Q3 2023 Arhaus Inc Earnings Call

At this time all participants are in a listen only mode.

<unk> 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. Please go ahead.

Good morning, and thank you for joining our house its third quarter 2023 earnings call and with me today are John Reed Co founder Chairman and Chief Executive Officer, and Don Phillips, Chief Financial Officer. After their prepared remarks, they will be joined by Jim Porter, Our chief marketing and E Commerce officer for the Q&A session.

During the Q&A. Please limit to one question and one follow up if you have additional questions. Please return to the queue.

We issued our earnings press release, and our 10-Q for the quarter ended September 30th 2023 before market opened today.

Those documents are available on our Investor Relations website at IR Dot our house Dot Com a replay of the call will be available on our website within 24 hours.

As a reminder, remarks today concerning future expectations events objectives strategies trends or results constitute forward looking statements actual results or events may differ materially due to a number of risks and uncertainties.

For a summary of these risk factors and additional information. Please refer to this morning's press release and the cautionary statements and risk factors described in our annual report on Form 10-K, and subsequent 10-Qs as such factors may be updated from time to time in our filings with the SEC.

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, including relevant non-GAAP reconciliation now I will turn the call over to John.

Good morning, everyone and thank you for joining us today.

I just wanted to call out again, thank our teams across our house for delivering another quarter of strong performance.

We are very pleased to have reported demand comp growth of 11, 7% in the third quarter.

Testament to the execution of the teams across the company.

Developing and delivering our heirloom quality artisan crafted furniture assist.

Assisting clients in our inspirational showrooms and via our E Commerce channel to find and purchase the special pieces that will make their spaces at home.

And the teams that are continuing to elevate and grow our brand and ensure our first class in home delivery experience and the teams that support all of the client facing and <unk> facing functions. Thank you.

I am so proud of all of you.

Many of you have asked why our houses consistently outperforming the industry.

The why is our passion and our people, we love designing and working with our incredible vendors.

Produce beautiful furniture that can be enjoyed cogeneration.

Our new collections are some of the most popular we have ever introduced allowing us to expand these collections into categories of new finishes.

We love, creating aspirational showrooms, where clients can imagine that their home of their dreams and expanding to new locations, who are new to our house clients can experience our brand up more luxury.

We are passionate about our products and our clients' experience and this is reflected in our performance.

Third quarter highlights include net revenue of $326 million.

Net and comprehensive income of $20 million with a margin of six 1% and adjusted EBITDA of $34 million with a margin of 10, 3%.

We experienced strong demand across all regions products and channels.

Moving to profitability as we communicated last quarter, we saw an expected year over year reduction in earnings driven primarily by costs and expenses related to our accelerated new showroom openings and our important donation to the nature Conservancy.

Some new initiatives and I'm excited about that will elevate our client.

They include new processes, and some key hires to provide an enhanced final mile delivery experience and more in home designers as it continues to grow their service.

We are also focusing on growing our trade business.

We see lots of opportunities in 2024 and beyond turning.

Turning to the showroom growth, we have a very busy week.

Opening two traditional showrooms tomorrow.

And in Coral Gables, Florida, and one in Huntington Station New York.

We'll bring our year to date, new showroom opening two eight.

And then in December.

This year, we plan to open three additional California, showrooms, Los Gatos Palm Desert and Newport Beach.

We are very proud of how our new showrooms perform right out of the gate and I wanted to remind you that there is a lag before we begin to see financial benefits.

Our income statement due to the normal timing between when a client purchases.

Makes a purchase in our showrooms and when that purchase was delivered to the client and recognized as revenue.

Additionally, our new showrooms are reflected in our reports demand comparable growth.

After they have been opened up for 13 months and in our reported comparable growth growth. After they have been opened for 15 months.

We have a tremendous white space to continue to grow our showrooms footprints across United States, and we expect to accelerate our new showroom openings to five to seven new traditional showrooms annually.

Plus design studios.

In 2024, we are targeting another new and sizable new showroom growth was six to eight year traditional showrooms.

New design studios, two to three new outlet locations and approximately 10 relocations expansions or renovation projects.

These new showrooms are in an excellent are in excellent locations as varied as at the Grove in Los Angeles.

Through a new development in Oklahoma City.

In closing as we finish out 2023 and begin to look at 2024.

We are focused on continuing to expand our collection of globally inspired heirloom quality artisan crafted furniture.

Underlying our showroom footprint with several exciting new locations and I'm, making the investments to support our growth for many years into the future.

I'm excited about the future of our house and I look forward to continuing to share our journey with you now I will turn it over to dawn.

Thank you and good morning, as John described we're very pleased with our third quarter performance.

Adams from our third quarter 2023 income statement include net revenue of $326 million up $6 million or one 9% with a two 1% comp decline versus Q3 last year when comp growth increased 54, 3%.

Comp growth was 11, 7% on a one year basis, and 99, 5% on a four years back to Lisa.

Gross margin decreased 4% to $131 million in the quarter the.

The gross margin decline was primarily due to the sale of price action products that were received with higher container cost.

Increased fixed showroom costs, as we expand our showroom footprint and higher delivery costs as we elevate our in home delivery experience.

Gross margin as a percent of net revenue decreased 250 basis points to 40%, primarily reflecting higher fixed costs and the higher product and delivery costs.

Third quarter, SG&A expense increased 20% to $107 million.

The increase was primarily driven by the $10 million donation to the nature Conservancy fire selling expense related to new showrooms in demand and increased corporate expense to support the growth of the business.

Third quarter 2023, net income decreased 47% to $20 million.

Adjusted EBITDA in the quarter decreased 41% to $34 million from $57 million in the third quarter of 2022.

Let me now move to our outlook and how we're thinking about the remainder of 2023 as we announced this morning, we've raised the midpoint of our full year 2023 outlets for net revenue net income and adjusted EBITDA.

Select our year to date performance.

Our full year 2023 guidance as outlined in our press release. This implies an outlook for the fourth quarter of net revenue of $321 million to $341 million a comp decline of 15% to 9% net income of 19% to $24 million and adjusted EBITDA of 40 to 45 million.

Our CMT demand comp growth is in the low single digit range.

For all other details related to our results and outlook. Please refer to our press release. Thank.

Thank you for your attention and we would now like to open the call up for questions.

Thank you we will now 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 that your line is in the question queue.

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Thank you.

Our first question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.

Good morning, John Don Wendy.

Maybe just to start Don the demand trends, you mentioned up low single digits.

As we think about the fourth quarter guidance here and the strength in demand that you've seen year to date.

Maybe just rephrase to us how we should expect the backlog to work through a flow through.

Income statement here over the next couple of quarters.

Good morning, Steve.

Yeah. So you know we've got a lot of time over the last few months really digging into more.

More granular information than what we've had in the past and what that's really enabled us to do is get a better handle on the backlog the abnormal backlog.

That kind of has been a result of that started in 2020 and that's carried forward. So you know.

We do expect to be through the abnormal backlog by the end of this year.

So we're really pleased with that we feel good about our strategy our.

Outbound capacity our inventory buys.

Theres really a few reasons for a higher.

A higher normalized backlog number.

That were seeing reflected in the information that we have available to us.

The first component is what really prudently buying into newness, so as we're thinking about newness.

Clients are typically willing to wait a little bit longer.

We're also deploying some pretty good discipline, because we don't know exactly you know in a particular collection, which finish might take off and wish which finished might not so we have certainly our unbelief, an assumption, but I'm really being prudent in how we're purchasing into nunez.

Our working capital flexibility that will result in a bit higher normalized backlog.

Going forward and kind of what we've seen over the last few years.

The second piece, that's driving a higher normalized backlog number is.

We think about showroom cadence and then just the number of showrooms that we're opening.

As we're opening and yours are opening a high number of showrooms and that are often heavier weighted towards the back half and even in the even in the fourth quarter. So as you all as well.

<unk> talked about earlier.

<unk>.

Five showrooms opening in the next.

Eight weeks.

So that will also result in just the higher carryforward of normalized backlog as we exit this year.

So as you think about the timing between when demand is recognized in showrooms versus one deliveries occur and are rolling through net revenue.

Certainly a component and then the last piece that I would call out from our normalized backlog first octave is just there's a higher volume of clients today that are engaging and home related projects and whether it's a light refresh of paint flooring, whether it's more robust renovations.

You know that there's a higher number of clients who are engaged in those so there is a client timing preference that is also resulting in a higher normalized backlog. So.

So again, we entered this year anticipating that there was about $100 million of abnormal backlog. The majority of that is still abnormal but we would expect to to deliver that product by the end of the year and then the component that is just normalized backlog will roll into next year.

And then as we think about next year's revenue that will also have a higher normalized backlog number which would then roll into 2025. So we feel really good in general about client lead times in getting product to clients in their homes when they like it.

But the backlog number is going to be a little bit higher than perhaps what it was in 2019 and prior.

Thanks, Don.

Maybe just a follow up for either you or John.

A lot of a lot of focus around growth retail as it pertains to predictability around year, one sales and margin. So I was I was curious if you can maybe.

Mind us or inform us how the 23 class of stores is performing relative to those pro forma targets for sales and margins and how youre thinking about the 'twenty 'twenty four class as it pertains to those sort of pro forma productivity targets as well.

Yes, sure Steve I can I can take that.

To answer your question the new stores.

We're very very happy with.

They have been performing well at or above our expectations.

And we certainly see the new stores that are coming onboard here shortly to do the same.

A lot of them are in big Big markets, where we think we will capitalize a lot of a lot of business.

Others are more mid sized markets.

I'll be fine, we do very well, we're very profitable in <unk>.

And.

Yes, we're happy with the whole the whole group.

Thank you.

Youre welcome.

Thank you. Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Hey, Good morning, everyone. My first question was really around pricing last quarter, you talked about a mid single digit average price decrease I think there were some temporary factors and there are other changes that would potentially continue I'm. Just curious how did that play out how is that playing out what's your view on pricing from here. Thank you.

Yes, I can take that.

Good morning, Sam.

Yes.

I think as Don mentioned.

Before with a container pricing and so forth and all of this inventory we had at higher cost, we kind of whittled that down.

To a point, where we thought we could be a little more aggressive with some of our pricing.

It wasn't I certainly across the board by any means it was just on some selected pieces.

But as we said that we're happy with the with the performance.

<unk> seen sales go up on certain collections.

And we think we're in a perfect spot right now to be very very competitive.

And hit our margin plans.

Okay just to follow up on that point is your sense that others in the industry have also taken steps to refine pricing or lower pricing on the back of those lower costs.

And then my follow up question is around the gross margin just trying to understand some pressures this quarter.

Related to those pricing actions.

Do you think about that going forward, you kind of through that already and you could start to see more of those freight savings come through how should we think about that thanks.

Good morning, SaaS, so as we think about the gross margin pressures from the third quarter.

When we used when we were talking in the second quarter. We had said we felt like the freight benefits that are flowing through would offset.

Some of these price reductions and Theres, a couple of things that cause that not to be exactly as anticipated.

So the primary reason is that the mix shift the product mix shift really skewed a bit more towards these price actions.

Skus versus what we originally anticipated. So we saw that those those items were really resonating with clients at these price points. So.

<unk> news is that we are clearing through the product a bit faster than anticipated that we wanted to the bad news is is that there is a little bit of gross margin compression related to that that was unanticipated at the time.

And I think as we're thinking go forward that.

Keep in mind.

If demand is right and we had great demand in the third quarter. It that takes some time to flow through the P&L NCB delivered so I would expect some.

Margin impacts from these pieces over the next few quarters as product is being delivered and then keeping in mind that we're not through all of the inventory that we would like to be through so demand will continue selling them a lot of these products that we took price action on they are they were receded at those higher freight costs.

And then just keep in mind that all of this is factored into the guide already so.

Added piece, there and then from the market perspective.

We closely track.

<unk> monitor competitors and what they're doing we still believe that our value proposition is is excellence and industry, leading so we really remain focused on that and making sure that our value proposition is where we want it to be.

So we're comfortable at the moment with how we're positioned in the market.

Okay, great. Thank you both.

Thank you. Our next question comes from the line of Max <unk> with TD Cowen. Please proceed with your question.

Great. Thanks, a lot. So first can you frame how much of the strong demand in <unk> came from new products versus the core versus some of the end of life or other.

Products that you took price actions.

Good morning Max.

We don't want to get that granular I think what's important to note is that we have a good handle on the <unk>.

Inventory with regards to price action Skus.

Clients responded to it a little bit faster than anticipated. We did have a phenomenal September with our marketing campaigns that really resonated with clients. So overall, we're pleased with the demand that we saw and everything all the different components that you asked me how is factored into the guide for the fourth quarter, certainly and then as we.

Move forward and report.

And guide to 2024, it will be factored in as well, but John do you have any context, you'd like to add on the marketing campaign.

Good morning Max.

So to emphasize the point that Don just made we had were really really pleased with the results of our fall campaign.

So our fall catalog and collection launch hit at the end of August and just saw incredible consumer response to that.

Both in terms of engagement and driving traffic into stores and onto the site to purchase those new products.

We're also continuing to see really really strong engagement with.

Our ongoing.

Actions that Werent part of a price action on process, our top sellers there.

You May remember, we launched our road campaign in early August of Q3, which was telling the story of one of our incredible vendor partners down in Mexico, one of our top.

Collections are that really has been performing well with with clients for a couple of years now and being able to share that additional knowledge in detail and storytelling about what makes that truly special really resonated with the business. So.

We're really really happy I'm really happy with our client health, we're seeing across both new and existing clients reacting to both of those price actions Skus, but also excitingly, but also new products and the product that wasn't included in that category and.

And Matt I'll, just add something to that as well on the product side.

The current products existing products that we've had.

He is doing great we are not seeing a slowdown.

Yes.

Most any of the current product that we've had that we've had.

For a while and then on top of that the new the new product has just been a homerun as well.

So we're happy with the whole the whole mix of product. We think we are.

Certainly.

Kind of leading edge.

On the design side and people are really resonating with it but our core products are doing well.

Over the last four years were up 99%.

So you can see if you do the math on that that people like our products in the last two years, we're up almost 28%.

So it's.

It's been a nice a nice ride here and we think we're hitting on all cylinders.

Got it that's very helpful and just sticking with that last point that you made so you're meaningfully out coffee peers and taking significant market share.

Is your sense of how your awareness levels are now trending and do you feel that you are starting to move in the right direction and then ultimately over the medium term, where do you think that that can go as I think you used to do surveys, where you were still meaningfully behind Peters.

Yes, Matt Great question.

Simple answer is yes, we definitely think our brand awareness is growing.

I think there are a number of factors driving that first and foremost our other new showrooms that we've been opening this year and I'm going to be continuing to open.

I swiftly into next year as I mentioned before our new showrooms in showrooms in general are the number one way that your clients are discovering our houses of the brand. So as the teams are really focused on opening up these incredible spaces.

In new markets and filling out existing markets, we're really pleased with what that's doing to increase awareness and.

In addition to that Bill.

Building off of what John was just saying about people like our products are really responding to it.

Our teams have really been focused on all aspects of service on quality on making sure that clients continue to have that incredible experience and the number two way back.

Since our discovering our houses through recommendations from friends and family. So that is incredibly important to US is something we're really proud of we really work very hard to maintain one of the reasons. We are putting so much effort into the storytelling and into being able to showcase how special our product truly is.

We're really focused on ensuring that clients are happy. So that then they are sharing by law for the brand with our friends and neighbors and family.

And for years to come.

In addition to that I think we are.

Been doing a lot of things right for the last few years added for decades before that.

We had an incredible brand awareness opportunity four years ago, we continue to have an incredible brand and this opportunity now I'm aware.

We are making really good progress towards that but.

There's a very long runway for us to continue to do that as we continue to open up new showrooms, we continue to get better at telling our story, we continue to get better at creating that really omnichannel experience.

No our showrooms are at the best showrooms out there our teams are incredible and we've been working really hard to bring that same experience and emotional connection to life online through our house dot com to digital advertising to social media and all of those channels and we think we've done a really great job of that over the last few years, but we have so much.

More to come I'm really excited about what the team is working on and how we can continue to build that so short answer is yes, our brand awareness is growing but huge potential for that to continue grow in the future.

Great. Thanks, a lot best regards.

Thank you.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, guys. This is jackie person on for Simeon. Thanks, So much for taking our question I guess first note that <unk> band comp has been very healthy the past couple of quarters. Despite a negative low single digit actual comp.

I guess at what point will demand comps translate into positive actual comps like anything along those lines.

Poppy is she's getting incrementally better.

Thank you.

Good morning, Jackie.

So you know we talked last quarter about the outbound capacity.

And in particular around Dallas, and how Dallas has a bit less productive than what we had originally planned by this point in time.

The good news is is that over the past several months we have.

We've made some system changes that have really.

Alleviated any kind of delivery constraints that we have.

With regards to Dallas now it doesn't mean, the Dallas it as productive as what we would expect at this point in time, but it does mean that Ohio, and North Carolina are compensating them based off of systemic and inventory allocation components that were still working through so so that's the good news there.

With regards to the comp keep in mind that the base further demand comp and the base for the comp coming out of 2022 are very different so if you remember.

We pushed through a significant amount of the backlog the abnormal backlog last year, which was about $150 million that was all pretty much driven in the in the second half. So keep in mind that that baseline is just going to skew the numbers from a math perspective.

But we feel really good about our demand how our product is resonating our marketing touch points. So some of this noise in the numbers will shake out as we normalize and kind of lap the normalized backlog number next year. So.

Got it thanks, so much and if I can squeeze in one more just on SG&A I think that came in a lot better than at least what the market was expecting I guess.

Is there any way you can see with Jack anything on the SG&A line intra quarter based on what you were seeing in the environment or where they're kind of broader cost reduction efforts done independently of what you were seeing in the quarter for the first quarter.

And you know, we're constantly evaluating our cost structure and it could be anything from timing of new hires two systems deployment changes just based off of.

Our operations and how things are flowing not necessarily to drive to a specific cost number but just.

Dynamic business things are changing.

And can be fluid.

I still feel good about the.

The expenses that we have in place some of the systems initiatives will shift just based off of changes in the business, which then accordingly changes and how that flows through the P&L from a timing perspective, but in general we haven't made any significant SG&A shift relative to what we would have anticipated last quarter or the quarter prior.

Great. Thanks, so much.

Youre welcome.

Thank you. Our next question comes from the line of Peter Peter Benedict with Baird.

Please proceed with your question.

Hey, good morning, everybody.

First question just on gross margin in terms of the commentary as you look forward.

<unk>.

The response to the price action items Rob.

So you got a lot of stores openings. So the fixed occupancy costs should be going up just curious that third quarter level of 40% is that does that kind of a new kind of baseline that we should be thinking about.

As we look out over the next few quarters just that's my first question.

Yeah. So you know.

Good morning, Peter We don't guide to gross margin.

I think theres, a theres a lot of things happening in that margin line item first being the product costs related to the price action Skus that were received at the higher container costs, you know that it will take a few quarters to go.

Work through to get the inventory, where we want it to be before we then take any additional price action.

Delivery costs I think is something that we are actively.

Really investing into so as we think about the in home delivery experience, that's really our last touch point with the client on any particular order and we wanted to make sure that experience is really seamless and beautiful as we're entering their home. So accordingly, we have hired an SVP of final mile. She joined us about six months ago and she.

Has some really great.

Our ideas and ways to invest that we think will really elevate the client experience. So we're pleased with the kind of the results that we're seeing to date on that from a client experience perspective, and yes, we will.

Continue to invest in that.

And that side of the business over the next several several quarters.

And then of course the <unk>.

You are right the showroom rents as we are opening new showrooms John mentioned earlier that we have a pretty exciting slate for next year as well. So just keeping in mind that those expenses start to roll in to 12 months prior to any top line benefit so.

It's a little bit of a moving target as you think about the showrooms that are opening today with all of those expenses a lot of them are in California, and so those are heavier and heavier rent expenses and we will start to see some nice top line come in on those over the next several quarters, but then we do have additional showrooms next year.

That will be rolling in so.

I guess those are just some of the kind of puts and takes that I would encourage you to think about.

Got it okay. Thank you and then.

Just a question on kind of Capex and cash.

Capex plan for the year was taken down a little bit just on I'm not sure what was driving that maybe you could help us understand that and then you're kind of.

This quarter, it's probably over 20% of your market cap is in cash good position to be in but just curious is there a point.

In time, where you kind of look at the cash balances that hey, there's something we wanted to do with us or just just curious your thoughts on that front. Thank you.

Sure. So you know.

Capex Capex reductions are really just timing related so as we think about showrooms opening showrooms spend and the timing of which is we're working through when we take possession of 2024 locations and when we start spending on those so it's really just timing there's no change in strategy.

So as we look out to next year.

It's just a slow flow between years.

With regards to the cash balance.

We are focused on reinvesting back into the business.

For growth, we have a ton of white space opportunity, we have a lot of opportunity beyond showroom expansion as well John mentioned, the trade program, which we're looking at how we can really kind of dig in there and build that business and grow that opportunity. So I would say more to come on that but we internally are having a lot of discussions on what.

Is the best use of that capital to drive a nice return for the organization.

Great. Thanks, so much good luck.

Thank you.

Yes.

Yeah.

Thank you.

Next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.

Thanks, and congrats on the strong momentum in the business.

So I wanted to come back here too.

Performance in the quarter in your E Commerce business was up 26%.

As the retail side of the business down to seven.

Just in terms of thinking about.

The pricing actions and kind of the interplay between.

E Com and your retail store channel.

Is that a reflection of the pricing actions being.

You know maybe more powerful.

On the digital side of your business.

I wanted to just understand you saw a pretty significant reacceleration here in Q3 in that channel of business specifically.

Good morning, Jeremy.

Would encourage you to remember that what's reported from a channel perspective in the Q is really based off of delivered so less about kind of the underlying demand trends in the organization and really more around just timing of deliveries.

With that being said certainly some of your commentary is volatile I'll pass over to John and she can talk about the E. Com drivers yeah. Good morning, Jeremy.

Yeah.

We're really really pleased with e-commerce.

Strong traffic strong conversion and strong engagement strong sales to your point.

We definitely do see our clients respond to and react surprise actions are digitally.

If we find out when they come in.

We also spoke on our last call about the team really focusing on how we are merchandising and displaying.

<unk> actions and sale product on our site. So we're really pleased with the reaction engagement there.

So definitely seeing a response there I do think that that is somewhat stronger on E com and digital channels and retail just because it's more prevalent and easy for that consumers find their way to the sales section and see all of that product and shop it directly.

He said that though we are incredibly happy with how.

Clients are responding to our full priced product on E comm as well, we're seeing really great engagement with that product, we're seeing really great sales in that product on our E. Com channel. We also know that the majority of our clients who are ultimately making purchases in our retail showrooms are starting that journey or at some point I am continuing our journey on E Commerce.

As well so.

From where we're looking at we're seeing really healthy growth about e-commerce business.

It's been really strong all year, we're happy with our Q3 performance.

And one of the things we've talked about for the last couple of years is growing E com not only as a sales channel, but also as an omnichannel presence to uplift. Our total company business has been a real focus since the relaunch of our site.

About two years ago now and then.

Teams continue to look at that.

But overall, we're really happy and we're going to continue to focus on building that channel out going forward.

And I would just add to that that even with the price action that we've taken in mid June we have seen really nice lift in <unk>. So.

So I think that also kind of one to the <unk>.

Strength of our newness and kind of core business that was that was not price actions here.

And then just just one last thing on E com.

As we open these new stores and new new clients find us.

We see in those areas our E comm business go way up as well.

So the new store renovation stores, so forth really helps.

Drive drive the E com business as well because people come into the store they sit on things and they go home and order.

Ordered online and that goes both ways.

<unk> data come in our stores have already been.

On the revenue steady steady our products and so forth.

Works in conjunction.

We're very happy with the performance of both the stores and E Comm business.

Great and then just a clarifying question here.

Bill.

<unk> noise around backlog, so I think prior commentary you'd indicated that kind of excess backlog delivered in Q4 of last year was about $40 million.

And so if we look at the midpoint of your guide here for Q4 $3 31 versus.

Kind of $3 16.

Last year adjusted for that excess backlog delivered.

In terms of that upside and obviously, if you have positive written order growth.

Are we kind of apples to apples.

Kind of implying that.

The business will be positive.

Yes.

With normalization of backlog or however, you prefer to characterize it.

So I think one point of clarification is that.

Last year, we had about $150 million of abnormal backlog.

In the second half of the year. This $40 million is not the only backlog that was in the fourth quarter that was the portion of the abnormal backlog that we hadn't anticipated that flowed through a little bit quicker than anticipated due to Dallas opening so strong.

So I think keep.

Keeping in mind that of the.

$150 million 40 was expected.

In 2023, but pulled into 'twenty, two the balance of $110 million of backlog with spread over.

Q3, and Q4, so just a clarification point, there, which I know backlog has been a bit confusing to folks. So hopefully that's helpful.

As we think about this year, we will still have some abnormal backlog deliveries in the fourth quarter of this year. So I think a little bit of noise in 2023 from backlog against a little bit of noise in 2022 of backlog.

I think the great news is that we will be through it all by the end of this year and then in 2020 for or we can have a clean slate and really.

Really just be back to normal business cadence. So we feel good about that.

But hopefully did that answer your question is is there more I can elaborate on.

No I think by the end of the year.

Sure.

It sounds like it'll be clear through the abnormal backlog.

Yes, yes.

Thank you.

Thank you. Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your question.

Good morning, and thanks for taking my question.

First one was just on the demand comp guide just curious if you could give us.

Justification for that coming off of the strong 12%.

Demand comp and three Q curious whether kind of that low single digit is.

Reflective of what Youre seeing in October or just conservatism.

Dissipation slowing in November and December.

Yes.

Good morning, Jonathan.

We're really pleased of course with the third quarter demand comp. We're very pleased with what we saw in October which was above the low single digit that we're guiding to for the fourth quarter.

You know as we think about November and December and November of last year, we had some promotions that we will not be comping. This year. So as we think about the price actions that we've taken in June and just overall product portfolio, we're being a little bit strategic and the promotional cadence for November so.

Keeping that in mind, along with just general macro uncertainty around the consumer which I guess persist for several years now, but just kind of being conservative in our view of what may happen in the fourth quarter that being said our <unk>.

<unk> continues to resonate the marketing continues to resonate so pleased with what we're seeing I would also just to remind everyone that we are not a holiday driven business from a demand perspective, while we do have a holiday assortment, that's not a significant driver of our business.

Most folks aren't purchasing so far as our tasks as holiday guests. So.

Just a little added context there.

That's helpful.

A follow up question is on the potential for membership some of your competitors offer that.

You could argue the backdrop to the consumer and housing in 'twenty four would maybe not be ideal for launching that but on the other hand.

Your brand is clearly on fire.

So would you say, you're more or less likely to pursue membership than you were a couple of months ago and if you are more seriously contemplating it what would be the aspects that attract you to that.

Thank you Jonathan So we have a lot of active debate over our pricing strategy internally and have for several years. Now. The question is what is the right time to deploy a new pricing model and membership model is one of a few of them that were discussing and looking into.

<unk>.

But until.

Until we have a better handle on when we would want to deploy a new pricing strategy.

I think we're going to kind of keep that a little bit close to the vest at the moment so.

I absolutely agree that we are.

Actively engaged in what our pricing model and our pricing strategy should be but nothing to note at this point in time for you.

Great. Thanks, so much.

Okay.

Thank you. Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

Hi, good morning.

John on your comments you talked about a couple of initiatives for next year.

I think they were new process for delivery the trade business or interior designers. So I wanted to see if you could expand on sort of exactly what.

What are your thoughts on being able to grow those businesses and what are you going to do differently.

Sure good morning.

Yes, as I mentioned.

The trade business is one we're focusing on we've seen some really nice growth in that business in.

In the last couple of years.

So it's one that we think there's a lot of white space there.

These are outside trade trade members, who basically have their own businesses.

And we're finding if they can come to us and do kind of a one stop shop, we give them the service they need they are really responding well. So we think that's a great business.

Our own interior designers.

We added or started that program.

Four years ago, or so we continue to grow it we continue to add more interior designers to stores.

Because they just can't keep up with the demand.

So we're seeing some really nice growth there and we're focusing on that as well.

Certainly as we mentioned, we're opening more new stores and renovating more stores than ever in the history of the company.

We see.

Driving our business as well.

The time is.

When we opened a new store OE renovate or move.

Shifting store with the old design model to the new design model, we see we see a great lift in <unk>.

On those as well so.

Those are kind of a three three things, we're focusing on that dimension.

The furniture, the product, which is what we're all about.

Great products, we execute right if we showed off right.

We do our business continues to grow and then we've got an incredible design team as well as the product team.

The team that <unk>.

Continues to come up with new products.

And products that really resonates with our clients.

That's really when you think about it that's why we're in business Goodbye people buy furniture from us and we delivered to them and we make their homes.

A much better place than they were in.

So every day, we focus on the product as well.

Yes.

On the product side any categories or that you're.

Looking to expand in 2020 for whether it's outdoor or any others you want to call out.

We're looking across all the categories. As you mentioned outdoor is one that we had had before.

During COVID-19 and we continue to grow it in the growth and it's been really we've.

<unk> been very happy with it.

With that we kind of look at each room in the house and say how can we grow the dining business how can we grow the living room.

At your own business and.

A lot of it is finding really great products and then expanding on the skus in those products.

He is nice because everybody's.

Rumors of different size.

Different shape different configuration.

So if we have a coffee table in one size or period and five sizes, we see a nice lift in the product as we expand out.

Product that people love and we generally start.

Conservative.

And then we will do then we see US working then we will jump on it.

Catch up to carry it in many different sizes, and skus and even finishes and so forth. So that's a great way to grow the business as well.

And then one last question I wanted to see if you can talk about what the companies.

Kind of a broader sustainability initiatives shall we think about the donation to the niche are conservative.

Conservative just stayed at one time or if there's going to be a recurring program and next year, we could see other donations, whether it's to the same organization or others.

Yes, we've had a lot of debate on that.

As you guys all know our world is burning up and.

We feel compel to help if we can with that said, we don't have any plans right now for 2024 to repeat what we did and that was kind of a one time opportunity that we really didn't want to pass up.

But we're always keeping our eyes open but right now I think in the plan and budget.

Dawn publishing here soon internally.

We don't have that.

Plan.

Thank you.

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hey, good morning, everyone nice results here.

I wanted to just kind of reflect back on your strategy around labor day weekend, where I think you extended the number of days around your advertising.

Industry wide, we do continue to hear about these peaks and valleys of holiday weekends being bigger in the troughs being lower.

How should we think about your successful labor day weekend, and then carrying that forward do you see more opportunity to extend.

I guess your visibility and advertising on upcoming holiday weekends.

Yes, good morning, Peter.

<unk>.

As he mentioned about heightened promotional environment is still out there for lengthening of times around those key selling Mackenzie continue to see that happening.

We're pleased with the results of Labor day as he spoke about on our last few calls we do have that subset of our client who is very promotional driven and that's where our growth.

And the growth stage, we want to be part of our consideration set. So we're really happy just lengthening the time of the marketing of our promotion for Labor day.

Looking forward to November and December as Don mentioned earlier.

<unk> expecting to accelerate our promos over last year in any way.

We do anticipate similarly to last year is that the black Friday problem with being pulled forward earlier earlier in November if you look out in the industry we're seeing.

Brad's, sorry that Black Friday promos in October of this year, so it's definitely happening there.

You can expect to see that earlier conversation about promo around the black Friday weekend. So much what we did last year.

But we are not expecting to accelerate our promotions and are actually decreasing a little bit from what we did last year.

Okay. Thank you and.

I guess my my second question would be to Don and Don I know you are not at a company that guidance quarterly.

We can back into an implied Q4 guide you've given detailed out in the press release. So the heart of my question is just the margin decline in Q4.

It seems like it's going to get worse in Q4 than it was in Q3 and thats without the $10 million charitable donation.

The demand trends are great, but there's just a lot of noise in your margins right. Now. So I was wondering if you could just maybe just take a step back for everyone and help to highlight the brush strokes on what's pressuring margin.

And there is the margin decline in Q4.

Ideally sort of a trough with the declines and as we get through some of these timing dynamics that the margin decline should be.

The less meaningful in the quarters to come for 'twenty four.

Yeah. Good morning, Peter So keep in mind that the from a margin first over margin rate perspective last year. It has significant impact and we saw some really nice leverage on the backlog delivery.

So you know artificially inflated just from timing perspective, one we're looking at the comparative.

As we look forward over the next several quarters years, and think about what's going to be impacting the business.

In the near term certainly the price actions in June that we took those will continue to have an impact.

As we're right sizing the inventory.

And kind of clearing through the end of life inventory.

Showroom occupancy certainly will continue to persist.

As we think about the strong opening cadence that we have for next year that we're really excited about which will have them.

Long term, it's the right thing for the business to do and it will have benefit it's just timing related there as well and then we've always said that we expect margin expansion, but it may not be entirely linear for us. So as we think about all of the areas of the business that we're reinvesting back into.

We're really taking our time to make sure that as we're scaling the organization from 1 billion to 2 billion and beyond that we can grow it more efficiently.

In the near term that does cause some compression so we talked a little bit about the in home delivery experience and how we're trying to elevate that over time, that's going to have a great great impact on the business as you think about.

Just the word of mouth that brand awareness component.

As we think about within SG&A as we think about the investments that we're making in the business to really drive the back office, which you know often isn't as exciting to talk about is product and showrooms, but it's very important to us. So as we're thinking about our warehouse management system that deployed in our North Carolina facility. This year as we're looking to it.

Deploy that in.

First quarter next year in our Ohio facility.

Theres always anytime we deploy a system like that there will be a little bit of noise in the top line.

If you think about for warehouse management system, you have to close the facility for a few days that for it to do the inventory conversion and just.

Some of the systemic components.

We're also working on our planning software, which is going to be vastly critical for us as we think about inventory allocation.

And making sure that we could have a drive efficiencies in line haul expense in moving product very heavy very bulky vary.

Large product through the network. We're also in the process of deploying our manufacturing ERP, which.

Is it going to be really critical to give us great visibility to our operations there from a bill of materials perspective.

Process perspective, so so lots of really great things, but in the near term. These were all compressed margins. We do expect expansion longer term, though and we're really excited as we continue to grow that top line, what that's going to look like from a financial perspective, but you know we're trying to give ourselves a little bit of breathing room to do the right things for the organization.

On the right things for the client.

And long term, it's going to be I think really great for the organization as a whole.

Okay.

Just just to round that out and I appreciate all the growth investments, but you did mentioned two big timing dynamics with backlog and to get five new stores coming in so you again, it's Q4.

Potentially the.

The worst of the year on year declines.

Best of your visibility on sales trends.

You know, we haven't guided to anything for 2020 for yet.

So I don't want to kind of.

Get out over my skis there.

But.

Certainly the math would indicate that the year over year component would be quite significant in the fourth quarter.

Yes.

Okay, alright, it sounds good thanks, guys.

Thanks Peter.

Thank you. Our next question comes from the line of Philip Lee with William Blair. Please proceed with your question.

Hi, everyone. Thank you.

Given the big year ahead for new showrooms and refreshes can you speak a bit about the changes you've made to them over the past several years that have had a direct benefit on productivity versus pre pandemic levels.

From a physical location, but also inside experience and then should we expect rent per square foot to continue to accelerate quite a bit on the higher profile litigations being open. Thank you.

Sure I can talk about the renovations.

And how it's working.

Yes.

Four years ago.

We have dramatically changed the looks of our stores.

We made them.

A lot more.

User friendly.

Just a lot more emotionally driven with that win Volkswagen.

Global furnishings the way, we're designing things we put in the design studios we've put in.

Fireplace rooms.

Things that just just warm ups to warm up the store quite a bit so as we as we've been doing that.

I think we mentioned as leases come up.

We will decide do we want to keep the store and renovated we want to move to store it.

The case normally we will renovate a store when a lease comes up if we do decide to keep it if not we'll move it and but we see we see we see an impact in.

Not only customer sales, but also.

Our clients.

Turning to come back again, and again and up on the web in order more so.

It's been.

It's been a nice nice change I think we have a lot of product.

Renovations and moves.

Coming up this past year and a lot more I believe in 'twenty four.

So it's.

It's a very good thing.

It's just elevates our brand.

To a point where.

The product just looks looks better.

Bob.

And when it looks better.

The clients tend to bias so.

And it really sets us apart from the competition as well.

We think.

The way our stores look is.

Really really enticing and we hear it all the time and certainly new stores when people walk in the kind of blown away because they've never seen anything like it.

And.

Well here that for.

Truly years to come.

In all of our stores as new clients come in June.

Been a very very good thing.

And just from a kind of tactical perspective and.

In our filings, we do not breakout showroom rent versus other leases so that rent number that lease number that youre seeing in there is for everything from computers to rent to a distribution center. So keep that in mind now from a just kind of operational and strategic perspective, we are opening showrooms.

That are a bit more expensive from a rent perspective.

We do believe that those showrooms, we will have a higher topline now so we're looking at.

The opportunity is very holistically from us from an investment perspective.

Okay, Great and then one quick follow up can you provide maybe a bit more color on inventory, we thought declines this quarter, how should we think about the go forward rebalancing new showrooms in new products versus cycling through some of the higher cost price actions gears. Thank you.

Yeah. So you know we continue to work through the inventory Assortments.

I think we feel good about how we're handling newness we feel good about.

Core assortment, our best sellers, and we do still have a little bit pockets of inventory were a bit long.

Continuing to work through the inventory that over the last few years, we haven't really focused on from an end of life perspective, so continuing to work through that to get the inventory levels right sized to where we'd like them to be.

And you know we.

We have a new where we're continuing to refine our planning organization.

In our planning processes and honestly, the strategic viewpoint at which we take.

And inventory approach so more to come on that I think is we also are working to deploy the demand forecasting software with regards to planning and certainly allocation software we're planning but.

Overall, we feel pretty good about our inventory recognizing we do have some pockets that we're still trying to clear through so.

<unk>.

So yes.

Great. Thank you.

Thank you.

Thank you.

Our final question comes from the line of Mickey <unk> with Bank of America. Please proceed with your question.

Good morning. Thank you for taking my questions. This is picky on for Jason.

My first question is related to the cadence during the third quarter. So given the strong market fall marketing campaign did you see an acceleration through the third quarter.

Okay.

Yeah.

Are you sorry are you referencing an acceleration of demand through the.

Through the months of the third quarter.

Okay.

So we are.

We try not to parse it out too much certainly because we know that one quarter does not make a month and.

We do feel very strongly and invest deeply into our marketing campaigns.

And are pleased with how those performed.

A lot of those catalogs went out at the end of August.

But yeah.

Yeah, I mean, I think overall, we're just pleased with the consumer response to the product.

Yeah. Thank you that's helpful.

And then as we think about.

Showroom openings for next year.

I know you have great pipelines coming up how should we think about like the selling expense.

Our stores and how did you say compared to this year.

You know as we as well.

Looking out towards those.

We're still refining the timelines, we certainly have.

A timeline today, but we know that showrooms can shift within the year, which then.

And that could have an impact both as we look to hire and staff up to up those locations.

But I.

I would say.

Typically just looking at the cadence here, it's not that dissimilar from.

From 2023.

Okay, yes. Thank you.

Thank you.

Thank you.

We have reached the end of our question and answer session and I would.

Now I'd like to turn the floor back over to Wendy Watson for closing comments.

Thanks, everybody for joining us today, and we look forward to talking to you again next quarter. Thanks, everybody.

Have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time.

You for your participation.

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