Q2 2022 Arhaus Inc Earnings Call
Good morning, and welcome to the Arco's second quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
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.
Ladies and gentlemen, I will now turn the conference over to MS. Wendy Watson Senior Vice President of Investor Relations.
Please go ahead.
Morning, and thank you for joining our houses second quarter 2022 earnings call.
With me today are John Reed co founder, Chairman, and Chief Executive Officer, and Don Phillips, and Chief Financial Officer.
John will start with a summary of the main point, we made in this morning's press release, along with the operational detail.
Don 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. Please return to the queue.
We issued our earnings press release, and our 10-Q for the quarter ended June 30th 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 and then.
GECAS strategies trends our 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-Qs as such factors may be updated from time to time in our 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 participating in our second quarter call.
We had another great quarter, our third as a public company.
We're excited to share our results.
This morning, we reported record quarterly net revenue of $306 million or 66% increase from Q2 last year with our retail channel up 69%.
And our E com channel up 54%.
Comp growth was 65, 2% and demand comp growth was a strong 22, 5%.
Net and comprehensive income increased 436% and adjusted EBITDA increased 76%.
Our second quarter performance is particularly notable on top of last year's very strong second quarter performance that included comp growth of 71% and demand comp growth of 73%.
So our two year demand comp stack for the second quarter is over 95%.
Despite ongoing macroeconomics geopolitical concerns, including high inflation rising interest rates and ongoing global supply chain challenges demand for our product remains strong driven by our passionate approach to design and development.
We seek inspiration from all around the world and are thrilled.
With our clients' response to our unique and artisan crafted assortment.
When the pandemic began in the spring of 2020, we continued designing and developing our products, which allowed us to continue to introduce new collections across our portfolio throughout the past year.
We know and stay true to what we do well.
We are also keenly focused on our client experience our showrooms are designed to inspire.
Highlighting the beauty of every piece of furniture and decor within them.
Our design consultants are available to help in any way and undergo rigorous training on our product designs and quality. So they can thoughtfully guide our clients through the process of furnishing and decorating their homes.
As you can see from our results. This is clearly resonating and we take the showroom and website experience a step further by offering complimentary in home design services to our clients, which result in an average order value that is over three times the company average.
We are also very proud of our trade designer program, which continues to grow as we have responded to the needs of the design community on both the front end with our aesthetics quality in education and on the back end with the room design software.
We opened two new showrooms during the quarter in Colorado Springs, and in White Plains, New York, We continue to be pleased with the strong opening performance and the quick ramp up of our new showrooms.
Additionally, our design studios continue to exceed our expectations and we are excited to expand this format in two to three additional markets over the next several months.
During the second quarter, we also launched a partnership with the surf Lodge and Mantech, New York Redesigning and outfitting the property's Beach front end private dining deck with artisan crafted furnishings from our outdoor collection.
Community and timeless designs are what inspire us at our house and we are thrilled to celebrate these values through our partnership with the surf Lodge.
Regarding our supply chain, both inbound and outbound logistics continue to improve and our lead times are coming down steadily.
We expect lead times to continue to improve over the rest of the year.
As we discussed last quarter, we believe our new distribution facilities will help alleviate our backlog reduce our lead times and support our growth over the next seven to 10 years.
Our North Carolina distribution center opening went better than expected and has played a large part in our first half net revenue outperformance, our Texas distribution Center is open and we are intentionally ramping up at a slower than expected pace as we work to ensure a seamless integration.
Yeah.
We also expect the expansion of our Ohio distribution facility to be complete near the end of this year.
Yeah.
Looking forward into Q3, we cannot wait to large short fall 2022 collection.
We've called our fall campaign, the art of home and I cannot think of a better title to celebrate this incredible collection of furniture and decor.
Adding hundreds of new arrivals and featuring some key home trends such as rich as textured bouquet fabrics, curbs and sculptures forums reading and the focus of celebration on natural materials and color. This collection is one of the strongest we've ever launched.
From the beauty of our materials to the handcrafted artisan designed with our furniture and decor. We believe our product is truly special within the market and clients seem to be agreeing.
Our style issue catalog will arrive in our clients homes and our new products will be in the showrooms by the end of August as a reminder, we operate in a highly fragmented 60 billion dollar home furnishings market in the United States. Our clients, who are predominantly from high income households continue to invest in their homes.
And we are executing our growth strategy by opening showrooms, making the investment to build the brand awareness and grow our omni channel footprint, enabling us to gain market share.
Our current momentum gives us confidence in our performance for the remainder of the year and we are raising our full year outlook as Don will discuss.
In closing I want to congratulate and thank our teams for their incredible execution and hard work in the last year, we have grown our product selection introduce newness across all categories posted record sales doubled our production capacity move from one distribution center to three opened new showroom.
Rooms, and produce excellent overall results.
I have always believed that our people and their passion set our house apart.
I am proud to work alongside each of you. Thank you for everything you've done and continue to do to make our house and the team the best in the business.
Now I'll turn it over to dawn.
Thank you John .
We're pleased to deliver second quarter 2022 net revenue and earnings that exceeded our expectations.
He items from the income statement include net revenue of $306 million comp growth of 65.2 per cent and demand comp growth of 22, 5% on a one year basis 95, 4% on a two year stacked basis.
This growth was driven by increased demand for our products in both showroom and e-commerce channels as well as delivery of orders in the backlog as our supply chain continues to improve and deliveries from our new distribution center in North Carolina exceeded expectations.
Our second quarter net revenue significantly beat our internal expectations with upside across demand comp and delivered orders and bolt showroom and ecommerce channels.
Our second quarter gross margin increased 71% to $133 million in the quarter driven by our higher net revenue, partially offset by higher variable costs related to the increase in net revenue and higher credit card fees related to demand.
Gross margin as a percent of net revenue increased 110 basis points to 43%, reflecting our ability to leverage our fixed showroom occupancy costs over higher net revenue.
Partially offset by higher transportation costs and variable rent expense.
The year over year gross margin expansion in the second quarter also beat our internal expectations, primarily driven by lower than expected product and container costs as well as leverage on fixed costs.
I'm very proud of the hard work across the company managing our gross margin during a time of high inflation and supply chain complexity.
Second quarter, SG&A expenses increased 20% to $83 million and decreased 1060 basis points as a percentage of net revenue to 27%.
The increase in expenses was primarily driven by investments to support the growth of our business.
Including increased warehouse and corporate 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.
The expense decrease as a percentage of net revenue was driven by leverage on fixed costs on the 66% net revenue increase and the non recurrence of the prior year derivative expense.
Second quarter 2022, net income increased 436% to $37 million.
Adjusted net income in the second quarter of 2022 increased 42% to $39 million.
Compared to adjusted net income of $28 million in the second quarter of 2021.
Adjusted EBITDA in the quarter increased 76% to $60 million from $34 million in the second quarter of 2021.
Net income and adjusted EBITDA also significantly exceeded our internal expectations, driven by higher revenues and better gross margin.
Turning to the balance sheet and cash flow as of June 30, F. 2022 cash and cash equivalents were $145 million and the company had no long term debt.
Net merchandise inventory was $272 million up 31% from December 31, 2021, and up 100% year over year as we continue to build inventory in response to strong ongoing client demand.
And as inventory value increase due to higher freight and product cost.
Our inventory dollars are growing due to inflationary conditions, our inventory units are growing at a significantly lower rate, we remain comfortable with our inventory levels.
For the six months ended June 30th 2022, net cash provided by operating activities was $41 million and net cash used in investing activities was $20 million with landlord contributions of $7 million as.
As a result total capital expenditures net of landlord contributions were approximately $13 million in the first six months of 2022.
As we announced this morning, we are raising our full year 2022 outlook to reflect our second quarter outperformance.
We have also recalibrated some of our revenue cost and margin assumptions for the second half of the year.
We now expect full year net revenue of 1.173 to 1.1 $93 billion.
Full year comparable growth in the range of 43% to 48%.
Net income of $92 million to $98 million and adjusted EBITDA of $173 million to $180 million.
Breaking this down a bit as I mentioned, we significantly beat our internal expectations for net revenue and earnings in the second quarter. We are raising our net revenue outlook for 2022, reflecting our first half outperformance well slightly adjusting our second half net revenue assumptions due to an intentionally slower ramp up of our recently opened.
Dallas distribution center.
Recall that this will add over 800000 square feet to our distribution capacity in key regions for our long term expansion.
And as we were growing from one to three distribution centers in less than a year, we want to ensure the integration is as seamless as possible and we'll meet our high standards for client experience.
We are very pleased with what we're seeing in the early part of the third quarter demand continues to be strong so a moderation from the levels in Q2.
We're also raising our full year earnings expectations, while recalibrating cost assumptions for increased marketing spend and increased warehouse costs were.
We're continuing to see very attractive returns on our marketing dollars, even with the higher industry wide cost.
The warehouse cost increases are the result of higher product storage costs due to the more gradual ramp of the Dallas D. C than we originally projected.
As well as certain Dallas D C car, they're higher than originally anticipated.
Our outlook assumes continued year over year inflation in product and transportation cost, we have lowered our full year expectations for capital expenditures net of landlord contribution to a range from $55 million to $65 million as some new showrooms have experienced construction and permitting delays.
Please keep in mind. These delays are temporary and will have no impact on 2022 revenue given our backlog.
Regarding backlog just a reminder, that it is driven by both demand and deliveries. We currently anticipate our backlog to be normalized by mid 2023.
Against this backdrop, we are mindful of current macroeconomic conditions and we believe we have the experience flexibility and balance sheet strength to address and weather cyclical environments.
In the past, we have exited cycles with strong demand and having gained market share.
For all other details related to our updated 2022 outlook. Please refer to our press release.
In closing we are very encouraged by our strong performance in the first half of 2022 and excited about the remainder of the year as well as our long term growth opportunities. Thank you for your attention and we would now like to open the call up for questions.
Thank you.
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One moment, please while we poll for questions.
Our first question comes from the line of Keith <unk> from Piper Sandler. Please go ahead.
Hey, Thanks, Good morning, everyone great results here.
You know I think you've kind of bucking the trend on on overall demand while there are concerns around.
The economy in a recession could you maybe just kind of frame up as your business has been around for a while how are you guys have done in past economic downturns and any any comparisons you might seek to the current environment.
Sure Peter.
Good question nice to hear it from you.
Yeah, we've we've been through.
Yeah.
Quite a few recessions over the last 30 years.
I'm happy to report, we've manage them very well.
Our strategy had been through recessions.
Is.
We were always.
I'm focused on.
Actually growing our business.
We were focused on coming up with new products that would really enticing and thrill our clients.
And and that was a different approach I guess it was more of an offensive approach we took.
Than what our competitors would do which which we saw would you know pull back on things not introduce new products pulled back on marketing.
And.
We certainly you know had a head of some small hiccups during during recession, especially the great recession.
And but we pulled out of it nicely if we didn't take a huge hit in sales, but then once once you started coming out we had a big big increases and we really know that we increased our market share at that point.
So we're not.
Of course, we manage our expenses.
Where we had to adjust them. We did we had to adjust inventory if we did but so we were cautious but we took an offensive approach and it seemed to have worked every time, especially coming out of out of the recessions.
Morning, Peter This is Don to add a little more context to John's comments in 2008 am we had a positive comp of 2% in 2009, we had a negative comp of 13% and then came out strong in 'twenty 10, with a 20% comp growth. So to further elaborate on John's point, you know, we're a different company today.
Then we were in 2008 and 2009 in the long term, we view all expenses as a variable, but we feel we're really well positioned with our balance sheet strength to to kind of weather what what uncertainties lie ahead for the next six to 12 months.
Okay. That's that's helpful. Don.
The demand comp, it's again kind of bucking the trend, but everything we're hearing out there even with premium home furnishings, you called out the two year round in 94, I think if we were even looking at a geometric basis, even over 100, but we'd like to look at a lot of things on a three year basis, whereas the man com on a on a three year basis.
If you happen to have that for you.
I do so on a demand comp basis. The two year at 95 point for the three year comp is 97 on a on a comp basis on a revenue a comp basis and the three year is 116, 9%.
Okay. Thanks, so much and good luck.
Thanks, Peter Thanks, Peter.
Thank you.
Our next question is from the line of Curtis Nagle from Bank of America. Please go ahead.
Oh, great. Thanks, very much for taking the question. So maybe one just in terms of.
What are you guys seeing from a supply chain and cost perspective, it didn't sound like that was something that was like a material tailwind.
Tailwind contracts are pretty.
Pretty strong gross margins that better than expected, but yeah.
Did you see your kind of how that's trending.
And where things are relative to expectations prior to situations you know for the rest of the year.
Good morning, Kurt So supply chain are certainly is the constraints are easing up from a gross margin perspective.
Year over year at the product in container costs were relatively flat. So pleased with what we're seeing there as we think about the the expectation heading into the quarter.
We've continued to say over the last few quarters that we expected the cost or to elevate them a bit more we have seen stabilization in the fourth quarter and again in the first quarter and so really pleased to see that stabilization and cost continue into the second quarter.
I will say that there's some offset there relative to the fuel surcharges were seeing in transportation on the outbound side I'm. So just important to keep that in mind as we think about the balance of the Earth.
Okay, that's very helpful.
I mean, it's I wonder what's important in terms of the design studios so.
It sounds like we're getting a couple of quick.
Mental new builds coming up relatively soon.
Just confirming that that is true that these are the.
I wanted to maybe work.
Expected previously and.
That's the case do you know what what's driving that.
<unk> increased our investment in this concept and you know how should we think about going into 2023 again or any kind of what we couldn't previously was this was more kind of a long test and learn so yeah I would love to hear your thoughts on that.
Yeah, I guess, Kurt that that was my fault.
Guess I changed my mind and wanted to add a couple of it we were going to hold off but I'm looking at the results of them we.
We felt.
We could we could handle a couple more and quite honestly the real estate just kind of popped up.
And they were.
Good deals and great great.
<unk> markets and.
So we decided to go for them in and I think we have two of them.
We'll open two to three have opened by the end of the year.
So for next for the following year.
You know again, we haven't set that a final plan for how many we can open per year.
But we shouldn't have that in the next quarter or so.
We're gonna, obviously with everything going on.
Thought too was plenty aggressive and you know, we'll see how the how the market goes in the next.
Three or four months and then we'll we'll put a we'll put a kind of an official plan in place after that.
Okay fair enough.
Thanks, very much Richard.
Thanks Kurt.
Yeah.
Thank you. Our next question is from the line of Jonathan Matuszewski from Jefferies. Please go ahead.
Great. Thanks for taking my questions and nice quarter. First question is just on the complexion of the comp in Q2, I'm curious if you could give us any color in terms of how much price contributed and and maybe how you know transaction growth was looking and.
And any commentary on on units per transaction I, just help us understand the growth. That's my first question. Thanks.
Morning, Jonathan So a O V was up nicely in the quarter, we're really pleased with what we're seeing there that's driven both by price increases filtering through that were deployed last year. We also saw a nice uptick in our in home designer program. The penetration of that program continues to expand in a O V continues to be.
You know over three times that of our average a O V for the companies are really pleased with how that program is performing.
A number of transactions are up healthily as well so really pleased with the you know with those numbers.
Units per transaction traffic also bolt up nicely I'm. So really just pleased with all of the metrics that we're seeing them and the consumer response to our product and our marketing and our showrooms.
Great. That's helpful. And then just my follow up is on pricing. It sounds like you guys have been less aggressive in passing along price.
Then some of your competitors.
Curious if you guys are seeing in terms of new customer acquisition, maybe an outsized increase in our customers.
With with presumably maybe a higher household income maybe potentially trading.
Any commentary on you know that the what the new customer that you're acquiring looks like if it's any different than than in the past would would be helpful. Thanks.
I can comment on the the price increases and then maybe John can comment on the <unk>.
Customers changed at all but no. We took we took price increases as as we needed to as product was increased by our vendors and suppliers partners and.
And as you know container costs district.
Coming into the facility and going out.
Increased we adjusted prices.
We feel we're right, where we need to be with that.
We feel you know if we have to we still have room to to take others. Other increases if we need to but we're pretty happy with where we're at and.
We haven't seen a lot of change in pricing you know price increases I should say from vendors.
Lately the last few months things have been pretty quiet.
They took their price increases are there, but they're happy with what they're getting right now.
We haven't had any big surprises in that regard.
Painter cost of course have come down a little bit.
Certainly nowhere with where they were three years ago, but.
Lower than last year, so where I guess it can be happy as you can be with the.
Paying that much for a container, but again out of our product also has made the United States. So again that hasn't hit us as much as most a lot of our competitors who have had to raise prices more because most of their things are imported and.
So they may have taken more.
As a percent than we have but we haven't needed to because half of our products here in the states.
John do you want to talk.
Talk about the yeah, Hi, Jonathan This is Chad yeah speaking directly to the new customer customers and the demos, we really haven't seen any changes in the customers who are coming in are they spending more which is great to see them and we continue to see that but in terms of who they are were really not seeing any impactful changes.
And that goes the same for China, all they're not coming in as well So show around the Star says E. Com continues to see really nice strong results.
Thanks, So much best of luck.
I can't.
Yeah.
Thank you our next.
Next question comes from the line of eight one year.
From Barclays. Please go ahead.
Good morning, Dan and John Congrats really nicely done.
John I was wondering if you can talk about the cadence across the quarter I believe last quarter. You said it was pretty steady across the three months in Q1 and then this is one of them.
Question that you can it's more still a thoughtful yes R. R.
How much if at all do the macro housing data points factor into your business forecast that that's probably for Don or John If you want to comment on that like pending home sales housing starts.
There seems to be a long duration between seeing those data points and kind of where you are in your kind of growth curve.
Sure.
Yeah, I mean, I can start with that that I I don't look at those.
Every day, and then worry about them too much all I focus on is executing our plan executing having the best product anywhere in the country.
And it's at $60 billion.
And we're a very small part of that so if we could get a couple of more percent from our competitors were doing great.
That's what that's what I focus on.
Don I don't know if you have more facts.
Yeah. So you know our customer is more tied to stock market volatility and you know the the demand outperformance in the quarter I'm really is indicating to us that that theirs. In this time period, there's a little bit less of a correlation than what we've seen historically, so really interesting data point for us as well.
But less tied to housing starts and more tied to stock volatility and as we think about the the cadence of the demand through the quarter April was certainly the strongest month and June was a little bit moderated from that point, but nothing kind of meaningful that I would call out there.
That shows the change in actual you know consumer behavior.
Okay, and then John just a quick follow up I'm, just trying to reconcile you know demand, obviously super strong demand strong a little bit of moderation. It sounds like as we go through Q T. D. But then the comment that backlog doesn't normalize until mid calendar 2023 suggest that the you know.
That theres going to all be an ongoing set of long lead time, so lumpy type of delivery I should say so what's happening is that getting any better that the path to kind of like when they book to when they actually get delivered and recognized revenue on.
I'm just trying to figure out like how do you think played into each other.
Yeah. So product lead times are shortening really nicely. We're pleased with with the majority of our lead times special order upholstery is still a little bit longer than what we would like it to be in longer than pre pandemic.
You know what we've done at half of what it was yeah yeah.
So what do we think about the constraints, it's really around getting Dallas ramped up.
And get being able to put the capacity towards pushing that product out of the distribution centers and and delivering it into the client's home. So.
It is a rolling backlog so keep in mind that you know clients aren't waiting six plus months of a product that is rolling in we are able to deliver.
To deliver more you know today than they were even six or eight months ago. So really pleased with the performance that we're seeing out of North Carolina, the productivity there and the distribution center is phenomenal and has certainly outpaced our original expectations for that first facility Dallas is coming up a little bit slower. So that's.
That's the constraint them, but if you recall when we talked to them a few months ago or longer term or long term goals were for backlog not to normalize until 'twenty four and beyond so we're pulling that up shorter than earlier than what we anticipated at the time of the transaction.
And then lastly, I just encourage you to keep in mind that backlog is a function of both the delivered in the demand. So as demand continues to be strong at it resolves the pipeline I'm. So therefore kind of pushing out the backlog a little bit longer so.
That's super helpful. Thanks, so much and breakout.
Thanks Adrian.
Thank you. Our next question comes from the line of Steve Forbes from Guggenheim Partners. Please go ahead.
Good morning, John Don.
One of the focus on the customer experience maybe high level. John if you can just given the strength in demand. He picked up just the scaling of the business over the past three years.
A lot of you just give us an update on your current thinking around investment needs of the business right inclusive of people technology infrastructure.
Where where is your sort of medium term oh.
Making sure I see the investments are ahead of the growth here.
Sure as you know we invested in the logistics side of the business with what these new warehouses and so forth Hum now we're focusing on putting some sophisticated systems in place to help us manage.
That you know the different warehouses, and so forth and pudding.
Management warehouse system in place and so forth. So we're investing in and things like that.
We're hoping to invest in a new planning system again, so we can plan our inventory more.
More efficiently.
As we as we're growing and get into more warehouses.
Other than that you know investing in new stores new locations not.
Not only new locations, but going back and renovating older stores or moving older stores that have been proven to be very successful.
And are worthy of our new look and a new design that has proven to be a huge success for us.
So you know, we're going back and re remodeling some some existing stores.
Quite a few every year that I'm excited about as well as the new stores.
Steve I'll I'll add on a little to that you know we are really pleased with the growth we're seeing in word.
We're being prudent in how we're investing in the business for growth you can see it in the you know some of the SG&A spend that that were investing in to ensure that the business can support the level of growth that we've seen in the growth that we anticipate at the same time, we recognize that you know over that six to 12 months a lot could change theres a lot of uncertainty out there so we're being.
You know physically responsible with our growth needs and trying to balance the potential macro factors that could impact the business with supporting the growth that we anticipate.
Thank you and then maybe just a follow up break it into common Charlie made around Remodels.
But curious if you could just give us an update on the current store network or how you view it right from an investment need standpoint, and then whether we should view. The next 12 month period is a period of time, where you may focus on.
Remodeling the existing store network.
These new stores or how you sort of balance those two and in the current macro environment.
Yeah, we will.
As we mentioned you know we're planning on five to seven new stores.
A year plus in addition to that some.
If you design studios at least this year, we're going to do two or three.
So I don't have a count on what stores, we're renovating right now, but you know we're looking at them.
We're looking at them for.
You know as as leases expire and going back to landlords and if we want to stay in this space. You know then renegotiating leases I'm trying to get some landlord contribution if we are going to remodel.
Or if we need to move it down the street or across the street or something then we look at that.
So let's.
Let's say, it's an ongoing fluid situation that we're looking at.
One one lease one location at a time.
Thank you.
Okay.
Thank you.
Our next question comes from the line of Beeville Benedict from Baird. Please go ahead.
Hey, good morning, guys. Thank you for taking the question I have a couple first just on the cost and pricing dynamics I mean, it sounds like there's certainly some relief you're seeing on the cost front stabilization Something's coming down John you also mentioned you've got some some ability to kind of move price in case you need it.
I'm just curious what the outlook over the balance of this year.
Assumes in terms of pricing is there anything else you plan to take and then in the event the costs continue to come down or moderate.
Is there any is there a situation where you would maybe take some price back on any product or do you think you are at levels that you can bucket sustained that's my first question.
Yeah. The other thing I just forgot as you know the dollar has gotten a lot stronger.
So you know we've.
We've negotiated actually discounts with some of our vendors.
Or in some cases, we pay and in Euro and of course, you know.
And that's what you said.
There's quite a bit stronger.
But across the world the dollar stronger so we have negotiated some discounts.
We're not planning on taking discounts or.
Coming in the future right now you know again its something we could do if we wanted to.
But right now we're holding steady with you know we think we're we think we're offering a customer a great value.
We don't want to raise prices again, because you know, we're happy with where they're at.
Thank you.
You can go crazy with pricing and that that will affect you know take a certain part of the market out.
And.
And that's something where we're certainly aware of us.
But where we're happy with everything the way it is right now.
Peter we have adjusted the the assumptions within the forecast them and in the guide to reflect the lower container costs that we're seeing stabilized over the last three quarters and so as you think about the back half of the year, there, there's some expenses and and.
To keep in mind, so we have recalibrated the model for the change in container costs I think with the three quarter stabilization now is a kind of it makes sense to change those assumptions and I'd also like you to keep in mind that Dallas is kind of at peak and productivity for the third quarter. So as we think about.
Expenses and how those are layered in second quarter had a little bit of that expense in there, but third quarter. The expenses will ramp up as we've opened the facility, but are not shipping much out of there given the slow ramp.
And then we've also are thoughtfully invested additional funds into marketing, which Jan can speak to them.
And where we're pleased with them.
With what we're planning to do there so John do you want to Yeah, Hi, Peter.
Yeah. So we we are looking as Don mentioned, we are increasing our marketing spend a little bit going into the back half of the year a good way to think about it is when you gets higher we are spending more on marketing to support that and support the long term growth as well and we're really excited by the results and I will touch on.
Previously those marketing spends are always based upon return driven targets are we can be very fluid as to how we are using and utilizing that those dollars mm shifting across campaigns across channels.
And we've been really pleased with the results to date this year and I'm really excited I'm moving forward with adding you'd fall launch upcoming John mentioned it in his Ah and the comments earlier, we are really excited about this launch with a lot of new products, a lot of new storytelling and marketing, but a lie.
It is really really nicely with some really exciting trends and things that are happening within the industry as a whole because I can't fall. So that's all coming out in the next few weeks before the end of August we're excited to see what the combination of an increase in dollars and combined with that really strong product doesn't really strong content can do in the market.
That's great that's helpful and Jim just to stick with you for a minute.
Any color you could give us on kind of your ecommerce efforts.
Pact that that the upgrades.
Made over the last year had been having what's been particularly effective.
And then what's next on the horizon, there, it's obviously an ongoing process to to to.
To improve the digital side of your business, but what's been working specifically at that what should we be expecting over the next 12 to 24 months on that front. Thank you.
Yeah, Great question, Yeah, we continue to be really really pleased with the performance of the new sites I believe I mentioned for Q1 that were seeing really positive results in terms of traffic and conversion on clients' time on site and how they're engaging about content and we've seen that really continue nicely and into Q2 as well.
As you mentioned it is a really exciting and continuous process of them. We have to you know being a shelf great with the all of the new site launch back in December and then it's just been a constant learning updating elevation.
Paying a process ever since then and really we anticipate that to continue definitely through the next 12 to 24 months as he mentioned and then beyond that as well I think some of the things that we are really seeing working off our clients are engaging with our content more and I think that is a combination of both the.
Just sticks, if you will have a site itself ease of use our ability to understand the analytics and really see how clients are engaging with site and optimize our content on our journey and all of those possibilities based upon real time learnings, which is the biggest thing we are excited about wasn't using moving to the new platform.
We are seeing our product content and storytelling really engaged a lot of fee our AI assisted our merchandising capabilities and the ability to share specific content with clients has seen watching really well I'm not going to get into too many more specifics there because I don't want to give away all of our secrets, but.
But where we are very excited with what we're seeing we just launched a week or two weeks ago, we had a G. T C onto the homepage, so really being able to show off product in clients' homes, and that's something that we know works incredibly well for us and our social channels. So we're really excited to bring that into the commerce experience as well. So that there are a lot of things.
Happening that I think the key things that we are working on are really looking at those conversion optimization capabilities. The way that we are presenting thing I'm merchandising our products all of your analytics capabilities on the back and and really have a exciting so front away over the next 12 plus months I'm on continues to optimize.
That and learn what we can do more in the future.
That's that's very helpful. Thanks, so much and best of luck.
Thanks Peter.
Yeah.
Thank you. Our next question is from the line of Simeon Gutman from Morgan Stanley . Please go ahead.
Hey, good morning, everyone I wanted to ask first about Dallas and understand it it's going to be a cost headwind in the second half.
Is there any quantification around that and then is it limiting your ability to write orders are I Couldnt tell if you were implying that it was it was hurting sales as well.
No not not one little bit.
Yeah to me and so Dallas, you know, we learned a lot and the opening of our North Carolina facility Dallas is over twice the size of that facility and its also operated by a third party. So as you can imagine the processes and the systemic implications of that or a little more robust than opening.
Facility that we have full control over and our system is seamlessly integrated already says we were evaluating them. The facility. It just made sense to us to make sure that the client experience.
As you know consistently that luxury experience that premium experience and that a slower ramp up of that facility on the outbound side. It makes a lot of sense to make sure that that experience is what we want it to be there's no implications for demand as I mentioned, we're really really pleased with how North Carolina is.
Shipping product out so relative to expectations, you know eight months ago. They're there there are some puts and takes there between the two but yeah. We think it's the right thing to do for the business and the client to have a slower ramp of Dallas.
Okay fair enough.
Second question, maybe two parts second half gross margins I guess, excluding Dallas from the equation Don because.
Curious about the markup and then again shipping costs, so really gross margin outside of what Dallas is doing what's embedded for the second half and then onto the fall product release can you give us a sense. It is full always going to be a new product release for this business what percentage of merchandise.
Is it replacing are you, adding to your SKU count if you could give us a little bit of flavor.
Sure. So I'll start there and then I'll pass it over to John for the second portion of your question as I mentioned, we have recalibrated the model to bring down container costs for the balance of the year. So we're pleased with what we're seeing there and think that now is the right time to make that change we do anticipate continued.
Surcharges on the outbound side. So you know those have continued at the level that you would expect so we don't guide to gross margin. We don't guide on a quarterly basis, but those are you know some of the higher puts and takes that you can think about I'd also call out variable rent him expenses is certainly a component so as we continue.
To drive those deliver those that revenue number higher the variable rent will also play a role.
John .
Yeah, I mean, it product wise, where I think you asked about.
We're launching our fall product now as Don mentioned that we're very excited about I dunno, how many skus that is it's it's you know a fair amount.
We're excited about the product we think it's all very very solid very very sellable.
And we'll continue to do that our next major rollout then we'll be at the end of the year for going into the winter and spring season.
First with with indoor product and then shortly after.
The holidays, and so forth, we start rolling out our outdoor product that we're excited about.
So we're continuing as is our plan as we've we've plans and we're very very happy with the product we think it's extremely strong.
And just to add some color to that as well I think one of the exciting things for us as we talk about Newport, often adding to the assortment is when you look at the marketing campaign elements around those launches that for example, when I was speaking about the outdoor catalog and product launch are back and.
Q2, and now talking about the fall campaign launch them in conjunction with a new product going into fall, we really see a very strong response from clients and potential clients about that infusion of newness into the assortments clients love to engage with it be inspired with that visit the show runs.
It's an experience that ultimately as clients start to engage with us as they start design consultants and our interior designers, it's really about finding that was perfect products that work for them their style that families are lifestyle and so it's really interesting we see a really nice halo effect when we're talking about new product, we're seeing sales results.
Across our entire assortment within the business as well.
Thanks, everyone.
Thank you.
Our next question is from the line of Cristina Fernandez from Telsey Advisory Group. Please go ahead.
Yeah, good morning, and congratulations on the quarter, we sold.
I wanted to ask about the competitive landscape any changes that you've seen over the past couple of months in in relation.
In relation to that what should we expect from our house as far as you know promotions.
Around key events for the back half of the year.
Yeah, I can start Gencon and help me with that but.
We have no changes in our either our marketing, where we're continuing to rollout incredible product.
It's really well priced we're not planning on any big promotions or anything that we haven't done in the past.
So everything is kind of houses in that in that regards.
Casino just to add to that I mean, we're definitely we're seeing promos out that will have a competitors, but as John mentioned, we feel really good about our strategy. Obviously, we're paying very close attention to ever saying, we're going to continue to pay very close attention to see what happens in the future, but we're also seeing really strong results clients respond.
Incredibly well to our product, they're responding well to our marketing and they are responding well to everything we're doing so we're really just focused on optimizing our what we do at and like I said, we'll continue to monitor what's going on in the environment, but right now we feel really good about where we are.
Thank you and then my follow up is I wanted to to ask about the store opening cadence you alluded to some delays in opening stores tissues do we still think like five to seven of the larger showrooms for this year or have some you have some of those get pushed into 2023.
Yeah, we have.
Three three.
Three will be opened this year are three have been pushed into next year sorry.
I don't know how many how many have we opened this year. We've opened two this year, we anticipate two to three design studios over the next several months and the expectation for those would as Jon said would be by the end of the year, but perhaps due to timing they might shift slightly into the first quarter, a little bit well, we will see more remains to be seen there, but three that we had anticipated opening this year will shift in.
Too early next year right.
Right.
So we we are planning on over a two year basis to stay with our plan of five to seven.
So that'll be 10 to 14.
Over 22 and 'twenty three.
Plus plus design studios.
Almost nothing.
Does that answer your question.
No that's it for me thanks.
Thanks, Christina Thank you.
Yeah.
Ladies and gentlemen, we have reached the end of the question and answer session.
And now I would like to turn the conference over to MS. Wendy Watson for closing comments.
Thank you everybody for your participation in our call and interest in our house, we look forward to speaking to you again next quarter.
Okay.
Thank you the conference of Art House, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
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