Q2 2023 Arhaus Inc Earnings Call
[music].
Good morning, and welcome to the our House second quarter 2023 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 conference is being recorded and the reproduction of any part of this call is not permitted.
Written authorization from the company.
I will now turn the call over to your host when do you watch and senior Vice President of Investor Relations.
Good morning, and thank you for joining our house of second quarter 2023 earnings call with me today are John Reed Co founder Chairman and Chief Executive Officer, Jim Porter, Chief marketing and E Commerce 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.
Ken will discuss read our most recent marketing campaign and Don will cover our financial performance and outlook for the remainder of 2023. After these prepared remarks, we will open the call for questions. During Q&A. Please limit to one question and one follow up if you have additional questions. Please return to.
Q.
We issued our earnings press release, and our 10-Q for the quarter ended June 30th 2023 before market opened today. Those documents are available on our Investor Relations website at IR <unk> got 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.
So 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.
All over to John .
Thank you Wendy.
Good morning, everyone and thank you for joining us today.
It was another great quarter for our house and our business continues to be incredibly resilient.
We continue to win with our clients and in the second quarter, we again saw exceptional demand comp growth.
It is notable that the.
11.6% demand comp stacks on a 22.5% demand comp in the second quarter last year.
In terms of cadence we started the quarter in the in April with a flat demand comp, which accelerated with May and June .
Mid teens to low twenties, we're seeing strength in all categories and in all regions.
We also have a strong start to the third quarter with demand comp growth in July .
High single digits.
Turning to highlights for the second quarter, while continuing to execute our strategic initiatives and growth plan for the year, we delivered net revenue of $313 million.
And comprehensive income of $40 million with a margin of 12, 8%.
And adjusted EBIT da of $64 million with a margin of 24%.
Note that revenue was below our expectations for the quarter impacted by delivery delays primarily focused on these three factors first slower deliveries out of the Dallas distribution center as we continue to optimize product assortment across the three distribution centers.
Second a temporary reduction in productivity as we implemented various new systems, including our new warehouse management system.
Drive future patient growth.
There are some clients are also asking us to delay deliveries.
A complete home related projects.
As we haven't gone from one distribution center to three in the past two years. It is critical that we continue to implement the system capabilities processes and talent to enable us to move product through our supply chain more efficiently as we scale for growth.
Some of the factors that slowed revenue.
In the second quarter will continue into the second half of this year.
As a result of some of that net revenue originally expected in 2023 will be pushed to 'twenty 'twenty four.
This is.
Offset by a stronger than anticipated demand growth.
As a result midpoint for our year net revenue outlook is unchanged Don will discuss in more detail. This later.
Moving to profitability, we saw a nice earnings benefits from the impact of lower freight cost.
Two our gross margin in the second quarter. This benefit is enabling us to pass through some of the lower pricing to our clients with a particular focus on ensuring we remain top of mind competitively.
It is also allowing us to optimize our assortment as we make way for new product launches in the fall.
And address the areas, where we need less inventory on hand.
Additionally, with our stronger earnings.
In the second quarter, we are raising our full year net income and adjusted EBITDA outlook.
Turning to an update on our showroom growth for the year, we are successfully scaling our showroom footprint, along with executing our renovation relocation and expansion projects.
To date, we have opened five new showrooms in 2023.
Two new design Studios Asheville, North Carolina in Naperville, Illinois to traditional showrooms to Panga, California, Peabody, Massachusetts, and a new outlet location in Dallas.
We are very pleased with the strong performance of our new showrooms and proud of how.
Ne Shortcake's arm incredible product for.
For the balance of the year, we expect to open.
Six additional traditional format showrooms are west Hartford, Connecticut location in the third quarter.
Five new showrooms in the fourth quarter Coral Gables, Florida, Huntington station, New York, and three new showrooms in California.
Additional planned, California showroom opened opening has been pushed to 'twenty 'twenty four.
Renovation relocation and expansion projects are all proceeding as expected.
I encourage all of you should visit one of our showrooms and see the experience our product for yourselves.
We also continued to grow our in home design or program. We are focused on the growth of this program is the average order value we enjoy from our in home.
Designer assisted sale is four times, our company average order value.
I found that our house.
More than 35 years ago with the objective to source wood sustainably and to create an heirloom quality furniture, but the hope that it will be passed down from generation to generation and not end up in landfills.
I've always been passionate about preserving our planet.
And now more than ever we must do our part to help slow down global warming.
I am proud today to announce a $10 million commitment to the nature Conservancy to support their abbott's efforts to protect the critical rainforest in Borneo, Indonesia.
Our donation will directly support the nature Conservancy and their local engineers Indonesian affiliate why can has embarked on an ambitious project to pilot solutions to drive more attractive and self sustaining economics and forestry.
We are proud to support these efforts and we hope others will join us.
Know that the environment is critical to our business, our employees and our clients and certainly the planet.
And we know that we must take bold action now.
We look forward to sharing this incredible journey with you.
And we will we are confident that together, we will make a difference.
Finally, I want I want to thank my team for their continued focus on providing an incredible product assortments and amazing omni channel experience and client per service as well as executing our showroom openings and enhancing strategic systems that will allow us to scale for long term growth.
And success.
It is their execution that makes me confident in our ability to capitalize on the significant opportunities ahead of us.
Now I'll turn it over to John to discuss rooted our latest campaign marketing campaign.
Thank you John and good morning, everyone I'd like to take a moment today to celebrate our latest campaign, which launched yesterday across our channels.
Last year, we sent a team of writers of Videographers and photographers to Mexico. The goal of that check with unique to visit artists and longtime our house partner Javier and to capture the magic happening in his workshop.
From the beginning of our partnership Javier is handcrafted furniture has been different distinct tests working only with salvaged unsustainably source of where he sees the specialness of every log unless that organic imperfections dry invented design.
As our businesses have grown together over the years. So has our collaboration our sense of the style involved unrefined, we've developed new collections and expanded our offerings into new spaces at the home.
It is a truly immersive campaign that tells the hobbyist story his family his process and his passion for the truth.
It is also volume one the story of who we are I encourage you to visit our house Dotcoms experienced the campaign for yourself.
We are so proud to partner with Javier and with all of our Sim partners around the world to offer our clients. The most beautiful and the most unique handcrafted furniture collections. We hope you enjoy the stories within related as much as we enjoyed telling them and we look forward to continuing to share their stories, which make our house so very special.
In addition to his head and we have some great marketing initiatives launching in Q3, a new content experience on our house dotcom entitled Unabridged launched this week here you will find the wonderful stories of our Sim partners alongside design inspiration partnerships and much much more we.
We will also be launching a fall campaign in just a few weeks off paying hundreds of new products and expansion into some of our best collections, we cannot wait to hear client feedback and share more updates with you on upcoming calls, but now I'll pass it over to Don Phillips.
And good morning, as John described we are pleased with performance in the second quarter key items from our second quarter of 2023 income statement include.
Net revenue of $313 million up $7 million or 2.2% with comp growth of negative <unk>, 8% and demand comp growth of 11, 6% on a one year basis and 102.3% on a four year stacked basis.
Gross margin increased 5% to $140 million in the quarter driven by a higher net revenue and lower product costs, partially offset by higher fixed tariff costs and higher credit card fees related to increased interest rates and demand.
Gross margin as a percent of net revenue increased 140 basis points to 45%, primarily reflecting favorable product costs, partially offset by higher fixture on costs and credit card fees.
Second quarter, SG&A expense increased 4% to $86 million.
The increase was primarily driven by higher corporate expenses to support the growth of our business and higher selling expenses related to new showrooms and strong demand, partially offset by lower product storage fees as we have expanded our warehouse capacity.
Second quarter, 'twenty, 'twenty, three and net income increased 10% to $40 million.
Net income in the second quarter of 2023 increased 3% to $40 million compared to adjusted net income of $39 million in the second quarter of 2022.
Really driven by the factors just described.
Adjusted EBITDA in the quarter increased 5% to $64 million from $60 million in the second quarter of 2022.
Second quarter 2023, net revenue of $313 million and adjusted EBITDA of $64 million resulted in a 20% adjusted EBITDA margin in the quarter, an increase of 70 basis points year over year.
Let me now move to our outlook and how we're thinking about the second half of this year.
At the midpoint of our narrowed net revenue range implies we expect second half net revenue to be down mid single digits versus the second half of 2022 with the higher than anticipated demand comp growth. We are experiencing also by the factor as John described earlier that affected our Q2 net revenue growth.
We expect to see demand comps increased in the low to mid single digit range in the second half of the year.
On the profitability side, the freight benefits, we are realizing enable us to increase our full year net income and adjusted EBITDA guidance. While also funding the crazy pricing adjustments as Jon described and our $10 million donation to the nature Conservancy.
We expect adjusted EBITDA margin to be down approximately 750 to 850 basis points in the second half of 2023 or since the second half of 2020 to do to reduce leverage as compared to the second half of 2022, when we benefited from substantial backlog delivery.
Higher showroom rent impacted by both the number of new showrooms and strong revenue.
Higher showroom staffing investments to enhance the omnichannel and technology capabilities, including information technology, and warehouse management systems infrastructure and the previously mentioned donation to the nature Conservancy.
Accordingly, as we announced this morning for the full year 2023, we are narrowing our net revenue outlook with our midpoint unchanged and increasing our net income and adjusted EBITDA outlook we.
We expect full year net revenue of $1.25 billion to $1.29 billion representing growth in the range of 2% to 5%.
Full year comparable growth in the range of negative 2% to positive 1%.
Net income of 102.5 to $112 $5 million and adjusted EBITDA of 187.5 to 197 $5 billion.
For all other details related to our results and our 2023 outlook. Please refer to our press release.
In closing we are pleased with the first half of 2023 we believe our strong debt free balance sheet, coupled with a strategic growth plan to build on our share gains and the highly fragmented $100 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 plan.
<unk> 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 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. If anytime you wish to remove your question from the queue. Please press star two for participants using speaker.
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Our first question is from Steven Forbes with Guggenheim.
Hey, John Don Julio Mark has actually on for Steven Forbes.
Just quick question given the ongoing strength in our underlying demand trends I was hoping you could give us a brief preview on your real estate plans for 'twenty 'twenty four.
There's always a new product pipeline and as a quick follow up how is the mix of in stock versus special order sales evolved over the past couple of years and what infrastructure related investments are so outstanding over the intermediate term to to ensure the customer experiences where it needs to be.
Yeah.
Yeah.
Hey, good morning, good morning.
Thanks for the questions.
Yeah as far as new stores go for 'twenty 'twenty four.
Well you know we're on track to choose to stay with our plan, which is which is as we've been saying five to seven stores a year.
And and we'll look at opportunities that may.
Presents themselves and maybe do a little more or maybe do a little less depending on.
Finding the right real estate and finding the right deals of course.
As far as you asked about the mix of special orders.
It's right on track with what we're what we're planning its been strong.
We feel we just one of our very unique parts of art house that makes us very competitive.
As is our custom our especially in the upholstery business since we own our own upholstery factory were able to get consumers.
Consumers really really great fabrics.
Looks.
Very very different than than we see out there in the market and we can custom order it and make it very quickly for for our clients. So we're very very happy with that part of the business.
Is there a third part.
Yeah.
Yes.
And yeah, just very quickly that you can follow up with anything on our infrastructure related.
Thank you so much.
Shorts in more intermediate term.
Yeah.
Thank you you cut out there for a second we've got a question about system.
Infrastructure.
Okay. So yeah. You know we're excited we have a lot of opportunities to continue to enhance the systems infrastructure that we have them in place you know as we've grown over the last several years.
Now that there are more efficient ways to do things and we have a really strong management team here who's driving some change in some nice it is going to facilitate some nice strong efficient growth. So as we're thinking about the next several months, we have a warehouse management system that has been deployed in one of our distribution centers, who are working to deploy another one for R. R.
In Ohio facility here, so really excited to see how that's going to continue to progress over the next several months and then you know we have several smaller ones I know we've talked in the past about planning software programs and then just various other our other projects that we're working on them to continue to drive efficiency.
Growth within the organization.
Awesome. That's helpful. Thank you very much.
Our next question is from Jonathan <unk> with Jefferies.
Okay.
Hey, good morning, and thanks for taking my question. The first question was just on the guidance framework for the second half.
Yeah, historically, you've suggested the bulk of your demand is driven by a light home refreshes and then also more complex contractor assisted refreshes.
And a smaller piece is driven by existing home sales, but just wanted to get your underlying assumptions for those three drivers in the second half.
How you're thinking about whether there was you know stay consistent with recent trends improve or worse and that's my first question. Thanks.
Hey, Jonathan this is Wendy.
Yes, I mean those are the primary driver is we never know exactly how they're going to play out from time to time, but our assumption that our.
Our assumptions are that they will continue I'm you know those same factors will continue to be the primary purchase drivers related to housing for a client I'm understanding to you know we have all of this incredible product.
It's coming in but I would say our assumptions in general have not changed regarding those three factors.
Yeah.
Okay Gotcha and then my follow up question is just on pricing you've done three rounds of pipe for the last couple of years, you know relative to peers you haven't been as aggressive.
So I I thought John's comment about lower supply chain costs, enabling lower price points for clients. What was interesting maybe if you could just expand upon you know that the lower price point.
That you're passing along to customers.
That would be helpful is it being driven by you know more promotion Audi in the industry competitor actions et cetera. Thanks, so much.
Sure sure.
Yeah, I mean, we we've always.
[noise] ran our business in the belief of giving customers a great value for their money.
We have a little different business model than most people out there and that as you know we buy direct.
From manufacturers, we cut out all the middleman the wholesalers.
<unk> man and all that kind of stuff that.
Yeah, you know a lot of people build into their price. So you know.
We've always felt that if we can give our customers and clients.
And better value if prices go down we do if the prices go up we raise prices and.
And you know we raised prices for for quite a while there.
E D.
Better values, we're getting now is really in the freight cost.
Yes, it's you know container costs that just come come way down compared to certainly a year ago year and a half ago. So you know those are the things that were impacted with that we're looking at every price. If we can take them down a little bit and it's still it's still withhold our margins, which obviously is number one.
We'll do it and.
And you know if that'll help our volume because prices have come down at all that you know it's great but.
But we're doing it very selectively and we're not we're.
We're not trying to chase customers with lower prices or anything and and you know it seems to be working for us. So.
That's it we're going to keep marching it that I don't see container costs coming down more than they are now because they're very very low so.
So I would think in the future prices will be more maintained they're not gonna have to raise them or or lower them. So.
That's kind of what the future look like so it looks like.
Jonathan I have just a couple of other points that you might find helpful. So we implemented the price actions and mid June So limited impact of those in the second quarter overall on the full assortment at a mid single digit price decline, but keep in mind that.
Most of those are temporary as we're looking to you right size the inventory assortment.
And.
You know, that's what I'm thinking about how to make way for newness within the assortment.
Immune.
Immune has seasons coming up price, so really excited for that and.
Those are the two points so [laughter].
Super helpful Best of luck.
Our next question is from Simeon Gutman with Morgan Stanley .
Hey, guys. This is Jackie assessment on for Simeon. Thanks, So much for taking our question just on the timing of deliveries I guess, how important is it for your business to be more consistent with that timing of deliveries. You know do you think you're impacting the brand in any way and kind of what's the path to marry up the demand.
The actual comp thanks, so much.
Sure. So for the you know delivered sales like like we mentioned there have been a couple of impacts in the second quarter of that were impacting our ability to deliver.
The demand if the spend rate and kind of to the level that we had anticipated originally.
You know, we're working through the second half to be able to fulfill those orders and based off of client timelines as well and so I would say more to come on the alignment of those two I think when you're looking at just the demand comp percentage and a comp percentage keep in mind. The base is going to be very different looking at last year or so.
There's going to be some noise until there's a lapping of normalization them, but we're working pretty diligently to get product delivered into clients' homes in the second half this year, particularly you know in advance of holiday season.
Really want their home cooking perfect.
And Jackie just to just to fill in your you asked it.
Jimmy and impact on anything.
We're selling handmade heirloom quality products.
And.
They're they're not.
This isn't a commodity so when folks or.
Our product and if it takes another couple of weeks to get to them.
It's fine you know, we're seeing absolutely zero.
Capsulation and products or so forth.
Cause you know were delayed or something like that and that's very important to know is.
Our our clients will wait for our product.
Because they know theyre going to have it for many years, that's very unique they can't find it anywhere else in the world.
And and a way for you now and then and maybe like in a couple of weeks earlier, but.
Yep Yep Yep.
And they'll wait for it and it's not that's not a big deal for them.
Gotcha, Thanks, very much and just a quick follow up.
I guess on new store productivity, you know Kenny.
Can you remind us what your one productivity in books like in new space as a percent of an average store and how our new galleries tracking on that.
Yeah. So what we thought is that you know for traditional showrooms, we target a minimum revenue of $10 million and adjusted EBITDA contribution of 32%.
So we're really you know we we feel really good about how our niche arms are performing relative to those not tracks and you know they come out of the gate really strong what we found is that we excel really well and you know any any market that we enter them, so whether it's urban and suburban whether we're in a mall.
Our lifestyle center or a standalone. So yeah, we felt pretty strongly and not only the showroom experience, but the marketing that we put behind it when we open a new location. So really proud of how our new locations are performing today.
Got you. Thanks, so much.
Our next question is from Peter Benedict with Baird.
Hello, Mr. Benedict.
Sorry about that hey, guys good morning.
Don can you talk a little more about maybe the second half outlook.
Help us understand your view on gross margin versus SG&A.
Certainly it looks like gross margins will be down our SG&A is going to be up a bunch just trying to understand what the puts and takes are there and any kind of call out around three Q versus four can you just as we set the expectation for the back half. That's my first question.
Yeah, Good morning, Peter.
So you know, while we don't guide to gross margin or SG&A I would be happy to provide some clarity on some of the components. So I'm you know within the gross margin line item. We did talk a bit about you know freight is coming down and we're seeing that starting to roll through the P&L all set up some nice relief there were offsetting that with pricing action.
But we've taken for the inventory assortment.
No other items rolling through there. That's particular note are the new showrooms as we're opening six new showrooms in the back half keep in mind that those are in more expensive locations and have rent in advance of opening. We also you know within a couple of months prior to opening we're starting to staff those locations as well and there's no.
Responding topline revenue impact so that's important and now it sets us up really well for 'twenty 'twenty four and beyond for these new showrooms, but but does have a near term impact of the share.
And we're also seeing you know a little bit of compression. So in credit card fees as you can imagine with the interest rates, where they are in and with demand accelerating that that impacts those line items within SG&A you know so staffing of the new showroom is wrong or SG&A, but.
So you now expecting some variable compensation increase and keep in mind that our showrooms are commission based off of demand versus mm cap revenue I'm looking at the disconnect. There and it says were working to get that delivered revenue out the door and you know there could be could be some variances there on a percentage basis and we're also.
Investing in system right since we talked about the the warehouse management system. The planning systems, we're talking about an order management system. So a lot of those you know in advance of actually turning out listen there's a lot of costs and implementation fees that go along with that so so yeah. So you know I think we're investing for growth we're excited about.
These systems are going to take us over the next kind of 12, 18, 24 months and how we're gonna be able to grow the business and support the growth that we've seen them, but certainly kind of that kind of a near term compression.
And then just as we're thinking between quarters you know again, we we we don't really give quarterly guidance at this point.
But I don't know when do you do you have maybe any additional contract.
No I mean other than you know we would hope that you know it's it's a it's a nice split obviously in the third quarter. We have our you know the launch of our new products and they're refreshing our show around and you know the big fall marketing campaign that that.
They can get us a little bit of a lift in the fourth quarter, depending on delivery, but but in general I would think about them as you know they're fairly even.
Alright, great. That's Super helpful. And then I guess the next question.
The C O Peter Peter one other note. So that so so also you know in SG&A, we will have the donation to T N C and that's likely to be in the fourth quarter.
Excellent. That's really helpful. Guys. Thank you my follow up would be on the C. O O departure can you talk a little bit more about that give us some context, obviously given your drive to become more efficient around supply chain and logistics just watch what your plans are there from a management standpoint. Thank you.
Yeah, we've got a great great team.
Driving.
On the back of that part of the business.
And.
And the C O M.
Two of the greatest just wasn't a great fit.
And you know to take us forward.
So we're going to keep moving on.
What our plans are for the future, but we've got a great great team on the ground that can execute.
And.
Well move forward with them and and keep things going.
Got it thanks, so much guys. Good luck.
Thank you. Our next question is from Seth Sigman with Barclays.
Hey, good morning, everyone I wanted to follow up on the price adjustment conversation, so it's really difficult to compare apples to apples.
But do you have a feel for you know following some of these adjustments and what the price gaps look like and maybe just any other commentary around what's happening competitively from a price and promotional perspective. Thank you.
Yeah. So you know we're constantly evaluating where we are positioned within the competitive side, making sure that our value proposition is exactly where we would like it to be making sure that we're kind of top of market with regards to that so.
You know, we feel really comfortable with some of these price adjustments that we've taken that would not be temporary that would be more permanent and based on what we know today and we feel great about how those position us within the market and I think you know as we're as we're looking across the assortment, we have really unique product with really great quality.
So you know I think we're really pleased with how how we're positioned in the market, but we're constantly evaluating that as well.
John do you want to talk at all about the promotional cadence, you're saying, yeah. I mean, I think there's too much specifically on promotions in a simulator and as I've mentioned on prior calls you know, we're continuing to see that heightened promotional activity. We our promo strategy remains unchanged. We continue to be really happy with it I think the one thing to note.
You know our promotional strategies. So you know we've always been money with those promotions around those holiday weekends, a three day weekend and started talking towards the end of last year like I'm not black Friday talking about how we were seeing those sales periods lengthening them. So I think you know as we are in growth mode, We do want to be.
His mind and part of the consideration back for those customers who are more promotional driven we have lengthened some of our promotional periods to what might've been a three to four day promo around July 4th weekend I might not be a little over a week in line with what we're seeing with trends in the market again, you know that's really.
We want we are in growth mode. We are trying to grow our brand awareness and we know that a subset of our clients are on promotional in Japan, and we want to be in that consideration set when they are out there in the market and shopping but like I said no no change in the strategy other than that and we continue to be really happy with that performance.
And just a reminder, that those price changes went into effect in mid June .
Yeah.
Yes.
No specific you would point to that you guys are doing well.
Or do you think maybe.
Just any more context there. Thank you.
Sam This is when do you broke up a bit can you repeat the question.
I'm, sorry, I got that right.
The acceleration that you saw in June .
At the corner pretty celebration I think on a one year basis.
Multiyear basis as well.
There anything Steve.
Yes.
Thanks Mark.
So if you are still breaking up but I think your question is about the demand acceleration in the second quarter and what we saw in how impressive it is on a multiyear basis.
Yeah, So you know what.
Yeah.
Go ahead Bob.
Yeah, I'm, sorry about that yeah, and if theres anything specific that you did to drive that acceleration or do you think the market. Thank you.
Well I certainly think were driving some of that I think there's probably a market component as well, but you know where we're continuing to execute on our strategies that we've outlined and talked about you know really for the last several years. So yeah, we feel great about our show around the aesthetic our product is really resonating it's on point we'd.
Continue to introduce newness throughout the last several years, which is a little bit different than perhaps some other folks in the market. So yeah. We feel great about that you know we certainly are constantly looking at you know our marketing touch points and evaluating you know is there are there different ways to engage with the clients and to drive.
You know responsive. So I you know I think we're executing on what we've laid out that we will execute and we will continue to do that and we're just really proud of the results and proud of our teams being able to drive the results.
Okay.
Thank you. Our next question is from Matt correct Clinker with T V Cowen.
Great. Thanks, a lot. So first gross margin was up nicely in the quarter, but just wanted to confirm that the lower prices will not result in gross margin pressure down the road and then how much do you think the pricing impact will have on two wage and then just the elasticity that you've seen.
Over the past handful of weeks.
Yeah. So you know as we've mentioned the.
We're reinvesting the freight savings or some of the freight savings that they're flowing through the P&L into some of these price actions that we've taken and we felt now is the right time to really evaluate taken into our inventory assortment and make sure that we're positioned how we want to be positioned heading into the back half of this year into next year and.
Then go forward, especially as there's renewed focus on you know our supply chain footprint with multiple D. C is.
So we're spending a lot of time.
In reviewing and analyzing that and think it's an opportunistic time to take some pricing actions to drive those internet.
Especially given that there's you know the ability to do so without margin impact to get in the freight rolling through the P&L and we also said that this freight savings are enabling us to contribute to the nature Conservancy, which we're really excited about and proud to partner with so we're feeling good about that.
Sorry was there a second part of your question.
Just the elasticity that you're seeing so are our how are customers reacting to the price cost.
Yeah, I mean, I think you know as far as.
So I'll answer this maybe in a slightly different way and tell me. If that's helped you but yeah. The consumer response has been good a price doesn't drive the client. However, so as we're thinking about there is a subset of the client base that will purchase you know maybe they were waiting for a promo maybe they were waiting for the next sale over a holiday weekend, but our client.
And once the products that they want based on the aesthetic and based on our quality and based on their home than what fits their lifestyle. So I'm you know we've seen we've seen some great response to so some of those products that were showcasing and we're showcasing them a little bit differently as well. So it's you know as we're looking about driving that inventory into the.
Supply chain to the clients, if it's about pricing a little bit, but it's also about how do we engage with the client and around those products as well so things like changing how they're displayed on the website and the navigation. So you know I think we're I think we're looking at all kinds of aspects that the client is engaging with the product regardless of price point with we're really.
And players left.
Got it okay and can you remind us how much newness are you going to introduce a second half of the year and then just what you're thinking for next year as well I know that you typically have a cadence, but just curious if you're sticking to it or if we should expect maybe any changes and then just with that how youre thinking about the time.
Of all of your the bulk rollouts.
Yeah, I can answer that Mac.
As you know I think are hard.
Sales are up about 33% over the last 24 months.
Clearly our product is resonating with our clients and and we got great product. So during the pandemic I had our merchants not slow down designing developing sampling new product. So you know when we came out of it and then I couldn't we could pull the trigger on those and they were ready to go and we're <unk>.
A lot of that.
We think that is baked.
A big part of.
Why we're doing so great, but I know it is because we've got great great products. So you know the future. We're staying staying steady you know where we shoot for about 20% newness a.
A year and and we're staying steady with that with that quite well.
Where.
Looking at every single category that we carry and trying to just get better and better every day.
We've got such a great merchant team great design team.
And theyre very passion, so talented that.
Working on products, and so do I and and.
And we keep coming out with better and better things.
We think our cutting edge.
People I know ive never seen anywhere else.
Take a look at this route it campaign that Jim just alluded to that some you know one of our key partners that we didn't throw out some really cool new product with this fall.
We're rolling out right now I shouldn't say that we know there's going to be it could be a homerun and.
So yeah, we're saying staying on course.
And in masks I would also add that that newness that's coming in is playing it really excited margin them. So you know, we're really proud of how we're able to price those pieces.
All right.
Can you maybe just elaborate on that if you don't mind just that last comment.
Okay.
I mean, you know I think we don't want to go too much into detail, mostly for competitive reasons right, but I can tell you that I guess as you're looking at the overall assortment and the pricing yeah. We've got newness is coming in really strong price points really great margin and then we have you know we mentioned that mid single digit price.
Adjustments that we've taken and I also would provide a little more clarity that in addition to most of those being temporary that it also is contingent upon the stock levels right. So while it's mid single digit across the assortment as you're thinking about you know maybe we have more we must simplify then and in some categories than others and we've taken higher.
Pricing on those than in others. So you know I think overall I I don't know that you can really model. This out but I'm just know that we're focused on margin management and we feel really good about how we're positioned with the client, but also from a P&L perspective.
And just just to add onto that.
I'm a merchant side.
We work on new products and rollout new product, that's going to be profitable.
We're not we're not I'm not interested in chasing.
Cheaper products, but like you know, let's cheapen the quality of the products. So we can sell more so we can get a lower price point or say, where cheap enough. So we can get a higher margin that's absolutely not not what we do.
But we keep the quality.
It's actually good is quite possible.
Great design, and then we analyze the product, but I mean, we go through hundreds of products that we pass on because maybe we can't get the margin on this cool stuff.
It's overpriced.
So anything we do rollout to Don's point is great product at a great value and we're getting a good margin on it.
Because that's number one.
And that's just sort of philosophy.
We always merchandise products.
Great. Thanks, a lot.
Our next question is from Jeremy Hamblin with Craig Hallum.
Thanks, and congrats on the strong results.
So you guys just posted.
Thank.
Your your best gross margin.
Right.
I think that your expectations are for that to come in a bit here in the second half of the year, but you know just not to belabor the point here and asking more questions about the gross margin, but it seems as though you've had a step up.
A sustainable step up in terms of what the long term our gross.
Gross margin outlook.
Picture is.
And whether or not I just wanted to see like clearly scale is part of this you know maybe scale also with the vendors has played a big part.
But the ability to offer those you know kind of the the price adjustments.
Mid single digit it's still you know it sounds like you're still kind of targeting a gross margin that is sustaining at a higher level than lets say you know kind of a few years ago. You know any additional comments you can share on kind of that viewpoint and and maybe.
The key the biggest key drivers of that sustainability on the gross margin.
Yeah. So I think you articulated that nicely in that you know there's a lot of opportunity as we continue to scale the business and what we said in the past is that you know we expect to grow adjusted EBITDA, but it may not be linear path. So as you're thinking about those margin rates, where you know we're investing in our showrooms.
Print them those are costly and advance you know six to 12 months in advance of actually opening the showroom.
We're also lapping, particularly in the back half of this year and Q4 in particular, we're lapping some really strong backlog delivery last year. So you know keep in mind that last year, we saw great leverage on those fixed expenses that I'm, we're not going to have that same benefit. This year. So I think it's just important to keep in mind you know in in 'twenty two.
Our backlog was about 150 million and what we said is that the flow through rate on that was between 35 to 45 first time, so really strong flow through on that about a $100 million in backlog delivery in 'twenty three 'twenty four depending on how the back half of this year plays out.
So you know as you're thinking about longer term and backlog is certainly going to play a role a significant role in those those rates but.
But we are positioning the company really well to continue to grow as we're investing in talent, we're investing in systems, we're investing in processes and certainly in products as we continue to work really closely with the vendors around you know pricing those pieces. So yeah.
You know I think more to come on that and that's it.
From a large larger perspective, but we're excited about where the company is heading and we feel really good about how we're gonna be able to deliver over the near and medium term.
Got it thanks, and then just a follow up here on the new the new showroom openings here.
Coming to the markets are really kind of coastal markets, you know slightly higher household income markets.
In terms of expectations around that you know what as you know kind of that $10 million million dollars bogie. You know are you seeing or the expectations for.
The unit level economics, higher given that likely you know rent costs are a little bit higher in those marketplaces as well do you have to set that bogie, even a little bit higher to get the unit level economics you want.
Yeah, you're exactly right. So we're targeting a 32% adjusted EBITDA contribution in year three for all of our showrooms now that's an average so you know as we're thinking about some of these showrooms, particularly in California, and California show around depending on the demographic, which location, we're going into is going to perform better than perhaps like in Akron canton might in one.
So yeah, we're we're very laser focused on the financials of each location.
And we're really pleased with the deals that we've been able to get them and the performance that we expect and anticipate coming out of them are entering some of these new markets and then adding new locations within existing market. So and so we were definitely focused on our financial performance.
Its location.
Thanks for the color best wishes.
Thank you. Thank you.
Yes.
Our next question is from Peter Keith with Piper Sandler.
Hey, good morning, everyone congrats on that.
Demand acceleration, it's pretty impressive.
And if this first kicking off the Jan on the <unk> campaign I did noticed that earlier this week, it's a it's a really impressive video.
So maybe just give us the plan how do you raise the awareness of that push that out to customers to help.
The profile of the Acacia and plasma collections, because it does seem like it could drive quite a bit of interest.
Yeah. Good morning, Peter and thank you we are thrilled with the campaign as I mentioned that launched earlier this week and can be found on our house I'll call My website and our stores on our social media channels were doing some advertising out in the market to us.
Prospect for our new new clients, who might be getting introduced to our house for the first time working with some of our partners and Influencers, who got that message out as well. So we're really excited to see how this plays out I think what is so incredible about this particular campaign is it's really expanding.
And on the stories and what is special about our house and what we have known since the beginning I think one of the great things that we hear from our design consultants and interior designers if clients want to know the story is gonna be artisans behind the products that they are buying them. They want to know where they come from how they're made how the.
Kraft dead, what materials, they made out of any sustainability elements to that and so we've always loves telling these stories on a one to one basis in showrooms, but this is our ability to really do it like you said on a broader scale. We also have printed a limited edition incredibly beautiful.
Book that will be going out to some of our top clients will be available in our showrooms and it's just an absolutely stunning works of art as I mentioned earlier on the call, we really spend some incredible artists and creators to Mexico to capture the story of some incredible art.
And creators in Mexico, and it's just been a really incredible synergy watching that all come together and we're really excited to start seeing a reaction from both our clients from our internal employees and then from a new people who are getting to know us for the first time I think you know the other two things I just want to know.
As I mentioned earlier on the call. This is volume one so we have a lot of stories to tell a lot of elements a lot of partners a lot of product that really combined to make our house incredibly special so looking forward to continuing this campaign in the future and that our fall campaign launches next in the next few weeks as I mentioned to Paul Carter.
Got along it'll be hitting homes in about two weeks here and that is incredible that is showcasing all of our product and the stories and the details and so we're just really excited for that sort of a one two punch there of Larry and cause additional storytelling elements onto.
Our marketing initiatives.
Okay, that's great stuff. Thank you.
My second question, I guess I'll ask specific weighted to dawn.
So the the.
The increase in the EBITDA guide is particularly impressive if we adjust out that that $10 million of tariffs as a nation.
But the midpoint of the sales guide there are some puts and takes that midpoint sales guidance holding steady. So suggests something's kind of better on the margin front and what you're expecting could you give us a little more color on kind of what's playing out to help the margin EBITDA growth.
Yeah.
Yeah. So you know we've seen really nice flow through on the.
It's primarily.
[noise] about gross margin so for us even within the organization, we have a little bit of channel. It doesn't seem like the important thing exactly how that free its impact is going to flow through just because it's skewed dependent.
And that's really contingent upon what clients is purchasing at what volume. So so you know we've been a little conservative in how we're thinking about free flow through in the P&L I think and so we saw some nice a nice response, there and that's enabling us to do some other things you know what I think.
We're we're very thoughtful about how we're continuing to invest in the organization.
On the talent front, especially with so much macro uncertainty we want to make sure that we're staffed appropriately not overstaffed as we're thinking about investments within the business.
Just making sure that we're being really a financially prudent and thoughtful about the timing of those as well. So I mean I think it's some active management by a really strong management team are fiscally minded management team in combination with the freight flow through.
Okay terrific. Thanks, so much guys.
Thank you Peter Thank you Peter.
Our next question is from Curtis Nagle with Bank of America.
Oh good morning. Thanks for the question just wanted to clarify a point Jonathan you made earlier in the call.
I'm, calling out what sounds like customers asking them.
It's completed.
Completing home projects just.
I guess, a little surprised by that or are we worried that we might see cancellations or just you know what what's going on there.
What's going on is our clients are still.
Renovating their homes and building second homes, and so forth and.
No.
Not a builder, but invariably builders are delayed.
Absolutely zero cancellations were seeing on this.
You know the percentage is so small it's not even worth.
You know talking about but yeah. It's just it's just the same old thing that I'm clear.
Answer renovating.
I said a lot of new homes are still being built.
You know for our client for our clients there and you know they may be delayed a couple of months two or three months on finishing up their homes. So obviously, they don't can't take the furniture until the room, our AUM is ready but.
Yeah.
Nothing nothing different than has been in the future or past.
We see Covid and there was even more delays cause even more people, we're building and so forth but.
No we see it as a.
It's a positive thing it's just just a timing issue. That's all it is absolutely just the timing issue.
Okay. So it sounds like that'll come through or anything to think about in terms of.
Inventory.
In terms of modeling.
Sorry.
Yeah sure in terms of are you going to be holding more inventory as a result, maybe just temporarily.
And.
When it when clients purchased.
Deposit from them and we hold our inventory for them absolutely.
But we're buying inventory prudently according to our sales we look at a SKU by SKU.
And we try to keep.
Our concept as we try to keep inventory in stock so clients do want it right away, we can deliver it to them.
And you know if they don't want it for two or three months will still hold it hold it in our warehouse for them.
And and we'll deliver it when they're ready.
Yeah.
Okay. So we're not adding inventory for any reasons.
Okay. Thanks, John I appreciate it.
Thanks Curtis.
Our next question is from Cristina Fernandez with Telsey group.
Hi, Good morning, I wanted to ask about did demand assumptions for the back half of the year. Don you said, you're assuming low to low single digit to mid single digit increases, which as you know.
Really good in this environment, but deceleration to what you've seen in the first half and so far in July so it's a function of the macro that's keeping you conservative or I guess, maybe your thought process behind those assumptions relative to earlier in the year.
Yeah, you know Kristina its just my own personal our conservative nature.
So you know I feel you know we're executing we're doing all the right thing because we know that there are some some things in the macro that we just cant control. So I think you know we're trying to be mindful about the things we can't control, we're executing on the things we can.
So you know I don't want to get out over my skis on on the financials in particular, so yeah I think that's a reasonable assumption then honestly, we would be thrilled with that result, so.
That's where our heads are at.
And then I.
On the.
On the performance by channel I was looking at your Q in retail sales seemed like they were you know were flat for the quarter E Commerce up double digits. So anything to know what are you seeing any divergence in demand trends by channel.
No. So you know keep in mind that those are those are based off of delivery sales. So just as you're thinking about you know sometimes E. Comm has a higher EPS component then showroom sales. So its just the timing metric nothing to call out and I think to be derived from that it's it's just a function of timing.
And maybe one last clarification.
Delivery delays you saw this quarter because of the system upgrades.
B G.
John you mentioned that that won't continue through the back half is going to be the same magnitude of delays or is the impact going to be less as we move through the third and fourth quarter relative to what you saw in the second quarter.
You know so so as we're moving through this year and we're learning a lot and we've had a lot of change in the last two years from you know assistance for soccer and from a supply chain perspective shifting from one distribution center to kill we never expected those to go smoothly entry. If I may you know there have been some kinks in the plan.
We're learning a lot, we're figuring out how to implement and drive while continuing to execute them. So you know I think we feel really confident in the guys that we put out there for this year and and we will continue to drive them to execute to that level if not better.
Thank you.
Thanks Kristina.
Ladies and gentlemen, we have reached the end of the 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 in our call and interest in our house, we look forward to speaking to you again next quarter.
Thank you. This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
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