Q1 2023 Arhaus Inc. Earnings Call

Their centers tend to be 100% filled.

It's not like they're struggling to.

To look for tenants.

I still believe the.

The retail.

Locations are key to our business into our growth, but we're really focusing on.

Great locations so.

Some of the some of the rents arent.

Our.

As cheap as going to B or C locations.

You get you get our traffic of our clients.

They live in there.

The visit at many times a month and in the.

And it's working for us So we're happy with with everything from how we negotiated the leases.

What we are paying we think it's very very fair.

And like I said most of those were done during COVID-19, because you need to be at least two years out.

On.

Getting new stores open at a minimum.

Great. Thank you and just very quickly.

And Preopening expenses.

<unk>.

Startup costs for new stores any color you can provide on that would be great. Thank you.

Good morning, this is Don.

So we haven't disclosed what the pre opening costs are but we didn't say there would be a drag in the second half of that just as it were.

And about the length of time it takes to open a new showroom and whatnot rent starts.

And to be incurred on the P&L. So there is some compression in the back half related to the new showrooms that we are opening.

Next year as well as this year.

And as far as cost obviously.

As we all know everything went up in price.

Labor materials light fixtures wood.

Everything has really gotten much more stable, though we found this year. So we know what our costs are in other words.

No surprises at all.

Tom.

Our construction guys are hitting hitting deadlines.

We see no no delays right now.

Foreseeing anything.

All the pieces and parts are coming together, but certainly things cost more than they did three years ago for sure.

Is everything did does.

In this world right now.

But we've already factored all that in and that's all part of the plan.

Awesome. Thank you.

Okay.

Thank you.

The next question comes from the line of P. J <unk>.

Chad.

Hey, guys good morning.

First question just touched on the first half low teens versus the prior high teens view, just maybe talk a little bit more about that I mean, how much of that is the demand environment, you're seeing how much is maybe backlog fill sliding into the second half and then as you think about the second half are you still thinking down high single digits.

Or does that benefit from from this shift or should we be thinking kind of lower end of the revenue plan is probably more likely at this point. That's my first question.

Good morning, Peter.

So the.

First half, we expect some of the backlog to push into the second half.

It's dependent upon.

Variety of factors, including.

A lot of clients are continuing to build and remodel and are not quite ready to take the product into their home yet.

And then we've also seen a really nice acceleration in the number of large orders.

We've had over the last few years and so.

Some of those clients, while we may have the majority of the pieces for that order, they're waiting on one piece.

In order to be as efficient with the client as possible.

We're waiting for that one piece to be receded in and then we can deliver it to their home. So those are a couple of the larger reasons that it will cause some of that backlog to push into the second half.

Okay. Thanks, and then just on that Amit.

On the demand.

Flattish at this point can you talk a little bit about I don't know this is a regional tone to that shifting down I mean, obviously its been expected that youre going to see your demand moderate but just any color on what youre seeing.

Around demand would be would be helpful. Thank you.

Yeah, we haven't seen anything too meaningful from a regional perspective, I will say there was a little bit of noise, perhaps in the California markets in March in particular.

John or John do you want to add any color on what a big part of that was whether they.

They were getting those huge huge rain storms.

And I think that slowed a little bit down.

But.

Yes, we haven't seen anything.

Normally the Midwest is a little more cautious in times of.

Uncertainty than the rest of the markets.

But it's a very small small very small percent.

And yes.

Being 149% up over the last few years.

Being flattish, we're pretty excited about that.

Like I said, we're getting we're getting set to getting all of these new stores in place getting this new product in place we're renovating quite a few stores on top of the 12 are opening.

We're really setting ourselves up for a great position that.

When people really start lumen and and the economy starts moving again, we're set to.

Capture our share of that market.

Okay.

That's helpful and I guess my follow up would just be on inventory.

18% year over year, Youre, adding stores clearly just talk a little bit about the complexion of the inventory how you feel about it what youre plans are.

For the balance of the year in terms of adding.

Adding inventory.

In the event that demand continues to moderate or moderate further than you expect your promotional plans for the year, how youre thinking about marketing.

Approach. Thank you so much.

Sure. So I'll start with the promotional cadence, we feel confident in our product assortment offerings and how we have positioned ourselves from a price perspective.

That being said, we certainly have promotions as a lever if we choose to.

<unk>, we chose not tail end March and April and still came in quite nicely at flat.

Not only in the stores within our marketing.

[noise]. Thank you. The next question comes from the line of Jonathan Modjeski Jeffrey.

Yeah, I just spent some time with some of them and.

We're going to wait until you lower your prices or something like that.

Any any color there would would be helpful. In terms of just initiatives not sure if you're trying to be more proactive in terms of going after beyond and consumers and designers, but maybe.

Medium sized businesses or hospitality.

Sure, it's aimee and so so we didn't change anything in our guidance from last quarter. We everything is the same so.

Particularly the upholstery business, we think we're going to really really explode. This fall.

And you know in our business.

The indoor products, if you're furnishing kitchen, our bedroom.

And it can kind of all starts with the upholstery and from there you buy the rugs the pillows lamps.

Coffee tables, and so forth. So so we're focusing on.

On delivering some really really cool new designs credible values incredible fabrics.

Can be used.

Our clients have have lives of their families their pets.

And they are very interested in things that you can use.

As in the room Gump lock, often and look at and we think that makes us really unique in the market.

We go to great lengths to make sure everything from the frames over our upholstery is almost indestructible to the Christians to certainly the fireworks and so forth.

And they were really really coming on some really cool designs that I don't think people have seen in this country and.

And we think that's going to be exciting footfall.

Thank you.

You're welcome.

[noise]. The next question comes from Vermont Office Lee Williamson.

Alright. Thank you last quarter you initially spoke about the remaining backlog of about 100 million expected to be fulfilled in the first half can you share how much of that is left after the first quarter and can you go a bit deeper into the margin impact and related fall through expected in the second half.

We still consider a mid teens per cent of trailing 12 months sales of more normalised level a backlog. Thank you.

Hi.

So we.

We don't want to get into the habit of disclosing backlog every time. We report we thought it was helpful. Just for the year over year comparisons to give the full year.

So there is so.

There are still significant backlog.

To push through.

So.

You know the any kind of margin impact is factored into the guide relative to I assume you're asking relative to kind of the freight component.

But certainly Ah clarify if that's not the case, so so everything's factored into the guide we don't guide to gross margin, but we did give some context, an adjusted EBITDA margin.

And then I apologize what was the last part of your question.

Just considering what I'm more normalised level, a backlog as if that's still kind of a mid teens range per cent of trailing 12 months sales.

Yeah, I mean for now I think that's appropriate as were consistently working too.

Improve our from our pre pandemic lead times, particularly around I know the virtual team is working pretty diligently to.

Reduce lead times on some special order type products, so that could come down a little bit but for now I think just using the historical average is appropriate until we have some kind of firm strategies deployed.

Okay. That's great. Thanks quick follow up on one of your competitors announced plans to launch a smaller format services focus location.

This is a presidential risk to your plan to accelerate the design studio footprint or your ability to lease a similar size box.

And then can you remind us how the sales productivity and margins of this format compared to your traditional showrooms. Thank you.

Yeah, we heard that too.

But no it's not changing.

Our strategy once whatsoever, and we don't think it's going to impact.

Business.

Have no idea what what our competitors are doing but we've got a nice plan.

And things like.

We just opened up in Asheville, North Carolina last month.

Phenomenal well bloomed blew me away, how well they did and places like that where there's pockets of.

Very much wealth.

And.

But you wouldn't want to put a full sized store there so.

Our design studios are working well we've.

We've got lots and lots of runway gears.

Runway to go on those so.

We're continuing to <unk>.

Freak them, a little bit trying to get more more productivity out of each square footage and we're just putting together a really talented team of experienced people to to focus on those so.

Okay.

I didn't we're not changing our strategy one little bit.

And then from a financial perspective.

In our traditional showrooms we.

Have said that we're targeting a 10 million dollar revenue number with.

Average contribution margin of 32% so the design studios.

B, a lower showroom net revenue number but it would have a higher average contribution margin of around 35% is what we target.

And that's driven by as you can imagine the rent and the staffing levels primarily.

That's great.

Mmm.

Does that complete your question.

Yes.

Thank you.

The next question comes from <unk>, <unk> and company.

Hey, Thanks, a lot for taking my question, sorry, I hopped on later on in case, you're already address this but what is your view on our houses ability to all this new higher pricing level vulgar term I think you're up at least a high teens compared to 2019. So do you think this is sort of the.

New baseline or could you need to.

Cheek pricing gradually lower over time and this is more longer term. So excluding some of the near term promos and things like that just curious on the run rate for the business.

Alright.

Have no intentions of lowering our prices unless we.

Can get lower prices from our vendors or from the freight cost. We're we're more than happy to pass along savings to our to our clients and.

If it's appropriate and we keep our margins, where we want them but.

Other than that we don't have any plans to.

To continue to lower prices whatsoever.

Because we don't think we need to we've got great product, that's an incredible value.

And is unique nobody else has it in the world and.

With that or.

Our clients really desire our products and.

Again, they buy it because they really want their homes heavy, especially nice not because they can save 200 bucks on a sofa or something like that.

I always tell my team that once.

Once our clients by our products.

Six months a year from now they don't remember what they paid if they got a deal or not on it what they remember is if they love their product and their sofa set right and they are not caving in and with cheap foam in cheap frames and all that kind of stuff and.

We appreciate it and they love it and they tell their friends, but they are not saying Hey look at this I got 300 Bucks off under Sofa, I mean, that's not where they behind our product and.

So we have no intentions of lowering our prices unless unless again, we can if we get lower prices from from vendors or from freight costs.

Got it okay.

That's great. Thanks, a lot.

Thank you, ladies and gentlemen that does conclude our Christian in opposition.

I'd like to turn the conference over to Andy Watson.

Bruno.

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

Thanks, everybody.

Okay. Thank you ladies and gentlemen is that concludes today's teleconference. Thank you for your participation and even now disconnect your lines.

[noise].