Q1 2022 Arhaus Inc Earnings Call
Greetings and welcome to our first quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference.
Please press Star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Wendy Watson Senior Vice President.
Investor Relations.
Thank you and over to good morning, and thank you for joining our house is first quarter 2022 earnings call.
And with me today are John Reed co founder, Chairman, and Chief Executive Officer, and Don Phillips, and Chief Financial Officer.
John I'll start with a summary of the main points. We made in this morning's press release, along with the operational details.
John will cover our financial performance and outlook for 2022, and then they will be joined by Jim Porter, Our Chief marketing officer for the Q&A session.
During the 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 March 31st 2022 before market opened today.
Those documents are available on our Investor Relations website at IR Dot our house Dot com.
A replay of the call will 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.
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 described in our annual report on Form 10-K, and subsequent 10-Q as such factors may be updated from time to time in our 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 .
Yeah.
Good morning, everyone and thank you for participating in our first quarter call.
We are very pleased with our first quarter 2022 performance.
Good morning, we reported record quarterly net revenue of $246 million or 44% increase from Q1 last year with our retail channel up 46% and our ecommerce channel up 34% comp.
Comp growth was 40%.
Net and comprehensive income increased 74% and adjusted EBIT da increased 22%.
Key operational highlights in the first quarter include.
First the launch of our spring product assortment.
<unk> has performed very well we are also pleased with the early reads of our outdoor 2022 catalog, which hit homes in March.
Our new our house Dot Com website experience continues to connect very well with visitors clients are not only spending more time on the site.
But they are also engaging with our interactive content, providing a more robust overall brand experience.
We welcomed our new C. H R O Jan Henkel, who comes to US after 20 years with various divisions of L brands. Most recently as senior Vice President Human resources for Bath <unk> body works.
Jen is focused on growing and enhancing our talent acquisition and talent management processes.
We are encouraged by current supply chain dynamics.
Our inbound supply chain continues to improve and vendors are focused on helping us return to having our top sellers back in stock.
On the outbound side, our teams are working diligently to get product to the clients as reflected in our better than expected net revenue in the first quarter.
Well lead times are still longer than historical averages. They are steadily improving from their peak in the second quarter of 'twenty 'twenty. One we expect the improvement to continue. Additionally, we believe the new distribution capacity coming online later this year from the expansion of our Ohio distribution facility.
<unk> and the opening of our third distribution center in Texas, well further positively impact our lead times.
In closing we are pleased with the trends in our business and with our long runway for growth.
I'll now turn it over to Don to discuss our first quarter financial performance.
And outlook for the remainder of the year.
Thank you John and good morning, everyone.
As John mentioned, we are pleased with our first quarter 2022 results.
For the first quarter net revenue increased 44% to $246 million. This.
This growth was driven by delivery of orders in the backlog as our supply chain continues to improve along with increased demand for our products in both showroom and e-commerce channels.
Our first quarter net revenue outperformance relative to our expectations was primarily driven by delivering product to our clients more quickly than anticipated.
Comparable growth was 43% in the quarter.
Demand comparable growth was eight 3% on a one year basis, and 98, 6% on a two year stack basis.
Gross margin increased 39% to $98 million in the quarter driven by a higher net revenue, partially offset by higher product transportation and variable rent expenses related to the increase in net revenue and credit card fees related to demand.
Gross margin as a percent of net revenue decreased 140 basis points to 39, 7%, reflecting the expected higher product and transportation costs as well as higher variable rent expense.
Partially offset by our ability to leverage our fixed showroom occupancy costs over higher net revenue and leverage on credit card fees related to demand.
SG&A expenses increased 27% to $75 million, primarily driven by investments to support the growth of our business, including increased corporate and warehouse expenses as new showrooms opened and we expand distribution capacity as well as public company related costs.
These were partially offset by the non recurrence of a prior year derivative expense.
As a percentage of net revenue SG&A expenses decreased 410 basis points.
To 34% with the decrease driven by leverage of fixed costs on the 44% net revenue increase.
Excluding the impact of the prior year derivative expense of $11 $5 million SG&A expenses as a percent of net revenue in the first quarter of 2022 would have increased versus the prior year driven by the higher corporate and warehouse expenses as well as public company related costs.
First quarter 2022, net income increased 74% to $16 million, our first quarter net income outperformance versus our expectations was driven by higher than expected net revenue and gross margin.
Gross margin was driven by stabilization of freight costs as well as leverage from our higher net revenue.
Adjusted net income in the first quarter of 2022 was $17 million compared to adjusted net income of $19 million in the first quarter of 2021.
Adjusted EBITA in the quarter increased 22% to $31 million from $25 million in the first quarter of 2021, the factors that led to higher than expected net income also contributed to our first quarter adjusted EBITDA outperformance versus our expectation.
Turning to the balance sheet as of March 31, 2022, cash and cash equivalents were $149 million and the company had no long term debt.
Merchandise inventory was $247 million, an 18% increase from December 31, 2021 as we built inventories in response to strong ongoing client demand and as the value of our inventory increased due to higher freight and product cost.
As I mentioned, while we are reducing our backlog and our comp growth is now outpacing demand comp growth demand to remain strong and we continue to increase our inventory levels to support this demand as well as to continue the trajectory of improvement on lead times as John discussed.
For the quarter ended March 31, 2022, net cash provided by operating activities was $35 million and net cash used in investing activities was $10 million with landlord contributions of $2 million.
As a result total capital expenditures net of landlord contributions were approximately $8 million in the quarter.
As we announced this morning, we are raising our full year 2022 outlook to reflect our first quarter outperformance.
Highlights include full year net revenue of 1.14 or $5 billion to $1.185 billion.
Full year comparable growth in the range of 36% to 46%.
Net income of $73 million to $83 million and adjusted EBITDA of $151 million to $161 million.
This outlook assumes continued inflation in transportation logistics container and product costs.
Regarding adjusted EBITA margin, we continue to expect year over year margins to stabilize by mid year and expand in the fourth quarter.
Our new distribution capacity is helping alleviate our backlog and we expect this to continue throughout the balance of the year.
For all other details related to our updated 2022 outlook. Please refer to our press release.
This concludes our prepared remarks, thank you for your attention and we would now like to open the call up for questions.
Okay.
Thank you.
At this time, we will 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.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please why did we pull for questions.
Yeah.
Thank you.
The first question.
Comes from the line of <unk>.
Jonathan.
My two with Jefferies.
Please go ahead.
Hey, good morning, nice quarter, and thanks for taking a time for the question.
First question was just on a two Q to date trend. The press release indicated demand trends were positive throughout the quarter and remain solid going into Q wondering if you could just frame how the first couple of weeks of QQ demand comp are shaping up relative to maybe that eat.
3% in in <unk>. Thanks, so much.
Good morning, Jonathan and.
Thanks for your question our demand in the second quarter, we're really pleased with what we're seeing we have seen them. It is positive year over year, and we are seeing some acceleration, but we don't guide to demand and don't want to get into a kind of cadence of giving color on that apart from just general. So we are pleased with what we're seeing though.
Got you that's helpful and just a follow up question I'm curious if you've observed any trend.
During the quarter in terms of customers.
By household income obviously, a lot of market gyrations in in late <unk> and into two Q I think half of your customers are earning over 200000 in household income wasn't sure. If there was any kind of that trend in terms of customers maybe earning.
Double or triple that amount, whether youre seeing any relative under or over performance by income quintile in junior customer base. Thanks.
Yeah, Hi, Jonathan This is John Porter, Great question, we don't like to look do detailed in shorter time periods of our customer base, just because as you know it can lead to false false results are false assumptions overall, though I can say that we really haven't seen any significant shift in our <unk>.
Customer mix, we are seeing that average order values are still going up so customers are still spending more.
But nothing specific that we would speak to in terms of customer demo our overall transact.
Great. Thanks, Jen best of luck.
Thank you. Thank you.
Yeah.
Thank you.
The next question comes from the line of Gordon.
Curtis Nagle with Bank of America. Please go ahead.
Sure.
So just a quick follow up of foods, Jonathan first question sure I just want to make sure I got my facts right.
So you said you saw an acceleration.
Demand.
Two Q is that off with 8.3 I was in Dubai.
<unk> tried to get both.
And then a follow.
Oh gosh.
That's correct, Kurt and good morning.
Sorry.
The keep rate.
Terrific great.
Good to hear.
Secondarily.
Curious how online is trending right I think it was all about 60%.
The tax rate.
For Q you guys have made a bunch of the rest of the group is growing well you know plenty of room for.
Increased penetration for you guys. So yeah.
How do you perform in the quarter, how how should we think about our growth going through the year.
Yeah, Hi, Curtis. This is this is John we're happy with how Econ performed in Q1 I think the key thing that we look at it was talked about and.
Prior calls is that all of the investments that we are making in E com and our digital we're really focused on the omnichannel experience, so really seeing those drive growth and.
In retail showrooms as well as online, but having said that we are really happy with what we're seeing on E. Com I know it was only about a month and a half ago. When I said Morris So nothing really revolutionary since then but all of those trends that we're seeing in terms of customer engagement time on site decrease and bounce rate are.
All continuing we are seeing clients engage really well with some new more interactive features that will add onto the site as well. So we're really excited about that and what it means is we just continue to optimize that onsite experience.
And then we're starting to see some really positive trends in mobile, which I think that is really exciting anytime youre looking at that digital experience being improvements in conversion and sales on mobile as well. So we're really happy with what we're seeing there.
The other thing that I think it's important to note just with that E com experience and how it's driving total brand is we're really thrilled with what it's allowed us to do in terms of the brands and campaign and storytelling. So I spoke a lot about us traveling degrees without outdoor campaign back on the last call and what we are really loving it.
That site experience is a great campaign is now translating indoors as well so we're really starting to get just not really holistic overall experience and we're seeing it resonate very very well with clients across the entire business.
Terrific. Thanks.
Thanks very much.
Yeah.
Thank you.
Yeah.
The next question comes from the line of Simon Gutman with Morgan Stanley .
Please go ahead.
Hi, This is Jackie zachmann on for Simeon. Thanks, so much for taking our questions. So it looks like you guys put up another great comp and it sounds like you guys are another exciting another good demand comp I guess could you give us some color as to whether or not the acceleration on a three year stacked basis on the on the comp was due to more of new orders being.
Place in new demand versus kind of working through the backlog any color there and as a follow up to that could you give us the breakdown between traffic and ticket.
Yeah.
Oh sure. So so I will start with that.
For demand our demand comp is not the backlog does not relate to that demand comp number. So demand comp is all new orders. We are seeing a O V up as John mentioned related to our in home designer program, which continues to perform extremely well and increase in penetration we also.
Implemented price increases last year that will impact the Ob am units per transaction is increasing nicely year over year total number of transactions is down slightly versus last year. We did close one showroom in the quarter, but we're watching that metric very closely.
Great. Thank you so much and just a quick follow up we know that supply chain has been a headwind to gross margin as you deal with higher costs and we were just wondering are you past the peak I mean, we're hearing some potential relief in the freight market kind of where are you guys with that are you still on track any any color there. Thanks.
Sure you know the the freight market remains volatile.
We have seen stabilization in our freight costs over the last few months, we did see an acceleration in those costs in April nothing that is outside of our expectations for the balance of the year. So everything that we're seeing is factored into our full year guide.
Great. Thanks.
Thank you.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Thank you.
Next question comes from the line of Steven Forbes with Guggenheim Securities. Please go ahead.
Good morning, John Don again.
Just wanted to start with your real estate plan. Don you just mentioned the one closure during the quarter, but would love to give you any color on the decision process there.
Just given the location of that store, if there's any anticipated business impact.
An update on the real estate pipeline for the year. It's five to seven is still the correct number to play out.
Sure Stephen I can take that.
Yeah. We were we are on track to us to stay on our plans.
Well, we're actually.
Finding more real estate than.
I think we should open in a year, which is a good thing.
Again as I've mentioned, we're really wide open on the west coast. So that that's going to be one of the concentrations for the next few years, which we think will will will.
Really resonate with our product out there.
And as far as the closure of the store now that that won't be significant it was a it was a planned closure we've opened stores and are planning on opening more stores around that area that will more than compensate for for any any change in the end at one one stores volume.
<unk>.
So that again has been a strategic plan of ours and we think we're on track to do what we were planning on doing and yeah, Everything's Everything's looking great on the real estate.
Right.
So.
We're marching forward.
And we're not we're not backing off on opening stores by any means.
Dave just a follow up on that this is Don we are you know much like the rest of our companies who are trying to.
Build out we are seeing you know similar logistical concerns around permitting and timing so more to come on that nothing that will impact our long term strategic plan with regards to real estate, but may have movement, just within a month or two here. So we'll we'll keep you updated on that.
Thank you.
Just a quick follow up I think I think it was Jon who mentioned that your vendors are working really hard to get your your best sellers in stock. So you know with that comment that any any plan changes to the product introduction pipeline. This year as we as we think about the breadth of assortment in general are or should we should we expect sort of no.
Change here and no issues as you plan for the fall.
Well you know our our stance on product.
Has been going into Covid and coming out of Covid is we we have been aggressively.
Working on new collections new products.
And the ones that have already rolled out of upstream seeming to work extremely well. So we're staying marching orders are we're going to continue to rollout new collections, new products going into the summer here going into the fall and into the first part of next year. So.
We're happy with that I mean, our vendors are just doing fantastic. You know you guys know as well as any of us that.
China has some some blips in shutting down and trying to contain COVID-19.
But other than that and that's more of an annoying delay than anything.
It doesn't matter you know our vendors or.
Our manufacturing at full full force.
<unk> got teams as we speak in different parts of the World right now working on new products, and we're going to keep going forward with that and with that plan.
Okay.
Thank you.
You bet you're welcome.
Thank you.
The next question comes from the line of Cristina Fernandez with Telsey Advisory group.
Please go ahead.
Yeah good morning.
John I wanted to see if you can expand on the <unk>. It looks like that's helped me would be men is there any way you can frame for us homeless munis. Its there this year versus last year or versus a normal year. It seems like it's a little bit more just but any color there.
Would be helpful.
Yeah, it's it's a little bit more.
And it's finally now coming to fruition because you know as as you can imagine these.
We're working on product can take a year or more time, you make design things have samples made samples.
And so forth and then getting it into the manufacturing process. So.
We have seen an increase in some of the new collections and items, but nothing major I mean, you know our our goal is to is to rollout approximately 20% newness every year in different categories. Obviously, some categories. We do more some categories, we do less.
Well I think I mentioned last last time, we focused on outdoor products. This year as it has as a major collection in.
<unk>.
Expansion.
That's gonna Kids continue throughout this year into next year as well.
But we're we're we're seeing nice.
Really nice response to collections and you know between bedroom in upholstery dining.
But all the court court.
Core product categories that are our clients are furnishing their homes. So.
So we continue to roll it out but is that going to be.
Is that going to be a double or triple a normal year.
But but we're pacing ourselves so we can just keep going.
And we think that's going to work and we're excited about it very very excited about our new products.
And then second question, given where youre seeing Pos which seems like they've been stable for you are there any additional price increases are planned this year.
Yeah.
Nothing planned right now it's kind of.
We think we've got prices at the right price we'd offset.
Most of the expenses.
You know barring freight.
<unk> freight cost double again, which which none of us can imagine doing.
We're trying to stay as is.
As.
R R.
Partners get price increases and so forth on things you know, we take a look at them.
On a on a individual basis we.
We did adjust price a little bit.
And.
Yeah.
April of this year. So was that last month, we did like a mid single digit price increase across the board for the most part of every SKU, but it came out to be an average of about mid mid single digit increase.
That's been accepted we don't see any.
Back from our clients.
Haven't heard anything from the store folks who we stay on.
In touch with weekly.
So we're.
We're going to stick with that right now.
Thank you.
Thank you.
The next question comes from the line of.
Peter Keith.
Piper Sandler. Please go ahead.
Hey, Thanks, Good morning, Great results guys just to follow up on the pricing I know you took pricing in Q4.
Could you just help us.
Think about the flow through of that pricing or did you see some in Q1, we will start to show up in Q2, how should we think about the timing of of those Q4 price increases and then separately now that pricing in the market for premium home furnishings has moved up quite a bit in recent months, how do you feel about your price to value equation relative.
To some of your peers out there.
Good morning, Peter This is Don I'll I'll start with the flow through and then pass it over to John for your second question. The flow through is for the fourth quarter price increases we should see you start coming through in Q2 Q3 of this year.
We did take some mid single digit price increases last summer we are seeing some of those flow through kind of in the latter part of Q1. So from a timing perspective, we're still working through much of the backlog, but starting to see some of those summer price increases coming through and then the the December Q4 ones.
We'll come through Q2 Q3.
John .
The what was the second quote out your proposition value right right Peter So yeah.
We obviously study our competitors very closely.
And we've noticed price increases coming all over the board.
But no we think our value is dead on.
Great value.
If we get the best quality in the business and our prices are extremely competitive we're not seeing us out pricing anybody who starts over pricing and we think we're in a good spot a very good spot with that.
Okay good to hear.
Yeah.
Maybe we'll move over to the <unk>.
Backlog and I've just been getting some investor questions on this in recent weeks and just to think about the flow through of the backlog did increase quite a bit sequentially you have talked about deliveries still above normal, but getting better and better. So I guess why is the backlog continuing to increase so much and and and.
But at this point as you see and how long do you think it's going to take to wind down the entire backlog.
Good morning, Peter So we will never wind down the backlog as it I think when you were talking about backlog youre looking at that client deposit number. So we will always have kind of a client deposit number out there as it is a it's a rolling backlog right. So we do have a backlog heading into this year kind of above what is new.
I'm also orders from prior year in excess of what we would have historically seen them. The outbound constraints are really what's holding us up from getting all those deliberate so we've seen inbound constraints alleviate nicely the outbound side I'm really getting our Texas distribution center up and running in the back half of this year.
It is going to be critical to getting pushing through the backlog I'm. So.
So as we think about that we we do expect a ramp up period for that facility. We don't expect that facility to come out of the gate you now operating at full capacity N. C. D. C. Our North Carolina facility is certainly outperforming expectations doing a lot better than we expected. So we're very pleased with what we're seeing there.
But it will take some time most likely we will have some backlog heading into next year, but we are working to get that down as quickly as possible, but I do just want to.
We reiterate that the client deposit number that you see as our comps continue to grow as our demand comps continue to grow you will see that increase that customer that quiet deposit number will increase so the two the two main factors in that or the demand comp them as we're taking new orders and then as we're getting those delivered so.
I wouldn't expect that number on a nominal basis to revert back to historical levels because our demand is just much much higher than it has been historically so just something that is a dynamic that I think is important to keep in mind.
Okay. Thank you very much I appreciate the help.
Yeah.
Thank you Denise.
Question comes from the line of.
Daniel Hopkins with William Blair. Please go ahead.
Good morning.
The first question.
And I apologize if I missed this earlier, but can you comment on any sort of.
Relative performance with the product mix in terms of per site.
Price point et cetera, and also any geographic variance.
Joe.
Sure I can I can take that.
First of all we didn't know geographic performance, we did notice since it was so wet and cold them in Midwest to the northeast the spring that are outdoor product did not excel as much as it did in the southern States, where we're just got we killed it in the southern States.
So we're expecting now that the weather has warmed up this week I don't know where you are but it's 80 degrees here in Cleveland finally.
We're expecting that to level off and catch up with the south.
But.
And other things you know, we're seeing our upper end product selling.
As well or better than ever.
Some of the more price conscious product as as the prices have gotten raised on those.
We may not have seen that quite as big increases, even though we're still seeing increases.
As far as design wise.
The product is still very clean we use we use so many different materials.
Our product is so handmade we we think that is resonating really well some of our most handmade product and most expensive product to some of our best sellers in many categories.
And we're doing we're going after that upper end client more and more we're doing initiatives too to look at other categories, where we can really.
Take it to the next level I guess.
As well as you know, we're covering the entry client who.
Can't afford a 5000 dollar dining table.
And.
So we're covering trying to cover both basis.
The lower again, the lower end things you know because of the freight cost if it's coming from Asia. It is tougher to hit short sharp price points, but we're going to leave that business to wayfarer and people like that I think and go after the other.
So if I understood correctly, maybe just on a relative basis without that makes a little bit relative.
Softness at lower price points relative strength at higher price points is that fair to say.
No I don't think that's the way I'm here, Dan we saw strength across all categories outdoor are certainly performing better like John mentioned, just given it's that time of year and it's the seasonal category for us.
But we're really pleased with what we're seeing across the board and I wouldn't say, there's anything of note are to communicate around price points or categories in particular apart from outdoor.
Okay.
And then just the other question I had was from a competitive standpoint.
[laughter] additional commentary or excuse me that you could provide in terms of.
Competitive promotional or perhaps.
Just what you're seeing up there. Thank you.
Hi, Hey, Dan This is John .
Yeah, I mean, we were starting to see a little bit more promotional.
Activity, particularly with the lower price point brands out in the market.
We are still really happy with how we're positioned so I've touched on prior calls our strategy, which really began a few years ago is to pull back on a lot of our promotions and really focused promotions around those three day sale weekends. We did one of those over the Easter weekend in April and that performed incredibly well for us.
But yeah I mean, we're starting to see things like I said right now it does seem to be and those lower price point brands and so nothing that we are too concerned about them, but we constantly monitor what's going on in the market and I think just going back to some of the prior questions of our primary focus rather than promotions is that value proposition and so.
Even while we are taking price increases, we're always very conscious to make sure the value and the quality and uniqueness of the product warrants those price increases. So we have focused our attention on very strongly there as well.
Okay.
Great.
Thanks, very much best of luck.
Thank you.
Yeah.
Thank you.
The next question.
Comes from the line of.
Adrian.
Thank you and please go ahead.
Great. Thank you very much congratulations what a great.
Report to here in the midst of you know a tough Q1 for retail.
So I guess my first question John can you help me sort of bridge the gap between say inventory grows so inventory at the end of the quarter.
That's about a 100% versus the sales growth that half that so there's clearly average unit cost inflation in there, but also how much of that is sort of early receipts and kind of safety thought that's built into that as you kind of you know.
Think about the supply chain and the disruption there. Thank you very much.
Sure Hi, Adrian Good morning, I'm. Good morning, Great question. It's a complicated question all of the factors that you mentioned are certainly playing into it. So our inventories up you know as we think about freight costs being significantly higher than the past we do have a landed.
Cost method, it's all of those freight costs are incorporated into the inventory product cost had increases increased in many cases, we are working very diligently to get product in stock. However, I'd want to be clear that it's not stock that we're sitting on for a long time its product that's coming in and Oh.
To meet demand a potentially new demand that's coming in as well so.
So all all of those things you know, we we are working to make sure that our inventory levels are appropriate we've expanded to three D. C. So as you can imagine the allocation model to have gotten more complicated more complex and so we think we have the right inventory levels. We don't believe that we're too heavy and we are working to.
Bring in and you know the right amount to clear through the backlog and make sure that our lead times will decline throughout the year and get to pre COVID-19 levels, and hopefully better than pre COVID-19 level. So I'm. We're working diligently we've implemented some planning softwares that will help with us.
And are constantly evaluating the right methodologies for for inventory management.
And so I think a quick one for John you.
You know the comment is obviously demand was strong throughout the entirety of the quarter. We heard another home furnishings retailers say that they were actually down in high point I'd add to that so we're at a conference.
And the upholstery manufacturers there were saying that there was demand weakness from the their customers mid March or end of March into April just wondering because you do so much. There are if you can reconcile that comment for us and then.
Go ahead.
I was going to say, we would love to take their production.
Are there because we were trying to get into as much as as our manufacturers, including our own factory can make.
Okay. So we have not seen a slowdown of North Carolina at all.
Okay that did that and then just very quickly on.
As you're building sort of the advertising and demand creation.
Across multiple different channels and strategies what are you finding as the most effective particularly as you enter new markets like California, not new markets, but expanded markets like California.
Yeah, Hi, nice to talk to you that's a great question and it's one that we talk about and we debate and we change our minds on honestly every single day, I think and I don't mean to give you a non answer here, but I think what really works very well for us is the Max and us pulling different levers depending on like you said, which markets we're going in what our.
Objectives are of what we're seeing happening within the business, obviously and we've talked in prior calls and I I.
The industry.
You know prices are going up with all of our privacy element. So that's affecting some of the efficacy is within some digital channels, but we're identifying.
So channels and opportunities that have proven really effective for us. So it's been an interesting mixes we split that direct mail continues to be a shining star and I think particularly as we go into our new markets. The team is has done a phenomenal job and evaluating what is working.
Really adopting our circulation strategies, our content strategies, we actually just switched up our content strategy a little bit this year and had the outdoor catalog hit homes, a little bit earlier, and we've seen really positive responses to that so so I hate to not be able to give you a specific answer but really it does vary on the mone.
And the objective that we're trying to achieve and I think the overall strength that we're seeing as a result of all of those elements coming together.
And so I think that's very helpful. Great product really does win the day so congrats to the team.
Thank you.
Yeah.
Thank you. The next question comes from the line of Peter Benedict.
Baird. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question just two from Us one.
Have you seen anything on cancellation rates.
Relative to how they've been trending prior and then just on the gross margin do you think.
The 39, seven a mark in the in the first quarter, what will be kind of a low point.
For your gross margin as you look out over the next few quarters. Thank you.
Good morning, Peter with regard to that cancellation rate, we are still lower than our were still lower than pre COVID-19 rates. So we're pleased with what we're seeing there is a metric that we track closely lead times are coming down nicely, which is as we know it today you know clients are perhaps.
A little less inclined to wait versus kind of in the middle of the pandemic consumers in general I would say.
So nothing notable with regards to the Cancelation rate with regards to the gross margin rate, we don't guide to the gross margin rate, but as you're thinking about it high level as we've talked about the price increases and when we will expect to see those flow through them it would be reasonable to assume.
That there will be benefit from those price increases are you know starting as I mentioned in the second and third quarters. This year.
So in the event that that is helpful to you.
Yep.
Sure Thanks very much.
Thank you Peter.
Yeah.
Thank you.
Ladies and gentlemen, we have reached the end of question and answer session and I would like to turn the call back to Wendy Watson for closing remarks.
Thank you everybody for your participation and interest in our house, we look forward to talking to you again next quarter.
Thanks, everybody.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.