September 30, 2023, net cash provided by operating activities was $131 million, compared to $58 million for the nine months ended September 30, 2022.
For the nine months ended September 30, 2023, net cash used in investing activities was $42 million which includes landlord contributions of $11 million and company-funded capital expenditures^(3) of $31 million. For the nine months ended September 30, 2022, net cash used in investing activities was $37 million, which included landlord contributions of $11 million and company-funded capital expenditures^(3) of $26 million.
*Outlook*
The table below presents our updated expectations for selected full year 2023 financial operating results and implied fourth quarter 2023 expectations derived from the full year 2023 outlook.
*Full Year 2023* *Implied 4Q 2023*
*($’s in millions)* *Current Guidance* *Previous Guidance*
Net revenue $1,265 to $1,285 $1,250 to $1,290 $321 to $341
Comparable growth^(1) (1)% to 1% (2)% to 1% (15)% to (9)%
Net income^(4) $112.5 to $117.5 $102.5 to $112.5 $18.5 to $23.5
Adjusted EBITDA^(5) $192.5 to $197.5 $187.5 to $197.5 $40.3 to $45.3
*Other estimates**:*
Company-funded capital expenditures^(3) $60 to $70 $70 to $80
Fully diluted shares Unchanged ~141 million
Effective tax rate Unchanged ~ 26%
_______________________
^(1) *Comparable growth* is a key performance indicator and is defined as the year-over-year percentage change of the dollar value of orders delivered (based on purchase price), net of the dollar value of returns (based on amount credited to client), from our comparable Showrooms and eCommerce, including through our direct-mail catalog.
^(2) *Demand comparable growth* is a key performance indicator and is defined as the year-over-year percentage change of demand from our comparable Showrooms and eCommerce, including through our direct-mail catalog.
^(3) *Company-funded capital expenditures* is defined as total net cash used in investing activities less landlord contributions.
^(4) U.S. GAAP net income.
^(5) We have not reconciled guidance for Adjusted EBITDA to the corresponding GAAP financial measure because we do not provide guidance for the various reconciling items. These items include, but are not limited to, future share-based compensation expense, income taxes, and interest expense. We are unable to provide guidance for these reconciling items because we cannot determine their probable significance, as certain items are outside of our control and cannot be reasonably predicted due to the fact that these items could vary significantly from period to period. Accordingly, reconciliations to the corresponding GAAP financial measure is not available without unreasonable effort.
*Conference Call*
You are invited to listen to Arhaus’ conference call to discuss the third quarter 2023 financial results scheduled for today, November 2, 2023, at 8:30 a.m. Eastern Time. The call will be available over the Internet on our website (http://ir.arhaus.com) or by dialing (877) 407-3982 within the U.S., or 1 (201) 493-6780, outside the U.S. The conference ID is: 13735046.
A recorded replay of the conference call will be available within approximately three hours of the conclusion of the call and can be accessed online at https://ir.arhaus.com for approximately twelve months.
*About Arhaus *
Founded in 1986, Arhaus is a rapidly growing lifestyle brand and omni-channel retailer of premium home furnishings. Through a differentiated proprietary model that directly designs and sources products from leading manufacturers and artisans around the world, Arhaus offers an exclusive assortment of heirloom quality products that are sustainably sourced, lovingly made, and built to last. With more than 85 showroom and design studio locations across the United States, a team of interior designers providing complimentary in-home design services, and robust online and eCommerce capabilities, Arhaus is known for innovative design, responsible sourcing, and client-first service. For more information, please visit www.arhaus.com.
*Investor Contact:*
Wendy Watson
SVP, Investor Relations
(440) 439-7700 x3409
invest@arhaus.com
*Non-GAAP Financial Measures*
In addition to the results provided in accordance with GAAP, this press release and related tables include adjusted EBITDA, adjusted EBITDA as a percentage of net revenue and adjusted net income, which present operating results on an adjusted basis.
We use non-GAAP measures to help assess the performance of our business, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with U.S. GAAP, we believe that providing these non-GAAP financial measures is useful to our investors as they present an informative supplemental view of our results from period to period by removing the effect of non-recurring items. However, our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items or that the items for which we have made adjustments are unusual or infrequent or will not recur. These non-GAAP measures are not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. These measures should only be read together with the corresponding GAAP measures. Please refer to the reconciliations of adjusted EBITDA and adjusted net income to the most directly comparable financial measures prepared in accordance with GAAP below.
*Forward-Looking Statements*
Certain statements contained herein, including statements under the headings “2023 Outlook Updated” and “Outlook” are not based on historical fact and are “forward-looking statements” within the meaning of applicable securities laws.
Forward-looking statements can generally be identified by the use of forward-looking terminology, including, but not limited to, “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Past performance is not a guarantee of future results or returns and no representation or warranty is made regarding future performance. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond our control that could cause our actual results, performance or achievements to be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to: our ability to manage and maintain the growth rate of our business; our ability to obtain quality merchandise in sufficient quantities; disruption in our receiving and distribution system, including delays in the integration of our new distribution centers and the possibility that we may not realize the anticipated benefits of multiple distribution centers; the possibility of cyberattacks and our ability to maintain adequate cybersecurity systems and procedures; loss, corruption and misappropriation of data and information relating to clients and employees; changes in and compliance with applicable data privacy rules and regulations; risks as a result of constraints in our supply chain; a failure of our vendors to meet our quality standards; declines in general economic conditions that affect consumer confidence and consumer spending that could adversely affect our revenue; our ability to anticipate changes in consumer preferences; risks related to maintaining and increasing showroom traffic and sales; our ability to compete in our market; our ability to adequately protect our intellectual property; compliance with applicable governmental regulations; effectively managing our eCommerce business and digital marketing efforts; our reliance on third-party transportation carriers and risks associated with freight and transportation costs; the COVID-19 pandemic and its effect on our business; and compliance with SEC rules and regulations as a public reporting company. These factors should not be construed as exhaustive. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above. Further information on potential factors that could affect the financial results of the Company and its forward-looking statements is included in the Company’s filings with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statement, except as may be required by law. These forward-looking statements speak only as of the date of this release. All forward-looking statements are qualified in their entirety by this cautionary statement.
*Arhaus, Inc. and Subsidiaries*
*Condensed Consolidated Balance Sheets*
*(Unaudited, amounts in thousands, except share and per share data)* *September 30,*
*2023* *December 31,*
*2022*
*Assets*
Current assets
Cash and cash equivalents $ 236,930 $ 145,181
Restricted cash equivalents 3,465 7,346
Accounts receivable, net 1,962 1,734
Merchandise inventory, net 268,960 286,419
Prepaid and other current assets 63,140 37,371
Total current assets 574,457 478,051
Operating right-of-use assets 314,378 252,055
Financing right-of-use assets 39,480 38,522
Property, furniture and equipment, net 156,632 135,066
Deferred tax asset 16,585 16,841
Goodwill 10,961 10,961
Other noncurrent assets 3,081 296
Total assets $ 1,115,574 $ 931,792
*Liabilities and Stockholders’ Equity*
Current liabilities
Accounts payable $ 58,138 $ 62,636
Accrued taxes 13,134 12,256
Accrued wages 12,015 20,860
Accrued other expenses 47,073 35,169
Client deposits 212,406 202,587
Current portion of operating lease liabilities 42,472 39,744
Current portion of financing lease liabilities 925 531
Total current liabilities 386,163 373,783
Operating lease liabilities, long-term 360,708 289,871
Financing lease liabilities, long-term 54,010 51,835
Deferred rent and lease incentives 2,032 2,272
Other long-term liabilities 4,173 4,336
Total liabilities $ 807,086 $ 722,097
Commitments and contingencies
Stockholders' equity
Class A shares, par value $0.001 per share (600,000,000 shares authorized, 52,749,450 issued and 52,666,334 outstanding and 51,437,348 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) 52 51
Class B shares, par value $0.001 per share (100,000,000 shares authorized, 87,115,600 shares issued and outstanding as of September 30, 2023 and December 31, 2022) 87 87
Retained Earnings 114,076 20,053
Additional Paid-in Capital 194,273 189,504
Total Arhaus, Inc. stockholders' equity 308,488 209,695
Total liabilities and stockholders' equity $ 1,115,574 $ 931,792
*Arhaus, Inc. and Subsidiaries*
*Condensed Consolidated Statements of Comprehensive Income*
*(Unaudited, amounts in thousands, except share and per share data)* *Nine months ended September 30,* *Three months ended September 30,* *2023* *2022* *2023* *2022*
Net revenue $ 943,696 $ 872,595 $ 326,229 $ 320,030
Cost of goods sold 544,481 505,561 195,372 183,739
Gross margin 399,215 367,034 130,857 136,291
Selling, general and administrative expenses 275,890 246,767 106,977 89,145
Income from operations 123,325 120,267 23,880 47,146
Interest expense (income), net (1,731 ) 3,367 (1,080 ) 751
Other income (738 ) (584 ) (78 ) (109 )
Income before taxes 125,794 117,484 25,038 46,504
Income tax expense 31,771 27,851 5,297 9,568
Net and comprehensive income $ 94,023 $ 89,633 $ 19,741 $ 36,936
*Net and comprehensive income per share, basic*
Weighted-average number of common shares outstanding, basic 139,365,870 137,939,577 139,628,776 138,484,495
Net and comprehensive income per share, basic $ 0.67 $ 0.65 $ 0.14 $ 0.27
*Net and comprehensive income per share, diluted*
Weighted-average number of common shares outstanding, diluted 140,021,670 139,545,802 140,140,899 139,845,333
Net and comprehensive income per share, diluted $ 0.67 $ 0.64 $ 0.14 $ 0.26
*Arhaus, Inc. and Subsidiaries*
*Condensed Consolidated Statements of Cash Flows*
*(Unaudited, amounts in thousands)* *Nine months ended September 30,* *2023* *2022*
*Cash flows from operating activities*
Net income $ 94,023 $ 89,633
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 21,439 18,319
Amortization of operating lease right-of-use asset 24,733 21,976
Amortization of deferred financing fees, interest on finance lease in excess of principal paid and interest on operating leases 16,037 8,731
Equity based compensation 5,752 2,613
Deferred tax assets 256 5,458
Amortization of cloud computing arrangements 386 —
Amortization and write-off of lease incentives (241 ) (224 )
Insurance proceeds 60 —
Changes in operating assets and liabilities
Accounts receivable (228 ) (1,550 )
Merchandise inventory 17,399 (84,228 )
Prepaid and other assets (28,952 ) (11,249 )
Other noncurrent liabilities 273 456
Accounts payable (4,093 ) 10,334
Accrued expenses 3,502 23,682
Operating lease liabilities (28,797 ) (22,586 )
Client deposits 9,819 (3,128 )
Net cash provided by operating activities 131,368 58,237
*Cash flows from investing activities*
Purchases of property, furniture and equipment (42,306 ) (36,950 )
Insurance proceeds 333 —
Net cash used in investing activities (41,973 ) (36,950 )
*Cash flows from financing activities*
Principal payments under finance leases (503 ) (113 )
Repurchase of shares for payment of withholding taxes for equity based compensation (1,024 ) —
Net cash used in financing activities (1,527 ) (113 )
Net increase (decrease) in cash, cash equivalents and restricted cash equivalents 87,868 21,174
*Cash, cash equivalents and restricted cash equivalents*
Beginning of period 152,527 130,908
End of period $ 240,395 $ 152,082
*Arhaus, Inc. and Subsidiaries*
*Condensed Consolidated Statements of Cash Flows (continued)*
*(Unaudited, amounts in thousands)* *Nine months ended September 30,* *2023* *2022*
*Supplemental disclosure of cash flow information*
Interest paid in cash $ 3,962 $ 3,858
Interest received in cash 5,395 316
Income taxes paid in cash 28,856 20,579
Noncash operating activities:
Lease incentives 7,313 7,532
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable 2,756 2,661
Noncash financing activities:
Adjustment to deferred tax asset impact of Reorganization from partnership to a corporation — (1,278 )
Derecognition of build-to-suit assets as a result of ASC 842 adoption — (31,017 )
Capital contributions 42 62
*Arhaus, Inc. and Subsidiaries*
*Reconciliation of Net Income to Adjusted Net Income*
*(Unaudited, amounts in thousands, except share and per share data)* *Nine months ended September 30,* *Three months ended September 30,* *2023**
* *2022**
* *2023**
* *2022**
*
Net income $ 94,023 $ 89,633 $ 19,741 $ 36,936
Adjustments (pre-tax):
Other expenses^(1) 992 6,567 555 1,909
Total non-GAAP adjustments pre-tax 992 6,567 555 1,909
Less: Tax effect of adjustments^(2) 257 1,556 144 395
Adjusted net income $ 94,758 $ 94,644 $ 20,152 $ 38,450
*Adjusted net income per share, basic*
Weighted-average number of common shares outstanding, basic 139,365,870 137,939,577 139,628,776 138,484,495
Adjusted net income per share, basic $ 0.68 $ 0.69 $ 0.14 $ 0.28
*Adjusted net income per share, diluted*
Weighted-average number of common shares outstanding, diluted 140,021,670 139,545,802 140,140,899 139,845,333
Adjusted net income per share, diluted $ 0.68 $ 0.68 $ 0.14 $ 0.27
^(1) Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, third-party consulting costs, one-time project start-up costs, severance, signing bonuses, recruiting and project-based strategic initiatives. For the nine and three months ended September 30, 2023, these expenses largely consisted of $0.7 million and $0.6 million of public offering costs, respectively. For the nine and three months ended September 30, 2022, these expenses consisted largely of $4.6 million and $1.6 million of costs related to the opening and set-up of our Dallas distribution center, respectively.
^(2) The Company applied its normalized tax rate of 25.9% and 25.9% to the adjustment for the nine and three months ended September 30, 2023, respectively. The Company applied its normalized tax rate of 23.7% and 20.6% to the adjustment for the nine and three months ended September 30, 2022, respectively.
*Arhaus, Inc. and Subsidiaries*
*Reconciliation of Net Income to Adjusted EBITDA*
*(Unaudited, amounts in thousands)* *Nine months ended September 30,* *Three months ended September 30,* *2023* *2022* *2023* *2022*
Net income $ 94,023 $ 89,633 $ 19,741 $ 36,936
Interest expense (income), net (1,731 ) 3,367 (1,080 ) 751
Income tax expense 31,771 27,851 5,297 9,568
Depreciation and amortization 21,439 18,319 7,299 6,324
EBITDA 145,502 139,170 31,257 53,579
Equity based compensation 5,752 2,613 1,848 1,224
Other expenses^(1) 992 6,567 555 1,909
Adjusted EBITDA $ 152,246 $ 148,350 $ 33,660 $ 56,712
Net revenue $ 943,696 $ 872,595 $ 326,229 $ 320,030
Net income as a % of net revenue 10.0 % 10.3 % 6.1 % 11.5 %
Adjusted EBITDA as a % of net revenue 16.1 % 17.0 % 10.3 % 17.7 %
^(1) Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, third-party consulting costs, one-time project start-up costs, severance, signing bonuses, recruiting and project-based strategic initiatives. For the nine and three months ended September 30, 2023, these expenses largely consisted of $0.7 million and $0.6 million of public offering costs, respectively. For the nine and three months ended September 30, 2022, these expenses consisted largely of $4.6 million and $1.6 million of costs related to the opening and set-up of our Dallas distribution center, respectively.