Q3 2022 Arhaus Inc Earnings Call
Good morning, and welcome to our House third 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 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 will now turn the call over to your host Wendy Watson Senior Vice President of Investor Relations. Thank you you may begin.
Good morning, and thank you for joining our house is third 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 operational detail.
Don will cover our financial performance and outlook for the remainder of 2022 and then they will be joined by Jim Porter, Our Chief marketing officer for the Q&A session.
During 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 September 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 events objectives strategies trends or results constitute forward looking statements.
Actual results or events may differ materially due to a number of risks and uncertainty.
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 <unk> 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 maybe 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'll now turn the call over to John .
Good morning, everyone and thank you for joining US today, we are pleased to report another strong quarter with record revenue and significant year over year earnings growth.
Our team once again executed extremely well in a very dynamic macro environment satisfying our clients supporting our growth strategies and managing our profitability.
Turning to some highlights for the third quarter results.
One net revenue of $320 million or 57% increase over Q3 last year with our retail channel up 61% and our ecommerce channel up 40% in the quarter.
Comp growth of 54, 3% and demand comp growth of 15, 8%.
Net and comprehensive income increased 160% and adjusted EBITDA increased 87%.
Our net revenue performance for the quarter was better than expected from both demand quarter and continued delivery of our backlog.
Our net income and adjusted EBITDA were also much better than expected, primarily driven by the strong net revenue and leverage on fixed costs.
Demand comparable growth in the third quarter was a robust 15, 8% significantly exceeding our expectations in the early part of the fourth quarter. We are continuing to see solid demand with mid single digit demand comp growth.
If a strong prior year Q4 demand comps.
This is consistent with our longer term expectations for comp growth and demand comp growth.
Turning to our operational developments in the quarter, our product and marketing continues to resonate with our clients. We are pleased with the fall campaign and just launched our new holiday campaign last week.
Regarding supply chain on the inbound side, we continue to see a moderation of the bottlenecks that we have impacted our industry since the start of the pandemic.
And our lead times are coming down steadily we are seeing lower freight costs persist, although a few fuel prices remain volatile.
On the outbound side as we discussed in the last quarter's call. Our Dallas just abuse and center is now open and we have started delivering product out of that facility. While we continue to show slow ramp the operation to ensure a seamless transition and client experience. We are making great progress. We're also on.
Track with the expansion of the Ohio distribution center expected to be completed by the end of this year.
As a reminder, we believe our new distribution capacity will help elevate our booked backlog reduced our lead times to support our growth over the next seven to 10 years.
Turning to showroom growth, we're opening a new design studio in Park City, Utah later this month as we expand our testing of that concept.
Has been very successful and we plan to open two more design studios over the next several months.
Looking ahead, our real estate pipeline is very robust we will share our showroom openings planned for 2023 early next year, we continue to target, adding five to seven new traditional showrooms annually.
Given our performance over the third quarter of 2022, and the strength of our backlog we are reaffirming.
Our full year net revenue in comparable growth outlook and raising our full year net income and adjusted EBITDA outlook that Don will cover next.
As we look to the future we remain confident in our strategy and our focus on delivering long term growth.
Closing I want to reiterate how pleased we are with our performance in the third quarter and truly thank our team for stepping up to the every challenge I'm incredibly proud of each and every one of you now I will turn it over to Don.
Thank you as John described our business continues to be resilient and we were pleased with our operational and financial performance in the third quarter.
The items from our third quarter 2022 income statement include net revenue of $320 million comp growth of 54, 3% and demand comp growth of 15, 8% on a one year basis 44, 1% on a two year stacked basis in.
An 87, 8% on a three year stack basis.
During the quarter, we saw strong demand in both showroom and E Commerce channel.
Our net revenue growth was driven by both demand and the continued delivery of orders in our backlog related to our increased distribution capacity and continued improvement in product lead time.
Our third quarter gross margin increased 61% to $136 million in the quarter driven by a higher net revenue, partially offset by higher variable costs related to the increase in net revenue, including product transportation and variable rent expense as well as higher credit card fees related to increased interest rates and.
Demand.
Gross margin as a percent of net revenue increased a better than expected 90 basis points to 43%, reflecting our ability to leverage our fixed showroom occupancy costs over the higher net revenue, partially offset by higher variable rent and transportation expense.
Third quarter, SG&A expense increased 31% to $89 million.
The increase was primarily driven by investments to support the growth of our business, including higher corporate and warehouse expenses as new showrooms open and we expand distribution capacity as well as public company related costs.
We expect the incremental expense from our expanded distribution center footprint in the near term to be approximately $40 million on an annualized basis.
SG&A expense as a percentage of net revenue decreased 570 basis points to 28% driven by leverage on fixed costs on the 57% net revenue increase and the non recurrence of prior year IPO expenses.
Third quarter 2022, net income increased 160% to $37 million.
<unk> net income in the third quarter of 2022 increase the better than expected, 97% to $38 million compared to adjusted net income of $20 million in the third quarter of 2021, driven by higher revenue.
Adjusted EBITDA in the quarter increased 87% to $57 million from $30 million in the third quarter of 2021.
Net income and adjusted EBITDA in the quarter exceeded our internal expectations.
Due to continued container and product cost stabilization positive impact from price increases, which offset higher fuel costs and lower than expected warehouse expenses.
I want to again, thank our team for working diligently to control expenses and drive operational efficiencies and what is still a highly inflationary environment.
Turning to the balance sheet and cash flow as of September 30th 2022, cash and cash equivalents were $146 million and the company had no long term debt.
Net merchandise inventory was $293 million up 40% from December 31, 2021, and up 72% year over year as we continue to build inventory in response to client demand and as inventory value increased due to higher freight and product cost.
As I mentioned last quarter, while our inventory dollars are growing due to inflationary conditions. Our inventory units are growing at a lesser rate, we remain comfortable with our inventory levels.
For the nine months ended September 32022.
Net cash provided by operating activities was $58 million and net cash used in investing activities was $37 million with landlord contributions of $11 million.
As a result total capital expenditures net of landlord contributions were approximately $26 million in the first nine months of 2022.
Finally, as we announced this morning, we are affirming our full year net revenue in comparable growth outlook for 2022, and we are raising our full year net income and adjusted EBITDA outlook.
We now expect full year net revenue of 1.1 dollars 73 to 1.1 $93 billion.
Full year comparable growth in the range of 43% to 48% net.
Net income of $109 million to $115 million and adjusted EBITDA of $185 million to $192 million.
This implies fourth quarter net revenue of $300 million to $320 million.
<unk> growth of 24% to 32%.
Net income of $19 million to $25 million and adjusted EBITDA of $36 five to $43 $5 million.
Our outlook reflects the expectation that we will continue delivering our backlog through the balance of 2022 and into mid 2023.
Carefully manage our expenses, even as we continue to invest in growth, including distribution marketing and product development.
Our outlook continues to assume year over year inflation in product and transportation costs.
We have further lowered our full year expectation for capital expenditures net of landlord contribution to range from $40 million to $50 million due to lower than expected capital expenditures for the Dallas distribution center and delays in new showroom construction and permitting.
For all other details related to our updated 2022 outlook. Please refer to our press release.
In closing we were pleased with our third quarter performance and despite an ever changing macro environment. We believe our strong debt free balance sheet, coupled with a strategic growth plan to build on our share gains and the highly fragmented $60 billion premium home furniture market position us to weather any economic cycle and emerge in an even stronger position.
Poised to deliver on our longer term growth plans and drive value for all stakeholders.
Thank you for your attention and we would now like to open the call up for questions.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May Press Star two if he was like three move your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Our first question is from Curtis Nagle with Bank of America. Please proceed.
Good morning.
For taking the question.
Just wanted to talk about.
Sort of I guess into next year, but you guys are well performing industry in terms of demand products activated right. That's a message of all sorts of macro uncertainty.
What do you think the pause is what keeps a positive there is it just a moment now and what are the biggest headwinds and do you think you can keep up that mid single digit demand comp growth.
Okay Moms will queue in your Walton targets are for next year.
Good morning, Curtis John Here, John Reed Yeah.
Yeah, we we are sticking with our original plan, which was.
During Covid, we focused on working on new great products Rolling out collections. They they've now gotten to me in the stores, we've gotten inventory behind them and.
Seems like our product is resonating with with with our customers.
What the retail is about if you have the right product the right.
The right product at the right price that your customers want they're going to buy and.
So we're gonna stay stay focused on that and we think what we think will be okay going into 'twenty three.
Okay understood and then just as a follow up.
So my question around just how to think about transportation costs for next year right I'm Gonna still elevated.
The charges are still an issue, but you know as contracts reset and freight costs have gone down because shipping too.
That might be a tailwind for gross margins into next year.
Good morning, Curt This is Don.
You know so well, we'll provide a little further context on 2023, when we report the fourth quarter, but I would just remind you that I'm you know container costs, while they are coming down this year. It will take some time to flow through our P&L just given the timing.
And we use our inventory is Atlanta, Pos which include says container costs, though.
So more to come when we report the fourth quarter, but we feel like we have a decent handle on on what that'll look like next year.
Okay. Thank you.
Our next question is from Simeon Gutman with Morgan Stanley . Please proceed.
Hi, This is Jackie Stefan on for Simeon. Thanks for taking our question just quickly on the kind of discounting and promotional environment. What are you guys seeing and can you. Please talk about your assumptions I guess for the fourth corner at the beginning of 'twenty three.
Yeah, Hi, Jackie this is Jan.
So as I've been saying, we're definitely seeing promotional activity pick up within the market looking at our strategy through Q3, we were in line with where we were last year, which is much lower promotional activity versus 2019, and we continue to feel very strong with the results of that as you heard today.
Going into the peak November holiday sales period, we're definitely seeing promotional activity pick up even further within the market.
And we are a bit more promotional than we were last year, which is really in a proactive effort to pull forward some of that promotional activity earlier in the month in line with the trends that we're seeing with apparel retailers are looking for what do we aren't really seeing this as a shift in our promotional strategy for a long term basis. This is more of a reaction to what's happening in this.
No peak holiday sales period.
So we will be monitoring very closely obviously, obviously as we move forward, but right now our plan is to stay in line promotional it was way out with being ear to date as we look forward into next year. One thing I will note is just the promotion that we did turn on and happy running we've seen a really nice react.
And to that which we think and part is you know we have been so quiet all year and as John mentioned, we have the product we have all cylinders firing them on that side. So it's really nice just to see that we do have this great lever if we haven't needed in the future, but for now looking into next year, we still feel really good about focusing on getting the.
Our product into the stores, having a marketing hat and paying our attention there.
Okay. That's really helpful and just one more on the complexion of the 54, 3% comp is there any color you can give us to like price versus underlying transaction growth in the corner of our underlying transactions positive and how does that compare maybe to 19 months.
Jackie This is Don so 54% is on a delivered basis, because we think about the components of the demand comp in the third quarter and that's where we would we would talk more about our average order number of transactions and both of those were up really nicely.
Units per transaction was also up really nicely. So so still seeing some nice strength from the consumer base.
As it pertains to our product offerings in the market in the third quarter. So we're really pleased.
Got it thanks, and congrats on a good corner.
Our next question is from Jonathan Matuszewski with Jefferies. Please proceed.
Hey, good morning, and great quarter.
First question is on market share you guys called 54% this quarter the premium furniture market is.
Not really near that pace. So just wanted to get your updated thoughts on where you think that share is coming from now.
Is there evidence of elevated challenges at some of your smaller players that you think is driving market share gains or do you think it's more of a function of certain larger competitors moving more up market. Just wanted your updated thoughts there. That's my first question. Thanks.
Good morning, Jonathan.
I can start this up if I'm.
John wants to pitch them, but I guess my answer is we really don't focus on what our competitors are doing I mean, we certainly know what theyre doing but you know we focus on our business and executing everything.
That is planned in our business right and you seem to be hitting on all cylinders.
Everything is working from getting the product in here to getting it delivered to having the right product that customers obviously want.
Tastic value.
Incredible quality and.
I don't have any clue, what smaller people doing or are the big guys are doing.
But.
We know what we're doing is working and we're going to keep doing it.
Gotcha. That's helpful. And then I guess as my follow up Don on the <unk> comp guide would be great just to get.
Any sense of kind of the macro and housing assumptions underlying that.
That forecast in terms of what you guys are expecting to.
Right.
At the midpoint of the <unk>.
For Q guide thanks, so much.
Sure. So so keep in mind that for Q guide as I'm on the delivered side versus the demand side. So I just want to clarify there you know we continue to see that we don't have an incredibly strong correlation with the housing market is a factor, but it's not the driving factor stock volatility continues to be kind of what we see.
Historically as a driving factor of the demand comp. So you know that being said, we're really pleased with what we're seeing them from the consumer response, like we said and in the third quarter and fourth quarter to date as well.
Continuing just to invest in our marketing programs, which we know are resonating really well with clients and making sure that the product is on point. So I'm just continuing to execute on those those key core strategies that we have and not deviating.
Gotcha best of luck.
Thank you.
Our next question is from Steven Forbes with Guggenheim Partners. Please proceed.
Good morning, John Don again.
I just wanted to follow up.
And a couple of questions before.
John .
The company's performance.
I don't know if you can sort of comment John high level sort of what youre seeing in your customer demographic profile that may help explain the outperformance if theres any changes in trends.
Trends were.
You had a difficult trade area.
Page from.
I think we're just looking at the homes here in trying to find sort of an explanation for whats driving the strength I think this acceleration in the multiyear stack of pump is certainly a standout I don't know if you have any sort of high level thoughts.
And what you're seeing in your customer data that would help explain it.
Yeah, Hi, Steve This is John I mean, looking at the customer data and we're continuing to see our customers really acts and demo wise I'd be the same as they have been where we're paying very close attention to that we're digging in honestly, where I was curious if you are looking there.
But we have you know really strong customer demophile.
Looking nuvaring is it new versus existing or continue seeing that look really nice without value still being around that 50 50, Mark I spoken before in terms of sort of the net worth and come down <unk> age all of that we're seeing that staying consistent with where we've been for the last.
A few years, so we're definitely paying very close attention.
And you know as we've spoken to all our clients are out there. They are seeing what they want that liking the product and theyre willing unable to pay for it. So we're continuing to focus on getting that message out.
And if we see anything in the future, we'll definitely share with you but for now nothing noteworthy to report.
And then maybe just a quick follow up for Don It looks like the fourth quarter.
EBITDA margin is being guided down year over year.
And I don't know if you can just help us better understand the anticipated margin pressures. It seems like you might be in the product margin side with promotions, but anything specifically to call out.
Inexpensive <unk> groceries, you should note.
Yeah. So so well you know we don't we don't guide on a quarterly basis I'm you know I think the additional context, that's gonna be really helpful. For you to think about is the Dallas distribution Center.
It was a very extensive and very large facility that you know is adding to our expense structure year over year. So we feel pretty good about you know our strategy is to execute topline out of that facility and I'd also say, we you know we talked last quarter about the marketing investments and we're being really thoughtful about.
I'm kind of getting in front of any macro softening that might be occurring which as you can see from our numbers in the third quarter, we feel pretty good about about how those came in but there'll be a bit more marketing investment in the fourth quarter, just preemptively I'm staying top of mind with clients. So those are probably the two components I would call out for you to think about.
Thank you best of luck.
As a reminder.
It is star one on your telephone keypad, if he would like to ask a question. Our next question is from Cristina Fernandez with Telsey Advisory Group. Please proceed.
Good morning, and congratulations on a good quarter I wanted to see if you could talk about inventory with inventories building you know across the industry and you don't see the demand.
Environment being a little bit more uncertain. How are you thinking about inventory flow going forward should we expect the inventory to increase from here or level off.
Yeah, So we feel pretty great about our inventory position today keep in mind that the inventory dollars are factoring in those higher transportation costs on the inbound side as well as some higher product costs that we've seen you know from from vendor price increases over the last 18 months or so but on a unit basis were.
Pretty confident with where we're at I would also say you know we have a pretty nice pipeline of backlog orders to deliver which it gives us good visibility into where we need the inventory levels to be for you know really the next eight months or so so we felt confident in our inventory strategy and we feel good about where the inventory is positioned today.
And then going back to the demand.
In the quarter any more color you can share about how the quarter progressed in any part of categories that outperformed relative to the to the to the overall company.
Yes, I think it's been pretty steady we didn't see any pop in any categories or anything.
Yes.
Core products and again the products that resonated with our customers are the ones that are selling and.
It's been pretty steady all year for that matter.
With the best sellers are.
But what our clients are buying where we're seeing a nice nice lift in some of the.
Categories that are.
Add ons to the core products in other words rugs lighting, so forth, which gives us a great a great additional sale because as.
People are buying say a sectional if we can add on the lights.
The rugs that it can literally almost double double the ever sale. So we've done a really nice job. Our team has done an expanding those categories and we've seen some great growth in those categories.
As well as the outdoor category, we've seen some nice growth on throughout the summer is that of course is winding down now, but it'll be picking back up soon.
After the first of the year again.
And then Kristina just on the dispersion of the comp within the quarter. We saw some moderation in September but it was still up really nicely.
Year over year or so so nothing really notable there, but very very pleased with how how the quarter performed and how it trended throughout the quarter as well.
Thank you.
Our final question is from Peter Keith with Piper Sandler. Please proceed.
Hi, Thanks, Good morning, everyone I'd hopped on the call a little bit late so I apologize if these are repetitive.
But I wanted to think about pricing going forward, there's a lot of discussion in the furniture industry around excess inventory and AR markdowns prices coming down over the next six to 12 months. Obviously, you guys are a bit of a different animal out there, but how do you think about your pricing going forward as you you've taken.
<unk> here a couple of times over the last 18 months.
Do you anticipate maintaining price or do you think they'll probably be some moderation in your overall pricing.
Good morning, Peter.
Yeah, we certainly as everybody has as we've seen we've seen them cost increase over the last 18 months or so.
We've adjusted our prices.
We don't see we we kind of see us holding steady.
Where we're at right now.
We have seen a nice.
Decrease in container cost and current product coming in but.
John said.
A lot of the product we own.
And we do have a good amount of product that's not access it by any means but.
The right amount of product so we can service our customer.
Customers and clients on a timely basis. So so we're happy with our inventory levels, we're able to service our customers a lot quicker than we were.
I do see out there in some of the industry that some people are still way out on inventory and I know that people have access to.
Turning to clear that out.
We're in good shape, we're not we don't have access so we're not trying to declare anything out.
And.
We see pricing holding steady what will look once we clear out the inventory that we owned at the higher <unk>.
Dinner cost.
We will look to even adjust their prices a little bit if we can.
To sell more units, but that's down the road.
Okay helpful. And then just lastly, just on the unit growth outlook.
Lot of other growth oriented retailers have talked about opening delays permitting HVAC. What what are you guys seeing out there right now as you're planning the openings for 2023.
Yeah, we've had a couple of stores that were planned for 2021 that are falling into the beginning of 2023.
I think we have a good handle on it now it's just we just have to plan longer.
We know things like <unk>.
Parts for HVAC, and so forth are going to take six months to get in and so forth. So we've got a great.
Team that's building our stores that they are all over it there they are way out in front of it.
So we think we're the dates that were committing to we think we're going to be able to hit it pretty well.
And.
They're longer then of course, we'd like or anything, but we are committed to we feel confident we'll get get them open at.
Those states might real estate team might kill me for saying that but that's that's about what we're seeing right now.
Okay sounds good well best of luck for the real estate team and everyone else there. Thank you.
Thank you.
Yes.
We have reached the end of our question and answer session I would like to turn the conference back over to Wendy for closing remarks.
Thank you everybody for your participation in the call and interest in our house, we look forward to talking to you again next quarter.
Thank you. Thank you.
This does conclude today's conference you may disconnect your lines at this time and thank you for your participation.
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