Q3 2021 Arhaus Inc Earnings Call

Okay.

Good morning, and welcome to the Art House third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal remarks. Please note that this call is being recorded and the reproduction of any part of this call is not permitted without written authorization from the company.

I would now like to turn this call over to your host Ms. Wendy Watson Senior Vice President of Investor Relations. Thank you Ma'am you may begin your presentation.

Good morning, and thank you for joining our houses inaugural earnings call with me today are John Lee Co founder Chairman and Chief Executive Officer.

Jamie Porter, Chief Marketing Officer, and Don Phillips, the Chief Financial Officer.

John will begin with a company overview and operational detail.

Jim will discuss the status of marketing initiatives across our omni channel footprint and Don will cover our third quarter performance and outlook.

After their formal remarks, we will open the call to questions.

For Q&A. Please limit to one question and one follow up if you have additional questions you may return to the queue.

We issued our earnings press release, and our 10-Q for the quarter ended September 30th 2021 before market opened today.

These documents along with supplementary slides will be made available on our Investor Relations website, and I are our house Dot com.

A replay of the call will also be available on our website within 24 hours.

As a reminder.

Today concerning future expectation then.

Active strategies trends or results constitute forward looking statements.

Actual results or events may differ materially due to a number of risks and uncertainties.

For a summary of these risk factors and additional information. Please refer to this morning's press release and the cautionary statements and risk factors contained in the company's third quarter 10-Q, and such factors may be updated from time to time and its other filings with the SEC.

The forward looking statements are made as of today's date and except as may be required by law. The company undertakes no obligation to update or revise these statements.

We will also refer to certain non-GAAP financial measures in this morning's press release, including relevant non-GAAP reconciliations.

I will now turn the call over to John.

Good morning, everyone and thank you for taking the time to join our third quarter.

2021 earnings call our first as a publicly traded company following our IPO in early November.

An exciting milestone for our company and I want to thank more than the 1400 team members for working together to get US at this point, we truly are the best in the business and I'm proud to be part of such a dedicated team who cares for one another our clients and what we do.

We had a record third quarter performance with net revenue in both our retail and e-commerce channels up 69% and comparable growth up over 61% compared to the third quarter last year.

Don Johnson, our CFO will cover our third quarter performance and the outlook for the remainder of the year in more detail later in the call, but we are extremely pleased with our trends in our business.

This is our inaugural earnings call I'll take a few minutes to introduce our inhouse describe what makes our brand so special.

Explain why I'm, so excited about the growth going forward.

I founded this company 35 years ago with a simple mission that furniture should be responsibly sourced lovingly made and built to last.

In order to fulfill our mission, we built a unique model that differentiates us in the marketplace in four key areas and offers multiple strategies for growth.

We believe we are in a position to nearly double.

The size of our business over the next few years and drive profitable long term growth for years to come.

Our first key differentiator is our product.

All of our products are designed in house and sourced directly from leading artisan.

Vendors around the world.

Our own exclusive products, we control the design work.

Control of it.

Credible quality, the supply chain and our content through.

Through our vertical integration designs and sourcing model, we offer a globally curated assortment.

Hand crafted products that represent our livable luxury aesthetic.

The second key differentiator is our showrooms.

From our very first showroom.

In Cleveland, Ohio, We have always believed that retailers theater, our showrooms to showcase our products in a way that is both the inspirational and aspirational.

When clients walk into our showrooms, we want them to envision that there could be an extension of their own home, we've put as much detail and attention into our showrooms as we do in our products and expanding our showroom base represents a tremendous white space growth opportunity and significantly build our brand aware.

This.

In the third quarter, we opened two new showrooms.

Traditional showroom in Salem, New Hampshire, and a design studio in Burlingame, California, We also relocated a showroom in Mclean, Virginia to the Tysons Galleria.

Where did this show room into the new format. We ended the third quarter with 77 showrooms across 28 States. We expect to end the year at 79 showrooms.

In the U S alone, we believe we can grow to as many as 165 total showrooms.

Target is to add five to seven new showrooms per year.

The seeable future.

Within our showrooms. We are also growing our in home design a program that offers clients the complementary service of having a designer personally come to their home.

At the end of the third quarter, we had 65 designers and 54 showroom and the average order value when the when the client purchases who are one our in home designers is more than three times greater than the standard order.

We intend to at least have one and home designer per showroom with locations accommodating more than one.

The third differentiator of our omni channel experience, Jim Porter, who will cover our omni channel initiatives and are detailed later in the call, but we will take the same inspirational approach to showcasing our products online.

In our catalogs as we do on our show our Omnichannel approach serves to further increase our brand awareness and represents another level of our growth.

We only recently begun investing in the digital capabilities and with ecommerce compromising approximately 18% of net revenue today.

He has significant runway to grow our e-commerce sales as we enhance our omnichannel capabilities.

The fourth key differentiator is our client first mentality. This core value runs through our business everything we do from the way we design our products builder showrooms hire train and retain associates and invest in growth.

As with our clients in mind I.

I invite you to visit one of our showrooms and experience our client first mentality and with our incredible design consultants firsthand.

With our tremendous opportunity to continue growing and scaling our business. We are closely focused on the current supply chain dynamics, and making investments to expand our distribution capabilities.

On the inbound side on the supply chain, we are working closely with our vendor partners to fulfill orders and ramp up production.

Our vendors have been incredibly resilient through the strong demand environment, increasing their capacity growing with us and further deepening our relationships.

At the same time, we are also expanding our vendor base and bringing in more new products.

And in Hungary, we expect to see improvements in lead time with the opening of our new upholstery manufacturing and distribution facility in North Carolina.

The facility will double our in house upholstery manufacturing capabilities.

On the outbound side of the supply chain, we are increasing our capacity and expanding our footprint, we have begun to 230000 square foot expansion.

Hi, all distribution and corporate facilities.

As well as expanding our offices in North Carolina, which we will add another 310000 square foot of distribution capacity.

In addition to a 187 square feet of upholstery manufacturing in the second half of 2022, we are planning to add a third distribution facility in the western United States, where we have significant growth opportunities along with our ongoing efforts on the inbound side the increases in our outbound capacity.

We will further allow us to get products to our clients more quickly more efficiently reducing backlogs in shortening lead times.

In summary, we feel very good about the trends of our business and the investments, we're making to drive long term growth.

At a time when consumers are spending more and more time in their home investing in their home and looking for more functional spaces. We think we're very well positioned to continue to gain market share.

The premium home furnishings market in the United States represents a $60 billion opportunity today, our market share is less than 1% of this large and rapidly growing market and we have multiple avenues.

Long run way to pursue sustainable growth.

I could not be more excited about the future of our house.

We know our products are unique in the marketplace. We have built an incredible team incredible infrastructure to grow and to scale our business now.

Now I'll pass the call over to John Porter to review, the Omni channel and digital initiatives.

Thank you John and good morning, everyone. One of our houses biggest opportunity is to increase our market share and to grow our brand awareness.

We are in the enviable position of introducing them and take you wont see cross it and proven heritage brands.

Mostly organically over the past 35 years to a highly fragmented arguably understand market in 2019, we began significantly increasing our investment in digital initiatives and bad marketing overall, we developed a test and learn strategy that balances brand awareness approach with high return on advertising spend.

Oh, well as driven targeted campaigns.

Our focus is on profitable and meaningful long term growth of the ban.

We have a proven ability to drive brand awareness by opening more showrooms and we see continued opportunity my father, enhancing and expanding our omnichannel marketing and technology capabilities.

For the third quarter, we are excited to report healthy client growth over Q3 last year in terms of both existing client numbers and value as well as the new client acquisition numbers and value.

Our approach to client Omni channel our direct mail channel continues to perform incredibly well for us with our fall catalogue hitting homes at the end of August we mail just pass along to our largest circulation fr well achieving a higher realized in last year. We are particularly excited to see direct mail continued to perform.

Not only with our existing client base, but also as a significant driver of traffic to our website and new clients to the brand.

I leave adult and draw holiday Gaslog, which hit homes in the beginning of November are looking very promising as well.

Q3 saw us increasing our media advertising and partnerships participating in thought of how you get a phone call home and architectural digest iconic home campaign, along with continuing to develop and expand upon our Influencer program on social media in September we reached 1 million followers on Instagram.

On the E Commerce front, we saw strong ecommerce growth driven by own arms and paid marketing efforts.

We continue to believe that E. Commerce is not only try to direct E. Commerce revenue, but also serves as a gateway to the brand and it just got me too old for our product.

I'm thrilled to be launching a new website. This month, which will immediately used up all our online user experience, allowing us to better showcase our brand and product knowledge with our online.

This site will also bolster our product and merchandising capabilities as well because I should have some further optimization throughout 2022 and beyond.

Along with other digital initiatives launched this year, such as our three D. Ram Tanner digital catalogs and virtual showrooms, who are we believe we have tremendous opportunity to continue to deepen our client relationships and grow our e-commerce business we.

We look forward to sharing more information about our omni channel development and growth in future quarters. Once our new site is up and running for now I'll pass over to dawn.

Thank you John and good morning, everyone.

As John mentioned, we are pleased with our third quarter results and the underlying trends in our business demand and net revenue were very strong in the quarter, we're working hard to address the supply chain challenges to deliver product in a timely manner to our clients and we're investing for growth as you heard from John and John.

As a reminder, because our IPO was in early November for a private company in the third quarter with minimal tax obligations.

For the third quarter net revenue increased 68, 7% to $203 million. The growth was driven by increased demand for our products as well as elements of our supply chain beginning to catch up with client demand. We're pleased to announce the comparable growth was 61, 3% in the quarter.

Demand remains strong in the quarter as well if demand comparable growth of 28, 3% on a one year basis and 72% on a two year stack basis, given the substantial demand comp growth that we began to see in the third quarter of 2020, and a corresponding increase in our backlog we've been focused on reducing delivery times from the peak levels experienced earlier this year.

Accordingly, we expected comp growth to outpace demand comp growth in the quarter and our results were in line with those expectations.

Gross margin increased 87, 6% to $85 million in the quarter driven by our higher net revenue, partially offset by the related increase in product and transportation costs as well as higher credit card fees related to demand.

Gross margin as a percent of net revenue increased 420 basis points to 41, 7% the improvement, reflecting our ability to leverage our fixed costs over higher net revenue.

SG&A expenses increased 66, 2% and $68 million, primarily from investments to support the growth of our business incorporate and warehouse expenses higher demand driven showroom compensation expense increased marketing investment and one time costs related to the IPO as a percentage of net revenue SG&A expenses declined.

A few basis points to 33, 5%.

Interest expense in the quarter was approximately $1 million.

Net income of $14 million in the third quarter of 2021 was up significantly compared to approximately 1 million in the third quarter last year and adjusted EBITDA increased over three times to $31 million from 10 million in the third quarter of 2020.

Year to date through September 30th net income increased to 31 million and adjusted EBITDA increased to over 90 million compared to $14 million and $41 million respectively. In the first nine months of 2020.

Turning to the balance sheet as of September 30th cash and cash equivalents of $149 million and the company had no long term debt.

That merchandise inventory was 171 million as of September 30, or 58% increase from December 31, 2020, as we built inventories in response to our strong ongoing client demand.

As I mentioned earlier, while we are focused on reducing our backlog and our comp growth is now outpacing our demand talk that demand remains very strong and we are increasing our inventory levels accordingly.

For the nine months period ended September 32021, net cash provided by operating activities was $143 million.

So the idea of the company remains in a net cash position for.

For the nine month period ended September 30th capital expenditures were nearly $30 million and landlord contributions were 11 million as a result company funded capital expenditures were approximately $18 million for the nine months period.

Regarding capex and investment in new showrooms. This is a good time to point out our strong unit economic model and return on investment from new showrooms.

Target an average investment in the new showrooms, approximately 1.4 million with a landlord contributing the balance of the total $3 million to $4 million cost, we expect new showrooms to be profitable within the first year of opening and by year. Three they have an average net revenue of $6 million with a 27% contribution margin.

As I mentioned, we completed our initial public offering after the third quarter. We used the proceeds from the IPO to pay the $64 million exit fee due under our former term loan that we terminated in December 2020, we allocated the remainder of the IPO proceeds for general corporate purposes, including a replenishment of working capital after the payment of a pre IPO.

Distributions to our house LLC unitholders.

Regarding our full year 2021 and implied fourth quarter outlook. Please refer to this morning's press release.

Underlying our outlook, particularly for net income it's continued expectation of higher freight costs will pressure gross margins in the fourth quarter as higher cost inventory is delivered as a reminder, in the fourth quarter. We also incurred a $15 million derivative expense related to our former credit facility $15 million in one time IPO and reorganization.

<unk> costs, and we will begin to sort of public company costs of approximately $3 million per quarter, all impacting SG&A expenses.

Because I know there are fully factored into our outlook for the full year and implied fourth quarter guidance.

Note that going forward, we plan to issue annual guidance, which will be updated quarterly.

That concludes our prepared remarks, thank you for your attention and we would now like to open the call for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is another question queue.

Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys. Please limit yourself to one question and one follow up one moment, while we poll for questions.

Our first question comes from the line of Curtis Nagle with Bank of America. You May proceed with your question.

Oh good morning, Thanks, very much so I guess the.

First one or what are your competitors are obviously reported last night.

I think there were some questions around you know whether they had seen any change in behavior in terms of Rob.

Don't know where people are shopping and what channels or perhaps more.

Demands you draw on the cross I think they said no not really but just curious so you know if you guys have any comments on that and then I'll have just a quick follow up.

We continue to see a demand was strong in both channels E. Commerce continues to perform really well as it has throughout COVID-19, but showroom traffic has picked up as well. So we don't we're seeing meaningful trends are differentiating and a kind of a third quarter or fourth.

Quarter to date based on D. Newberry.

Okay fair enough and silver early so.

That makes sense and then just forgive me if I missed this but in terms of what we're thinking.

Backlogs peak, you know I guess fair to assume kind of mid next year or you know I always out looking right now and you know that.

That may be changed in terms of your expectation say from I don't know a three months ago.

Yeah, our expectation for the backlog is consistent with how we were thinking about it a few months ago. We continue to see really strong demand is as we noted in the press release and based on that strong demand and continuing our freight constraints.

Uh huh.

You know, we do expect that that backlog to remain elevated and we will work through it throughout 2022 were.

We're not seeing significant increases in cancellation rates. So clients continue to be willing to wait for the merchandise in the product and so we feel confident in our strategy. We do continue to be opportunistic and bring in product as quickly as possible in a financially prudent manner. So we think our strategy is working and we'll continue.

To closely monitor our cancellation rates.

But to date, we're we feel good about how we're handling it.

And Curtis.

Just to add to that.

Yeah.

We do expect the backlog to continue however.

The amount of wait time the clients have.

It continues to get a little bit tighter.

So in other words, you don't have to wait quite as long as they did six months ago.

And that's really the key here that we're looking at as well.

We may not be 100% in stock, but you don't have to wait X amount of time.

As John just mentioned, we're seeing you know.

Clients are used to that we feel they've been trained on the worldview.

To wait now for two years for things that most so they are willing to wait they know it's product that they're investing in their home.

We're not throw away product so it will be.

Long term for them.

And just like just to clarify you guys are not seeing an increase in cancellations was that correct.

That's correct for those remain lower than pre COVID-19 rates.

Perfect. Okay. Thank you appreciate it.

Okay.

Our next question comes from the line of Jonathan <unk> with Jefferies. You May proceed with your question.

Great Good morning, John Don and John Congrats on the strong quarter.

Thank you two questions first one is on just promotion Audi I think a key question in retail. These days is how sustainable are the pullback in promotional posture is once COVID-19 paid so maybe just kind of take a chance to kind of share management.

Confidence in being able to see success with more full price selling in a future backdrop where are there.

There may not be a pandemic and there may not be long lead times. So just maybe talk to that dynamic. Thanks.

Hey, Jonathan This is Jim Porter.

Yeah, we we feel very confident in our current approach, we actually started pulling back on promotional activity back in 2019, so pre COVID-19 and we're seeing really strong responses to it at that time. It really allows us as a brand to focus more on the quality of the product the stories of our artist and.

The uniqueness of what we are offering to our clients and we see really strong responses to that our clients are looking for that quality of sabic and are willing to pay for it so.

So we have continued to pull back on promotions throughout the Covid time period, we do still you know run promotions out in time to time, particularly of a three day weekend, but we think that pullback can kind of continue going into 2022.

Great. That's helpful. Jim and then I guess, Don just a follow up question on freight costs. You know curious how those are trending in October and November are against maybe initial expectations you had for four Q and you know not.

Not looking for specific guidance for next year, but just Directionally do you think a freight costs as a percentage of inventory should still be higher versus the recent trend or do you think it kind of practical that maybe that that ratio could could be more flattish or even down.

Thanks.

Sure you know, we continue to be opportunistic and really thoughtful in our approach to inbound product.

Between bringing in product at the spot rates in the contracted rate we.

We don't have any material changes to the forecast for us with regards to freight increases you know I think we were appropriately conservative with how we thought about those for next year. The we are seeing a little bit of favorability in the fourth quarter relative to what we had provided a few months ago.

But that being said you know the free free industry continues to be volatile.

And so we have a very clear line of sight into any favorability that would be ongoing we're going to kind of hold steady with how we're thinking about 2022.

So the gross margin rate you know four for the fourth quarter I would expect somewhere in the kind of 38% to 39% so slightly better than where we were anticipating them a few months ago.

And Jonathan just to add to that keep in mind.

You may or may not know, but over half of our product is purchased here in the United States. So we have not seen significant increases in freight costs like like the containers are.

And that's we think a competitive advantage of ours.

Okay. That's helpful. Thanks for the color and best of luck for the rest of the quarter.

Thank you.

Our next question comes from the line of Peter Keith with Piper Sandler You May proceed with your question.

Hey, Thanks, Good morning, everyone and congrats on the first quarter out of the gate here.

I wanted to ask about the new <unk>, North Carolina facility with the poultry production and D. C capabilities could you give us the the timing on when you expect that's going to open and then are you seeing any potential delays just as it would relate to hiring or build out.

Sure I can take that Peter.

The building is built we're actually getting permits hopefully this week or next week.

We fully intend to be in there before the year's out.

Putting product in there and getting going.

As far as the team goes there are.

Almost tired.

They say, it's been a great great great response.

Great building to work out of.

We get great benefits and so forth. So we're pretty well almost fully staffed. So we're excited to go we moved a few people down from Cleveland to help manage it and so forth they've been down there for a month or so.

And we're ready to go we're just waiting on one inspector.

Which we hope you all are from very soon.

Great. Okay, that's exciting.

And maybe a separate question I'll I'll direct to I Don on the on the model so it really nice.

Increase in the outlook for for Q4 versus what you were looking for earlier.

We're looking at I guess, if our math is right.

Midpoint, raising revenue by about $14 million, raising EBITDA by about $6 million. So it's a really healthy.

Mid Forty's contribution margin if our math is right. It is there anything unique about Q4 that that allows you to get that type of margin or is that something we could see in in later quarters as well.

We're continuing to work through.

Backlog, we are our strategy to bring product in it some of those higher spot rates.

Youre seeing some of that on the top line flow through we're also have worked really diligently in the warehouse.

And with our third party providers to expand the capacity flowing out of our existing headquarters building. So so we're really pleased with where we expect the fourth quarter to come in and hopeful that we'll be able to continue that cadence.

Okay sounds great well good luck with the holiday season.

Thank you.

Our next question comes from the line of Simeon Gutman with Morgan Stanley You May proceed with your question.

Hey, Good morning, everyone. My first question is on sales.

Can you talk about how you'd characterize the underlying momentum other business do you feel like it's accelerating do you think is holding it looks like the top end of your sales guide implies a modest acceleration in like the way we calculate this geometric stack, but curious if you. If you think that is that fair or do you think things are getting sequentially.

Longer.

I used them in so.

So you know, while we don't provide guidance on demand, we haven't seen any meaningful change in demand trends in the fourth quarter on a two year stack basis.

We are facing larger year over year comparisons in the fourth quarter. So we're looking at it on a two year stack basis I will note that similar to what we anticipated and saw in the third quarter, we would expect comp sales growth to outpace demand comp growth as we continue to work through the supply chain constraints and deliver against the backlog of orders but.

Demand continues to be healthy and we're pleased with what we're seeing in our client base.

Okay. Thanks, and then my follow up on adjusted EBITDA, So in the fourth quarter.

Fight the revision higher still looks like it will be down year over year, and we know why investment and maybe some some freight pressure can you talk about the drivers between those two when we sort of lap them both.

And then whether there was anything different in timing as far as the investments go whether they are shorter in duration longer in duration and when we might see EBITDA flip I know I'm not trying to get quarterly guidance for next year, but just conceptually when we see EBITDA growth year over year.

Yeah. It does.

Think about the investments, we're making in the business.

In the fourth quarter, we're going to see the expenses and the investment in North Carolina and some.

Key initiatives come into play in the P&L and as we think about next year and on boarding a western distribution center that is larger in size than North Carolina. It will take time to start to see some leverage on those.

We don't expect it to come out of the gate on both of those facilities with everything running smoothly at 100% I'm, sorry, we have thoughtfully forecasts at a ramp up out of those facilities.

So I think you can kind of think about the timing of those.

Gail.

And then as we think about freight costs.

I mentioned earlier, we are forecasting that to remain elevated through next year until we have line of sight into those clearly coming down consistently it's just prudent for us to expect those to remain elevated.

Okay. Thanks, happy holidays, and good luck in the fourth quarter.

Thank you.

Our next question comes from the line of Andrea <unk> with Barclays. You May proceed with your question.

Yeah, Good morning, and congrats again on your first quarter out of the box very successful.

John I was wondering can you discuss the price increases that you took kind of early fall I believe it was in the high single digit range. When did you take them what was the customer reaction clearly it doesn't seem like any noticeable impact on demand and what's the opportunity for 2022 further increases.

And then Dan if you can talk about you know what is the assumption for spot versus contract in your fourth quarter guidance, what does it look like for Q1.

Q1 has any more or similar pressure on freight and inventory deliveries. Thank you.

Yes.

Sure I can start with that.

Yes, we did we did take price increases.

We have not seen any.

Much demand falling off if any.

You know the clients seem to be.

It seems to be fine.

Sales teams adjusted to it and it.

It seems like it's it's it's it's.

Good to go as far as the future goes.

Your guess is as good as mine.

Prices are going up all over the place, we think things have stabilized quite a bit.

From beginning of this year, where lumber prices were two or three or four times higher and then they came back down at.

At least things aren't don't seem to be as volatile as they were.

So where you.

I'm hopeful as I'm sure everybody in the world is that that inflation will get under check here.

But.

If we do get price increases, where we tend to and intend to pass them along raise prices and really protect our margin.

Yeah, Hi agent.

Wait out with regards to the spot versus contract rates vary.

By origin and it really is contingent on what's going on at each individual port what I'll say is that the fourth quarter. It is relatively consistent with how we approached it in the rates that we are the percentages between spot and contract that we deployed in the third quarter.

We are forecasting those to continue.

Throughout 2022, but it it's really just contingent upon container availability in what's happening at each individual court, which as you know is not it's not just subject to our house shipping so.

So that's how we forecast that we think we're appropriately conservative.

In 2002.

Okay. Thank you very much best of luck for holiday.

Okay.

Thank you very much.

Our next question comes from the line of Peter Benedict with Baird. You May proceed with your question.

Okay.

Great Hey, good morning, everybody I.

I guess my first question.

Maybe for Jan just on the on the on the New web platform, that's going to be launching here. Later. This month just curious maybe you can expand on maybe two things one is as a customer what are we going to see.

Maybe.

That's most notable are most different and then.

What does it really allow you to do.

Next year that you have not been able to do in the past whether it be through data analytics or <unk>.

What would you kind of call out as the biggest deliverables there. That's my first question.

Yeah, Hi, Peter.

Yeah, we're really excited about the new site launching.

Final testing mode right now so they are coming very quickly I think the biggest thing that we're really excited about for the immediate impact. It's just that the huge step up and customer user experience, so really focusing in on that inmarsat creative content and imagery and storytelling and really working to.

Bring the our house brand to life on that digital channel.

I think one of the most amazing thing about the our house story. If you look this brand has been getting being built for 35 years and our showrooms. We know what happens when clients are in their and we've had a good site experience, but we're really excited for clients to be able to really deep dive into the brand and the product.

Get that says Wow factor when they see inventory and then get into the details of the story and then also making the shopping and the purchase journey easier and more seamless.

And ultimately less stressful for clients. So we're excited about things like navigation and merchandizing capabilities to really help that client journey as they're starting to explore the product get the information that they need to find other products that they might like.

Will it be able to do that in their homes, and then be able to connect that to that end showroom experience or do the entire thing digitally online.

Looking forward to next year I think you know what the repack launch really excited about the increased analytics capabilities and backend functionality.

Oh, you know over time really being able to lean more into AI assisted product discovery content personalization and the like analytics will really allow us to understand how clients are engaging with the platform.

So we can constantly test and improve conversion optimization opportunity.

And really just getting to know our clients better and then probably I know you only asked for next year, but I think the really key thing for US is it really just improves our speed to market for new innovation as well so.

So we really see that as a great step up and that's going to be an immediate impact on our e-commerce business, but it's really setting us up for success in the future to stay at the head of IR enhancement that we can make to that.

Online part of our business.

Alright, that's great content, Thank you and I guess, maybe somewhat related.

Circling over to brand awareness and just curious some of the strategies around that I know opening showrooms on their own drive some brand awareness, but maybe talk about your plans from a marketing perspective, where you're allocating your spend over the next year or two and just how your brand awareness sets up right now nationally and maybe if there's any pockets.

Either particularly strong or underdeveloped, just just any context around that.

And your kind of plans for driving brand awareness would be helpful. Thank you.

Definitely yeah, I mean, I think you nailed the big one on our showrooms just such an incredible new client acquisition vehicle for us they introduce the brand to new pockets in markets around the country and so we are.

Been seeing incredible success that we've been opening up new showrooms, we have additional new showrooms planned for next year.

And we're excited to continue to support that we are very purposeful about the marketing support we put around those showrooms.

It's great knowing that we have with key tool in those markets. We can really amplify our efforts of digital marketing catalogs, social media and those buckets as well to amplify those effects.

I think overall, though as we're thinking about brand awareness.

We really look at it as an omnichannel opportunity and holistically across the marketing mix. So within our direct mail program. We are very focused on our prospecting audience and have really been working over the last few years to increase our prospecting circulation and getting these incredible introductions too to the.

<unk> into the homes of clients.

Really excited by the results we've been seeing this year.

Looking to continue that next year.

Digital marketing and more broad based marketing is also a great opportunity to support what we're seeing but I think there are also you know we touched a little bit on the call about some of our partnerships and media efforts.

We really haven't done much of that is Brian before.

It's really grow.

Relatively organically for 35 years and so we're just at the beginning of investing in those areas and really looking to continuously try new things and test and optimize upon what works.

And then social media and Influencers I noted that we had a million followers on Instagram in Q3, and we just see so much runway and potential and those areas both in our own channels.

But also partnering with Influencers and partners I'm, just to spread that message to a wider audience. So we have a lot of levers to pull and I think we're really excited just to continue playing and pushing into those I'm seeing what works the best.

Okay.

That's great. Thanks, so much and good luck.

Thank you.

Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group you May proceed with your question.

Good morning, and congratulations on your on your first report here I wanted to ask also on on supply chain, but specifically on on Vietnam. You know what are you seeing there from your partners as far as production and perhaps any color you can share on your exposure in and the ramp up.

In manufacturing out of that country.

Yes, Vietnam has been.

<unk> bin.

One of the sources subject over over in Asia.

They were.

Basically shut down for quite a while.

They are up and running.

Now and.

We believe that.

That.

Shipments will be.

Pretty much on time going forward here.

One thing to note is Vietnam is a very small part of our of our business.

I think we only have two or three vendors there.

So it hasn't impacted us much much at all.

<unk> had pretty good inventory stock.

So we're not seeing.

A decrease in sales and just Vietnamese products.

Whereas.

I'm sure if we had a lot more.

Exited the Vietnam basket, it would be a whole different story.

Thank you and then my second question is on.

The worst perhaps you can talk about your store pipeline for next year I guess any you know locations that you're particularly excited about it.

And anything to note on the performance you're seeing out of your this tiny center switch.

Smaller.

Matt stores I know, it's just a few but any color there would be helpful. Thank you.

Sure.

Yes.

Constantly working on new stores I think that the guidance has been we're going to open five to seven.

We feel confident we'll we'll be in that range.

<unk>.

We're not giving out locations at this point.

As far as design studios, we've only had one open a whole year very happy to see the results of that one.

We've had another one opened for a few months and another one opened a few weeks.

So.

The newer ones.

So have started right out of the gates pretty strong on demand sales of course.

Sure.

The turn those into actual sales usually it takes it takes a little bit.

Just for the backlog and so forth.

We do have two more.

Design studios being opened before the year's out so we'll have five in total.

By January one.

After that we are very excited to really.

<unk> tweaked down merchandise and re merchandize them, if we need to learn a lot.

Into 2022, and then from there we'll see if we can really grow that business as well as the <unk>.

Regular stores.

Yeah.

Thank you.

Yeah.

Youre welcome.

Our next question comes from the line of Steve Forbes with Guggenheim Securities. You May proceed with your question.

Good morning.

Maybe for Jan here.

Curious if you could discuss any client demographic or client engagement differences that you're seeing within the new customer base relative to the existing base.

I think you mentioned something in the prepared remarks here about the new customer growth, but just curious what you are seeing anything notable to call out.

Yeah. So we've been really excited by our new customer growth over the last year and a half.

And we continue to see that so that is really exciting.

You know, it's it's really too early to have a full picture as to how those clients are behaving relative to clients to join the business earlier, but really the initial results is that.

They're spending more than new clients were before COVID-19, but we're seeing that trend in our existing client base as well and currently that behavior that repeat behavior seems like it's very similar so we're gonna be continuing to monitor it and pay very close attention to it but overall, it's looking like theyre coming in and being really great clients sit with that.

Yes.

And then maybe just a quick follow up on V and home designer initiative can you can you update us on the percent of demand demand generated from that group. Your hiring plans right for the next couple of years and whether the average order value generated from those designers has has changed at all relative to what was discussed.

During the IPO process.

Hey, Steve.

So.

The Oh, we said earlier a few months ago is over three times that of a non and home designer assisted sale and we continue to be consistent with that.

When we think about them.

Sure.

Their penetration we are seeing increases.

And that program relative to where we were at last year.

So we're really pleased with how that program is continuing to perform we will continue.

Expand that program by the end of this year, we'll have several more in place and then next year. We will continue to ensure that our existing store fleet has the appropriate staffing levels and all new showroom as well also.

You don't have this program was deployed as well so we're really confident we're excited about this program.

And it seems to be working really well for us.

Yeah.

Thank you best of luck.

Thank you very much.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to MS. Wendy Watson for closing remarks.

Thank you everybody and we will look forward to talking to you again next quarter.

Happy holidays, everyone.

And thank you for your time.

Thank you everyone for your participation and interest in our house, we look forward to speaking to you next quarter.

Okay.

Yeah.

[music].

[music].

[music].

[music].

Good morning, and welcome to the Art House third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal remarks. Please note that this call is being recorded and the reproduction of any part of this call is not permitted without written authorization from the company.

I would now like to turn this call over to your host Ms. Wendy Watson Senior Vice President of Investor Relations. Thank you Ma'am you may begin your presentation.

Good morning, and thank you for joining our houses inaugural earnings call with me today are John Lee Co founder Chairman and Chief Executive Officer.

Jen border, Chief Marketing Officer, and Don Phillips, Chief Financial Officer.

John will begin with a company overview and operational detail.

Jim will discuss the status of marketing initiatives across our omni channel footprint and Don will cover our third quarter performance and outlook.

After their formal remarks, we will open the call to questions.

For Q&A. Please limit to one question and one follow up if you have additional questions you may return to the queue.

We issued our earnings press release, and our 10-Q for the quarter ended September 32021 before market opened today.

Documents, along with supplementary slides will be made available on our Investor Relations website at IR Dot our house Dot com.

A replay of the call will also be available on our website within 24 hours.

As a reminder, remarks today concerning future expectations events objectives strategies trends or results constitute forward looking statements.

Actual results or events may differ materially due to a number of risks and uncertainties.

A summary of these risk factors and additional information. Please refer to this morning's press release and the cautionary statements and risk factors contained in the company's third quarter 10-Q, as such factors may be updated from time to time in its other filings with the SEC.

The forward looking statements are made as of today's date and except as may be required by law. The company undertakes no obligation to update or revise these statements.

We will also refer to certain non-GAAP financial measures in this morning's press release includes the relevant non-GAAP reconciliations I will now turn the call over to John.

Good morning, everyone and thank you for taking the time to join our third quarter.

2021 earnings call, our first as a publicly traded company following our IPO in early November.

Exciting milestone for our company and I want to thank more than 1400, our house team members for working together to get US at this point. He truly are the best in the business and I am proud to be part of such a dedicated team who cares for one another our clients and what we did.

We had a record third quarter performance.

Net revenue in both our retail and e-commerce channels up 69% and comparable growth up over 61% compared to the third quarter last year.

Don <unk>, our CFO will cover our third quarter performance and the outlook for the remainder of the year in more detail later in the call, but we are extremely pleased with our trends in our business.

This is our inaugural earnings call I'll take a few minutes to introduce our inhouse describe what makes our brand so special.

Explain why I'm, so excited about the growth going forward.

I founded this company 35 years ago with a simple mission that furniture should be responsibly sourced lovingly made and built to last.

In order to fulfill our mission, we built a unique model that differentiates us in the marketplace in four key areas and offers multiple strategies for growth.

We believe we are in a position to nearly double.

The size of our business over the next few years and drive profitable long term growth for years to come.

Our first key differentiator is our product.

All of our products are designed in house and source directly from leading artisan.

Vendors around the world by sourcing our own exclusive products, we control the design.

We control the incredible quality of the supply chain and our cost.

Through our vertical integration designs and sourcing model, we offer a globally curated assortments.

Hand crafted products that represent our livable luxury aesthetic.

The second key differentiator is our showrooms.

From our very first showroom.

In Cleveland, Ohio, We have always believed that retailers theater, our showrooms should showcase our products in a way that is both inspirational and aspirational.

When clients walk into our showrooms, we want them to envision that there could be an extension of their own home, we've put as much detail and attention into our showrooms as we do on our products and expanding our showroom base represents a tremendous white space growth opportunity at significantly build our brand awareness.

Yes.

In the third quarter, we opened two new showrooms, a traditional showroom in Salem, New Hampshire, and a design studio in Burlingame, California. We also relocated a showroom in Mclean, Virginia to the Tysons Galleria.

We converted this show early into the new format.

We ended the third quarter was 77 showrooms across 28 states, we expect to end the year at 79 showrooms.

In the U S alone, we believe we can grow to as many as 165 total showrooms.

Target is to add five to seven new showrooms per year for the foreseeable future.

Within our showrooms. We are also growing our in home design a program that offers clients the complementary service of having a designer personally come to their home.

At the end of the third quarter, we had 65 designers in 54 showrooms and the average order value when the when the client purchases who are one our in home designers is more than three times greater than the standard order we.

We intend to at least have one in home designer per showroom with locations accommodating more than months.

The third differentiator of our Omnichannel experience, Jim Porter, who will cover our omnichannel initiatives.

Detail later in the call, but we will take the same inspirational approach to showcasing our product online and.

In our catalogs as we do on our showroom.

Our omnichannel approach serves to further increase our brand awareness and represents another level of our growth.

We only recently begun investing in the digital capabilities and with ecommerce compromising approximately 18% of net revenue today.

See a significant runway to grow our e-commerce sales as we enhance our omnichannel capabilities.

The fourth key differentiator is our client first mentality. This core value runs through our business everything we do from the way we design our products builder showrooms hire train and retain associates and invest in growth.

As with our clients in mind.

I invite you to visit one of our showrooms and experience our client first mentality and with our incredible design consultants firsthand.

With our tremendous opportunity to continue growing and scaling our business. We are closely focused on the current supply chain dynamics, and making investments to expand our distribution capabilities.

On the inbound side on the supply chain, we are working closely with our vendor partners to fulfill orders and ramp up production.

Our vendors have been incredibly resilient through the strong demand environment, increasing their capacity growing with us and further deepening our relationships.

At the same time, we are also expanding our vendor base and bringing in more new products.

In our poultry, we expect to see improvements in lead time with the opening of our new upholstery manufacturing and distribution facility in North Carolina.

The facility will double our in house upholstery manufacturing capabilities.

On the outbound side of the supply chain, we are increasing our capacity and expanding our footprint. We have begun a 230000 square foot expansion.

Ohio distribution and corporate facilities.

As well as expanding our offices and North Carolina, which we will add another 310000 square foot distribution capacity. In addition to 187 square feet of upholstery manufacturing in the second half of 2022, we are planning to add a third distribution facility in the western United States.

Where we have significant growth opportunities along with our ongoing efforts on the inbound side the increases in our outbound capacity will further allow us to get products to our clients more quickly more efficiently reducing backlogs in shortening lead times.

In summary, we feel very good about the trends of our business and the investments, we're making to drive long term growth.

At a time when consumers are spending more and more time in their home investing in their home and looking for more functional spaces. We think we're very well positioned to continue to gain market share.

The premium home furnishings market in the United States represents a $60 billion opportunity today, our market share is less than 1%.

<unk> large and rapidly growing market and we have multiple avenues.

<unk>, a long runway to pursue sustainable growth.

I could not be more excited about the future of our house.

Our products are unique in the marketplace. We have built an incredible team incredible infrastructure to grow and to scale our business now.

Now I'll pass the call over to Jenn quarter to review, the Omnichannel and digital initiatives.

Thank you John and good morning, everyone. One of our houses biggest opportunities to increase our market share and to grow our brand awareness.

We are in the enviable position of introducing I would take you must be crafted and proven heritage brands.

Mostly organically over the past 35 years to a highly fragmented and arguably underserved market in 2019, we began significantly increasing our investment in digital initiatives and bad marketing overall, we developed a test and learn strategy that bounded brand awareness approach with high return on advertising spend.

Well as driven targeted campaigns.

Our focus is on profitable and meaningful long term growth for the brands we.

We have a proven ability to drive brand awareness by opening more showrooms and we see continued opportunity further enhancing and expanding our omnichannel marketing and technology capabilities.

For the third quarter, we are excited to report healthy client growth over Q3 last year in terms of both existing client numbers and value as well as the new client acquisition numbers and value.

Our approach to clients think omni channel our direct mail channel continues to perform incredibly well for us with our fall catalogue hitting homes at the end of August we may I'll, just pass along to our largest circulation ever while achieving a higher realized in last year. We are particularly excited to see direct mail continued to perform.

Not only with our existing client base, but also as a significant driver of traffic to our website and new clients to the breadth.

Early results for our holiday Gaslog, which had homes in the beginning of November are looking very promising as well.

Q3 saw us increasing our media advertising and partnerships participating in both how beautiful the whole home and architectural digest iconic home campaign, along with continuing to develop and expand upon our Influencer program on social media in September we reached 1 million followers on Instagram.

On the E Commerce front, we saw strong ecommerce growth driven by own arms and paid marketing efforts. We continue to believe that e-commerce, not only try to direct E. Commerce revenue, but also serves as a gateway to the brand and a discovery tool for our product we have.

I hope to be launching a new website. This month, which will immediately used up all our online user experience, allowing us to better showcase our brand and product knowledge with our online client.

This item will also bolster our product and merchandising capabilities as well as position us for further optimization throughout 'twenty to 'twenty two and beyond.

Along with other digital initiatives launched this year, such as our <unk> room planner digital catalogs and virtual showrooms, who are we believe we have tremendous opportunity to continue to deepen our client relationships and grow our e-commerce business.

We look forward to sharing more information about our omnichannel development and growth in future quarters. Once our new site is up and running.

Now I'll pass over to John.

Thank you John and good morning, everyone. As John mentioned, we are pleased with our third quarter results and the underlying trends in our business demand and net revenue were very strong in the quarter, we're working hard to address the supply chain challenges to deliver product in a timely manner to our clients and we're investing for growth as you heard from John and John as a reminder.

Our IPO was in early November we were a private company in the third quarter with minimal tax obligations.

For the third quarter net revenue increased 68, 7% to $203 million. The growth was driven by increased demand for our products as well as elements of our supply chain beginning to catch up with client demand. We're pleased to announce comparable growth was 61, 3% in the quarter demand remains strong in the quarter as well as demand comparable growth of <unk>.

Eight 3% on a one year basis, and 72% on a two year stacked basis, given the substantial demand comp growth that we began to see in the third quarter of 2020, and a corresponding increase in our backlog we have been focused on reducing delivery times from the peak levels experienced earlier this year accordingly, we expected comp growth to outpace demand.

<unk> growth in the quarter and our results were in line with those expectations.

Gross margin increased 87, 6% to $85 million in the quarter driven by our higher net revenue, partially offset by the related increase in product and transportation costs as well as higher credit card fees related to demand growth.

Gross margin as a percent of net revenue increased 420 basis points to 41, 7% the improvement, reflecting our ability to leverage our fixed costs over higher net revenue.

SG&A expenses increased 66, 2% to $68 million, primarily from investments to support the growth of our business and corporate and warehouse expenses higher demand driven showroom compensation expense increased marketing investment and onetime costs related to the IPO as a percentage of net revenue SG&A expenses declined.

50 basis points to 33, 5%.

Interest expense in the quarter with approximately $1 million.

Net income of $14 million in the third quarter of 2021 was up significantly compared to approximately $1 million in the third quarter last year and adjusted EBITDA increased over three times to $31 million from $10 million in the third quarter of 2020.

Year to date through September 30th net income increased to $31 million and adjusted EBITDA increased over $90 million compared to $14 million and $41 million respectively. In the first nine months of 2020.

Turning to the balance sheet as of September 30th cash and cash equivalents of $149 million and the company has no long term debt.

Merchandise inventory was 171 million as of September 30, or 58% increase from December 31, 2020, as we built inventories in response to our strong ongoing client demand.

As I mentioned earlier, while we are focused on reducing our backlog and our comp growth is now outpacing our demand growth demand remains very strong and we are increasing our inventory levels accordingly.

For the nine months period ended September 32021, net cash provided by operating activities was $143 million post.

The idea of the company remains in a net cash position for.

For the nine month period ended September 30th capital expenditures were nearly $30 million in landlord contributions were $11 million as a result company funded capital expenditures were approximately $18 million for the nine months period.

Regarding capex and investment in new showrooms. This is a good time to point out our strong unit economic model and return on investment from their showrooms.

Target an average investment in the new showroom of approximately $1 4 million with a landlord contributing the balance of the total $3 million to $4 million cost, we expect new showrooms three profitable within the first year of opening and by year three they have an average net revenue of $6 million with a 27% contribution margin.

As I mentioned, we completed our initial public offering after the third quarter. We used the proceeds from the IPO to pay the $64 million exit fee due under our former term loan that we terminated in December 2020.

We allocated the remainder of the IPO proceeds for general corporate purposes, including a punishment of working capital after the payment of our pre IPO distribution to our house LLC unitholders.

Regarding our full year 2021, and implied fourth quarter outlook. Please refer to this morning's press release.

Underlying our outlook, particularly for net income is continued expectation of higher freight costs will pressure gross margins in the fourth quarter as higher cost inventory is delivered as a reminder, in the fourth quarter. We will also incur a $15 million derivative expense related to our former credit facility $15 million in one time IPO and reorganization.

<unk> cost and we will begin to incur a public company cost of approximately $3 million per quarter, all impacting SG&A expenses.

These items are fully factored into our outlook for the full year and implied fourth quarter guidance.

Note that going forward, we plan to issue annual guidance, which will be updated quarterly.

That concludes our prepared remarks, thank you for your attention and we would now like to open the call for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys. Please limit yourself to one question and one follow up one moment, while we poll for questions.

Our first question comes from the line of Curtis Nagle with Bank of America. You May proceed with your question.

Oh good morning, Thanks, very much so.

First one I'm sorry, what are your competitors are obviously reported last night.

I think there were some questions around you know whether they have seen any change in behavior in terms of I D.

Where people are shopping and what channels or perhaps more.

Oh demand due to on the Cogs.

I think they said no not really but just curious if you guys have any comments on that and then I'll just a quick follow up.

We continue to see demand was strong in both channels.

E Commerce continues to perform really well as it has throughout COVID-19, but showroom traffic has picked up as well. So we don't we're seeing meaningful trends are differentiating and kind of the third quarter or fourth quarter to date based on the new variant.

Okay fair enough and silver early so.

That makes sense and then just forgive me if I missed this but in terms of what we're thinking.

Backlogs peak I guess fair to assume kind of mid next year or you know I always out looking right now.

How has that maybe changed in terms of your.

Your expectation say from I don't know three.

Three months ago.

Yeah, our expectation for the backlog is consistent with how we were thinking about it a few months ago. We continue to see really strong demand is as we noted in the press release.

And based on that strong demand and continuing our freight constraints.

We do expect that backlog to remain elevated and we will work through it throughout 2022.

We're not seeing significant increases in cancellation rates so clients continue.

If you'd be willing to wait for the merchandise in the product. So we feel confident in our strategy. We do continue to be opportunistic in bringing product as quickly as possible in a financially prudent manner.

So we think our strategy is working and will continue to closely monitor our cancellation rates.

But to date, we feel good about how we're handling it.

Curtis.

Just to add to that.

We do expect the backlog to continue however.

The amount of.

Wait time the clients have.

It continues to get a little bit tighter. So in other words, they don't have to wait quite as long as they did six months ago.

And that's really the key key that we're looking at as well.

We may not be 100% in stock, but you don't have to wait X amount of time.

<unk>.

As John just mentioned we're seeing.

Clients are used to that we've got they've.

<unk> been trained on the Worldview to.

To wait now for two years for things almost so they are willing to wait they know it's product that they're investing in their home.

Throw away product so it will be.

They are long term partners.

And then just like just to clarify you guys are not seeing an increase in cancellations is that correct.

That's correct.

Those remain lower than pre Covid right perfect. Okay. Thank you appreciate it.

Okay.

Our next question comes from the line of Jonathan Matuszewski with Jefferies. You May proceed with your question.

Great Good morning, John Don and John Congrats on the strong quarter.

Thank you I had two questions.

First one is on just promotional holiday I think a key question in retail. These days is how sustainable that the pullback in promotional posture is once COVID-19 fade. So maybe just kind of take a chance to kind of share management's confidence in being able to see success with <unk>.

More full price selling in a future backdrop where are there.

There may not be a pandemic and there may not be long lead time, so just maybe talk to that dynamic. Thanks.

Hi, Jonathan This is Jim Porter.

Yeah, we feel very confident in our current approach, we actually started pulling back on promotional activity back in 2019, so pre COVID-19.

And we are seeing really strong responses to it at that time, it really allows us as a brand to focus more on the quality of the product the stories of our artist and.

The uniqueness of what we are offering to our clients and we see really strong responses to that our clients are looking for that quality of sabic and they're willing to pay for it.

We have continued to pull back on promotions throughout the Covid time period, we do still run promotions at time to time, particularly have a three day weekend, but we think that pullback Ken can continue going into 2022.

Great that's helpful. Jim and then.

I guess, Don just a follow up question on freight costs, you know curious how those are trending in October and November.

Against maybe initial expectations you had for <unk>.

Not looking for specific guidance for next year, but just Directionally do you think freight costs as a percentage of inventory should still be higher versus the recent trend or do you think it kind of practical that maybe that that ratio could could be more flattish or even down.

And next year. Thanks.

Sure.

We continue to be opportunistic and really thoughtful in our approach to inbound product.

Between bringing in product at the spot rates in the contracted rate.

We don't have any material changes to the forecast for with regards to freight increases I think we were appropriately conservative with how we thought about those for next year.

We are seeing a little bit of favorability in the fourth quarter relative to what we have provided a few months ago.

But that being said the free free industry continues to be volatile.

And so we have a very clear line of sight into any favorability that would be ongoing we're going to kind of hold steady with how we're thinking about 2022.

So the gross margin rates.

For the fourth quarter, I would expect somewhere in the kind of 38% to 39% so slightly better than where we were anticipating a few months ago.

And Jonathan just to add to that keep in mind.

You may or may not know, but over half of our product is purchased here in the United States. So we have not seen significant increases in freight costs like like the containers are so.

And that's we think a competitive advantage of ours.

Okay. That's helpful. Thanks for the color and best of luck for the rest of the quarter.

Thank you.

Our next question comes from the line of Peter Keith with Piper Sandler You May proceed with your question.

Hey, Thanks, Good morning, everyone and congrats on the first quarter out of the gate here.

I wanted to ask about the new North Carolina facility with the poultry production and do you see capabilities could you give us the the timing on when do you expect thats going to open and then are you seeing any potential delays.

Relate to hiring or build out.

Sure I can take that Peter.

The building is built.

Actually getting permits hopefully this week or next week.

We fully intend to be in there before the year's out.

Putting product in there and getting going.

As far as the team goes there.

Almost tired.

They say, it's been a great great great response.

Building the work out of.

We give great benefits and so forth. So we're pretty well almost fully staffed so we're excited to go.

A few people down from Cleveland to help manage it and so forth they've been down there for a month or so.

And we're ready to go we're just waiting on one inspector.

Which we hope from very soon.

Great, Okay, and Thats exciting.

And maybe a separate question I'll I'll direct to dawn.

On the model so it really nice.

The increase in the outlook for for Q4 versus what you were looking for earlier, we're looking at I guess, if our math is right kind of midpoint raising revenue by about $14 million raising EBITDA by about $6 million. So it's a really healthy.

Mid 40% contribution margin if our math is right. It was there anything unique about Q4 that that allows you to get that type of margin or is that something we could see in in later quarters as well.

We're continuing to work through the backlog, we are our strategy to bring product in it some of those higher spot rates.

Youre seeing some of that on the top line flow through we're also have worked really diligently in the warehouse.

And with our third party providers to expand the capacity flowing out of our existing headquarters building. So.

So we're really pleased with where we expect the fourth quarter to come in and hopeful that we'll be able to continue that cadence.

Okay sounds great well good luck with the holiday season.

Thank you.

Our next question comes from the line of Simeon Gutman with Morgan Stanley You May proceed with your question.

Hey, Good morning, everyone. My first question is on sales.

Can you talk about how you'd characterize the underlying momentum of the business do you feel like it's accelerating do you think is holding it looks like the top end of your sales guide implies a modest acceleration in like can we calculate this geometric stack, but curious if you. If you think that is that fair or do you think things are getting sequentially straw.

Longer.

And demand.

So you know, while we don't provide guidance on demand, we haven't seen any meaningful change in demand trends in the fourth quarter on a two year stacked basis, we are facing larger year over year comparisons in the fourth quarter. So we're looking at it on a two year stack basis.

I will note that similar to what we anticipated and saw in the third quarter, we would expect comp sales growth to outpace the demand comp growth as we continue to work through the supply chain constraints and deliver against the backlog of orders, but demand continues to be healthy and we're pleased with what we're seeing in our client base.

Okay. Thanks, and then my follow up on adjusted EBITDA, So in the fourth quarter.

Spite the revision higher still looks like it will be down year over year, and we know why investment and maybe some some freight pressure can you talk about the drivers between those two when we sort of lap them both.

And then whether theres anything different in timing as far as the investments go whether they are shorter in duration longer in duration and when we might see EBITDA flip I know, we're not trying to get quarterly guidance for next year, but just conceptually when we see EBITDA growth year over year.

Yes, it does.

Think about the investments, we're making in the business.

In the fourth quarter, we're going to see the expenses and the investment in North Carolina.

IP initiatives come into play in the P&L and as we think about next year and Onboarding a western distribution center that is larger in size than North Carolina. It will take time to start to see some leverage on those.

We don't expect it to come out of the gate on both of those facilities with everything running smoothly at 100%. So we have thoughtfully forecasted a ramp up out of those facilities.

I think you can kind of think about the timing of those.

Our scale as well.

And then as we think about freight costs.

I mentioned earlier, we are forecasting those to remain elevated through next year until we have line of sight into those clearly coming down consistently it's just prudent for us to expect those to remain elevated.

Okay. Thanks, happy holidays, and good luck in the fourth quarter.

Thank you.

Our next question comes from the line of Andrea <unk> with Barclays. You May proceed with your question.

Yes.

And congrats again on your first quarter out of the box very successful John I was wondering or John can you discuss the price increases that you took kind of early fall I believe it was in the high single digit range. When did you take them what was the customer reaction clearly doesn't seem like any noticeable impact on demand.

And what's the opportunity for 2022 further increases.

And then Dan if you can talk about you.

You know what is the assumption for spot versus contract in your fourth quarter guidance, what does it look like for Q1.

And does the Q1 has any more or similar pressure on freight and inventory deliveries. Thank you.

Yeah.

Sure I can start with that.

Yes, we did we did take price increases.

We have not seen any.

Much demand falling off if any.

Clients seem to be.

Seem to be fine.

Sales teams adjusted to it and it.

It seems like it's it's.

Good to go as far as the future goes.

Your guess is as good as mine.

Prices are going up all over the place, we think things have stabilized quite a bit.

From beginning of this year, where lumber prices were two or three or four times higher and then they came back down.

These things don't seem to be as volatile as they were so where.

Hopeful as I'm sure everybody in the world is that that inflation will get under check here.

But.

If we do get price increases we tend to.

Intend to pass them, along raise prices and really protect our margins.

Yeah, Hi, Andrew.

Wait out with regards to the spot versus contract rate.

By origin and it really is contingent on what's going on at each individual court.

What I'll say is that the fourth quarter is relatively consistent with how we approached it in the rates that we are the percentages between spot and contract that we deployed in the third quarter. We are forecasting those to continue.

Throughout 2022, but it's really just contingent upon container availability in what's happening at each individual court, which.

As you know is not it's not just subject to our house shipping so.

So that's how we forecast that we think we're appropriately conservative.

In 2002.

Okay. Thank you very much first of luck for holiday.

Thank you very much.

Our next question comes from the line of Peter Benedict with Baird. You May proceed with your question.

Yeah.

Great Hey, good morning, everybody.

Yes, My first question.

For Jan just on the on the on the New web platform, that's going to be launching here. Later. This month just curious maybe you can expand on maybe two things one is as a customer what are we going to see.

Maybe that's that's most notable are most different and then.

What does it really allow you to do.

Next year that you have not been able to do in the past or the piece of data analytics or just.

What would you kind of call out as the biggest deliverables there. That's my first question.

Yes, Hi, Peter.

Yeah, we're really excited about the new site launching.

Final testing mode right now so they are coming very quickly I think the biggest thing that we're really excited about for the immediate impact is just the huge step up and jet customer user experience, so really focusing in on that unless they have create add content and imagery and storytelling and really working to.

Bring the our house brand to life on that digital channel.

I think one of the most amazing things about the our house story. If you look this brand has been getting being built for 35 years and our showrooms. We know what happened some clients are in that and we've had a good site experience, but we're really excited for clients to be able to really deep dive into the brand and the product.

Get that says Wow factor when they see inventory and then get into the details of the story and then also making for shopping in the purchase journey easier and more seamless.

And ultimately less stressful for clients. So we're excited about things like navigation and merchandizing capabilities to really help that client journey as they are starting to explore the product get the information that they need find other products that they might like.

Will you be able to do that in their homes, and then be able to connect that to that end showroom experience or do the entire thing digitally online.

Looking forward to next year I think with the re platform really excited about the increased analytics capabilities and backend functionality.

Over time really being able to lean more into AI assisted product discovery.

Content personalization and the like analytics will really allow us to understand how clients are engaging with our platform. So.

So we can constantly test and improve conversion optimization and opportunity.

And really just getting to know our clients better and then probably I know you only asked for next year, but I think the other really key thing for US is it really just improves our speed to market for new innovation as well so.

So we really see that as a great step up and that's going to be an immediate impact on our e-commerce business, but it's really setting us up for success in the future to stay at the head of IR.

Enhancements that we can make to that.

Online part of our business.

Alright, that's great content, Thank you and I guess, maybe somewhat related.

Secondly over to brand awareness and just curious some of the strategies around that I know opening the show.

Rooms on their own drives some brand awareness, but maybe talk about your plans from a marketing perspective, where you're allocating your spend over the next year or two and just how your brand awareness sets up right now nationally and maybe if there's any pockets regionally that are particularly strong or underdeveloped just just any context around that.

And your kind of plans for driving brand awareness would be helpful. Thank you.

Definitely yeah, I mean, I think you nailed the big one our showrooms just such an incredible new client acquisition vehicle for us they introduce the brand to new pockets in markets around the country and so we've been seeing incredible success that we've been opening up new showrooms, we have additional new showrooms plan for next year.

And we're excited to continue to support that we are very purposeful about the marketing support we put around those showrooms.

It's great knowing that we have best key tool in those markets. We can really amplify our efforts of digital marketing catalogs and social media in those buckets as well to amplify those effects.

I think overall, though as we're thinking about brand awareness.

We really look at it as an omnichannel opportunity and holistically across the marketing mix. So within our direct mail program. We are very focused on our prospecting audience and have really been working over the last few years to increase our prospecting circulation and getting these incredible introduction two to the <unk>.

<unk> into the homes of clients and we have been.

Really excited by the results we've been seeing this year.

Looking to continue that next year.

Digital marketing and more broad based marketing is also a great opportunity to support what we're seeing.

But I think there are also you know we touched a little bit on the call about some of our partnerships and media efforts.

We really haven't done much of that is brand before our house really grow.

Relatively organically for 35 years and so we're just at the beginning of investing in those areas and really looking to continuously try new things and test and optimize upon what works.

And then social media and Influencers I noted that we had 1 million followers on Instagram in Q.

Three and we just see so much runway and potential in those areas both in our own channels.

But also partnering with Influencers and partners I'm, just to spread that message to a wider audience. So we have a lot of levers to pull and I think we're really excited just to continue playing and pushing into those I'm seeing what works the best.

That's great. Thanks, so much and good luck.

Thank you.

Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group you May proceed with your question.

Good morning, and congratulations on your on your first report here.

Wanted to ask also on on supply chain, but specifically on on Vietnam, you know what.

Are you seeing there from your partners as far as production and perhaps any color you can share on your exposure and the ramp up in manufacturing out of that country.

Yes, Vietnam has been what.

While they've been one of the stores subject over over in Asia.

They were basically shut down for quite a while.

They are up and running.

Now and.

We believe that.

That.

Our shipments will be.

Pretty much on time going forward here.

One thing to note is Vietnam is a very small part of our of our business.

I think we only have two or three vendors there.

So it hasnt impacted us much much at all.

We had pretty good inventory stock.

So we're not seeing.

A decrease in sales and just Vietnamese products.

Whereas.

I'm sure if we had a lot more.

Exited the Vietnam basket, it would be a whole different story.

Thank you and then my second question is.

Once the worst perhaps you can talk about your store pipeline for next year, I guess any locations that you're particularly excited about.

And anything to note in the performance you're seeing out of your design centers, which are the smaller format stores I know, it's just a few but any color there would be helpful. Thank you.

Sure.

Yes, we are.

Constantly working on new stores I think that the guidance has been we're going to open five to seven.

We feel confident we'll we'll be in that range.

<unk>.

We're not giving out locations at this point.

As far as design studios, we've only had one open a whole year very happy to see the results of that one.

I had another one opening for a few months and another one opened a few weeks.

So.

The newer ones also have started right out of the gates pretty strong.

Demand sales of course.

Let's turn those into actual sales usually it takes it takes a little bit.

Just for the backlog and so forth we.

We do have two more.

Nine studios being opened before the year's out so we'll have five in total.

By January one.

After that we are very excited to really.

Tweak them merchandize re merchandising if we need to learn a lot.

The 2022, and then from there we'll see if we can really grow that business as well as the regular stores.

Thank you.

Youre welcome.

Our next question comes from the line of Steve Forbes with Guggenheim Securities. You May proceed with your question.

Good morning.

Maybe for Jen.

Curious if you could discuss any client demographic or client engagement differences that youre seeing within the new customer base relative to the existing base.

I think you mentioned something in the prepared remarks here about.

Customer growth, but just curious what you are seeing anything notable to call out.

Yeah. So we've been really excited by our new customer growth over the last sort of year and a half.

And we continue to see that so that is really exciting.

You know, it's it's really too early to have a full picture as to how those clients are behaving relative to clients to join the business earlier, but really the initial results is that.

They are spending more than new clients were before COVID-19, but we're seeing that trend in our existing client base as well and currently that behavior that repeat behavior seems like it's very similar so we're going to be continuing to monitor it and pay very close attention to it but overall, it's looking like theyre coming in and being really great clients.

Yes.

And then maybe just a quick follow up on the in home designer initiative can you update us on the percent of demand demand generated from that group Youre hiring plans right for the next couple of years and and whether the average order value generated from those designers has has changed at all relative to what was discussed.

During the IPO process.

Hey, Steve.

So.

The Oh, we said earlier a few months ago is over three times that of a non and home designer assisted sale and we continue to be consistent with that.

When we think about that.

Sure.

Their penetration we are seeing increases.

And that program relative to where we were at last year.

So we're really pleased with how that program is continuing to perform we will continue.

Expand out program by the end of this year, we'll have several more in place and then next year. We will continue to ensure that our existing store fleet has the appropriate staffing levels and all new showroom as well also.

Have this program deployed as well so we're really confident we're excited about this program.

And it seems to be working really well for us.

Thank you best of luck.

Thank you very much.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to MS. Wendy Watson for closing remarks.

Thank you everybody and we will look forward to talking to you again next quarter.

Happy holidays, everyone.

And thank you for your time.

Thank you everyone for your participation we look forward to speaking to you next quarter.