Q4 2023 Arhaus Inc Earnings Call

Operator: Good morning, and welcome to the Arhaus fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode.

Good morning, and welcome to the Arco's fourth quarter and full year 2023 earnings conference call.

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

Operator: A question and answer session will follow 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.

Question and answer session will follow formal remarks.

Please note that this call is being recorded.

The reproduction of any part of this call is not permitted without question.

From the company.

Now I'll turn the call over to your host.

Wendy Watson senior Vice President of Investor Relations. Please go ahead.

Wendy M. Watson: Good morning, and thank you for joining us at our house for the fourth quarter and full year 2023 earnings call. On with me are John Reed, co-founder, chairman, and chief executive officer, who is joining us this morning from Italy, and Dawn Phillipson, chief financial officer. After prepared remarks, they will be joined by Jen 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.

Good morning, and thank you for joining our house for the fourth quarter and full year 2023 earnings call with me are John Reed Co founder Chairman and Chief Executive Officer, who is joining US this morning from Italy, and Don Phillips and Chief Financial Officer. After prepared remarks, they will be joined by John 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.

Wendy M. Watson: If you have additional questions, please return to the queue. We issued our earnings press release for the year ended December 31st, 2023 before the market opened today. Yesterday, after market close, we filed an 8k to inform investors that we identified an error in our unaudited condensed consolidated balance sheet as of September 30, 2023, related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets, rather than property furniture and equipment net. This error resulted in inaccurate cash flows ascribed to the operating and investing activities in the unaudited, condensed, consolidated statement of cash flows for the nine months ended September 30th, 2023.

You have additional questions. Please return to the queue.

We issued our earnings press release for the year ended December 31st 2023 before market opened today, yes.

Yesterday after market close we filed an 8-K to inform investors that we identified an error in our unaudited condensed consolidated balance sheet as of September 30th 2023 related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included.

In prepaid and other current assets rather than property furniture and equipment. Net this error resulted an inaccurate cash flows ascribe to the operating and investing activities and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30th 2023 as such.

Wendy M. Watson: As such, we will restate our financial statements for the third quarter of 2023 and revise the December 31st, 2022 comparative balance sheet that will be included in the amended third quarter 10-Q. For more details, please refer to the 8-K. These documents are available on our investor relations website at ir.arhaus.com. As a reminder, remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. However, actual results or events may differ materially due to a number of risks and uncertainties.

We will restate our financial statements for the third quarter of 2023 and revised the December 31st 2022, comparative balance sheet that will be included in the amended third quarter 10-Q for more details. Please refer to the 8-K. These documents are available on our Investor Relations website.

And I are that our house dotcom.

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.

John P. Reed: 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 most recent 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, and this morning's press release includes the relevant non-GAAP reconciliation. A replay of this call will be available on our website within 24 hours.

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 most recent 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 reconciliation.

A replay of this call will be available on our website within 24 hours now I will turn the call over to John.

John P. Reed: Now, I will turn the call over to John. Good morning, everyone, and thank you for joining us on the call today. We delivered a strong fourth quarter 2023 with net revenue of $344 million, net income of $31 million, and adjusted DA of $51 million, and are very pleased to have exceeded our top and bottom line outlook for the quarter. Pairing to our 2023 performance, it was another exceptional year for Arhaus, fueled by our long-term growth strategies to one, increase brand awareness, expand our showroom base, three, enhance our omni-channel capabilities and technology, and four, invest in growth to build scale and enhance long-term margins. Highlights from our 2023 full-year results include net revenue of $1.3 billion, with our showroom channel up 2% and our e-commerce channel up 17%, on top of growth of 57% and 43% in each of these channels in the full year 2022, comp growth of 1% and demand comp growth of 8%, both at or above the high end of our outlook for the year, and cycling comp growth of 52% and a demand comp growth of 1 Given our strong cash generation and balance sheet strength following 2023's outstanding performance, I am pleased to announce our Board of Directors has approved a special cash dividend of $0.50 per share, payable on or about April 4th, 2024, to shareholders of record at the close of business on March 21, 2021.

Good morning, everyone and thank you for joining us on the call today, we delivered a strong fourth quarter 'twenty to 'twenty three with net revenue of $344 million net income of $31 million and adjusted EBITDA of $51 million.

And are very pleased to have exceeded our top and bottom line outlook for the quarter.

Turning to our 'twenty to 'twenty three performance. It was another exceptional year for her house fueled by our long term growth strategies to one increase brand awareness to expand our showroom base three enhance our omnichannel capabilities and technology and four invest in growth to build scale in your hands.

Long term margins.

Highlights from our 2023 full year results include.

Net revenue of $1 $3 billion, which our showrooms channel up 2% and our ecommerce channel up 17% on top of growth and up 57% and 43%.

Each of these channels in the full year 2022.

Comp growth of 1% and demand comp growth of 8% growth at or above the high end of our outlook for the year and cycling comp growth of 52% in the day.

Mankind, a growth of 14% and a full year of 2022.

And comprehensive income of $125 million and adjusted EBIT of $203 million.

Even though our strong cash generation and balance sheet strength following two.

2020, Three's outstanding performance I am pleased to announce our board of directors approved a special cash dividend of 50 cents per share payable on or about April 4th of 2024 to shareholders holders of record as of close of business on March 21 2024.

John P. Reed: We are very pleased to be able to return value to our shareholders while retaining the balance sheet strength that will allow us to continue investing in Arhaus growth. Dawn will cover our fourth quarter and full year 2023 financial results in more detail later in the call, but I want to congratulate our team for delivering these results. I'm astonished by what our team has accomplished in the short time since we went public on November 4th, 2021.

We are very pleased to be able to return value to our shareholders, while retaining the balance sheet strength that will allow us to continue investing in our house growth.

John will cover our fourth quarter and full year 'twenty two 'twenty three financial results in more detail later on in the call.

I want to congratulate our team for delivering these results I'm astonished by what our team has accomplished in a short time since we went public.

November 4th of 2021 at that time, we had 77 showrooms today, we have 92 showrooms, adding almost 20% to our showroom total.

John P. Reed: At that time, we had 77 showrooms. Today, we have 92 showrooms, adding almost 20% to our showroom total. And we expect to add another 9 to 11 this year. Over the last three years, we believe the U.S. premium has increased. The home furnishings market has grown 50 percent, while our growth has been more than three times that of the industry. We've increased our net revenue by 154% or $780 million, increased our net income by 634% or $108 million, and increased our adjusted EBIT DA by 193% or $134 million. As impressive as this growth and the execution by our team has been, it is our future potential that is so significant and has me so excited.

And we expect to add another nine to 11 this year.

Over the last three years, we believe the U S premium hungry.

Home furnishings market has grown 50%, while our growth has been more than three times that of the industry. We have increased.

Our net revenue by 154% or $780 million increase our net income by 634% or $108 million and increased our adjusted EBITDA by 193% or $134 million.

As impressive as this growth and the execution by our team has been it is our future potential that is so significant that has me. So excited going forward, we expect to continue to grow faster than the market by executing on our strategy.

John P. Reed: Going forward, we expect to continue to grow faster than the market by executing on our strategy. Starting with showroom growth, which is the number one way we will expand our brand awareness in 2023, we completed the largest number of showroom projects in our history, opening eight new showrooms, two new design studios, and one new outlet location, along with eight renovations, relocations, and expansion projects.

Starting with showroom growth, which is the number one way we expand our brand awareness in 2023, we completed the largest showroom number of showroom projects in our history.

Opening eight new showrooms to.

Two new design studios and one new outlet location, along with eight renovations relocations and expansion projects remember our new showroom economics are very strong and we target new traditional showrooms should generate at least $10 million in revenue by year, three with target adjusted EBITDA Mark.

John P. Reed: Remember, our new showroom economics are very strong, and we target new traditional showrooms that generate at least $10 million in revenue by year 3, with target adjusted EBITDA margins averaging 32% and average investment payback in 2 years or less. In 2024, as I mentioned, we expect another year above record showroom growth with plans equal to or exceeding the number of 2023 showroom projects, including four to six new traditional showrooms, two design studios, three outlets, and to renovate, relocate, or expand several existing showrooms. With wonderful feedback from our clients and the continued word of mouth awareness building around our showrooms and the incredible products they showcase, we look forward to introducing the Arhaus brand and experience to many more clients over the next several years, especially as we continue to work towards our target of 165 traditional showrooms. The number two way we expand brand awareness is through recommendations from friends and family.

<unk>, averaging 32% and average investment payback in two years or less.

In 2024 as I mentioned, we expect another year of above the record.

Room growth with plans to equal or exceed the number of 'twenty to 'twenty three showroom projects, including four to six new traditional showrooms to design studios, three outlets and to renovate relocate or expand several existing showrooms.

That's wonderful feedback from our clients and the continued word of mouth awareness building around our showrooms and the incredible product. They showcase we look forward to introducing our house brands and experience with many more clients over the next several years, especially as we continue to work towards our target of 165.

Traditional showroom.

The number two way we expand brand awareness is through recommendations from friends and family are incredible products and then value proposition. It offers is at the heart of these recommendations.

John P. Reed: Our incredible product and the value proposition it offers is at the heart of these recommendations, and we will enjoy persistent demand for our product throughout 2023, driven by the success of many of our newer products and collections. We frequently describe traveling the world to seek inspiration, meet with incredible artisans, and ensure we continue to delight our clients with beautiful products from across the globe. As Wendy mentioned, I am joining you from Italy today, where members of our product development team and I are working on some really exciting new products. Last year, I told you 2023 was going to be the best year ever for new product lineups, and I think we have exceeded even that very high bar.

And we enjoy persistent demand for our product throughout 2023, driven by the success of many of our newer products and collections.

We frequently described.

The world to seek inspiration meet with incredible artisans and ensure we continue to delight our clients with beautiful products from across the globe as Wendy mentioned I am joining you from Italy today, where members of our product development team and I are working on some really exciting new products.

Last year I told you I thought 2023 was going to be the best year ever in new product lineup and I think we have exceeded even that very high bar with the product introductions and category expansions in 2024.

John P. Reed: With the product introductions and category expansions in, our spring and outdoor catalogs and showrooms are currently showcasing these products, and I encourage all of you to go to the showroom and spend some time on arhaus.com to judge for yourself. During 2023, we will also continue to make some important growth investments to enhance our omni-channel capabilities and technology. We are growing our insights from website engagement and have launched our incredible story campaigns online and in print,highlighting artisans from Mexico and Italy.

Our spring at outdoor catalogs and showrooms are currently showcasing that product and I encourage all of you to go to the showrooms.

And spent some time on our house dot com to judge for yourself.

During 2023, we also continued to make some important growth investments to enhance our omnichannel capabilities and technology.

We are growing our insights from web site engagement and have launched our incredible story campaigns online and then trends.

Highlighting artisans from Mexico, and Italy These campaigns.

John P. Reed: These campaigns not only tell our product stories, but they elevate our brand at a time when we are introducing Arhaus to many new clients across the United States. This is also a great time to highlight Volume 2 launch of the story campaign Felicimos Fegreto, A Beautiful Secret. As a reminder, we developed the story campaign in response to our clients asking to know more about the talented craftsmen behind our beautiful products. The introductory volume, Storied Rooted, a story not common, highlighted a family of woodworking artisans in Mexico and was released last fall.

Not only tell our product stories, but they elevate our brand at a time when we are introducing our house to too many new clients across the United States.

This is also a great time to highlight the volume to launch of the story campaign at least amongst cigarette so a beautiful secret.

As a reminder, we we'd get that lets the story campaign in response to our clients asking to know more about the talented craftsmen behind her beautiful products.

The introductory volume storied rooted a story not common highlighted a family of woodworking artisans in Mexico and was it released last fall.

John P. Reed: The current campaign is a testament to our Italian partnerships, some of which were established decades ago, and all of which have been instrumental to building our brand. We are thrilled to continue this series and look forward to telling the Arhaus story through future volumes. We are also continuing to make strategic investments to upgrade the technology that supports our business and long-term growth plan and enhances our capabilities in warehouse management, inventory planning and allocation, and manufacturing delivery and efficiency. Our teams have been working around the clock on these initiatives.

The current campaign is a testament to our Italian partnerships some of which we were established decades ago and all of which have been instrumental in building. Our brands. We are thrilled to continue the F series and look forward to telling you. They are how story through future volumes.

We are also continuing to make strategic investments to upgrade the technology that supports our business and long term.

Gross plants and enhances our capabilities in warehouse management inventory planning and allocation and manufacturing delivery and efficiencies.

Our teams have been working around the clock on these initiatives I am excited about our technology roadmap.

John P. Reed: I'm excited about our technology roadmap and the long-term advantages and expected margin enhancements it will create. These investments and enhancements will continue in 2024, and Dawn will give you more detail on the size and scope of these investments. These are near and long-term processes combined with a strong and disciplined execution of our strategic priorities, buttressed by our debt-free balance sheet, have us well positioned to deliver on our financial and operational goals. As we look to 2024 and beyond, I'm excited about the opportunities of our business and our brand, both of which are, in many ways, still in the early days, even though I've been at this for close to 40 years. I generally feel that there are no collections like our collections, there are no people like our people, and there's no potential like our potential. Arhaus stands out, and he stands alone.

And the long term advantages and expected margin enhancements it will create for US. These investments in our hand Enhancers will continue in 2024, and Don will give you more detail on the size and scope of these investments.

These are near and long term prospects combined with the team's strong and disciplined execution of our strategic priorities and buttressed by our debt free balance sheet.

Well positioned to deliver on our financial and operational goals.

As we look to 'twenty 'twenty, four and beyond I'm excited about the opportunities of our business and our brand both of which in many ways is still in the early days, even though it had been.

At this for close to 40 years I generally feel that there are no collections like our collections. There are no people like our people.

And there is no potential like our potential our house stands out.

Our house stands alone.

John P. Reed: Our products are designed using the best materials. And with an unparalleled focus on quality and comfort, we are curious world travelers, and our mission to design and craft the best furniture and decor leads us to work alongside some of the most talented designers and craftsmen on earth. Our showrooms are an authentic expression of who we are. We curate inviting spaces, carefully layered footprints, and compelling digital presentations to take every visitor on the journey of their choosing. Always letting inspiration lead the way.

Our product is designed using the best materials.

And with an unparalleled focus on quality and comfort we are curious world travelers and our mission to design and craft the best furniture and decor leaves us to the to work alongside some of the most talented designers and craftsmen on Earth.

Our showrooms are an authentic expression of who we are we curate inviting spaces carefully layered footprints and compelling digital presentation should take every visit are on the journey of their choosing.

I always letting inspiration lead the way.

John P. Reed: With our clients' experience, we aim to build authentic relationships, inspiring and supporting our clients at every step in the journey. We encourage exploration, customization, and we are never defined by a single style.

With our clients' experience, we aim to build authentic relationships inspiring and supporting our clients at every step in the journey, we encourage exploration customization and we're never defined by the single style. Instead, we encourage and help our clients clearly the unique styles of their homes.

John P. Reed: Instead, we encourage and help our clients curate the unique styles of their home, and I believe we have the best team in the industry. We are a team of designers, dreamers, and doers as passionate as we are curious. Finally, I want to personally congratulate our team for a great job in 2023. I want to thank them for their dedication to our company and our clients. I'm looking forward to what we will continue to build in 2024 and beyond. Now, we'll turn it over to Dawn.

And I believe we are have the best team in the industry.

We are a team of designers dreamers doers as passionate as we are curious.

Finally, I want to personally congratulate our team for a great job of 2023.

And thank them for their dedicated dedication to our house and our clients I'm looking forward.

So what we will continue to build in 'twenty 'twenty four and beyond.

Now I'll turn it over to Don.

Dawn Phillipson: Thank you, John, and good morning. As John mentioned, we are incredibly proud of our 2023 fourth quarter and full year financial results and our operating performance throughout the year. We delivered a solid fourth quarter that concluded another year of record net revenue and exceeded our expectations for both revenue and earnings. Key items from our fourth quarter 2023 income statement include net revenue of $344 million with a 6.8% comp decline against a comp growth comparison of 47% in the fourth quarter last year that reflected strong backlog delivery. We were pleased with our demand comp growth in the quarter, which was 1.6% on a one-year basis and 91.4% on a four-year stacked basis. Demand crop growth in the quarter was impacted by promotions in November of 2022 that we made a strategic decision not to repeat in November of 2023 to preserve margin. Our fourth quarter growth margin decreased $17 million to $141 million, driven primarily by lower net revenue, transportation costs, and showroom expenses, partially offset by lower costs related to the reduction in net revenue.

Thank you John and good morning, as John mentioned, we are incredibly proud of our 2023 fourth quarter and full year financial results and our operating performance throughout the year, we delivered a solid fourth quarter that concluded another year of record net revenue and exceeded our expectations for both revenue and earnings key items from our fourth quarter 2000.

'twenty three income statement include net revenue of $344 million with a six 8% comp decline against the comp growth comparison at 47% in the fourth quarter of last year that reflected strong backlog delivery.

We were pleased with our demand comp growth in the quarter, which was one 6% on a one year basis and 91, 4% on a four year stacked basis.

Demand comp growth in the quarter was impacted by promotions in November of 2022 that we made a strategic decision not to repeat in November of 2023 to preserve margin.

Our fourth quarter gross margin decreased $17 million to $141 million, driven primarily by lower net revenue transportation costs, and <unk> expenses, partially offset by lower costs related to the reduction in net revenue.

Dawn Phillipson: Growth margin as a percent of net revenue decreased 330 basis points to 41%, driven primarily by product mix related to the sell-through of SKUs that were price actioned in June of 2023, as well as increased showroom costs and transportation investments. Fourth quarter SG&A expense increased $7 million to $100 million, primarily driven by strategic investments in the business to support our growth and increased selling expenses related to new showrooms and higher demand, partially offset by lower warehouse expense. Fourth quarter 2023 net income decreased $16 million to $31 million. Adjusted EBITDA for the quarter decreased $23 million to $51 million from $74 million in the fourth quarter of 2022.

Gross margin as a percent of net revenue decreased 330 basis points to 41% driven primarily by product mix related to the sell through of Skus that were price action in June of 2023, as well as increase show on costs and transportation investment.

Fourth quarter, SG&A expense increased $7 million to $100 million, primarily driven by strategic investments in the business to support our growth and increased selling expense related to new showrooms at higher demand, partially offset by lower warehouse expense.

Fourth quarter 2023, net income decreased $16 million to $31 million adjust.

Adjusted EBITDA in the quarter decreased $23 million to $51 million from $74 million in the fourth quarter of 2022.

Dawn Phillipson: The fourth quarter net revenue of $344 million and adjusted EBITDA of $51 million resulted in a 15% adjusted EBITDA margin for the quarter. For the full year, key income statement items include net revenue of $1.3 billion, comp growth of 1.4%, and demand comp growth of 7.6% on a one-year basis and 91.4% on a four-year stacked basis. During the year, demand was strong in both showroom and e-commerce channels as our products and marketing continued to resonate. Our net revenue growth was driven by both our strong demand and the delivery of approximately $75 million in abnormal backlog in 2023. Gross margin as a percent of net revenue decreased 70 basis points to 42%, primarily reflecting higher showroom expense, transportation investments, and credit card fees, which were partially offset by favorable product costs.

The fourth quarter net revenue of $344 million and adjusted EBITDA of $51 million resulted in a 15% adjusted EBITDA margin in the quarter.

So the full year key income statement items include net revenue of $1.3 billion comp growth of one 4% and demand comp growth of seven 6% on a one year basis and 91, 4% on a four year stacked basis.

During the year demand was strong in both showroom and e-commerce channels as our products and marketing continue to resume.

Our net revenue growth was driven by both our strong demand and the delivery of approximately $75 million in abnormal backlog in 2023.

Gross margin as a percent of net revenue decreased 70 basis points to 42%, primarily reflecting higher shower makes fun transportation investments and credit card fees, which were partially offset by favorable product costs.

Dawn Phillipson: Product costs improved due to the flow through of container cost favorability versus prior year and promotion management, partially offset by the impact of price action skews. Full year SG&A expense as a percent of net revenue increased 150 basis points to 29%. The increase was primarily driven by strategic investments to support and drive the growth of our business, including increased expenses as new showrooms opened and we invest in technology and the donation to the Nature Conservancy. These increases were partially offset by lower warehouse expenses and the non-recurrence of costs related to the 2022 opening and setup of our Dallas Distribution Center. Full year 2023 net income decreased $11 million to $125 million. Full year 2023 net revenue of $1.3 billion and adjusted EBITDA of $203 million resulted in a 16% adjusted EBITDA margin for the year. I want to reiterate John's appreciation of the exceptional work of our teams across the company over the past year, which was instrumental in driving 2023's strong performance and record net revenue. Turning to this morning's special dividend announcement, one of our competitive strengths is our strong debt-free balance sheet and the financial flexibility it affords us.

Costs improved due to the flow through of container cost favorability versus prior year and promotion management, partially offset by the impact from price actions.

Full year SG&A expense as a percent of that revenue increased 150 basis points to 29%.

The increase was primarily driven by strategic investments to support and drive the growth of our business, including increased expenses as new showrooms open and we invest in technology and a donation to the nature Conservancy. These.

These increases were partially offset by lower warehouse expense and the non recurrence of costs related to the 2022 opening and setup of our Dallas distribution Center.

Full year 2023, net income decreased $11 million to $125 million for.

Full year 2023, net revenue of $1.3 billion and adjusted EBITDA of $203 million resulted in a 16% adjusted EBITDA margin for the year.

I want to reiterate John's appreciation of the exceptional work of our teams across the company over the past year, which was instrumental in driving 2023 is strong performance and record net revenue.

Turning to this morning special dividend announcement.

One of our competitive strength is our strong debt free balance sheet and the financial flexibility it affords us.

Dawn Phillipson: Following several years of outstanding performance, growth, and cash generation, and having ended the year with $223 million in cash, our Board of Directors is pleased to return approximately $70 million in capital to shareholders in the form of a special cash dividend. We are pleased to note that even with this special dividend, our growth and strategic investments remain unchanged, as we are also in the enviable position of having both a long runway to continue to grow our showroom footprint and high returns from that growth. Investing in the business to drive profitable growth remains our top priority. We will continue to build on that profitable growth with our planned CapEx investment of $80 to $100 million in 2024, with the majority allocated to showroom projects.

Following several years of outstanding performance growth and cash generation and having ended the year with $223 million in cash our board of directors is pleased to return approximately $70 million in capital to shareholders in the form of a special cash dividend.

We were pleased to know even with this special dividend our growth and strategic investments remain unchanged and we are also in the enviable position of having both a long runway to continue to grow our showroom footprint and high returns from that growth.

Investing in the business to drive profitable growth remains our top priority.

We will continue to build on that profitable growth with our planned capex investment of $80 million to $100 million in 2024, with the majority allocated to shower and projects.

Next I'd like to turn to our outlook for 2024 with continued macroeconomic uncertainty and lapping prior year backlog delivery, we have assumed a range for comp growth of negative 4% to negative 2%.

Dawn Phillipson: Next, I'd like to turn to our outlook for 2024. With continued macroeconomic uncertainty and lapping prior year backlog delivery, we have assumed a range for comp growth of negative 4% to negative 2%. As a reminder, we are comping approximately $75 million in abnormal backlog delivery in 2023. While we enter 2024 with a normalized backlog, our congress metric will not normalize until 2025.

As a reminder, we are comping approximately $75 million in abnormal backlog delivery in 2023.

While we entered 2024 with a normalized backlog our comp growth metric will not normalize until 2025.

For the full year of 2024, we expect net revenue of 1.33 billion to $1.37 billion, which represents growth of 3% to 6% comp decline of 4% to 2%.

Net income of 95 million to $105 million and adjusted EBITDA of 185 million to $200 million.

Dawn Phillipson: For the full year 2024, we expect net revenue of $1.33 billion to $1.37 billion, which represents growth of 3% to 6%, comp decline of 4% to 2%, net income of $95 million to $105 million, and adjusted EBITDA of $185 million to $200 million. We expect full-year adjusted EBITDA margins to be lower than in 2023. D-Leverage will be most significant in the first half of the year and is driven by comping prior year backlog delivery and strategic investments we are making this year. 2024 strategic investments include a robust number of showroom projects and operational improvements to enhance our capabilities and drive our success long term. We expect most of the de-leverage to come from SG&A, with a lesser amount of de-leverage in the growth margin.

We expect full year adjusted EBITDA margins to be lower than 2023 deleverage will be most significant in the first half of the air and is driven by Comping prior year backlog delivery and strategic investments were making this year.

'twenty 'twenty four strategic investments include a robust number of shower and projects and operational improvements to enhance our capabilities and drive our success long term.

We expect most of the deleverage to come from SG&A with a lesser amount of deleverage in gross margin.

We expect to invest approximately $10 million to $15 million and corporate strategic investments. This year as we worked to streamline operations and drive a best in class client experience.

Strategic investments for the year in addition to new showrooms, including a new warehouse management system in our Ohio distribution Center planning and allocation software and a manufacturing ERP.

We will also continue to invest in our in home delivery experience as well as other growth initiatives, such as e-commerce, and our in home designer and trade programs.

Dawn Phillipson: We expect to invest approximately 10 to $15 million in corporate strategic investments this year as we work to streamline operations and drive a best-in-class client experience. Strategic investments for the year, in addition to new showrooms, include a new warehouse management system in our Ohio Distribution Center, planning and allocation software, and a manufacturing ERP. We will also continue to invest in our in-home delivery experience, as well as other growth initiatives, such as e-commerce and our in-home designer and trade program. For the first quarter of 2024, we expect net revenue of $260 million to $270 million, a comp decline of 23% to 20%, net income of $1 million to $3 million, and adjusted EBITDA of $11 million to $15 million.

For the first quarter of 2024, we expect net revenue of 260 million to $270 million a comp decline of 23% to 20% net income of 1 million to $3 million and adjusted EBITDA of 11 million to $15 million.

As the range indicates in the first quarter of 'twenty 'twenty four we expect net revenue to be down low teens compared to the first quarter of 2023. This.

This is primarily due to the implementation of our new warehouse management system in March and weather related impacts in January.

Quarter to date, our demand comp in January declined high single digits as weather impacted traffic with February accelerating to mid single digit demand comp growth.

We expect significant adjusted EBITDA deleverage in the first quarter of the deleverage approximately a third is coming from gross margin due to deleverage of fixed cost on the revenue decline and continued delivery of price action Skus.

Balance of the deleverage in SG&A due to the revenue decline and as we continue to make strategic investments.

Dawn Phillipson: As the range indicates, in the first quarter of 2024, we expect net revenue to be down low teens compared to the first quarter of 2023. This is primarily due to the implementation of our new warehouse management system in March and weather-related impacts in January. Quarter-to-date, our demand comp in January declined high single digits as weather impacted traffic, with February accelerating to mid-single-digit demand comp growth.

As our full year outlook implies we expect net revenue growth in the balance of quarters. This year, we expect deleverage in both gross margin and SG&A in the first half of the year with inflection expected in the second half as the P&L impact from the June 2023 price action product is complete and revenue and earnings from Nisha arms positively impact our P&L.

Get you on our second quarter expectations. When we report first quarter financial performance in May.

Dawn Phillipson: We expect significant adjusted EBITDA de-leverage in the first quarter. Of the de-leverage, approximately a third is coming from gross margin due to de-leverage of fixed costs on the revenue decline and continued delivery of price action SKUs. The balance of the de-leverage is in SG&A due to the revenue decline and as we continue to make strategic investments.

For all other details related to our 2024 outlook. Please refer to our press release.

We are also reiterating our long term growth goals, we expect the investments we are making in the near term will enable us to achieve these goals.

Over the long term, we target mid single digit comparable sales growth and mid to high single digit showroom growth leading to high single digit net revenue growth and low double digit adjusted EBITDA growth.

Dawn Phillipson: As our full-year outlook implies, we expect net revenue growth in the balance of quarters this year. We expect de-leverage in both gross margin and SG&A in the first half of the year, with inflection expected in the second half as the P&L impact from the June 2023 price action product is complete, and revenue and earnings from these showrooms positively impact our P&L. We will update you on our second quarter expectations when we report our first quarter financial performance in May. For all other details related to our 2024 outlook, please refer to our press release. We are also reiterating our long-term growth goals. We expect the investments we are making in the near term will enable us to achieve these goals.

The thing I want to again acknowledge the hard work and dedication of our teams. Our success in 2023 reflects our focus on and execution of our strategy, which remains unchanged. We believe our strong debt free balance sheet is a competitive advantage, enabling us to execute on our growth plan and make the necessary investments to build on our share gains and the highly fragmented.

At $100 billion premium home furniture market.

We believe we are well positioned to meet the needs of our clients in any economic environment and remain keenly focused on driving value for all stakeholders.

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

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session.

If you would like to ask a question. Please press star and one on your telephone keypad.

Dawn Phillipson: Over the long term, we target mid single-digit comparable sales growth and mid to high single-digit showroom growth, leading to high single-digit net revenue growth and low double-digit adjusted EBITDA growth. In closing, I want to again acknowledge the hard work and dedication of our teams. Our success in 2023 will reflect our focus on and execution of our strategy, which remains unchanged. We believe our strong debt-free balance sheet is a competitive advantage, enabling us to execute on our growth plan and make the necessary investments to build on our share gains in the highly fragmented $100 billion premium home furniture market.

Information tone will indicate your line is in the question queue.

You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Our first question is from Peter Keith with Piper Sandler. Please go ahead.

Hi, Thanks, Good morning, everyone. Great results I wanted to ask about the system Rollouts, which are interesting so ERP systems can.

Operator: We believe we are well positioned to meet the needs of our clients in any economic environment and remain keenly focused on driving value for all stakeholders. Thank you, and we would now like to open the call to questions. Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question area. You may press Star and 2 if you would like to remove your question from the queue.

Send some feared on analyst spine so.

Talk about the risk of the ERP and then future benefits of the other systems that could come in.

The next two years.

Good morning, Peter John here.

Don has probably got more more information on this tonight.

But where were kind of laying things out in stages.

I don't believe we're doing a full ERP system anytime soon we're doing a warehouse system and then our management planning system and then a totally separate system for our manufacturing plants.

Peter Jacob Keith: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from Peter Keith with Piper Sandler. Please go ahead. Hi, thanks. Good morning, everyone.

Manufacturers are upholstery.

Don do you have anything to add to that.

Yeah, you know I good morning, Peter I think.

We in the fourth quarter of last year, we deliberately we hired a consulting agency to help us really evaluate you know our full systems and business infrastructure and look at not only what we should be really contemplating for revision and updating but I'll.

Peter Jacob Keith: Great results. I want to ask about the system rollouts, which are interesting. So ERP systems can send some fear down analysts' spines, so talk about the risk of the ERP and then future benefits of the other systems that could come in the next two years. Good morning, Peter. John here.

So the sequencing and cadence of that.

For exactly what you're speaking to you know, we we want to make sure that as we are continuing to grow the top line that we don't compromise and you know the.

The client experience certainly and that we don't compromise operational integrity. So so we're we're certainly being very thoughtful very mindful ERP is I think it's unfair down the signs of everyone Implementers and analysts alike. So you know we are trying to be very thoughtful. We are excited for some of these new systems you know.

John P. Reed: Dawn's probably got more more information on this than I do, but we're kind of laying things out in stages. I don't believe we're doing a full ERP system any time soon. We're doing a warehouse system, then a management planning system, and then a totally separate system for our manufacturing plants that manufacture our pulse. Dawn, do you have anything to add to that? Yeah, you know, I Good morning, Peter, I think we, in the fourth quarter of last year, we deliberately hired a consulting agency to help us really evaluate, you know, our full systems and business infrastructure and look at not only what we should be really contemplating for revision and updating but also the sequencing and cadence of that, for exactly what you're speaking to. We want to make sure that as we So, we're certainly being very thoughtful, very mindful. ERPs, I think, send fear down the spines of everyone, implementers and analysts alike.

As we think about the planning and allocation software really that's going to help us just more seamlessly facilitate movement of products through our network, which is going to have not only operational efficiencies, but financial efficiencies. Once deployed. So we're really excited for that and there are some other systems that we have not yet started but have mentioned.

And in the past that we're under analysis like an order management system, which will also do the same thing and help kind of facilitate you know making sure. The product is is coming from where it needs to be so you know I think overall I am you know, we're getting a very thoughtful prudent responsible approach I would say to you is systems enhancements and infrastructure changes.

But well certainly you know we're laser focused on the operational impact as well.

Okay. Thank you and then just maybe Don for little more financial technical question.

With.

The warehouse management system Rolling out in Q1, I guess, its probably causing a little bit of sales lag.

So Q1 sales guy that a little bit worse than we thought is there a sales shift that you could quantify for us that's that's going to roll directly into Q2 or maybe also carry into Q3.

Dawn Phillipson: So, you know, we are trying to be very thoughtful. We are excited about some of these new systems. You know, as we think about the planning and allocation software, really, that's going to help us just more seamlessly facilitate the movement of product through our network, which is going to have not only operational efficiency but financial efficiency once deployed. So we're really excited about that. There are some other systems that we have not yet started but have mentioned in the past that we're under analysis, like an order management system, which will also do the same thing and help kind of facilitate, you know, making sure the product is coming from where it needs to be.

You know, we we think it's probably about a week, whereas though you know simple simple math you could kind of just take what our typical you know typical Florida, it looks like and divide by the number of weeks in the quarter.

That being said you know we also did see some impact on deliveries in January related to weather. So do you think about those drivers who are out there, but theres really IC conditions or snowy conditions that are particularly difficult.

At times, they will delay those deliveries. So you know I think as we're thinking about 2024 and the first quarter certainly has kind of the lowest year over year impact are the least favorable year over year impact and then as we look out to the following quarters, where we're pretty excited and we think that as we move through the year.

Dawn Phillipson: So, you know, I think overall we're taking a very thoughtful, prudent, responsible approach, I would say, to systems enhancements and infrastructure changes. But we'll certainly, you know, we're laser focused on the operational impact as well. Okay, thank you.

We should see a sequential acceleration in the deliveries and net revenue as we move through the year.

Very good thank you so much.

Thanks Peter.

Thank you.

Dawn Phillipson: And then maybe done for a little more financial technical question. With the warehouse management system rolling out in Q1, I guess it's probably causing a little bit of sales lag. So Q1 sales got a little bit worse than we thought. Is there a sales shift that you could quantify for us that's, that's going to roll directly into Q2, or maybe also carry into Q3? Um, you know, we think it's probably about a week's worth. So, you know, simple, simple math, you could kind of just take what a typical, you know, typical quarter looks like and divide by the number of weeks in the quarter.

Our next question is from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Good morning, and nice result, thanks for taking my question first one is just on underlying assumptions for your 2024 comp guide of down four to down too.

Just help us give some color in terms of how you're thinking about large scale renovation light refresh is existing home sales are factors like that that you've said had the the most are waiting on on demand for your business. That's my first question. Thanks.

Peter Jacob Keith: That being said, you know, we also did see some impact on deliveries in January related to weather. So you think about those drivers who are out there; there are really icy conditions or snowy conditions that are particularly difficult. You know, at times they will delay those deliveries. So, you know, I think as we're thinking about 2024, the first quarter certainly will have kind of the lowest year over year impact or the least favorable year over year impact. And then, as we look out to the following quarters, we're pretty excited. And, you know, we think that as we move through the year, we should see a sequential acceleration in delivery and net revenue as we move through the year. Very good. Thank you so much.

Go ahead Don.

Good morning, Jonathan.

Yeah. So you know as we're thinking about them about the macro there certainly continues to be a lot of uncertainty we do know that our client continues to renovate.

Renovate continues to refresh their home and you know a light refresh could be something as simple as as painting around so yeah. We think there is there's still plenty of of that happening I'm. You know I think we also as you think about our our market share of just the total of 100 billion dollar industry. We have we have a ton of runway you know where lesson.

You know two per sign of market and so I was just so much opportunity for us as we continue to open showrooms as the marketing team continues to really expand the brand awareness and I'm trying to think outside the box when somebody is different marketing campaigns. John do you want to talk about the Italy campaign sure Hi, Jonathan Good morning.

Jonathan Richard Matuszewski: Thanks, Peter. Thank you. Our next question is from the line of Jonathan Matuszewski with Jeffries. Please go ahead. Good morning, and nice results.

Yeah. We were really excited you know as as Don mentioned, we're really excited opening up those new showrooms, but within marketing as well, we're really excited about the new opportunities that we have to not only present in our house are in a similar way to more people, but also new ways that we're presenting our house out to the audience.

Dawn Phillipson: Thank you for taking my question; the first one is just on the underlying assumptions for your 2024 comp guide and more. Thank you. Some color in terms of how you're thinking about large-scale renovations, light refreshes, existing home sales, factors like that that have the most weighting. That's my first question. Go ahead, John. Morning, Jonathan.

So as John mentioned, we kicked off our storied theories with rooted campaign featuring our Mexican offense.

Last fall, we just launched our Italy campaign.

In spring was a big rollout in February and it really does give us a way to tell those stories sure. The Craftsman sure sure the things that really make our house unique and special John you know talks all the time about how proud we are of our product and what we're delivering to the market.

Dawn Phillipson: Yeah, so you know, as we're thinking about, about the macro, there certainly continues to be a lot of uncertainty. We do know that our client continues to renovate, continues to refresh their home. And you know, a light refresh could be something as simple as painting a room.

And I think we have a marketing team are just thrilled to really be able to share those stories and let people see into our world and these are things that you know we are excited about and have been experiencing for decades.

Dawn Phillipson: So, you know, we think there's, there's still plenty of that happening. You know, I think we also, if you think about our market share of just the total $100 billion industry, we have a ton of runway. You know, we're less than 2% of the market. And so, just so much opportunity for us as we continue to open showrooms, as the marketing team continues to really expand the brand awareness and kind of think outside the box on some of these different marketing campaigns. Jen, do you want to talk about the Italy campaign? Sure. Hi Jonathan.

But these campaigns really allow us to go into detail and share those stories with a larger audience really really excited by the responses that we are seeing to those campaigns. We are learning a lot. We are seeing some really great engagement and traffic results, particularly on digital with those campaigns.

So you know as John mentioned, we decided to start telling the story because of questions and interests. We were getting from current clients and just seeing.

Existing clients and also future potential clients really engage with them is really really exciting so more to come from that but I'm really excited about what we'll see through the rest of the year there.

That's helpful. Thanks, Thanks for the color there and then I guess just a follow up we could get an update on anything youre seeing regarding cancellation rates, whether you've seen any deviation there from historical levels and I guess related to me I think you know last year, you called out at one point.

Jennifer E. Porter: Good morning. Yeah, we're really excited. You know, as Dawn mentioned, we're really excited about opening up those new showrooms. But within marketing, as well, we're really excited about the new opportunities that we have to not only present our house in a similar way to more people but also new ways that we present our house to the audiences. So, as John mentioned, we kicked off our story series with our Rooted campaign featuring our Mexican artisans. Last fall, we just launched our Italy campaign in spring with a big rollout in February. And it really does give us a way to tell those stories, share the craftsmanship, and share the things that really make our house unique and special.

Consumers choosing to postpone their orders and and that kind of having an impact on when you know revenue you may have been recognized or I get postponed their their receipt of deliveries or are you still seeing that dynamic any color there would be helpful.

Yeah, I don't believe I'm certain we have not seen any.

Any increase in Cancelation rates number one.

There they hold steady.

They have been the last last quite a few years.

Jennifer E. Porter: John, you know, talks all the time about how proud we are of our product and what we're delivering to the market. And I think we as a marketing team are just thrilled to really be able to share those stories and let people see into our world. And these are things that, you know, we are excited about and have been experiencing for decades. But these campaigns really allow us to go into detail and share those stories with a larger audience.

So that's normal case, we're actually doing a little better than we had that.

And we're not really saying people now delaying orders either.

Sometimes you'll see that you know obviously when people are renovating homes as we know you know.

People aren't moving as much as they had been but but people are at least in our category you know renovating quite a bit.

And.

Most most builders in that have caught up at least you know.

Jennifer E. Porter: Really, really excited by the responses that we are seeing to those campaigns. We are learning a lot. We are seeing some really great engagement and traffic results, particularly on digital with those campaigns. So, you know, as John mentioned, we decided to start telling these stories because of questions and interest we were getting from current clients. And just seeing existing clients and also future potential clients really engage with them is really, really exciting. So more to come from that, but really excited about what we'll see through the rest of the year there. That's helpful. Thanks for the color there, to follow up. Thank you all for joining us... , , , , , , , , , , , , , , color.

The the clients.

An actual date that they can stick too so.

Things are getting better in that field.

We're not seeing people delaying delaying like we did last year.

So we're not saying that it's going to be a factor at all.

Thank you.

Yeah.

Thank you.

Our next question is from the line of Peter Benedict with Baird. Please go ahead.

Oh, Hey, guys. Thank you. Thanks for taking the question. Good morning, I'm kind of a question around kind of the top line cadence.

How youre thinking about the recovery over the course of the year.

Just you talked a little bit about some of the macro drivers there but.

John P. Reed: Yeah, I don't believe, I'm certain we have not seen any increase in cancellation rates, number one. They hold steady as they have been for the last quite a few years, so that's a normal case we're actually doing a little better than we had. And we're not really seeing people now delaying orders either. Sometimes you see that, you know, obviously when people are renovating their homes, as we know, people aren't moving as much as they used to, but people are, at least in our category, renovating quite a bit. Most Most builders and that have caught up at least, you know, telling the clients that an actual date that they can stick to.

Just maybe unpack that a little bit what you're thinking in terms of just sector demand. So you guys have clearly been doing better than the sector, but just your views there and help us understand maybe the cadence of that $75 million backlog.

Please that you saw in 'twenty three just so we understand that the comparisons on that that's my first question.

Yes, good morning, Peter Don you can help me with this one but you know what we're saying is as we've been saying all along.

You know last year was strong very strong our new products are just resonating so well.

John P. Reed: So things are getting better in that field. We're not seeing people delaying like we did last. So we're not saying that's going to be a factor at all.

And I think we're just dead on with what people want these days.

Peter Sloan Benedict: Thank you. Our next question is from the line of Peter Benedict with Baird. Please go ahead.

Our unique product, we think we're way ahead of the curve from a competition on products.

Peter Sloan Benedict: Oh, hey, guys. Thank you. Thanks for taking the question. Good morning.

So you know we think.

Dawn Phillipson: Kind of a question around kind of the top line cadence, how you're thinking about the recovery over the course of the year. You talked a little bit about some of the macro drivers there, but just maybe unpack that a little bit, what you're thinking in terms of just sector demand. You guys have clearly been doing better than the sector, but just your view there and help us understand maybe the cadence of that $75 million backlog release that you saw in 23, just so we understand the comparisons on that. That's my first question. Yeah, good morning, Peter.

People are responding and you know as we've opened up so many new stores every day, we're getting new and more and more new clients coming in finding out who we are.

Because we were relatively unknown brand, especially on the West coast.

And and they're resonating that's amazing how people walking in I really don't know, where our brand and are purchasing from us because they just fall in love with our product fall in love with our showrooms and fall in love with our work with our designers who are just fantastic.

You know that part of it is great and then I'm seeing.

The lineup of new products and so forth.

John P. Reed: Dawn, you can help me with this one. But, you know, what we're seeing is, as we've been saying all along, last year was strong, very strong. Our new products are just responding so well. And I think we're just dead on with what people want these days. And it's a very unique product.

And that's what we're all about selling great products and the more we.

Better products and the more people know about it.

Is that ever going to be.

And we're just continuing to grow.

Sure.

Don do you want to add.

Add on to the other part of that.

Sure. So you know I think just to reiterate what Jonathan we feel so great about the new product introductions, the marketing materials. The new showrooms that were opened in the fourth quarter of last year were so excited with how those are performing and the clients I'm you know engagement with those locations. So as we think about demand in the first quarter.

John P. Reed: We think we're way ahead of the curve from our competition on products, so, you know, we think people are responding. And, you know, as we've opened up so many new stores every day, we're getting more and more new clients coming in, finding out who we are because we're a relatively unknown brand, especially on the West Coast. And, um, and they're responding.

You know January was a bit soft February accelerated nicely and so you know I think as we're thinking about the demand cadence that that will impact a little bit in the first quarter, but really feeling great about you know all of our offering is how we're engaging with clients and you know switching to think about that revenue.

John P. Reed: It's amazing how people come in who really don't know our brand and are purchasing from us because they just fall in love with our product, fall in love with our showrooms, and fall in love with our designers, who are just fantastic. So, you know, that part is, is, is great. And I'm seeing the lineup of new products and so forth is strong. And that's what we're all about, selling great products. And the more we have better products and the more people know about us, the better we're gonna be. We'll just continue to grow. Dawn, do you want to add to the other part of that?

As we move through the year, we do expect sequential acceleration. So every quarter, we expect net revenue to improve a bit and that's really going to be driven by new showrooms and the open not only in the fourth quarter of this year about showrooms and 'twenty 'twenty four are slated and heaviest in Q2 and Q3. So you know we should see some nice benefit in the.

Back half from those openings as well.

As we think about backlog in 2023, it's relatively evenly split between first half and second half is slightly heavier weighted towards the second half.

Dawn Phillipson: Sure. So, you know, I think just to reiterate what John was saying, we feel so great about the new product introductions, the marketing materials, the new showrooms that were opened in the fourth quarter of last year. We're so excited about how those are performing and the clients, you know, engagement with most locations. So as we think about demand in the first quarter, January was a bit soft, but February accelerated nicely.

Okay. That's helpful. Thank you and then just maybe on the.

Turning to the sourcing side of things.

Transportation was a benefit for you guys. In 2023, just curious what you have kind of assumed in your plan for 'twenty for.

<unk> kind of the geographic exposure you guys have in terms of where your product is coming from and just any thoughts on all the activity the red sea and what that might be.

Dawn Phillipson: So, you know, I think as we're thinking about the demand cadence, that that will impact a little bit in the first quarter. But really feeling great about all of our offerings, how we're engaging with clients, and, you know, switching to think about net revenue. As we move through the year, we do expect sequential acceleration. So every quarter, we expect net revenue to improve a bit. And that's really going to be driven by new showrooms that open not only in the fourth quarter of this year, but showrooms in 2024 are slated heaviest in Q2 and Q3. So you know, we should see some nice benefits in the back half from those openings as well. As we think about backlog in 2023, it's relatively evenly split between the first half and the second half; it's slightly heavier weighted towards the second half. That's helpful.

Doing to your to your inbound rates on Ocean freight. Thank you yeah, we are keep.

Keep in mind, almost almost half of our product is made the United States.

Which you know we've always made our upholstery in the United States.

Some other products that are being made here so that takes almost half the business off the table.

Hmm.

The other strong parts, where we're strong.

Well Mexicali buys a fair amount of product and in Europe, we buy a fair amount of products, especially in Italy, none of that is affected by the Red Sea at all.

Some of the Asian Asia and things were.

But we just didn't leave out of them and we're not seeing significant.

Cost increases.

With that so we're not where.

We were right or wrong, we're not worried about threats see part of that.

Peter Sloan Benedict: And then maybe on the sourcing side of things, you know, transportation was a benefit for you guys in 2023. Just curious what you have kind of assumed in your plan for 24.

The business again.

Maybe 20, 20% of our business that May go through there.

If that so it's not I'm not going to be significant.

John P. Reed: Remind us kind of the geographic exposure you guys have in terms of where your product is coming from and just any thoughts on all the activity in the Red Sea and what that might be doing to your inbound rates on ocean freight. Thank you. Yeah, keep in mind, almost half of our product was made in the United States, which, you know, we've always made our upholstery in the United States, and some other products are being made here.

Yeah, just to layer on there you know I think over the last few years, we have seen some slight adjustments and you know products coming domestic versus international. So so the number is a little bit little bit lower coming from domestic these days, it's closer to probably you know 30%.

Versus the 50, when we IPO, Ed but to John's point, we have layered in some slight increases in the back half of this year for freight costs related to Red Sea just from a guide perspective, yeah. We're cautiously optimistic that we won't see significant increases in the cost, but I think it's prudent just based off of it.

John P. Reed: So that takes almost half the business off the table. The other strong parts, you know, where we're strong are in Mexico. We buy a fair amount of products, and in Europe, we buy a fair amount of products, especially in Italy. None of that is affected by the Red Sea at all.

What we know today and what we're seeing them to have something factored in there and then just to reiterate John's point, we are seeing a few you know week delay answer in containers, but we're managing that really well front with the clients and so far haven't seen any kind of client kind of issue or ordering issue related to the red Sea.

John P. Reed: Some of the Asian things were, but we just have rerouted them. And we're not seeing a significant cost increase with that, so we're not, whether right or wrong, we're not worried about the Red Sea part of part of the business. And again, It's maybe 20% of our business that may go through there, if that. So it's not going to be significant.

The delays.

Alright that was super helpful. Thanks, So much guys. Good luck.

Dawn Phillipson: Yeah, just to add on there, you know, I think over the last few years, we have seen some slight adjustments in, you know, products coming domestic versus international. So, the number is a little bit, a little bit lower coming from domestic these days; it's closer to probably 30% versus the 50 when we IPO'd. But to John's point, we have layered in some slight increases in the back half of this year for freight costs related to the Red Sea, just from a guide perspective. You know, we're cautiously optimistic that we won't see significant increases in the cost. But I think it's prudent, just based on what we know today and what we're seeing, to have something factored in there.

Thank you.

Thank you. Our next question is from the line of Steven Forbes with Guggenheim Partners. Please go ahead.

Good morning.

John John and Jim I was wondering if you could expand on what's driving that acceleration and demand trends were in February.

Simply the weather compare month over month or is it is the core accelerating.

And any early reads on how the consumers engaging with the new outdoor collections.

Noting it may be early but John you. Since you brought excited about the products. So really would love to hear your thoughts on how the consumer engagement.

Sure.

Peter Sloan Benedict: And then just to reiterate John's point, we are seeing a few weeks delay in certain containers, but we're managing that really well up front with the clients. And so far, we haven't seen any kind of client issue or ordering issue related to the Red Sea delays. All right, that was super helpful.

I saw the February versus January.

It was really the first two weeks of January that.

We were effective just I mean, you guys.

The news and in the news scared the Hell out of it basically everybody in the country, except California, and Florida I think.

Steven Paul Forbes: Thanks so much, guys. Good luck. Thank you. Thank you. Our next question is from the line of Steven Forbes with Guggenheim Partners. Please go ahead. Good morning.

And frankly sell them some some nasty weather there.

Once we got through the first two weeks, we actually saw.

Positive.

So for the last two weeks of January and then of course in the paper work.

John P. Reed: John, Dawn, Jen, I was wondering if you could expand on what's driving the acceleration in demand trends during February. Is it simply the weather comparison, month over month, or is the core accelerating? and any early reads on how the consumer is engaging with the new outdoor collection. Noting it may be early, but John, you sound super excited about the product. Really would love to hear your sort of early thoughts on how consumer engagement is, Sure. First of all, that February versus January. It was really the first two weeks of January that, um... You know, we were affected just because you guys heard the news. I mean, the news scared the hell out of basically everybody in the country except California and Florida, I think, and frankly so. There was some nasty weather while we were there.

So it was kind of a blip with weather and whatnot.

Given that.

Any word whatsoever on our products is strong it's resonating very very strongly.

The outdoor products, we just launched our new new new and by far our best catalog hopefully you've all received it.

If not let us know what that's going to get one in the mail to you.

But it is by far the best product ever.

We have put together a assembled a new.

Outdoor came about three years ago, three and a half.

Years ago.

They are really running at full speed in 2024, So we've got great products. The results so far have been incredible on it.

It literally catalogs, just 10 days ago, but the response, we are hearing from the stores from a from our clients.

John P. Reed: Once we got through the first two weeks, you know, we actually saw positive trends for the last two weeks of January and then, of course, in February. So it was kind of a blip with the weather, and we're not... Without giving that any worry whatsoever, our product is strong; it's responding very, very strongly. As far as the outdoor products, we just launched our new and, by far, best catalog. Hopefully, you've all received it. If not, let us know; we'll get one in the mail for you.

So that's the very first things.

Nobody else in the world are doing and.

Great style incredible quality is fantastic right. So what we think are out there is gonna be sun this year.

Thanks for that and maybe just a quick follow up capital.

Capital structure extremely strong balance sheet free cash flow profile.

You announced a special dividend.

Maybe maybe you sort of give us some preliminary thoughts on the 23 five pipeline I guess is there an opportunity here to accelerate store growth.

John P. Reed: But it is by far the best product ever. We put together a pilot of the new outdoor team about three years ago, three and a half years ago, and they are really running at full speed in 2024. So we've got a great product. The results so far have been incredible for it. It literally just arrived days ago, but the response we're hearing from the stores, from our clients, is fantastic. We've got some very fresh things, things nobody else in the world is doing. It's great style and incredible quality at a fantastic price.

Are you thinking about potentially accelerating store growth or are you sort of thinking about it right.

Of store growth from square footage growth over the coming years.

Right right well, we as you know we've been saying we.

We've had quite a bit of new store growth renovations.

And last year and also this year going.

Going into 'twenty five and beyond.

We're shooting to go back to a very well planned and very strategic growth plan, which is five to seven full size stores a year.

John P. Reed: So we think Updoor is going to be strong this year. Thanks for that. Maybe just a quick follow-up. Capital Structure, Extremely Strong, Balance Sheet, and Free Cash Flow Profile. He announced his special dividend.

And on a couple of more of the design centers as we as we see fit.

Steven Paul Forbes: Maybe sort of give us some preliminary thoughts on the 2025 pipeline. I guess, is there an opportunity here to accelerate store growth? Are you thinking about potentially accelerating store growth? Or how are you sort of thinking about the right rate of store growth or square footage growth over the next, right, right?

No we're not no we're not looking to expand beyond what we have.

<unk> been planning, all along and we're going to stick with our strategic plan.

Thank you.

Youre welcome. Thank you.

Our next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

John P. Reed: Well, we, as you know, we've been saying we did quite a bit of new store growth renovations. And last year and also this year, going into 25 and beyond, we're shooting to go back to our very well-planned, very strategic growth plan, which is five to seven full-size stores a year and on a couple more of the design centers as we see fit. So we're not no; we're not looking to expand beyond what we are.

Thanks, Congrats on the strong results I'm just wanted to come back to the last point here on the showroom.

Growth in and just see if we could clarify are the car or make sure that we're interpreting the right way the mid to high single digit showroom growth on a long term basis that that you'd mentioned on <unk>.

John P. Reed: I've been planning all along, and we're going to stick with our strategic plan. Thank you. You're welcome.

So in term are we thinking about that on a percentage basis are we talking about you know still five to seven showrooms per year, FY 'twenty five and beyond.

Jeremy Scott Hamblin: Thank you. Our next question is from Jeremy Hamblin of Craig Hallam Capital Group. Please go ahead.

Jeremy Scott Hamblin: Thanks, and congratulations on the strong results. I just want to come back to the last point here on the showroom growth and just see if we could clarify or make sure that we're interpreting the right way the mid to high single-digit showroom growth on a long-term basis that you mentioned. You know, so in terms of percentage, are we thinking about that on a percentage basis? Are we talking about, you know, still five to seven showrooms per year, FY25? Go ahead, Dawn.

Go ahead dawn.

Thanks.

Yeah. So you know I think on a percentage basis makes sense in the near term the fastest oven feels like the right number adding on you know that five to seven traditional with incremental design studios on top of that.

I see okay that is.

That's helpful and then in terms of just.

Looking at your gross margin profile are you know I think you had said that you expect to see some some nice improvement on that in second half of 'twenty four and you know it seems based on where your sales levels are falling.

Dawn Phillipson: Thanks. Yeah, so you know, I think on a percentage basis it makes sense in the near term, the five to seven feels like the right number adding on, you know, that five to seven traditional with incremental design studios on top of that. I see, that's helpful. And then in terms of just looking at your gross margin profile, I think you said that you expected to see some nice improvement on that in the second half of 2024, and it seems based on where your sales levels are falling. Maybe fewer pricing actions, dragging on mix on a go forward basis. Are you planning for a kind of solid step up in your gross margin profile as well as we get into the later years? So we don't; we don't typically guide to gross margin.

Maybe fewer pricing action are dragging on mix on a go forward basis are.

Are you planning for like kind of a solid step up and your gross margin profile as well as we get into the out years.

So we we don't we don't typically guide to gross margin and you haven't put out kind of medium and long term goals for the gross margin, but you know what I will say is that we feel very good about our product costs in in June of 2023, we did take some price actions I'm really to kind of make sure.

That our inventory was right sized primarily and so you know we will clear through those in the first half of this year from a delivery perspective, the second half P&L benefit having been through that but you know as we think about longer term, we are investing in our in home delivery experience, which that.

Dawn Phillipson: And you haven't put out any kind of medium and long-term goals for the gross margin. But, you know, what I will say is that we feel very good about our product costs. In June of 2023, we did take some price actions, really to kind of make sure that our inventory was right-sized, primarily. And so you know, we'll clear through those in the first half of this year from a delivery perspective. In the second half, P&L will benefit from having been through that.

<unk> gross margin in and we will kind of continue to invest in that as we really focus on making sure that client experience is where we want it to be and.

I think over time, well, we'll see how that kind of plays out and as we we have a relatively dynamic strategy I think as we continue to scale the top line and really drive some of these growth initiatives that we have around our in home designer program. Our trade program New showroom expansion. We're really you know we would expect to see.

Dawn Phillipson: But you know, as we think about the longer term, we are investing in our in-home delivery experience, which rolls through gross margin, and we'll kind of continue to invest in that as we really focus on making sure that client experience is where we want it to be. And, you know, I think over time, we'll see how that kind of plays out. And as we have a relatively dynamic strategy. I think as we continue to scale the top line and really drive some of these growth initiatives that we have around our in-home designer program, our trade program, new showroom expansion, we're really, you know, we would expect to see leverage over time on that revenue, right? So the goal is always to scale those fixed costs.

Leverage overtime over you know long term on that on that revenue right. So the goal is always to scale those fixed cost. It doesn't mean it won't be you know it may not be linear I guess that as we continue to reinvest strategically in some of these areas, where we feel we can continue to elevate and really provide that luxury.

Are you a premium experience, but yeah, we remain laser focused on driving our margins and in fixed fixed.

Fixed cost leverage across the board.

If I could just sneak a follow up on the pricing actions, what what would you characterize the impact on kind of Q4 gross margins and <unk>.

Dawn Phillipson: It doesn't mean it won't be, you know, may not be linear, like I said, as we continue to reinvest strategically in some of these areas where we feel we can continue to elevate and really provide that luxury premium experience. But yeah, we remain laser focused on driving margins and fixed, fixed cost leverage across the board. If I could just sneak a follow-up on the pricing actions. What, how would you characterize the impact on kind of Q4 gross margins and, and then in the first half of 2014 from the kind of pricing actions and the impact on?

And then in the first half of 'twenty four.

Just from kind of the pricing actions and the impact on mix and gross margin.

Yeah, we haven't really disclosed from the P&L flow through because a bit of that is you know contingent upon just timing, but what we did say was that we talk about a mid single digit price decrease when youre looking at it across the full assortment.

So we are really pleased to say that those prices have largely normalized back to kind of where we think they should be in the you know as we go forward assortment. So feeling good about our price position position going forward.

Dawn Phillipson: Yeah, we haven't really disclosed the P&L flow through because a bit of that is, you know, contingent upon just timing. But what we did say was that we took about a mid single-digit price decrease when you're looking at it across the full assortment. So we are really pleased to say that those prices have largely normalized back to kind of where we think they should be in the, you know, as a going forward assortment. So I feel good about our price position going forward. Great. Thanks for taking the questions.

Great. Thanks for taking the questions best wishes.

Thank you. Thank you.

Thank you.

Our next question is from the line of Max Rattling pool with Pee Dee Coffman. Please go ahead.

Okay.

Great. Thanks, a lot. So first I know, it's early but how do you think about the new unit economics on the West coast galleries, what could those look like compared to what you've outlined for your legacy markets, how much more robust as the revenue side and some of those bigger galleries.

Jeremy Scott Hamblin: Best wishes. Thank you. Thank you. Thank you. Our next question is from the line of Maks Rakhlenko with TD Cowen. Please go ahead.

<unk> costs are higher as well and then if there's any differences in paybacks that we should be thinking about.

Maksim Rakhlenko: Great, thanks a lot. So first, I know it's early, but how do you think about the new unit economics in the West Coast galleries? What could those look like compared to what you've outlined for your legacy markets? How much more robust is the revenue side in some of those bigger galleries, as costs are higher as well?

Yeah, I mean, I don't have any specifics, but we do know that.

You know what the new stores, we've already opened on the West coast.

Last year.

And the one upcoming we feel we're going to be very strong.

John P. Reed: And then if there's any differences in payback, Yeah, I mean, I don't have any specifics, but we do know that, You know, with the new stores we've already opened on the West Coast in the last year and the ones upcoming, you know, we feel they're going to be very strong. The current ones are already very strong.

The current months are already very strong.

And you know.

The economics of the cells should be stronger than say a store in Akron, Ohio.

You know, where we have a store and.

Yeah, just you know there's more people more people with money and our product really really resonates on the west coast I mean, they're they're absolutely loving it.

Dawn Phillipson: And, you know, the economics, the sales should be stronger than, say, a store in Akron, Ohio, where we have a store. It's just, you know, there are more people, more people with money, and our product really, really resonates on the West Coast. I mean, they're absolutely loving it.

Yeah, we feel very very confident about it done I don't know if you have.

Numbers or any or excuse me.

Yeah.

Yeah, No I mean, I don't think we'd want to disclose kind of geographically, but but what John says certainly holds true you know you would expect you know larger location in California to perform better than maybe a smaller Midwest market.

John P. Reed: So, you know, we feel very, very confident about it. Dawn, I don't know if you have any numbers or anything for us. Yeah, no, I mean, I don't think we'd want to disclose kind of geographically, but what John says certainly holds true, you know, you would expect a larger location in California to perform better than maybe a smaller Midwest market. But we still remain focused on kind of the average, the average Adjust the EBITDA contribution for a showroom at 32%. And then the top line is a minimum of $10 million.

But we still remain focused on kind of the average the average adjusted EBITDA contribution for I shall wear them at 32% and then the top line is there is a minimum of $10 million. So some of those locations may significantly outperforms I may have been a little bit under but you know we we remain laser focused on.

The payback, which as you know under making sure that we have a payback within two years or so feeling good about you know our overall strategy and you know Dallas opening up that Dallas distributions on a really unlocks the west coast for us. So excited to continue to develop that in our geographic region.

Dawn Phillipson: So some of those locations may significantly outperform, some may come in a little bit under, but, you know, we remain laser focused on the payback, which is, you know, under, making sure that we have payback within two years or so feeling good about, you know, our overall strategy and, you know, Dallas opening up that Dallas distribution center really unlocked the West Coast for us. So excited to continue to develop that, you know, geographic region. I got it. Next, I was going to ask a question about Dallas, D.C. But how is that going? How are those?

Got it and actually I was going to ask Scott to ask question on the Dallas DC, but how is that going to how are those efficiencies is that D. C. Now where you need it to be or is it still ramping and then what could the stem a stem mile savings look like as the overtime, you'll be depending less and less.

On some of those Midwest facilities as you deliver out to the western markets.

Yeah, So Dallas and Dallas is performing and it continues to I would say underperform, where we expected it to be at this point in time, primarily because of inventory allocation, which as we mentioned a little bit ago, we are expecting to get the allocation software up and running kind of.

Dawn Phillipson: Is that DC now where you need it to be, or is it still ramping, and then what could the stem stem mile savings look like as, over time, you will be depending less and less on some of those Midwest facilities as we deliver out to the West? Yeah, so Dallas is performing. It continues to, I would say, underperform where we expected it to be at this point in time, primarily because of inventory allocation, which, as we mentioned a So we won't fully be able to unlock Dallas productivity until we have the allocation software and order management system in place. So those are kind of two different pieces.

Early next year, so we won't fully be able to unlock the Dallas productivity until we have the allocation software and order management system in place. So those are kind of two pieces in the interim we are you know shuttling products back and forth as necessary to kind of try to get that inventory allocation in line with where we'd like it to.

B. So importantly, we remain laser focused on making sure the client received their product on time and that the experience is seamless for them.

We're excited to get these systems deployed to unlock this time savings I'm certainly I remain focused on that I know the team is as well so but we just there. There's you know there's a couple of big platforms that we need to implement in order to really unlock that so more to come you know in 2025, I would say on what those savings could look like.

Okay.

Great. Thanks, a lot and best regards.

Thank you. Thank you.

Dawn Phillipson: In the interim, we are, you know, shuttling products back and forth as necessary to kind of try to get that inventory allocation in line with where we'd like it to be. But, importantly, we remain laser focused on making sure the client receives their product on time, and the experience is seamless for them. We're excited to get these systems deployed to unlock the STEM savings. Certainly, I will remain focused on that. I know that the team is as well.

Next question is from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, Good morning, everyone, Hey, John I wanted to ask you about newness you've touched on it a bit in prepared and even in some of the Q&A, putting your own design hat on and looking across your product and it's okay. If you're biased, but I am curious about.

Dawn Phillipson: So, but we just, there's, you know, there's a couple big platforms that we need to implement in order to really unlock it. So more to come, you know, in 2025, I would say on what those STEM savings could look like. Great. Thanks a lot.

You know trends, where your product stand in terms of style and price point, you know I heard you made some price adjustments just thinking about where it sits and I know you also said like we're not a one one design fits all can you talk about any specific trends even within your product assortment, that's growing faster than than others.

Simeon Ari Gutman: Thank you. Thank you. Our next question is from the line of Simeon Gutman with Morgan Stanley; please go ahead. Hi, good morning, everyone.

Sure Yeah, I'd love to.

Yeah, I mean, I like I said before I think we're hitting hitting on all cylinders on their products.

Yeah, Yeah, obviously, the fun part of the business and consumers.

John P. Reed: Hey, John, I wanted to ask you about newness. You've touched on it a bit in your prepared remarks and even in some of the Q&A, putting your design hat on and looking across your product. And it's okay if you're biased.

Looking for new looks price looks for their homes and.

Gotten into.

A lot of products, especially in the wood categories that are brand new in upholstery categories, where things have gotten softer have gotten around her curvier.

John P. Reed: But I am curious about, you know, trends, where your product stands in terms of style and price point. You know, I heard you made some price adjustments. And I know you also said, like, we're not a, you know, one design fits all. Can you talk about any specific trends, even within your product assortment, that's growing faster than others? Sure. Yeah, I'd love to.

Now, what's the pennies it warmed up a lot.

And away from the dark green and so forth.

So hot few years ago, we saw those trends a few years ago and we can all over it.

And.

So yeah, well they walked through our store enhancing our sales. It's the new product is really whats getting our clients excited.

John P. Reed: Yeah, I mean, like I said before, I think we're hitting on all cylinders with our products. It's obviously the fun part of the business, because consumers are looking for new looks, fresh looks for their homes. And, you know, we've gotten into a lot of products, especially in the wood categories that are brand new and in the upholstery categories where things have gotten softer, have gotten rounder, and curvier. You know, woods have changed, they've warmed up a lot, they've gone away from the dark grays and so forth that were so hot a few years ago.

And so we continue to look at work on large collections that were that were going to launch in quite a few more in 2024.

So as far as the new products as well the margins are very strong on those.

You know, what's happening and where we want to be I don't want to be and I tell my.

Buyers and so forth it let's not be greedy and margin musket, our margins, where we can have a healthy.

Business long term.

Very profitable, but don't get so greedy that you know, we're gonna cut kind of half the clients out.

John P. Reed: We saw those trends a few years ago, and we've been all over them. So yeah, when we walk into our store and see our sales, it's the new product that's really getting our clients excited. And so we continue to look at work on large collections that we're going to launch and quite a few more in 2024. So as far as the new products are concerned, the margins are very strong on those. So, you know, we think our price is the way we buy things direct from the manufacturers, www.youtube.com.au, and our business keeps growing. So, yeah, the trends are great, you know. Again, things have gotten softer, curvier, you know. Anything we're doing that's in those types of shapes is doing very well, and I perceive that to continue certainly in 2024 and 2025. And then, maybe, one follow-up.

So.

Our prices the way, we buy things direct from the from the manufacturers.

Right from the factories right into our warehouse them from their right to the consumer you can't get a better business model of giving.

Clients, you know the best value us getting a great margins, but not being totally agree and.

You know it works.

Customers are happy they come back and they tell their friends.

Our business keeps growing.

So yeah.

The tons are great.

Again, thanks have gotten softer curvier.

Yeah anything we're doing that in those types of states are doing very well.

And I perceive that to continue certainly in the 'twenty 'twenty four and 'twenty five.

And then maybe one follow up Oh, Yeah. That's great. Thank you my follow up I think it's more for Don.

Simeon Ari Gutman: Oh, yeah, that's great. Thank you. My follow up question, I think it's more for Dawn.

Dawn Phillipson: It's got two parts. They're connected to some of the WMS and the disruption in the first quarter. The demand comps, I think, were running positive at the end of last year; correct me if I'm wrong. So I'm thinking about the anatomy of getting to this minus 20 or so that you're putting in that you're expecting for the first quarter, even with a negative high single digit in January, meaning wire. Is it just comparison-based? Why is there not enough?

It's got two parts, they're connected to some of the WNS and a disruption in the first quarter can you. The demand comps I think were running positive at the end of last year and correct me if I'm wrong. So I'm thinking about the anatomy of getting to this minus 20, or so that you're putting that you're expecting for the first quarter.

Even with a negative high single digits in January.

Meaning weren't wire. It just comparison base why is there not enough you know throughput from the.

Dawn Phillipson: Transcribed by https://otter.ai, Prior Demand Comps to get you to a better outcome, and then just related to this. You know, you have this ERP rollout; can you talk about that in terms of... Benefits and then any risks that could pose or, with the WMS, the biggest hurdle in terms of systems investment that could have created some type of disruption to your business. Thank you. So, you know, I would remind you that the demand comp has, you know, that's a clean calculation year over year. But from a comp basis, that is not a clean calculation year over year because the base of 2023 has backlog in it. So, there's still going to be a divergence between the demand comp and the comp number as we move through 2024 because of the backlog in 23. Once we clear 2024, and we hit 2025, those two will be more in tandem. So, there is still some disparity between them.

The prior demand comps to get you to a better outcome and then just related to this.

You know you have this ERP rollout can you talk about that in terms of you know.

Benefits and any risks that could pose or was the WNS. The biggest hurdle in terms of systems investments that could have created some type of disruption to your business. Thank you.

Sure. So I'm you know I would remind you that the demand comp has you know that's a that's a clean calculation year over year from a comp basis and that is not a clean calculation year over year, because the base of 2023 has backlog in at so they're still going to be a divergence between the demand comp in there.

Comp number as we move through 2024 because of the backlog in 'twenty three once we clear 2020 for them and we had 2025 those two will be more in tandem. So there is still some disparity there with.

Dawn Phillipson: With regard to the ERP, you know, I would just remind everyone, it is our manufacturing ERP. So, it is not some kind of retail ERP. So, we, you know, it has a lesser impact on the overall organization when it comes to, you know, it's not impacting deliveries, it's not impacting, you know, kind of the retail organizations day to day. So, there are some great benefits. We're going to have some increased visibility into costing, which is going to really give better visibility to the team. You know, the product teams as they're costing the product, and, you know, just some other operational benefits to the actual manufacturing team. So no, no significant risk to the overall organization, I would say.

With regard to the ERP you know I I would just remind everyone. It is our manufacturing ERP. So it is not kind of the if not the retail ERP. So we you know it has a lesser impact on the overall organization. When it comes to you know its not impacting deliveries, it's not impacting you know.

Kind of the the retail organizations day to day, some great benefits, we're going to have some increased visibility to you costing which is going to really give them better visibility to the teams.

You know the product teams as they were costing product and I'm you know just some other operational benefits to the actual manufacturing team. So no no significant risk to the overall organization I would say, we're closely monitoring it and managing it but it's it's not a meeting.

Dawn Phillipson: We're closely monitoring it, managing it, but it's not meaningful from the point of view of, you know, no meaningful risk that we're anticipating. Thanks, everyone. Thank you. Thank you. Our next question is from the line of Robbie Holmes with Bank of America. Please go ahead. Hi, and this is Maddie Cech on behalf of Robby Owens.

Fall from Yeah, no meaningful risk that we're anticipating.

Okay. Thanks, everyone. Good luck.

Thank you.

Thank you our.

Next question is from the line of Robbie <unk> with Bank of America. Please go ahead.

Hi, This is matti check on for Robbie Thanks for taking our questions. So I think you called out that showroom openings should be heaviest in Q2, Q3, Q and I just wanted to ask specifically on the outlets you expect three openings. This year, it's still a pretty small part of the overall showroom count, but how is demand response to.

Robby Holmes: So, I think you called out that showroom openings should be heaviest in 2Q3Q, and I just wanted to ask specifically about the out.. expect three openings this year. It's still a small part of the overall showroom count, but how has demand responded to these outlets? How did the economics compare to the traditional showroom? And where are you, how are you deciding where?

These outlets how do the economics compare to the traditional showrooms and where are you how are you deciding where to put these.

John P. Reed: Sure, yeah, I mean, as we have more than doubled their business in the last couple of years, we just haven't kept up with the, you know, the outlet growth. So this is really just balancing out what we needed to keep up with, you know, the output product. The outlet product is, you know, sold at a substantial discount.

Yeah.

Sure Yeah, I mean, absolutely.

More than double our business in the last couple of years.

We just haven't kept up with with.

Yeah.

The outlet growth. So this is really just balancing out.

What we needed to keep up with you know keep up with the outside product.

That product is yes.

Sold at a substantial discount.

John P. Reed: So certainly, the economics are not as strong as a traditional store, but if you look at it as a percent of sales, we're actually not adding anywhere near what we need to add compared to how much our sales growth has happened, which means we're actually doing a better job delivering things, fewer people are returning things, and so forth. So we think we're in good shape once we get these three open, you know, just steady things out so we can... And then, as far as locations go, I believe one is in Colorado, one is in Pittsburgh, and one is in Kentucky. And all three are opening in the second quarter.

So certainly the economics are not.

As strong as it was as a traditional store, but if you look at it as a percent of sales, where we're actually not having anywhere near what we need to add compared to how much our sales growth has happened.

Which means we're actually doing a better job delivering things.

People are returning things and so forth so.

We think we're in good shape once we get these three open.

Just steadily steady things out so we can.

So we can move on.

And then as.

As far as locations I believe once in Colorado ones in Pittsburgh and one's in Kentucky.

And all three are opening I think second quarter.

John P. Reed: I believe you. Thank you. Thank you. That's really helpful.

I believe.

Thank you. Thank you that's really helpful and now okay.

John P. Reed: And then... My last question is about, maybe, promotions. You dialed back on promotions and margins in November. What are some of your assumptions for the promotional environment in 1Q and for the rest of the year, maybe just high-level? Yeah, I mean, high level. We haven't really changed our strategy from what it has been. You know, we certainly run summer promotions at certain times of the year. But we're not looking to change that dramatically at this point. You know, we have plenty of levers to turn on if we need to, but

My last question is about maybe promotions you dialed back on promotions, which helped margins in November what are some of your assumptions for the promotional environment and <unk> and the rest of the year, maybe just high level.

Yes, I mean high level, we haven't really changed our strategy.

It has been.

We certainly run some promotions at certain times of the year, we're not looking to change that dramatically at this point.

We have plenty of levers to turn it on if we need to but.

John P. Reed: You know, right now, it's going to be as it has been the last year or so. And, you know, we do some promotions, we'll do, whatever's coming up next Memorial weekend, things like that. Well, that's already happened, hasn't it?

Right now it's going to be it has this as it has been in the last year or so and you know.

We do some promotions will jewelry.

Whatever's coming up next.

L'oreal weekend things like that.

That's already happened.

John P. Reed: Yeah. So I know it's coming up. But anyway, so I don't know, on and off, we'll do some promotions, but everything is typical of what we do. Got it about right, Ken. Yeah, no, I would agree with that. And Maddie, hi, good morning.

So.

It's coming up but anyway.

So I don't know on and off we'll do some do some promotions, but it.

Everything is typical of what we have been doing.

Got it about right John.

Yeah, No I would agree with that and Maddie. It's nice good morning, what I would add and this is something that we spoke to on the last call as well to John's point, our strategy to promotions hasn't changed what we have been doing now is really focusing on our messaging our promotions. So we spoke about really focusing.

Jennifer E. Porter: What I would add, and this is something that we spoke to on the last call as well. To John's point, our strategy for promotions hasn't changed. What we have been doing, though, is really focusing on messaging promotion. So we spoke about really focusing on how we arrange our sales section on our website, for example, how we speak about promotions, really, you know, paying close attention to those elements. But I echo John's point about the overall promotional approach has not changed. Thank you for your help.

And how we have thought our sales section on our website. For example, how we speak to promotions really you know paying close attention to those elements.

But oh John's point about the overall promotional approach has not changed.

That's super helpful. Thank you.

Dawn Phillipson: Thank you. Our next question is from the line of Phillip Blee with William Blair. Please go ahead. Hi, good morning.

Thank you.

Our next question is from the line of Philip <unk> with William Blair. Please go ahead.

Yeah.

Phillip Blee: Thanks for taking my question. You guys have done a lot of remodels and relocations over the past few years and plan to continue in 2024. And you've elevated your store experience, which is clearly having a nice tailwind on demand. Can you talk about how many of your showrooms are still in, maybe, a legacy format? And what kind of lift do you see following a remodel or a reload?

Hi, good morning, Thanks for taking my question.

You guys have done a lot of Remodels and relocations over the past few years and plan to continue in 2024.

Elevated your store experience, which is clearly having a nice tailwind on demand can you talk about how many of your showrooms are selling maybe a legacy format and what kind of lift you see following a remodel or reload. Thank you.

John P. Reed: Yeah, Don, I don't have specific numbers, but I think we're about halfway to where we want to be. Does that sound about right, John? Yeah, I think so. Yeah, so, you know, we're trying to do it again. We don't have a set schedule because a lot of this has to do with leases, landlords, you know, do we want to move the store, do we want to renovate it? when you move it down the street, across the hall, whatever.

Yes, Dan I don't have specific numbers, but I think.

We're about halfway to where we want to be that sounds about right John.

Yeah, I think so.

Yeah. So.

We're trying to do.

Again, we don't have a set schedule because.

Let us has to do with with leases landlords you know.

Do we want to move to historically one of the renovated.

When you move it down the street across the hall or whatever so we don't have a set thing but we are.

John P. Reed: So we don't have a set thing, but we are absolutely committed to remodeling existing stores that are doing well in good areas that we know we want to stay in. And it definitely helps. We do see a lift in sales. It's a long-term investment. You know, the last thing we want to do is get stale, like you've all seen many retailers get to a point where it's too late to remodel because there are too many of them to remodel, and you just can't do them. So we're staying ahead of that curve. Big time.

Absolutely committed to to remodel it.

Existing stores that are doing well in good areas. Yeah. We know we want to stay stay at and.

And.

It definitely helps with we do see a lift in sales.

It's a long term investments.

The last thing we wanted to do was get stale like like you've all seen many retailers have gotten to a point, where it's too late to remodel because there's too many of them to remodel.

And you just can't do them. So we're staying ahead of that curve.

John P. Reed: We think better than anybody, certainly any of our competitors that I see in remodeling, staying fresh. Thank you for watching. Sets us up for a great, great, great future for many years to come. Okay, great, that's very helpful. And then, Dawn, maybe a question on inventory. It was down 11% at the end of the year on a dollar basis.

Next time, we think better than anybody certainly any of our competitors that I see.

And remodeling staying fresh staying appropriate and it really really really helps our clients come in again were driven by a female.

Clients and.

I guess, so inspired whom both females males. They got so inspired when they walk into our stores and they say Oh My gosh, what did you do the store.

Dawn Phillipson: Can you maybe talk about how much freight and price action versus unit driven? And then how you feel about your positioning heading into 2024, particularly around some of the newness? And then should we expect more muted inventory growth through the first half of the year? Yeah, so we feel great that the price actions that we took in June of 2023 really positioned us pretty well as we exited 2023. There's still a little bit to clear through and have delivered, you know, in the first half, which we talked about. So, you know, I think we feel that freight has largely container costs have largely normalized in the inventory relative to kind of the spikes that we saw in 21 and 22.

Oh, I want my home to look and.

That's very refreshing NSS and stuff for the future I mean, that's the biggest thing that's what's up for a great great great future for many years to come.

Okay, Great. That's very helpful. And then Don maybe a question on the inventory was down 11% at the end of the year on a dollars basis can you maybe talk about how much is raising price action versus unit driven and then how you feel about your positioning heading into 'twenty Q4, particularly around some of the newness.

And then should we expect more muted inventory growth through the first half of the year. Thank you.

Yeah. So you know we feel great that the price actions that we took in June of 2023 really positioned us pretty well as we accident 2023, there's still a little bit to clear through and and have delivered them you know in the first half, which we talked about it. So yeah I think we feel good.

Dawn Phillipson: So feeling good about kind of where the inventory is sitting, as we continue to clear through those price action fees in the first half of this year, and then really excited for the newness that is going to be launched or that was launched earlier this year, and that, you know, we have a fall launch as well. And I would say that the team is taking a very responsible approach to buying into that newness. We spoke last quarter about how, you know, that backlog that is normalizing slightly higher than it was pre-pandemic, right? As we think about it, how do we buy into newness?

Freight has largely container costs have largely normalized in the you know in the inventory relative to kind of the spikes that we saw in 'twenty, one and 'twenty two so feeling good about kind of where the inventory is sitting them as we continue to clear through those price actions. He is in the first half of this year and then I'm really excited.

For the newness that we're that is gonna be launched or that was launched earlier. This year and that you know we have a fall launch as well and I would say that the team is taking a very responsible approach with buying into that newness. We spoke last quarter around how you know that backlog that is normalizing slightly higher.

Dawn Phillipson: And, you know, can we make sure that we're getting a really solid read on the business before making meaningful purchases into that product? And we know that clients are willing to wait a little bit longer lead times for that newness because it's exciting, it's different, it's unique. So, I feel good about where we'll be positioned in the next quarter and, you know, the buy plan for the year. Thank you. That's a lot.

Here than it was pre pandemic right as we think about how do we buy into newness and can we make sure that we're getting a really solid read on the business before making meaningful purchases into into that product and we know that clients are willing to wait a little bit longer lead times for that newness, because it's exciting it's different it's unique so.

And so I feel good about you know where we'll be positioned you know they pay in the next quarter and I'm you know the the buy plan for the year.

Great. Thank you best of luck.

Dawn Phillipson: Thank you. Thank you. Our next question is from the line of Cristina Fernandez with the Telsey Advisory Group. Please go ahead.

Yeah.

Thank you our.

Next question is from the line of Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Cristina Fernandez: Good morning and congratulations on a good quarter. I wanted to ask about the special dividend and the decision to pay that. Well, should we think of this as just one time?

Good morning, and congratulations on a good quarter I wanted to ask about the special dividend and the decision to paid that what shall we think of this is one time and then going forward you know how do we you can see there.

John P. Reed: And then going forward, you know, how would you consider dividends, perhaps a regular dividend or share buyback? Sure. I can start.

Dividends.

Perhaps a regular dividend or a share buyback.

Sure I can start I mean, you know this is a onetime thing.

Dawn Phillipson: You know, this is a one-time thing. We have no plans to continue it on a consistent basis. You know, we've got a lot of cash. It's been great the last couple of years. You know, we very well planned out how much cash we're going to need this year, next year, the year after, and we thought we could do this. Thank you, future. I'm very happy to be able to do it. Dawn, I don't know if you have anything to add to that.

We have no plans to continue.

System faces.

Jay.

We've got a lot of it we've done the last couple of years.

You know very.

Very well planned out how much cash within our need.

This year next year the year after and we felt we could do this okay.

Okay.

In the future.

Very happy to vehicles.

Sometimes.

Don I don't know if you have anything to add to that.

John P. Reed: Yeah, I would just reiterate that the board was really pleased to be able to return capital to shareholders. And we know we just, we have a really strong balance sheet, we have a great cash position, the special dividend, which we are considering to be, you know, one-time in nature; we don't have plans to do anything additional in the future at this point in time. But, but, interestingly enough, we're in a very fortunate position to be able to pay a dividend, a special dividend, and still continue to invest very heavily in the business when it comes to new showroom expansion and some of these other strategic investments in the back office function.

Yeah, I would just reiterate that you know the board was really pleased to be able to return capital to shareholders and we know we just we have a really strong balance sheet with a great cash position.

The special dividend, which we are considering to be you know a onetime in nature. We don't have plans to do anything additional in the future at this point in time, but but you know we interestingly enough where it had been very fortunate position to be able to do a dividend a special dividend and still continues.

To invest very heavily in the business when it comes to new showroom expansion and some of these other strategic investments in the back office functions. So really really pleased with the performance that we've seen within the company and you know our ability to to return this value to shareholders.

Dawn Phillipson: So really, really pleased with the performance that we've seen within the company and, you know, our ability to return this value to shareholders. Thank you. And then my other question was on the price action queues. I know you can comment on the timing of the deliveries, but where are you as far as taking the orders from those queues?

Thank you and then my.

The other question was on the on the price actions Qs I know you can't comment on the timing of the library, but where are you as far as like taking the order some dose Qs you know what most have you kind of gotten through most of what you wanted to do or are there still more to go here in 2024.

Dawn Phillipson: You know, have you kind of gotten through most of what you wanted to do, or is there still more to go here in 2024? We've cleared through the majority of it from the demand perspective, the order taking perspective. So, you know, there's still a little bit left. And, you know, it's not meaningful.

We have cleared through the majority of it from the demand perspective, the order taking perspective. So you know there's still a little bit left them in and you know, it's it's not I wouldn't say, it's a meaningful so we're excited to get these kind of products delivered in clients' homes and then you know start to see some nice.

Dawn Phillipson: So we're excited to get these kinds of products delivered to clients' homes and then, you know, start to see some nice product costs and gross margin expansion sequentially in the back half. Thank you and best of luck for this year. Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Wendy Watson for her closing comments. Thank you, everybody, for participating in our call today, and we look forward to talking to you again next quarter. The conference of Arhaus has now concluded. Thank you for your participation. You may now disconnect your lines.

Product cost and gross margin expansion sequentially.

In the back half.

Thank you and that's what luck for this year.

Thank you.

Thank you.

Ladies and gentlemen, how's that there are no further questions I would now hand, the conference over to Wendy Watson for closing comments Wendy.

Thank you everybody for participating in our call today, and we look forward to talking to you again next quarter.

Thanks, everybody. Thank you.

The conference off our house has now concluded. Thank you for your participation you may now Goodbye Goodbye.

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