Q2 2024 Arhaus Inc Earnings Call

August 8, 2024

Good morning and welcome to the Arhaus second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal remarks.

Operator: All participants are in a listen-only mode. A question and answer session will follow the formal remarks.

Operator: Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal remarks. Please note that this call is being recorded, and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Wendy Watson, Senior Vice President of Investor Relations.

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.

Wendy Watson: Good morning, and thank you for joining the Arhaus second quarter 2024 earnings call. On with me today are John Reed, co founder, chairman, and chief executive officer, 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. If you have additional questions, please return to the queue.

Speaker Change: Please go ahead.

Wendy Watson: Good morning, and thank you for joining the Arhaus second quarter 2024 earnings call. On with me today are John Reed, co-founder, chairman, and chief executive officer, and Dawn Phillipson, chief financial officer.

Speaker Change: After prepared remarks, they will be joined by Jen Porter, our Chief Marketing and E-commerce Officer for the Q&A session.

Speaker Change: during q and a please limit to one question and one follow up if you have additional question please return to the queque

Speaker Change: We issued our earnings press release and our 10-Q for the quarter ended June 30, 2024, before market opened today.

Wendy Watson: Those documents are available on our Investor Relations website at ir.ourhouse.com. A replay of the call will be available on our website within 24 hours.

Operator: As a reminder, remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. Such forward-looking statements are made as of today's date.

Speaker Change: 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.

Speaker Change: for a summary of these risk factors and additional information.

Wendy Watson: 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.

Speaker Change: The forward-looking statements are made as of today's date.

Wendy Watson: 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 reconciliations. Now I'll turn the call over to John .

Wendy Watson: We issued our earnings press release and our 10-Q for the quarter ended June 30, 2024, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours.

John Reed: Good morning, everyone, and welcome to the Arhaus second quarter conference call. Our team delivered another quarter of solid operational execution, with several new showrooms opening, successful new product development, and important strategic investments made to support our long-term growth. On a two-year stack basis, demand-com growth increased 8.6% in the second quarter, and on a three-year stack basis, demand-comparable growth increased 31.1%. July's demand comp accelerated the second quarter trend with a high teens decline, resulting in a two year stack demand comp decline in the low double digits and a three year stack low double double digit demand comp increase.

John Reed: Good morning, everyone, and welcome to the Arhaus second quarter conference call.

Wendy Watson: 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. 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.

John Reed: our team delivered another quarter of solid operational execution with several new showverooms opening successful new product development and important strategic investments made to support our long-term growth

Wendy Watson: 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 reconciliations. Now, I'll turn the call over to John.

John Reed: In the second quarter, we delivered a net revenue of $310 million, net income of $22 million, and adjusted EBITDA of $40 million.

John Reed: Good morning, everyone, and welcome to the Arhaus second quarter conference call. Our team delivered another quarter of solid operational execution, with several new showrooms opening, successful new product development, and important strategic investments made to support our long-term growth. In the second quarter, we delivered net revenue of $310 million, net income of $22 million, and adjusted EBITDA of $40 million. During the quarter, we saw demand comparable growth soften to a decline of 3%.

Wendy Watson: During the quarter, we saw demand-comparable growth soften to a decline of 3%.

John Reed: On a two-year stack basis, demand comp growth increased 8.6% in the second quarter, and on a three-year stack basis, demand comparable growth increased 31.1%. We're very proud of our strong growth over the past several years and expect to continue to grow our demand comps in the mid single digits in the long term, even as there is near-term contraction related to the macro environment. July's demand comp accelerated the second quarter trend with a high teens decline, resulting in a two year stack demand comp decline in the low double digits and a three year stack low double double digit demand comp increase.

Wendy Watson: on a two -year stack basis demand cal growth increased eight point six percent in the second quarter and on a three -year stack basis demand comparable growth increased thirty- one point one percent

Wendy Watson: we're very proud of our strong growth over the past several years and expect to continue to grow our demand compps mid-single digits in the long term even as there as near-term contraction related to the macro environment

Wendy Watson: July's demand comp accelerated the second quarter trend with a high teens decline, resulting in a two-year stack demand comp decline in a low double digits and a three-year stack low double digit demand comp increase.

John Reed: Demand metrics in the second quarter were mixed. Our average order value and comp traffic were down. Conversions were down slightly year over year but up sequentially from the first quarter. However, transactions in the second quarter were positive, and orders over $5,000 and $10,000 continue to grow nicely. We also saw solid growth in new customers in the second quarter, and total traffic was up. Total demand in the second quarter increased mid-single digits.

Wendy Watson: Demand metrics in the second quarter were mixed.

Wendy Watson: Our average order value and comp traffic were down.

Wendy Watson: conversions were down slightly a year-over year

Wendy Watson: but upsequentially

Wendy Watson: from the first quarter.

Wendy Watson: transactions in the second quarter.

Wendy Watson: were positive and orders over $5,000 and $10,000 continued to grow nicely. We also saw a solid growth in new customers in the second quarter and the total traffic was up.

Wendy Watson: Total demand in the second quarter increased mid-single digits. We continue to be very pleased with the new showroom performance and our showroom expansion plans.

John Reed: We continue to be very pleased with the new showroom performance and our showroom expansion plan. Dawn will discuss in more detail later in the call, but given the current consumer backdrop and industry trends, as well as our own demand comp trends over the past three months, we are adjusting our expectations for the second half of the year and lowering our full year outlook. While our net revenue and earnings outlook are not what we originally expected for the second half of this year, I am confident that we have the right strategy, the right product, and the right marketing to continue to successfully grow over time.

Don: don will discuss in more detail later in the call but given the current consumer backdrop in industry check trends as well as our own demand comp trends over the past three months we are adjusting our expectations for the second half of the year and lowering our full year outlook

Speaker Change: While our net revenue and earnings outlook are not what we originally expected for the second half of this year, I am confident that we have the right strategy, the right product, the right marketing to continue to successfully grow over time.

John Reed: We have extensive experience navigating cyclical consumer environments. Marketing and showroom. We will continue to advance our growth strategy by enhancing and elevating our product assortment and opening their 100th location. I want to thank our teams across Arhaus for their effort in achieving this important milestone in our journey.

John Reed: We have extensive experience navigating cyclical consumer environments, where we maintain focus on our expense control while our strong debt-free balance sheet allows us to continue to execute our strategic growth plan. 30 times of economic softening. We have and will continue to invest in product, marketing, and showroom. As we have done before, we are confident that this approach will enable us to emerge from this cycle in an even stronger position.

Speaker Change: We have extensive experience navigating cyclical consumer environments, where we maintain focus on our expense control while our strong debt-free balance sheet allows us to continue to execute our strategic growth plans.

Don: three times of economic softening we have and will continue to invest in product

Don: marketing and showrooms as we have done before we are confident that this approach will enable us to emerge from this cycle in an even stronger position

John Reed: We will continue to advance our growth strategy by enhancing and elevating our product assortment, expanding our showroom base, increasing brand awareness, and making the strategic investments necessary to upgrade our infrastructure and improve our business tools to support this growth. Our growing showroom footprint with two primary formats continues to drive brand awareness and our long-term growth. We have opened eight new showrooms in six states so far this year and opened their 100th location.

Don: we will continue to advance our growth strategy by enhancing and elevating our product assortment

Don: expanding our showroom base, increasing brand awareness, and making the strategic investments necessary to upgrade our infrastructure and improve our business tools to support this growth.

Don: our growing showroom footprint with two primary formats continue to drive brand awareness in our long-term growth we have opened eight new showrerooms and six states so far this year

John Reed: I want to thank our teams across Arhaus for their effort in achieving this important milestone in our journey. Just since late May, we have opened three incredible new showrooms, which are large format in fabulous centers in California, The Grove in Los Angeles, the Beacon La Costa in Carlsbad, and Stanford Shopping Center in Palo Alto. Today we have 83 traditional showrooms, only halfway through our goal of 165 traditional showrooms. Our 165 traditional showrooms goal is based on

Speaker Change: and opened their 100th location. I want to thank our teams across Arhaus for their effort in achieving this important milestone in our journey.

Speaker Change: just since late may we have opened three incredible new show rooms which are our large format in fulular centers in california the grove in los angeles the beacon laaccoa in kcarlsbad and stanford shopping center in pollo volta

Speaker Change: Today we have 83 traditional showrooms, only halfway through our goal of 165 traditional showrooms. Our 165 traditional showrooms goal is based on very attractive markets we have identified through our experienced real estate team.

John Reed: Our 165 traditional showroom goal is based on. We perform robust analytic work, and our location list and have more opportunities than we choose to execute in any given year, slated to open later this year. As I mentioned earlier, we are pleased with the performance of our new showrooms and our new showroom economics. The top two ways we increase brand awareness are through opening new showrooms and recommendations from friends and family.

John Reed: Very attractive markets we have identified for our experienced real estate team. We perform robust analytic work, and our location list and have more opportunities than we choose to execute in any given year. Our model is successful in a variety of markets and across all geographies, allowing us the opportunity for a significant expansion. In short, we couldn't be more excited about the new location opportunities ahead of us. As you know, we are also thrilled with our smaller design studio concept, and last week, we opened our second design studio of the year in Peachtree City, Georgia. Our skilled real estate team has identified 100 locations for design studios.

Don: we perform robust analytic work

Don: and our location list and have more opportunities that we choose to execute in any given year.

Don: our model is successful in a variety of markets in across all geographies

Don: allowing us the opportunity for a significant expansion. In short, we couldn't be more excited about the new location opportunities ahead of us.

John Reed: And while we are early in our growth journey, with this footprint, we are incredibly pleased with the performance we've seen with design studios outperforming the balance of the chain. We are on pace to meet our showroom opening goal for 2024 with a design studio in the Lake Norman, North Carolina area and traditional showrooms in Oklahoma City and Corta Madera, California, slated to open later this year. As I mentioned earlier, we are pleased with the performance of our new showrooms and our new showroom economics.

Don: As you know, we are also thrilled with our smaller design studio concept.

Don: And last week opened our second design studio of the year in Peachtree City, Georgia.

Don: Our skilled real estate team has identified 100 locations for design studios, and while we are early in our growth journey, with this footprint, we are incredibly pleased with the performance we've seen, with design studios outperforming the balance of the chain.

Speaker Change: we are on page to meet our showroom opening goal for two thousand and twenty four with a design studio and the lake normmal north carolina area and traditional showrooms in oklahoma city in kartzadira california

Don: Slated to open later this year. As I mentioned earlier, we are pleased with the performance of our new showrooms in our new showrooms economics

John Reed: Moving on to our brand awareness, this is a significant opportunity as more and more potential clients become familiar with our house. The top two ways we increase brand awareness are through opening new showrooms and recommendations from friends and family. From our nearly 40 years in the industry, we generate strong recommendations from friends and family because of the factors that set us apart in the premium home furnishing industry. Our exceptional product and the value propositions it represents, the unique artisan nature of the aesthetics, and the time we take to understand our clients' wants and needs in their homes and match that with our livable luxury approach.

Speaker Change: Moving to our brand awareness. This is a significant opportunity as more and more potential clients become familiar with our house. The top two ways we increase brand awareness are through opening new showrooms and recommendations from friends and family.

Speaker Change: from our nearly forty years and the industry we generate our strong recommendations from pr family because the factors that set us apart in the premium home burnishing the industry

Don: Our exceptional product and the value propositions it represents, the unique artisan nature of the aesthetics.

Don: the time we take to understand our clients once in needs in their homes and matching that with our elivable luxury approach

John Reed: The inspirational and aspirational experience in our showrooms, the ability to match our clients with our complimentary in-home designers, and the ease with which we work with our clients' own interior designers, and our focus on creating the best in-home experience in the industry. Speaking of product, we cannot wait for you to see our new fall collections, which will begin arriving in showrooms at the end of the month. At the same time, our fall catalog will start arriving in homes.

John Reed: The inspirational and aspirational experience in our showrooms, the ability to match our clients with our complimentary in-home designers, and the ease with which we work with our clients' own interior designers, and our focus on creating the best in-home experience in the industry. We continue to focus on offering our clients high design combined with the trademark comfort and functionality that define the livable luxury aesthetic. As we've communicated, we are focused on setting the foundation for long-term growth by improving operational efficiencies with upgraded infrastructure, technology, and processes.

Don: the inspirational of aspirational experience in our showrooms the ability to match our clients with our complementary and home designers and the ease with which we work with our clients own interior designers

Don: and our focus on creating the best in- home experience and the industry

Speaker Change: Speaking of products, we cannot wait for you to see our new fall collections.

Don: which will begin arriving in showrooms at the end of the month.

John Reed: It is a stunning catalog, and we have meaningfully increased circulation with prospects to drive brand awareness. We are introducing some incredible new collections that build on the success of some of our most popular pieces. You'll see stunning new wood finishes that we are very excited about, and new curved takes and wonderful fabrics in our upholstery collection.

Don: At the same time, our fall catalog will start arriving in homes. It is a stunning catalog and we have meaningfully increased circulation with prospects to drive brand awareness.

Speaker Change: we are introducing some incredible newy collections that build on the success of some of our most popular pieces yieldll he stunning you wouldod finishes that we are very excited about and new curve takes and wonderful fabrics in our uppulsetryy recollections

John Reed: We continue to focus on offering our clients high design combined with the trademark comfort and functionality that define the livable luxury aesthetic. On a strategic investment front, as we've communicated, we are focused on setting the foundation for long-term growth by improving operational efficiencies with upgraded infrastructure, technology, and processes. We are pleased to have implemented our new warehouse management system and continue to refine the opportunities for operational efficiencies. Further, over the next several months, we will begin to employ a new planning system that will help optimize our inventory purchases and forecast capabilities, a new ERP system, and our Upholstery Manufacturing Facility that will improve margin visibility and production capability.

Speaker Change: We continue to focus on offering our clients high design combined with a trademark comfort and functionality that define livable luxury aesthetics.

Speaker Change: On a strategic investment front, as we've communicated, we are focused on setting the foundation for long-term growth by improving operational efficiencies with upgraded infrastructure, technology, and processes.

John Reed: We are pleased to have implemented our new warehouse management system and continue to refine the opportunities for operational efficiencies. We are continuing to work hard to create a future scalable operating environment that will set the stage for more efficient growth. During the second quarter, we were able to bring in all of our containers using the contract rate, but we have paid some higher spot rates in the third quarter to ensure product availability for our clients. This impact is factored into a revised outlet for the remainder of the year.

Don: We are pleased to have implemented our new warehouse management system and continue to refine the opportunities for operational efficiencies.

Don: Further, over the next several months, we will begin to employ a new planning system that will help optimize our inventory purchases and forecast capabilities, and a new ERP at our upholstery manufacturing facility that will improve margin visibility and production capabilities.

John Reed: We are continuing to work hard to create a future scalable operating environment that will set the stage for more efficient growth. Turning now to supply chains for the update on ocean freight, all carriers are still avoiding the Red Sea.

Don: We are continuing to work hard to create a future scalable operating environment that will set the stage for more efficient growth.

John Reed: Intransit times are two weeks longer on average, which we are planning for in our inventory purchases. Spot rates have increased this summer due to container capacity shortages, early peak season shipping, and port congestion at the Asian point. During the second quarter, we were able to bring in all of our containers using the contract rate, but we have paid some higher spot rates in the third quarter to ensure product availability for our clients. This impact is factored into a revised outlet for the remainder of the year.

Speaker Change: Turning now to supply chains for the update on ocean freight. All carriers are still avoiding the Red Sea. Intransit times are two weeks longer on average.

Don: Which we are planning

Don: Spot rates have increased this summer from container capacity shortages, early peak season shipping, and port congestion at the Asian points.

Speaker Change: During the second quarter, we were able to bring in all of our containers using the contract rate, but have paid some higher spot rates in the third quarter to ensure product availability for our clients.

Speaker Change: This impact is factored into a revised outlet for the remainder of the year.

John Reed: Together with our vendors, not only did we learn to successfully navigate supply chain challenges during the pandemic, but we confirmed our geographically diverse supply chain is an advantage in our industry. I am pleased to say that, with our strong vendor relationship, we are also working together to improve our costs given the current environment. But don't mistake that for cost engineering. We do not reduce our quality to hit a margin target.

John Reed: Together with our vendors, not only did we learn to successfully navigate supply chain challenges during the pandemic, but we confirmed our geographically diverse supply chain is an advantage in our industry. I am pleased to say that, with our strong vendor relationship, we are also working together to improve our costs, given the current environment. But don't mistake that for cost engineering. We do not reduce our quality to hit a margin target.

Speaker Change: Together with our vendors, not only did we learn to successfully navigate supply chain challenges during the pandemic,

Speaker Change: But we confirmed our geographically diverse supply chain is an advantage in our industry. I am pleased to say that with our strong vendor relationship, we are also working together to improve our costs.

Speaker Change: Given the current environment, but don't mistake that for cost engineering. We do not reduce our quality to hit a margin to target

John Reed: Before I turn this over to Dawn to discuss our results and outlooks in more detail, I want to thank our teams for striving to provide industry-leading client service every day and for achieving key milestones in advancing our strategic growth initiatives in the first half of 2024. I'm extremely proud of all of you, and I'm excited to keep the momentum going. Now I'll turn it over to Dawn. Thank you.

Speaker Change: Before I turn this over to Dawn to discuss our results and outlooks in more detail, I want to thank our teams for striving to provide industry-leading client service every day and for achieving key milestones in advancing our strategic growth initiatives in the first half of 2024.

Dawn Phillipson: i'm ex extrely proud of all of you and i'm excited to keep the momentumm going now i'll turn it over to d

Dawn Phillipson: Thank you and good morning. The decrease in net revenue compared to the prior year was driven primarily by the non-recurrence of prior year abnormal backlog deliveries and the implementation of our warehouse management system in our Ohio distribution centers. As John mentioned earlier, our demand comp declined 3% in the quarter, with April's mid-single-digit increase more than offset by mid-single-digit declines in the balance of the quarter. First margin as a percent of net revenue decreased to 40.1%, driven primarily by lower product margins, higher showroom costs, and higher delivery and transportation costs. Corporate expenses will increase as we invest in our strategic initiatives to support and drive the growth of the business.

Dawn Phillipson: Thank you and good morning. Net revenue in the second quarter was $310 million, with a 7.1% comp decline. The decrease in net revenue compared to the prior year was driven primarily by the non-recurrence of prior year abnormal backlog deliveries and the implementation of our warehouse management system in our Ohio distribution centers. As John mentioned earlier, our demand comp declined 3% in the quarter, with April's mid-single-digit increase more than offset by mid-single-digit declines in the balance of the quarter.

Dawn Phillipson: Thank you and good morning. Net revenue in the second quarter was $310 million with a 7.1% comp decline.

Dawn Phillipson: the decrease in net revenue compared to the prior year was driven primarily by the nonrecurrence of prior year abnormal backlog deliveries and the implementation of our warehouse management systems in our ohio distribution centers

Dawn Phillipson: As John mentioned earlier, our demand comp declined 3% in the quarter, with April's mid-single-digit increase more than offset by mid-single-digit declines in the balance of the quarter.

Dawn Phillipson: Our second quarter gross margin decreased to $124 million, driven primarily by higher showroom costs as we continue to expand our footprint, lower product margin related to promotional activity, and increased delivery and transportation costs as we continue to invest in our final mile experience. First margin as a percent of net revenue decreased to 40.1%, driven primarily by lower product margin, higher showroom costs, and higher delivery and transportation costs. Second quarter SG&A expense increased $9 million to $95 million, primarily driven by higher selling expenses related to new showrooms.

John Reed: Our second quarter gross margin decreased to $124 million, driven primarily by higher showroom costs as we continue to expand our footprint, lower product margin related to promotional activity, and increased delivery and transportation costs as we continue to invest in our final mile experience.

Dawn Phillipson: first margin as a percent of net revenue decreased to forty point one percent driven primarily by lower product margin higher showroom cost and higher delivery and tranplortation cost

Dawn Phillipson: second quarter sgna expense increased nine million dollars to ninety-five million dollars primarily driven by higher selling expenses related to new show room increased corporate expenses as we invest in our strategic initiatives to support and drive the growth of the business

Dawn Phillipson: Corporate expenses as we invest in our strategic initiatives to support and drive the growth of the business, and higher warehouse expenses related to increased productivity in Dallas and the WMS implementation. Second quarter 2024 net income was $22 million. Adjusted EBITDA for the quarter was $40 million versus $64 million in the second quarter of 2023. Second quarter net revenue of $310 million dollars and adjusted EBITDA of $40 million dollars resulted in a 12.9% adjusted EBITDA margin in the quarter. As we reported this morning, we are lowering our full year outlook for 2024. However, our first half performance was consistent with our expectations.

Dawn Phillipson: and higher warehouse expense related to increased productivity in Dallas and the WMS implementation.

Dawn Phillipson: Second quarter 2024 net income was $22 million. Adjusted EBITDA for the quarter was $40 million versus $64 million in the second quarter of 2023. As we reported this morning, we are lowering our full year outlook for 2024. While our first half performance was consistent with our expectations, our second half net revenue and growth margin expectations have changed given the recent demand trend. We believe this is especially prudent in an election year, when the industry generally experiences slowing year-over-year sales growth in the second half of the year relative to the first.

Dawn Phillipson: Second quarter 2024 net income was $22 million.

Operator: A question and answer session will follow the fall 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.

Dawn Phillipson: adjusted ebitdain the quarter was forty million dollars versus sixty-four million dollars in the second quarter of twothousand y three

Dawn Phillipson: Second quarter net revenue of $310 million dollars and adjusted EBITDA of $40 million dollars resulted in a 12.9% adjusted EBITDA margin in the quarter.

Wendy Watson: I will now turn the call over to your host, Wendy Watson, Senior Vice President of Investor Relations. Please go ahead.

Dawn Phillipson: as we reported this morning we are lowering our full year outlook for two thousand and twenty four

Wendy Watson: Good morning, and thank you for joining the Arhaus Second Quarter 2024 earnings call. On with me today, are John Reed, co-founder, chairman, and chief executive officer, 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.

Dawn Phillipson: Our second half net revenue and gross margin expectations have changed given recent demand trends. We experienced softening demand comp starting in May, and the negative trend accelerated into July. We believe this is a reflection of the pullback by the home furnishings consumer that is starting to impact our business. In the past, we've seen that our client has typically been the last to stop shopping and the first to start again during times of economic downturn.

Dawn Phillipson: While our first half performance was consistent with our expectations, our second half net revenue and growth margin expectations have changed given recent demand trends.

Dawn Phillipson: We experienced softening demand comps starting in May and the negative trend accelerated into July. We believe this is a reflection of the pullback by the home furnishings consumer that is starting to impact our business.

Dawn Phillipson: In the past, we've seen that our client has typically been the last to stop shopping and the first to start again during times of economic downturn.

Operator: During Q&A, please limit to one question and one follow-up. If you have additional questions, please return to the Q.

Dawn Phillipson: Similar to how we've handled other cycles, our uncompromising strategy of new product introduction, marketing investment, and opening new showrooms will allow us to capture market share as the macro improves and as clients return to investing in their homes. Our outlook contemplates a low double-digit demand comp decline for the remainder of the year. We believe this is especially prudent in an election year, when the industry generally experiences slowing year-over-year sales growth in the second half of the year relative to the first. At the same time, as John mentioned, we are very excited about our fall product launches supported by a robust marketing campaign.

Dawn Phillipson: Our outlook contemplates a low double-digit demand comp decline for the remainder of the year.

Dawn Phillipson: We believe this is especially prudent in an election year, when the industry generally experiences slowing year-over-year sales growth in the second half of the year relative to the first half.

Dawn Phillipson: At the same time, as John mentioned, we are very excited about our fall product launches, supported by robust marketing campaigns.

Dawn Phillipson: As the midpoint of our range implies, we expect net revenue to decline approximately 1% in the second half of the year versus the second half of 2023. We now expect gross margin de-leverage in the second half of the year versus our prior expectation of gross margin inflection. In closing, I want to reiterate our strong commitment to our strategic growth strategy despite the current macro challenges. Our long-term growth targets have not changed.

Dawn Phillipson: As the midpoint of our range implies, we expect net revenue to decline approximately 1% in the second half of the year versus the second half of 2023. On the profitability side, we expect approximately 280 basis points of adjusted EBITDA de-leverage in the second half of 2024. We expect about 70% of the D leverage to come from SG&A, with the balance and growth margin. The majority of this de-leverage is from slowing demand and continued important growth investments.

John Reed: As the midpoint of our range implies, we expect net revenue to decline approximately 1% in the second half of the year versus the second half of 2023.

John Reed: On the profitability side, we expect approximately 280 basic points of adjusted EBITDA de-leverage in the second half of 2024.

Speaker Change: we expected about seventy percent of the de leverage to come from sna with the balance in birth margin

John Reed: the majority of this de leverage is from slowing demand and continued important growth investments

Operator: We issued our earnings press release and our 10Q for the quarter-ended June 30th, 2024, before market open today. Those documents are available on our Investor Relations website at ir.rhouse.com. A replay of the call will be available on our website within 24 hours.

Dawn Phillipson: Compared to our prior expectations for the second half, we now expect incremental deleverage from lower net revenue, which will impact both gross margin and SG&A. Additionally, our outlook allows for flexibility around promotions for the balance of the year, as well as factors in elevated rate costs. We now expect gross margin de-leverage in the second half of the year versus our prior expectation of gross margin inflection. For the third quarter of 2024, we anticipate net revenue in the range of $325 to $345 million. And at the midpoint, we expect adjusted EBITDA to decline approximately 130 basis points versus the prior year.

Operator: As a reminder, remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent annual report on form 10K and subsequent 10Qs. As such factors may be updated from time to time in our violence with the SEC.

John Reed: Compared to our prior expectations for the second half, we now expect incremental deleverage from the lower net revenue, which will impact both growth margin and SG&A.

Operator: 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.

John Reed: our outlook allows for flexibility around promotions for the balance of the year as well as factors in elevated rate costs

Operator: We will also refer to certain non-gap financial measures. And this morning's press release includes the relevant non-gap reconciliation.

John Reed: We now expect gross margin de-leverage in the second half of the year versus our prior expectation of gross margin inflection.

John Reed: Now I'll turn the call over to John.

John Reed: In the third quarter of 2024, we anticipate net revenue in the range of $325 to $345 million, and at the midpoint, we expect adjusted EBITDA to decline approximately 130 basis points versus prior year.

John Reed: Good morning, everyone, and welcome to the RHO's second quarter conference call. Our team delivered another quarter of solid operational execution. With several new showrooms opening, successful new product development, and important strategic investments, made to support our long-term growth. In the second quarter, we delivered a net revenue of $310 million net income of $22 million and adjusted EBITDA of $40 million. During the quarter, we saw demand comparable growth soften to a decline of 3%.

Dawn Phillipson: For all other details related to our 2024 outlook, please refer to our press release. In closing, I want to reiterate our strong commitment to our strategic growth strategy despite the current macro challenges. Our long-term growth targets have not changed. We continue to expect long-term total revenue growth in the high single digits as we grow showrooms in the mid to high single digit range, and comparable sales grow in the mid single digits. We will also continue to improve operational efficiency, driving adjusted EBITDA growth of low double-digits in the long term.

John Reed: For all other details related to our 2024 Outlook, please refer to our press release.

John Reed: in closing i want to reiterate our strong commitment to our strategic growth strategy despite the current macro challenges

John Reed: our long-term growth targets have not changed we continue to expect long-term total revenue growth in the high single digits as we grow showrooms in the mid- to high single-digit range and comparable sales grow mid-single digits

John Reed: we will also continue to improve operational efficiency driving adjusted ebitda growth of low double-digit long-term

Dawn Phillipson: Our debt-free balance sheet is a meaningful competitive advantage that allows us to make responsible investments to build on our share gains in the highly fragmented $100 billion premium home furniture market. We continue to navigate the current environment from a position of strength, and we believe we are well positioned to maintain our client-first service and drive value for all stakeholders. This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we are happy to take your questions.

John Reed: Our debt-free balance sheet is a meaningful competitive advantage that allows us to make the responsible investments to build on our share gains in the highly fragmented $100 billion premium home furniture market.

John Reed: On a two-year stack basis, demand-com growth increased 8.6% in the second quarter, and on a three-year stack basis, demand comparable growth increased 31.1%. We're very proud of our strong growth over the past several years, and expect to continue to grow our demand-coms mid-single digits in the long-term, even as areas near-term contraction related to the macro environment. July's demand comp accelerated the second quarter trend with a high teens decline, resulting in a two-year stack demand comp decline in a low double digits and a three-year stack low double digit demand comp increase.

John Reed: Demand metrics in the second quarter were mixed. Our average order value and comp traffic were down, conversions were down slightly a year over a year, but up to sequentially from the first quarter. Transactions in the second quarter were positive and orders over $5,000 and $10,000 continued to grow nicely. We also saw a solid growth in new customers in the second quarter and the total traffic was up. Total demand in the second quarter increased mid-single digits. We continue to be very pleased with the new showroom performance and our showroom expansion plans.

John Reed: We continue to navigate the current environment from a position of strength, and we believe we are well positioned to maintain our client-first service and drive value for all stakeholders.

Speaker Change: This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we are happy to take your questions.

Operator: 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 queue. You may press star and 2 if you would 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 key.

Operator: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press the star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Speaker Change: 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.

John Reed: Dawn will discuss in more detail later in the call, but given the current consumer backdrop and industry trends, as well as our own demand comp trends over the past three months, we are adjusting our expectations for the second half of the year and lowering our full-year outlook. While our net revenue and earnings outlook are not what we originally expected for the second half of this year, I am confident that we have the right strategy, the right product, the right marketing to continue to successfully grow over time.

John Reed: A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue.

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

Operator: Ladies and gentlemen, we request you to limit yourself to one question and one follow-up question. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

John Reed: Ladies and gentlemen, we request you to restrict to one question and one follow-up question.

John Reed: ourfirst question comes from the line of semon gutman with morgan stanley please go ahead

Simeon Gutman: Hi everyone. I wanted to ask first just the technical on the fourth quarter back into the comp. It looks like it's down mid-teens. It's just straight math, but I want to make sure that that's correct.

John Reed: We have extensive experience navigating cyclical consumer environments where we may maintain focus on our expense control while our strong debt-free balance sheet allows us to continue to execute our strategic growth plans. During times of economic softening, we have and will continue to invest in product marketing and showrooms. As we have done before, we are confident that this approach will enable us to emerge from this cycle in an even stronger position. We will continue to advance our growth strategy by enhancing and elevating our product assortment, expanding our showroom base, increasing brand awareness, and making the strategic investments necessary to upgrade our infrastructure and improve our business tools to support this growth.

semon gutman: Hi everyone. I wanted to ask first just a technical on the fourth quarter backing into the comp.

Speaker Change: It looks like it's down mid-teens. It's just straight math, but I want to make sure that that's correct and then

Simeon Gutman: And then the summer swoon, I guess that's occurred. Can you talk about that? Has there been a real change in demand? Has it been, I guess, customers may be deferring purchases? And anything you can talk about product categories? Was it outdoor? That's heavy, or it's all the indoor and fall purchases that customers have stopped buying?

Speaker Change: The summer swoon, I guess, that's occurred, can you talk about...

Speaker Change: Has it been a real change in demand? Has it been, I guess, customers may be deferring purchases and anything you can talk about, product categories. Was it outdoor that slowed or it's all the indoor and fall purchases that customers have stopped buying?

John Reed: Yeah, good morning, Simeon. John Reed here.

Speaker Change: yes first of all i'm in at last part of that question now we've seen that we've seen them

Speaker Change: Products, it hasn't been a specific category whatsoever.

Speaker Change: It's kind of just been across the board. You know, we're seeing

John Reed: Our growing showroom footprint with two primary formats continue to drive brand awareness and our long-term growth. We have opened eight new showrooms in six states so far this year and opened their 100th location. I want to thank our teams across our house for their effort in achieving this important milestone in our journey. Just since late May, we have opened three incredible new showrooms which are our large format in fabulous centers in California.

John Reed: Yeah, first of all, and the last part of that question. Now, we've seen the product; it hasn't been a specific category whatsoever. It's kind of just been across the board. You know, we're seeing, we're seeing nice traffic in our stores. People are just, you know, taking a little break right now from buying as much as they had been. You know, business has been so strong for so long, and we're still buying growing leads.

Speaker Change: We're seeing nice traffic in our stores, people are just, you know, taking a little break right now from buying as much as they had been.

John Reed: ourbusiness has been so strong for so long and

John Reed: We're still buying, growing leads. Our interior designers are still very, very busy. So there really hasn't been a huge change in that. It's just, you know, it seems like the summer blues and people are traveling so much. Our customers are certainly.

John Reed: Our interior designers are still very, very busy. So there really hasn't been a huge change in that. It just seems like the summer blues and people are traveling so much. Our customers are certainly saying that they're taking a little break from what they had been.

Simeon Gutman: that they're taking a little break from what they were doing.

John Reed: The Grove and Los Angeles, the Beacon LaCosta in Carlsbad, and Stanford Shopping Center in Palo Alto. Today, we have 83 traditional showrooms only halfway through our goal of 165 traditional showrooms. Our 165 traditional showrooms goal is based on very attractive markets. We have identified through our experience real estate. We perform robust analytic work in our location list and have more opportunities that we choose to execute in any given year. Our model is successful in a variety of markets and across all geographies, allowing us to be up to you for significant expansion.

Speaker Change: that they're ta a little break from from what they had better

John Reed: And then, if I can sneak in a follow-up, I think the press release mentions promotional activity and maybe the first time it's been written, might have talked about it on calls, but talk about the backdrop and then your approach to it and how much you're waiting in the fall, you have a new product coming, and how much of the gross margin is also promotions for the back half. Thank you.

Speaker Change: And then, if I can sneak in a follow-up, I think the press release mentions promotional activity. It may be the first time it's been written. We might have talked about it on calls, but talk about the backdrop and then your approach to it and how much you're wading in in the fall. You have a new product coming.

Simeon Gutman: and how much of the gross margin is also promotions for the back half. Thank you.

Speaker Change: and how much of the gross margin is also promotions for the back half. Thank you.

John Reed: Sure, I can take part of that, and Jen can as well. Yeah, the back half of our product lineup is unbelievable. We're very, very excited about it. We think it's certainly the strongest in the industry. And, you know, I've been through these times. We all have for quite a while, ups and downs and so forth.

John Reed: Sure. I can take part in that, and Jen can as well.

Speaker Change: Sure, I can take part of that and Jen can as well. Yeah, the back half, our product lineup is unbelievable. We're very, very excited about it. We think it's certainly the strongest in the industry.

John Reed: Yeah, the back half, our product lineup is unbelievable. We're very, very excited about it. We think it's certainly the strongest in the industry. And, you know, I've been through these times. We all have for quite a while, ups and downs and so forth.

John Reed: In short, we couldn't be more excited about the new location opportunities ahead of us. As you know, we are also thrilled with our smaller design studio concept and last week opened our second design studio of the year in Peach Tree City, Georgia. Our skilled real estate team has identified 100 locations for design studios and while we are early in our growth journey with this footprint, we are incredibly pleased with the performance we've seen with design studios outperforming the balance of the chain.

Speaker Change: And, you know, I've been through these times. We all have for quite a while, ups and downs and so forth.

John Reed: And, you know, the way our strategic plan has always been is that, you know, people pull back in times like this if their business is bad. We kind of do the opposite. We accelerate our new product, our excitement, and the looks in the stores, refreshing them. We're bringing a lot of color into the stores. We're doing things that really excite the customer because that's what they want. They want exciting products. They want exciting visits and experiences. And, you know, if we keep that going, people will come back, and we really win when business comes back. We've done that every time for 36 years now.

John Reed: And, you know, the way our strategic plan's always been is that, you know, people pull back in times like this if their business is bad. We kind of do the opposite. We accelerate our new product, our excitement, and the looks in the stores, refreshing them. We're bringing a lot of color into the stores. We're doing things that really excite the customer because that's what they want. They want exciting products. They want exciting visits and experiences. And, you know, if we keep that going, people will come back, and we really win when business comes back. We've done that every time for 36 years now.

Speaker Change: the way our strategic plans always been is people

Speaker Change: Pull back in times like this if their business is bad We kind of do the opposite. We accelerate our new product, our excitement, the looks in the stores, refreshing them up We're bringing a lot of color in the stores We're doing things that really excite the customer because that's what they want

Speaker Change: They want exciting products. They want exciting visits, experiences. And, you know, if we keep that going, people come back and we really win when business comes back. We've done that every time for 36 years now.

John Reed: We are on pace to meet our showroom opening goal for 2024 with a design studio in the Lake Norman, North Carolina area and traditional showrooms in Oklahoma City and Cartamavera, California. So I have to open later this year. As I mentioned earlier, we are pleased with the performance of our new showrooms and our new showrooms economics.

Jennifer Porter: Do you have anything to add to that? Yeah. Hi Simeon.

Jennifer Porter: Jen, do you have anything to add to that? Yeah. Hi, Simeon.

Jennifer Porter: Just to add a little bit more color to that, you know, as you heard, we did get more promotional in Q2 than we were in the past. You know, as we've been speaking for the last, you know, probably almost two years now, we've definitely seen that heightened promotional activity out there from our peers. I think one of the really, you know, interesting things is that it's been a really tough macro environment out there for the last year and a half. We've been hearing a lot of our peers really having to address that. And we've really been an outlier to that.

Speaker Change: Do you have anything to add to that? Yeah. Hi, Simeon. Just to add a little bit more color to that, you know, as you heard, we did get more promotional in Q2 than we were being in the past.

John Reed: Moving to our brand awareness, this is a significant opportunity as more and more potential clients become familiar with our house. The top two ways we increase brand awareness are through opening new showrooms and recommendations from friends and family. From our nearly 40 years in the industry, we generate our strong recommendations from friends and family because the factors that set us apart in the premium home furnishing industry. Our exceptional product and the value propositions that represents the unique artisan nature of the aesthetics.

Simeon: You know, as we've been speaking the last, you know, probably almost two years now, we've definitely seen that heightened promotional activity out there from our peers. I think one of the really, you know, interesting things is...

Speaker Change: You know, it's been a really tough macro environment out there for the last year, year and a half. We've been hearing a lot of our peers really, you know, having to address that. And we've really been an outlier to that.

Jennifer Porter: So, you know, it's definitely something that we've been monitoring, and we're going to be continuing to monitor. As Dawn mentioned, the guide for the rest of the year allows us to be promotional as we see what happens going into fall and Q4. But just echoing, you know, what John said, we are really, really excited about our fall launch coming here in just a few weeks. A couple of weeks ago, at the end of July, we did a sneak preview of some of our fall products, and we're really pleased with the marketing engagement that we saw from consumers there.

Speaker Change: So, you know, it's definitely something that we've been monitoring, we're going to be continuing to monitor. As Dawn mentioned, the guide for the rest of the year allows us...

Speaker Change: to be promotional.

Dawn Phillipson: we see what happens going into fall and q four but just echoing you what john said we are really really excited looking at our full la unch coming here just a few weeks

John Reed: The time we take to understand our clients once and needs in their homes and matching that with our livable luxury approach. The inspirational aspirational experience in our showrooms, the ability to match our clients with our complimentary in-home designers and the ease with which we work with our clients, own interior designers, and our focus on creating the best in-home experience in the industry.

Speaker Change: a coupleof weeks back the end july we did neque preview some of our fall products and we're really pleased withthe marketting engagement that we saw from consumers there you know we're seebeing some positive elements we're seeing really nicetraffic to the website we're see engage ment of marketing we're excited about the products we're definitely seeing you know for the lower traffic and stores pollowero vales stores and like so that's something in q two we're also off again really positive strong comp last year in may and june so you know we're looking at that

Jennifer Porter: And we're really pleased with the marketing engagement that we saw from consumers there. You know, and we're seeing some positive elements. We're seeing really nice traffic to the website. We're seeing engagement with marketing. We're excited about the product. We're definitely seeing, you know, lower traffic in stores, and lower order values in stores than we'd like. We saw that softening in Q2. We're also up against really positive, strong comps last year in May and June.

Jennifer Porter: You know, and we're seeing some positive elements. We're seeing really nice traffic to the website. We're seeing engagement with marketing. We're excited about the products. We're definitely seeing, you know, lower traffic in stores, and lower order values in stores than we'd like. We saw that softening in Q2. We're also up against really positive, strong comps last year in May and June. So, you know, we're looking at that acceleration of a decline into July quite a bit.

John Reed: Speaking of product, we cannot wait for you to see our new fall collections, which will begin arriving in showrooms at the end of the month. At the same time, our fall catalog will start arriving in homes. It is a stunning catalog and we have meaningfully increased circulation with prospects to drive brand awareness. We are introducing some incredible new collections that build on the success of some of our most popular pieces. You'll see stunning new wood finishes that we are very excited about and new curve takes and wonderful fabrics in our poll tree collections. We continue to focus on offering our clients high-design combined with trademark comfort and functionality that define livable luxury aesthetics.

Jennifer Porter: So, you know, we're looking at that acceleration of a decline into July quite a bit. But, you know, there's a lot of positive things coming forward to fall. And as Dawn mentioned, we are ready and able to be more promotional if we need to be. But we are also looking at all those levers we can pull in terms of increasing our marketing spend, making sure the fall product gets out to stores, continuing to open up our showrooms, and really positioning us to be there, you know, when this cycle turns around.

Jennifer Porter: But, you know, there's a lot of positive things coming forward this fall. And as Dawn mentioned, we are ready and able to be more promotional if we need to be. But we are also looking at all those levers we can pull in terms of increasing our marketing spend, making sure the fall product gets out to stores, continuing to open up our showrooms, and really positioning us to be there, you know, when this cycle turns around.

Dawn Phillipson: Acceleration of the decline into July quite a bit, but you know, there's a lot of positive coming forward to fall and as Dawn mentioned

Dawn Phillipson: We are ready and able to be more promotional if we need to be, but we are also looking at all those levers we can pull in terms of increasing our marketing spend, making sure the fall product gets out to stores, continuing to open up our showrooms, and really positioning us to be there, you know, when this cycle, um...

Dawn Phillipson: Good morning, Simeon. This is Dawn.

Speaker Change: Coins Round

Dawn Phillipson: Good morning, Simeon. This is Dawn. I just wanted to confirm you're thinking about that correctly from a comp basis in the fourth quarter, you know, down that kind of mid-teens is appropriate.

Dawn Phillipson: I just wanted to confirm you're thinking about that correctly from a comp basis in the fourth quarter, you know, down that kind of mid-teens is appropriate. And then with regard to your gross margin question in the second half, if you remember, we're lapping the price action skews from last year. So, you know, as we think about product margin year-over-year in the second half, there's a little bit of incremental compression layered into the second half relative to last year's second half, driven by some of those container costs that we are seeing increase.

Dawn Phillipson: I just wanted to confirm you're thinking about that correctly from a comp basis in the fourth quarter, you know, down that kind of mid-teens is appropriate. And then with regard to your gross margin question in the second half, if you remember, we're lapping the price action skews from last year. So, you know, as we think about product margin year over year in the second half, there's a little bit of incremental compression layered into the second half relative to last year's second half, driven by some of those container costs that we are seeing increase.

John Reed: On a strategic investment front, as we communicated, we are focused on setting the foundation for long-term growth by improving operational efficiencies with upgraded infrastructure technology and process. We are pleased to have implemented our new warehouse management system and continue to refine the opportunities for operational efficiencies. Further over the next several months, we will begin to employ a new planning system that will help optimize our inventory purchase system forecast capabilities in a new ERP at our approaching manufacturing facility that will improve margins visibility and production capabilities. We are continuing to work hard to create a future scalable operating environment that will set the stage for more efficient growth.

Speaker Change: and then with regard to your gross margin question in the second half if you remember were're lapping the price actions used from last year so

Speaker Change: You know, as we think about product margin year over year in the second half, there's a little bit of incremental compression layered into the second half relative to last year's second half.

Speaker Change: driven by some of those container costs that we are seeing elevate.

Dawn Phillipson: But for the most part, you know, from a product margin perspective, year over year, we think that will be relatively flat. And then from a gross margin perspective, we are anticipating a bit of de-leverage on showroom rent versus last year, as you think about the continued investment in new showrooms and our growth strategy there.

Dawn Phillipson: But for the most part, you know, from a product margin perspective, year-over-year, we think that will be relatively flat. And then from a gross margin perspective, we are anticipating a bit of de-leverage on showroom rent versus last year, as you think about the continued investment in new showrooms and our growth strategy there.

Speaker Change: But for the most part, you know, we're, from a product margin perspective, year over year, we think, you know, that we'll be relatively flat.

Speaker Change: and then for a growth margin perspective we are anticipating a bit of deleverage on showgrroom rent versus last year as you think about the continued investment in new show rooms and our growth strategy there

Dawn Phillipson: Thanks, Dawn. Good luck, everyone!

Operator: Thank you. Thank you. Thank you. Our next question is from the line of Maks Rakhlenko with TD Cowen. Please go ahead.

John Reed: Turning out to supply chains for the update on ocean freight, all carriers are still avoiding the red seed and transit times are two weeks longer on average, which we are planning for in our inventory purchases. Spot rates have increased this summer from container capacity shortages, early peak season shipping and port congestion at the Asian points. During the second quarter, we were able to bring in all of our containers using the contract rate, but have paid some higher spot rates in the third quarter to ensure a product availability for our clients.

Speaker Change: based on good luck everyone

Maksim Rakhlenko: Thank you. Our next question is from the line of Maks Rakhlenko with TD Cowen. Please go ahead.

Speaker Change: thank you thank you thank you on next question is from the line of max rock linko with td carvin please go ahead

Maksim Rakhlenko: Great, thanks a lot, guys. First, John, given your perspective, how long do these cycles typically last on the high end? Are they shorter than the overall market? And then what categories typically inflect first as we do look for signs of improvements ahead?

Speaker Change: Great, thanks a lot guys. So first, John , given your perspective, how long do these cycles typically last on the high end? Are they shorter than the overall market? And then, what categories typically inflect first as we do look for signs of improvements ahead?

John Reed: Um, good morning, Max. Um, yeah, I mean, every cycle is different. You know, we had the big crash, what was that? An 08 or something.

Maksim Rakhlenko: Um, good morning, Max. Um, yeah, I mean, every cycle is different. You know, we had the, uh, big crash. What was that? An 08 or something.

Speaker Change: Good morning, Max.

John Reed: Yeah, I mean, you know...

John Reed: This impact is factored into our revised output for the remainder of the year. Together with our vendors, not only did we learn to successfully navigate supply chain challenges during a pandemic, but we confirmed our geographically diverse supply chain is an advantage in our industry. I am pleased to say that with our strong vendor relationship, we are also working together to improve our costs given the current environment, but don't mistake that for cost engineering. We do not reduce our quality to get a margin to target.

John Reed: Every cycle is different. You know, we had the big crash, what was that, in 08 or something? And, you know, which is totally different than COVID, which is totally different than today.

Speaker Change: so your guess is as good in mind on that obviously there's a lot

John Reed: And, you know, which is totally different than COVID, which is totally different than today. So, you know, your guess is as good as mine on that. Obviously, there's a lot of news out there; there's an election coming up, which has all kinds of cheery news in it. So who knows? I don't know.

Speaker Change: news out there there's electure coming out which has all kinds of cheery news in it so who knows i don't know i do know that you know we stay focus on what our plan is we execute our plan very very well

John Reed: I do know that, you know, we stay focused on what our plan is, we execute our plan very, very well. We think better than anyone. And we come out of these things. You know, some of our competition may fall off, and we come out of these stronger and get more and more market share every time. So that's what we're focusing on, and that's what we're excited about.

Maksim Rakhlenko: Got it. Okay.

Speaker Change: We think better than anyone and we come out of these things, you know, some of our competition may fall off. And we come out of these stronger and get more and more market share every time. So that's what we're focusing on and that's what we're excited about.

Maksim Rakhlenko: And, you know, which is totally different than COVID, which is totally different than today. Um, so, your guess is as good as mine on that. Obviously, there's a lot. And we come out of these stronger and get more and more market share every time. So that's what we're focusing on, and that's what we're excited about.

John Reed: Before I turn this over to Dawn to discuss our results and that looks in more detail, I want to thank our teams for striving to provide industry, leading client service every day and for achieving key milestones in advancing our strategic growth initiatives in the first half of 2024. I am extremely proud of all of you and I am excited to keep the momentum going.

John Reed: And then philosophically, how nimble are you in dealing with changing competition in the marketplace? So, for instance, if close peers start to make changes in price that are impacting you, how would you go about maybe, you know, reacting? Or is that generally not how you're thinking about the business?

Speaker Change: Got it. Okay, and then philosophically, how nimble are you with dealing with changing competition in the marketplace? So for instance,

Speaker Change: If close in peers start to make changes on price that are impacting you, how would you go about maybe reacting or is that generally not how you're thinking about the business?

Dawn Phillipson: Now I will turn it over to Dawn. Thank you and good morning. Net revenue in the second quarter was $310 million with a 7.1% cost decline.

John Reed: Yeah, generally not. We certainly watch the competition very closely. But when we, you know, compare product to product, we really don't have any products that we can compare as far as quality goes or design goes. So, you know, we think the ones we do look at, people are undercutting us, the quality isn't there, it's inferior. So we're not too worried about that. We've got an incredible sales team, the best in the business, an incredible, you know, army of interior designers who are out there, and customers aren't. They want a beautiful home.

Speaker Change: Yeah, generally not.

Dawn Phillipson: The decrease in net revenue compared to the prior year was driven primarily by the non-recurrents of prior year abnormal backlog deliveries and the implementation of our warehouse management system in our Ohio distribution center. As John mentioned earlier, our demand comp declined 3% in the quarter with April's mid-single digit increase more than offset by mid-single digit declines in the balance of the quarter. Our second quarter growth margin decreased to $124 million, driven primarily by higher showroom costs as we continue to expand our footprint.

Maksim Rakhlenko: But when we, you know, compare product to product, we really don't have any products that we can compare as far as quality goes or design goes. So, you know, we think the ones we do look at, people are undercutting us, the quality isn't there, it's inferior. So we're not too worried about that. We've got an incredible sales team, the best in the business, an incredible, you know, army of interior designers who are out there, and customers aren't. They want a beautiful home. They don't remember two years ago what they paid for as long as it's working, it's comfortable, it's not falling apart, and so forth. So we stay with that vision and that focus.

Speaker Change: we certainly watched the competition very closely

Speaker Change: but when we compare product to product we really don't have any product that we can compare to as far as quality goes or design goes

Speaker Change: So, you know, we think...

Speaker Change: The ones we do look at, you know, people are undercutting us.

Speaker Change: the quality isn't there it's ferior so we're not too worried about that we've got incredible sales team the best in the business

Speaker Change: Incredible, you know, army of interior designers who are out there.

Dawn Phillipson: Lower product margin related to promotional activity and increased delivery and transportation costs as we continue to invest in our final mile experience. First margin as a percent of net revenue decreased to 40.1% driven primarily by lower product margin, higher showroom costs, and higher delivery and transportation costs.

Speaker Change: and customers aren't, they want a beautiful home.

John Reed: They don't remember two years ago what they paid for as long as it's working, it's comfortable, it's not falling apart, and so forth. So we stay with that vision and that focus, that we're not going to compromise our quality. We can easily cut quality and take prices down 2030%. But I won't do that. I will not take quality down because, in the long run, that goes back to hurt you.

Speaker Change: They don't remember.

Speaker Change: Two years ago, what they paid for, as long as it's working, it's comfortable, it's not falling apart, and so forth. So we stay with that vision and that focus.

Speaker Change: that we're not going to compromise our quality we can easily cut quality and take prices down twotwenty and thirty percent but i won't do that i will not

Dawn Phillipson: 2nd quarter S.G.A, expense increased $9 million to $95 million, primarily driven by higher selling expenses related to new showrooms, increased corporate expenses as we invest in our strategic initiatives to support and drive the growth of the business, and higher warehouse expense related to increased productivity and Dallas and the WMS implementation. 2nd quarter 2024 net income was $22 million. Adjusted EBITDA on the quarter was $40 million for $64 million in the 2nd quarter of 2023. 2nd quarter net revenue of $310 million and adjusted EBITDA of $40 million resulted in a 12.9% adjusted EBITDA margin in the quarter.

Speaker Change: Take quality down because in the long run that goes back to hurt you.

Operator: Great, thanks a lot, and best regards. Thank you.

Maksim Rakhlenko: Great. Thanks a lot. Best regards. Thank you.

Speaker Change: Great. Thanks a lot and best regards.

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

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

Speaker Change: thank you

stephen fobs: our next question is from the line of stephen fobs with googai's securities please go ahead

Steven Forbes: Maybe start with Dawn as a follow-up to Simeon's question. And you think through the sort of decrement, the margin profile implied by the guidance change, it's really high, and I think that's what we're trying to get our arms around. And so you mentioned promotional activity. You also mentioned freight costs, right? Investment into marketing. Any way to help frame, you know, sort of how you, how to explain the high decrement of the margin profile?

stephen fobs: Good morning.

Speaker Change: Maybe start with Dawn as a follow-up to Simeon's question.

stephen fobs: You think through the sort of decrement, the margin profile implied by the guidance changes, it's really high, and I think that's what we're trying to get our arms around.

Speaker Change: And so you mentioned promotional activity, you also mentioned freight costs, right, investment into marketing.

Speaker Change: Any way to help frame, you know, sort of how you, how to explain that the high decrement of the margin profile. And then as you think through sort of this promotional activity comment.

Steven Forbes: And then as you think through sort of this promotional activity comment, can you parse it out into the various impacts? I mean, how much is being driven by inventory management? Is there any sort of price value correction, or is this simply just to stimulate conversion given the macro? Thank you.

Dawn Phillipson: As we reported this morning, we are lowering our full year outlook for 2024. While our first tax performance was consistent with our expectations, our 2nd half net revenue and growth margin expectations have changed given recent demand trends. We experienced softening demand comp starting in May and the negative trend accelerated into July. We believe this is a reflection of the pullback by the home furnishing consumer that is starting to impact our business.

Speaker Change: Can you parse it out into the various impacts, I mean how much is being driven by inventory management? Is there any sort of price value correction and or is this simply just to stimulate conversion given the macro?

Dawn Phillipson: Yeah, good morning, Steve. So as we're thinking about the second half, you know, we are expecting D leverage of about 280 basis points versus the prior year. So you can think about that as about 70% of that is coming through in SG&A, and about 30% of that is coming through in gross margin. On the gross margin side, as you said, there's, we've left ourselves some operating flexibility around promotions. But we're still feeling good about our product margin relative to the prior year.

Speaker Change: Yeah, good morning, Steve. So as we're thinking about the second half,

Dawn Phillipson: In the past, we've seen that our client has typically been the last to stop shopping and the first to start again during times of economic downturn. Similar to how we handled other cycles, our uncompromising strategy of new product introduction, marketing investment, and opening new showrooms will allow us to capture market share as the macro improve and as clients return to investing in their homes. Our outlook contemplates a low double digit demand comp decline for the remainder of the year.

Speaker Change: You know, we are expecting de-leverage of about 280 basis points versus prior year. So you can think about that as about 70% of that is coming through in SG&A and about 30% of that is coming through in gross margin. On the gross margin side, as you said, there's

Speaker Change: We've left ourselves some operating flexibility around promotions.

Speaker Change: But we're still feeling good about our product margin relative to prior year. We are seeing de-leverage as we're continuing to invest in our growth strategies, which...

Dawn Phillipson: We are seeing D leverage as we're continuing to invest in our growth strategies, which is, you know, those new showroom rents are rolling through gross margin. So the balance is in SG&A, and really, you know, our spend, as we think about what we guided to three, six months ago versus where we're at today is still consistent. So we are continuing to invest in new showrooms. We're continuing to invest in our strategic growth initiatives around our planning system, our manufacturing ERP, and our warehouse management system.

Dawn Phillipson: We believe this is especially prudent in an election year. When the industry generally experiences flowing year over year sales growth in the second half of the year relative to the first half. At the same time, as John mentioned, we are very excited about our fall product launches supported by robust marketing campaigns. As the midpoint of our range implies, we expect net revenue to decline approximately 1% in the second half of the year versus the second half of 2023.

Speaker Change: The new showroom rents are rolling through growth margin. So the balance is in SG&A and really, you know, our spend, as we think about what we guided to three, six months ago versus where we're at today, is still consistent. So we are continuing to invest in new showrooms.

Speaker Change: We're continuing to invest in our strategic growth initiatives around our planning system, our manufacturing ERP, our warehouse management system.

Dawn Phillipson: We are going a little bit deeper in marketing in the back half of this year, really excited to continue to drive brand awareness, increase our spend, and prospect a bit for the September catalog, which is going to be beautiful and really support the product launches that are rolling out at the end of this month. And then, you know, a bit of D leverage on the warehouse expense as Dallas is continuing to ramp up productivity.

Dawn Phillipson: On the profitability side, we expect approximately 280 basis points of adjusted EBITDA-D leverage in the second half of 2024. We expect about 70% of the D leverage to come from S-GNA with the balance in growth margin. The majority of this D leverage is from flowing demand and continued import and growth investments. Compared to our prior expectations for the second half, we now expect incremental D leverage from the lower net revenue which will impact both growth margins and S-GNA.

Speaker Change: We are going a little bit deeper in marketing in the back half of this year. Really excited to continue to drive brand awareness, increase our spend and prospecting a bit for the September catalog, which is going to be beautiful and really support the product launches that are rolling out at the end of this month. And then, you know, a bit of deleverage on the warehouse expenses. Dallas is continuing to ramp up in productivity. So, you know, I think from a spend perspective, we're consistent with what we've said all along. There's just some noise as you think about, you know, how that math is all working relative to where we thought revenue would be, you know, for the year six months ago versus where we think revenue will be this year. You know, in the back half now, where we think it'll be today.

Dawn Phillipson: So, you know, I think from a spend perspective, we're consistent with what we've said all along. There's just some noise as you think about how that math is all working relative to where we thought revenue would be, you know, for the year six months ago versus where we think revenue will be this year, you know, in the back half now versus where we think it will be today.

Dawn Phillipson: Our outlook allows for flexibility around promotions for the balance of the year as well as factors in elevated freight costs. We now expect growth margins D leverage in the second half of the year versus our prior expectation of growth margin inflection.

John Reed: Then maybe a follow-up for John. You think about this sort of lean into share and it being very optimistic about sort of the strengthening of the position during a challenging backdrop, the product product obviously a big, big focus there. So can you can you expand on the product pipeline? I mean, what are some of the product initiatives that you're excited about, whether it's assortment expansion, breadth depth, What are you sort of leaning into? Any teases for the fall here or early thoughts on newness come spring? Um, sure. I mean...

Steven Forbes: You think about this sort of lean into share and it being very optimistic about sort of the strengthening of the position during a challenging backdrop, the product, obviously a big, big focus there. So can you can you expand on the product pipeline? I mean, what are some of the product initiatives that you're excited about, whether it's assortment expansion, breadth, and depth, Um, sure. I mean...

John Reed: then many a follow per john

Speaker Change: You think about this sort of lean into share and You're being very optimistic right about sort of the strengthening of the position

Dawn Phillipson: In the third quarter of 2024, we anticipate net revenue in the range of $325 to $345 million. And at the midpoint, we expect adjusted EBITDA to decline approximately 130 basis points for the prior year, for all other details related to our 2024 outlook, please refer to our press release.

John Reed: During a challenging backdrop the product product obviously a big a big focus there. So can you can you expand on the product pipeline? I mean, you know, what what are some of the product initiatives that you're excited about whether it's absorbent expansion breath depth

Speaker Change: What are you sort of leaning into? Any teases for the fall here or early thoughts on newness come the spring?

Dawn Phillipson: In closing, I want to reiterate our strong commitment to our strategic growth strategy, despite the current macro challenges. Our long-term growth targets have not changed. We continue to expect long-term total revenue growth in the high single digit, as we grow showrooms in the mid to high single digit range, and comfortable sales grow mid single digit. We will also continue to improve operational efficiency, driving adjusted EBITDA growth of low double digits long-term.

John Reed: Sure, I mean, I can talk big picture about that. You know, we are launching new products in every category, first of all. Very, very excited about the upholstery end of the business, you know, which is the largest category we have. And it drives, when you think about it, it drives a lot of other purchases, rugs, lamps, end tables, so forth.

John Reed: Sure. I can talk big picture about that. We are launching new products in every category, first of all. Very, very excited about the upholstery end of the business, which is the largest category we have. And it drives, when you think about it, it drives a lot of other purchases, rugs, lamps, end tables, so forth.

Speaker Change: Sure, I mean I can I can talk big picture about that

Speaker Change: yeah we

Speaker Change: are launching new product in every category, first of all.

Speaker Change: Very, very excited about the upholstery end of the business.

Speaker Change: You know, which is the largest category we have, and it drives, when you think about it, it drives a lot of other purchases, rugs, lamps.

John Reed: So we've really focused on that part, and we're rolling out some incredibly strong products, incredibly great designs, some of the most comfortable, best quality things I've ever seen in my lifetime. And we're hitting both sides. We're pushing the envelope as far as the high end, and we also have some really great starting price point products that we feel will bring new clients in the door. And if people are looking to save a little bit of money or not spend quite as much, then we have that covered.

John Reed: So we've really focused on that part, and we're rolling out some incredibly strong products, incredibly great designs, some of the most comfortable, best quality things I've ever seen in my lifetime. And we're hitting both sides, you know, we're pushing the envelope as far as the high end, and we also have some really great, you know, kind of starting price point products that we feel will bring new clients in the door.

Speaker Change: and so forth. So we've really focused on that part and we're rolling out some incredibly strong product, incredibly great designs.

Dawn Phillipson: Our debt free balance sheet is a meaningful competitive advantage that allows us to make the responsible investment to build on our share gains in the highly fragmented $100 billion premium home furniture market. We continue to navigate the current environment from a position of strength, and we believe we are well-positioned to maintain our client-first service and drive values for all stakeholders. This concludes our prepared remarks.

Speaker Change: Some of the most comfortable, best quality things I've ever seen in my lifetime. And we're hitting both sides, you know, we're pushing the envelope as far as on the high end and we also have some really great, you know, kind of starting price point products.

Operator: With that, I'd like to thank you for joining us this morning, and we are happy to take your questions. 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. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would 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 request you to restrict to one question and one follow-up question.

Speaker Change: That we feel will bring new clients in the door. And that people are, you know, looking to save a little bit of money, or not spend quite as much. Then we have that covered. So I think that's probably the most exciting part that I think is we've got the entire...

John Reed: And if people are looking to save a little bit of money or not spend quite as much, then we have that covered. So I think that's probably our most exciting part, which is that we've got the entire gamut of upholstery, and you know, that includes chairs and sectionals and sofas and so on and so forth. And again, that's how I've always seen the business drive, especially in times when times do dip a little bit. That's usually how we come out really strong.

John Reed: So I think that's probably our most exciting part, that we've got the whole thing. And again, that's how I've always seen the business drive, especially in times when times do dip a little bit. That's usually how we come out really strong.

Speaker Change: gamit up of a poster and inclues chairs and sectionals and su as until on and so forth

Speaker Change: And again, that's how I've always seen the business drive, especially when times do dip a little bit. That's usually how we come out really strong.

Speaker Change: then

Speaker Change: Thank you.

Operator: Our next question is from the line of Seth Sigman with Barclays. Please go ahead. Great.

Speaker Change: Thank you.

Speaker Change: Our next question is from the line of Seth Sigman with Barclays. Please go ahead.

Simeon Gutman: Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead. Hi everyone. I wanted to ask first just a technical on the fourth quarter backing into the comp. It looks like it's a down mid-deens, it's just straight math, but I want to make sure that's correct. And then the summer Simeon, I guess, that's occurred. Can you talk about, has it been a real change in demand? Has it been, I guess, customers may be deferring purchases and anything you can talk about, product categories.

Operator: Great. Good morning, everyone.

Seth Sigman: If you go back and think about the drop-off you've seen in the business the last few months, I guess I'm trying to better understand just consumer engagement. Any more perspective on, you know, how much of that drop-off is actual traffic versus maybe conversion and consumers pushing things out? Do you have a way to measure that? Just trying to think through, you know, is it just deferral that comes back at some point? Just help us frame that a little bit. Thank you.

Seth Sigman: Great. Good morning, everyone.

Seth Sigman: great good morning everyone if you go back and think about thedropoff you've seen in the business last monthsiguess imtry to understand is the consumer engagement anymore perspective on you know how much of that drop off is actual traffic

Speaker Change: First maybe conversion and consumers pushing things out. Do you have a way to measure that just trying to think through? You know, is it just deferral that comes back at some point? Just help us frame that a little bit. Thank you

John Reed: Yeah, I can start that, Seth. Yeah, I mean, people are coming in there. They're not as excited as they were, you know, two years ago, when COVID was going on, where they would take anything at any price and wait any length of time for it. They just seem to be, you know, busy with other things in their lives right now. And they're still engaged.

John Reed: Yeah, I can start that, Seth.

Speaker Change: Yeah, I can start that, Seth.

Simeon Gutman: Was it outdoor that's load or it's all the indoor and fall purchases that customers have stopped buying? Yeah, good morning Simeon. John Reed here. Yeah, first of all, last part of that question. Now we've seen the product, it hasn't been a specific category whatsoever. It's kind of just been across the board. We're seeing nice traffic in our stores. People are just taking a little break right now from buying as much as they had been.

Seth: Yeah, I mean, people are coming in, they're...

Speaker Change: they're not as excited as they were

Speaker Change: You know, two years ago when COVID was going on, where they would take anything at any price and wait any length of time for it. They just seem to be, you know, busy with other things in their life right now.

Speaker Change: And they're still engaged. They're still coming in. You know, we haven't seen this huge, huge traffic drop. The new stores are doing fantastic. The response is unbelievable, especially out in California.

John Reed: They're still coming in. You know, we haven't seen this huge, huge traffic drop. The new stores are doing fantastic. The response is unbelievable, especially out in California and, So we're gonna just keep focusing on that. I don't know if you guys have anything else to say.

Speaker Change: so we're going to just keep focusing on that that don't know ifyou guys have things to say

Dawn Phillipson: Yeah, interestingly enough, from a data perspective, we've really seen some mixed results around different components. Traffic on a comp basis decelerated in the second quarter.

Simeon Gutman: Business has been so strong for so long and we're still buying growing leads. Our interior designers are still very, very busy. So it really hasn't been a huge change in that. It just seems like the summer blues and people are traveling so much, our customers are certainly that they're taking a little break from what they had been.

Jen Porter: Yeah, so interestingly enough, from a data perspective, we've really seen some mixed results around different components. Traffic on a comp basis decelerated in the second quarter. The number of orders over $5,000 and $10,000 were up versus last year, so still seeing some strength there. Number of transactions increased healthily versus last year, but the average order was down slightly. Units per transaction is up, though. So the data's really mixed, so it kind of speaks to what John was saying. You know, the folks are maybe coming in more often to look at things prior to making a transaction. But, Jen, anything additional on the consumer?

Dawn Phillipson: The number of orders over $5,000 and $10,000 were up versus last year, so we are still seeing some strength there. The number of transactions increased healthily versus last year, but the average order was down slightly. Units per transaction are up, though, so the data is really mixed, so it kind of speaks to what John was saying. The folks are maybe coming in more often to look at things prior to making a transaction, but Jen, anything additional on the consumer? Yes,

John Reed: And then if I can sneak in a follow up, I think the press release mentions promotional activity and maybe the first time it's been written, it might have talked about it on calls but talk about the backdrop and then your approach to it and how much you're waiting in in the fall you have new product coming and how much of the gross margin is also promotions for the back half. Thank you.

Jennifer Porter: Yeah, I mean, Dawn and John sort of said it all. We're seeing a lot. I think we are really pleased with seeing those 5,000 to 10,000 and above orders performing really healthfully. If you think about, you know, consumer behavior when they're buying furniture and, you know, if you have bought a new home or if you are updating and doing a renovation, you have a timeframe, and you have that drive to complete that purchase.

Jen Porter: yes i think done and john said as allwe're seeing saying a lot i think we are really pleased with seeing those was five to ten thousand and above orders performing really helpfully you think about you know consumer behaor when theythe buying furniture and you know if you have boardred you home or if you are updating and doing a renovation you have a time frame and you have that drive to complete that purchase

John Reed: Sure, I can take part of that and Jen can as well. Yeah, the back half of our product lineup is unbelievable. We're very, very excited about it. We think it's certainly the strongest in the industry. And you know, I've been sure that these times we all have for quite a while, ups and downs and so forth. And you know, the way our strategic plan has always been is, you know, people pull back and times like this, their business is bad.

Jennifer Porter: But as both Dawn and John mentioned, we're seeing less of that sense of urgency to complete for maybe some of those less urgent purchases. They're browsing, they're exploring, as I mentioned, we're seeing that heightened traffic to the website, we're seeing that heightened engagement with the product, you know, and as we've always spoken about, we know that that's where a lot of our clients are, you know, doing their exploring, they're engaging with the website before they make that purchase.

Jen Porter: but as as spoed on in john mentioned we're seeing less that sense of urgency to complete for maybe some of those more

John Reed: We kind of do the opposite. We accelerate our new product, our excitement to look in the stores, refreshing them up. We're bringing a lot of color in the stores. We're doing things are really excited to customer because that's what they want. They want exciting products. They want exciting visits, experiences. And you know, if we keep that keep that going, people come back and we really win. When business comes back, we've done that every time for 36 years now.

Speaker Change: less urgent purchases. They're, they're browsing, they're exploring, as I mentioned, we're seeing that heightened traffic to the website, we're seeing that heightened engagement with the product.

Speaker Change: You know, and as we've always spoken about, we know that that's where a lot of our clients are, you know, doing their exploring, they're engaging with the website before they make that purchase. So there's definitely that interest level, we're just seeing less of that urgency to make the purchase today. And as we've all been saying, I think that's, you know, what we are all focused on that is really at the core of our strategy. We want to be here for our clients wherever they are ready and continuing to present them all of the great products, the inspiration, the reasons, you know, that separate Arhaus apart from, you know, everybody else out there in the market, and then we'll be here when they're ready to convert.

Jennifer Porter: So there's definitely that interest level; we're just seeing less of that urgency to make the purchase today. And as we've all been saying, I think that's, you know, what we are all focused on that is really at the core of our strategy. We want to be here for our clients wherever they are ready and continue to present them all of the great products, the inspiration, the reasons, you know, that separate our house apart from, you know, everybody else out there in the market. And then we'll be here when they're ready to convert.

John Reed: Jen, do you have anything to add to that? Yeah, hi, Saman. Just add a little bit more color to that. You know, as you heard, we did get it more promotional and Q2 than we would be in in the past. You know, I've been speaking the last, you know, probably almost two years now, we've definitely seen that heightened promotional activity out there from up here. I think one of our really, you know, interesting things is, you know, it's been a really tough macro environment out there for the last year, year and a half.

Seth Sigman: That's, that's helpful. And I guess just the follow-up there is thinking about, you know, Arhaus has been able to really navigate a very difficult environment the last couple years, right? It's been tough out there, and a lot of your peers have been seeing that for some time. So, to some extent, it's caught up to you now, and I guess the question we're getting is, why now? I do think if you look at your business on a four or five-year basis, not at all.

Speaker Change: That's that's helpful. And I guess just the follow-up there is thinking about, you know Arhaus has been able to really navigate a very difficult environment the last couple years, right? It's been tough out there and a lot of your peers have have been seeing that for some time So to some extent it's caught up to you now, and I guess the question we're getting is why now? I do think if you look at your business on a four or five year basis

John Reed: We've been hearing a lot of our peers really, you know, having to address that and we've really been an outlier to that. So, you know, it's definitely something that would be monitoring. We're going to be continuing to monitor. As Dawn mentioned, the guide for the rest of the year allows us to be promotional as we see what happens going into fall and Q4. But just echoing, you know, what John said, we are really, really excited looking at our fall launch coming here in just a few weeks.

Speaker Change: Just for all the swings, it's actually much more stable.

Speaker Change: then the big dropoff that re you're talking to but anyway i guess the real question is what gives you confidence that

Speaker Change: It's not something more competitive that's changing.

Speaker Change: What gives you confidence in price points, where they are today, that they don't need to be adjusted further, just any more context. Thank you.

John Reed: A couple of weeks back at the end of July, we did a sneak preview of some of our fall products and we're really pleased with the marketing engagement that we saw from consumers there. You know, when we're seeing some positive elements, we're seeing really nice traffic to the website. We're seeing engagement with marketing. We're excited about the products. We're definitely seeing, you know, the lower traffic and stores, the lower order values of stores and would like so that's happening in Q2.

John Reed: Yeah, I think, you know, as you mentioned, we were the first ones to kind of, or the last ones, I should say, to see this effect of, you know, sales slowing down, and our competitors saw it a lot earlier. All I can say is we're going to come out of it a lot quicker as well. We've always seen these things where, you know, we do, we start them at, you know, later than our competitors. But we also come out of them a lot quicker because of what we do.

Speaker Change: Yeah, I think, you know, as you mentioned...

Speaker Change: We were the first ones to kind of, or the last ones, I should say.

Speaker Change: to see this effect of sales slowing down.

Speaker Change: And our competitors have seen it a lot earlier. All I can say is we're going to come out of it a lot quicker as well. We've always seen these things where, you know, we do start them later than our competitors.

John Reed: We're also up against really positive strong comps last year in May and June. So, you know, we're looking at that acceleration of the decline in July quite a bit. But, you know, there's a lot of positive coming forward to fall. And as Dawn mentioned, we are ready and able to be more promotional if we need to be. But we are also looking at all those levers we can pull in terms of increasing our marketing spend, making sure the fall product gets out to stores, continuing to open up our showrooms, and really positioning us to be there, you know, when this cycle turns around.

John Reed: We've got an amazing product. We're not, absolutely don't think this is a competitor taking our business by any means whatsoever. You know, we look at that backwards and forwards. We are in touch with our stores, our store managers, our top sales people literally every week, and we've not heard a peep about that one little bit.

John Reed: Backwards and forwards, we you know, we're in touch with our stores, our store managers, our top sales people literally every week, and we've not heard a peep about that one little bit.

Jennifer Porter: I think that the other thing that I would add to that confidence is that we've never seen price be the driving factor of our purchases. And what's interesting, looking at Q2 and particularly going into July, although we were more aggressive with our promotional strategy, we're actually starting to see promos be a little bit less effective in driving traffic and conversion.

John Reed: Good morning, Simeon, this is Dawn. I just wanted to confirm you're thinking about that correctly from a comp basis in the fourth quarter down that kind of mid-teens is appropriate. And then with regards to your growth margin question in the second half, if you remember, we're lapping the price actions used from last year. So, as we think about product margin year over year in the second half, there's a little bit of incremental compression layered into the second half relative to last year's second half driven by some of those container costs that we are seeing elevate.

Jennifer Porter: And I think what that speaks to us is it's not price that's a factor. Our clients want what they want. They are able to pay for it. Obviously, everybody likes a deal, but it's not a question of if they can get a better price point. They'll make the purchase, and if they can't, they won't. As John mentioned, you can't find the same product with the same quality at higher competitors. So it's not a pricing conversation. So we're continuously monitoring that, but I think that speaks to the fact that we're seeing this slowdown across promotion and non-promotional business as something more at the macro level. Thank you so much.

Jennifer Porter: And I think what that speaks to us is it's not price that's a factor. Our clients want what they want. They are able to pay for it, and obviously everybody likes a deal, but it's not a question of if they can get a better price point, they'll make the purchase, and if they can't, they won't. As John mentioned, you can't find the same product with the same quality at higher competitors, so it's not a pricing conversation. So we're continuously monitoring that, but I think that sort of speaks to the fact that we're seeing sort of this slowdown across promotion and non-promotional business as something more at the macro level.

John Reed: The purchasing that they cant they won't as John mentioned, you cant find the same products at the same quality at alpha compared to share. It. So it's not a pricing conversation. So you know we're continuously monitoring that but I think that just speaks to the fact that we're seeing that slow down across probably a non promotional business as something more to that mark.

John Reed: But for the most part, we're from a product margin perspective year over year, we think that will be relatively flat. And then from a growth margin perspective, we are anticipating a bit of deliverage on showroom rent versus last year as you think about the continued investment in new showrooms and our growth strategy there. Thanks, Dawn. Good luck, everyone. Thank you.

Speaker Change: To lap them.

Seth Sigman: I got it. Thank you so much. Good luck!

Speaker Change: I got it. Thank you so much good luck.

Speaker Change: Thank you.

Operator: Thank you. Our next question is from the line of Robbie Ohmes with Bank of America. Please go ahead.

Speaker Change: Thank you our next.

Speaker Change: Question is from the line of Robbie <unk> with Bank of America. Please go ahead.

Robert Ohmes: Oh, good morning. Thanks for taking my questions. There are kind of two follow-ups here. The first question is, you guys called out that you were pleased with the new showroom performance, and I was just curious, is the new showroom performance better than you would have expected relative to existing showrooms in the way they've been performing the last couple of months? And then the second question, just to follow up on the promotional question, are there any sort of changes to the way Arhaus has traditionally been promotional historically? Are there any new things you guys are looking at that you can share with us, you know, specifically for this environment?

Robbie: Oh good morning, Thanks for taking my questions.

Max Rakhlenko: Our next question is from the line of Max Rakhlenko with TD Cowan. Please go ahead. Great. Thanks a lot, guys. So first, John, given your perspective, how long do these cycles typically last on the high end? Are they shorter than the overall market? And then what categories typically inflict first as we do look for signs of improvements ahead?

Speaker Change: There's kind of two follow ups here the.

Robbie: The first question is you guys called out the you know that you're pleased with the new new showroom performance and I was just curious.

Speaker Change: <unk> is new showroom performance better than you would've expected relative to existing showrooms and the way they've been performing you know the last couple of months and then the second question just to follow up on the promotional question are there any sort of changes to the way our house would be promotional.

John Reed: Good morning, Max. Yeah, I mean, you know, every cycle is different. You know, we had the big crash, what was that? No, eight or something. And, you know, which is totally different than COVID, which is totally different than today. So, you know, your guess is as good as mine on that. Obviously, there's a lot of news out there. There's a lecture coming out which has all kinds of cheering news in it.

Speaker Change: Historically are there any new things you guys are looking at that you can share with us.

Speaker Change: No for two specifically for this environment. Thanks.

John Reed: Yeah, the new the new showrooms are performing very well. We're very excited. The traffic's in there.

Speaker Change: Yeah, the news the new showrooms.

John Reed: are performing very well. We're very excited. The traffic's in there.

Speaker Change: Are performing very well, we're very excited the tropics and there. The response has been absolutely phenomenal, especially out in California, where we've focused on opening some incredibly beautiful most beautiful showrooms, we've ever done and the response is great. So you know the compare them to other stores.

John Reed: So who knows? I don't know. I do know that, you know, we stay focused on what our plan is. We execute our plan very, very well. We think better than anyone. And we come out of these things, you know, some of our competition may fall off. And we come out of these stronger and get more and more market share every time. So that's what we're focusing on. And that's what we're excited about. Got it. Okay.

John Reed: The response has been absolutely phenomenal, you know, especially out in California where we've focused on opening some incredibly beautiful, the most beautiful showrooms we've ever done. And the response is great. So, you know, to compare them to other stores, I mean, we really come up with a solid, conservative sales plan for new stores. And we're very happy, you know, to see how their business is doing. So it's not necessarily comparing them to, you know, a store in Cleveland, Ohio or Tampa, Florida or something like that, because they're all totally different markets, different sized stores, and so forth.

Speaker Change: I mean, we really come up with a you know a solid conservative sales plan.

Speaker Change: For our new stores, and we're very happy to see.

Speaker Change: How their how their business is doing.

Speaker Change: So it's not necessarily comparing them to you know a store in Cleveland, Ohio, or Tampa, Florida, or something like that because they're all totally different markets different sized stores and so forth.

John Reed: And then philosophically, how nimble are you with dealing with changing competition in the marketplace? So for instance, if close and peer starts to make changes on price that are impacting you, how would you go about maybe, you know, reacting, or is it generally not how you're thinking about the business? Yeah, generally not. We certainly watch the competition very closely. But when we, you know, compare product to product, we really don't have any product that we can compare to as far as quality goes or design goes.

Jennifer Porter: And then to jump in, and if you'll allow me for a second, I just have to do a marketing plug. If you guys haven't visited Arhaus.com in August, I strongly encourage you to do so. We've recently launched a campaign celebrating our showroom experience, and it features a lot of incredible imagery from some of these new showrooms that we've opened this year. And it's absolutely stunning, but it's just something that we're really proud of as a business, which is how incredible our showroom experience is and how unique it is. So if you haven't visited, please, please go check it out.

Speaker Change: And then to jump in on the aim if you'll allow me for a second I guess it has to do with marketing cloud. If you guys haven't visited our house Dotcom and August I strongly encourage you to do so.

Speaker Change: <unk> launched a campaign celebrating our showroom experience and it features a lot of incredible imagery from some of these new showrooms that we've opened this year.

Speaker Change: And it is absolutely it's stunning, but it's just something it's celebrate something that we're really proud of is our business as how incredible our showroom experience is and how unique that maybe haven't been said I'm sorry. Please go check it out but to touch on your point about just promotional strategy and how we're thinking about the rest of the year.

John Reed: So, you know, we think the ones we do look at, you know, people are undercutting us. The quality isn't there. It's, it's inferior. So we're not too worried about that. We've got an incredible sales team, the best in the business, credible, you know, army of interior designers who are out there. And customers aren't, they want a beautiful home. They don't remember two years ago what they paid for as long as it's working.

Jennifer Porter: But to touch on your point about just promotional strategy and how we're thinking about the rest of the year, and if we're going to make any changes, you know, as I mentioned earlier, and Dawn mentioned, the guide does allow us that flexibility in how we're looking at promotions for the rest of the year. We're currently looking at our same strategy of those holiday weekends, Black Friday, those key promotional periods.

Don: We're going to make any change as you know as I mentioned earlier I think Don mentioned, the Guy does allow us that flexibility on how we're looking at pretty much the rest of the year. We're currently looking at you know our same strategy those holiday weekend Black Friday, those key promotional periods.

John Reed: It's comfortable. It's not falling apart and so forth. So we say what that vision and that focus that we're not going to compromise our quality, we can easily cut quality and take prices down 20, 30 percent. But I won't do that. I will not Okay, quality down, because in the long run that comes, goes back to Earth you.

Jennifer Porter: You know, we've been talking on the last few calls about how we've started lengthening those promotional periods. We're always looking at, you know, how we're setting those up, what they look like, how we are optimizing our marketing messaging for those promos. So we are going to continue to do that into the back half. But as of now, we are really looking, you know, at those similar time periods as our ongoing strategy. Terrific, thank you. Thank you, Robert. Thank you. Our next question is from the line of...

Jennifer Porter: You know, we've been talking on the last few calls about how we've started lengthening those promotional periods. We're always looking at, you know, how we're setting those up, what they look like, how we are optimizing our marketing messaging for those promos. So we are going to continue to do that into the back half. But as of now, really looking, you know, at those similar, those similar time periods as our ongoing strategy. Terrific, thank you. Thank you, Robert. Thank you. Our next question is from the line...

Speaker Change: You know we've been talking I'm open for the last few calls about how we've started lengthening those promotional periods. We're always looking at you know how we're setting those up what those look like how we are optimizing our marketing messaging and so it's probably not that we are going to continue to do that into the back half.

John Reed: Great, thanks a lot in best regards. Thank you.

Don: But as of now really looking at that similar similar time periods as our ongoing strategy.

Steven Forbes: Our next question is from the line of Steven Forbes with Google Nimes Techities, please go ahead. Good morning.

Speaker Change: Terrific. Thank you.

Ravi: Thank you Ravi.

Operator: Thank you. Our next question is from the line of Phillip Lee with William Blair. Please go ahead. Hi, this is Sabrina. Thanks for taking our question. Can you talk about some of the progress your team has made on internal system investments?

Speaker Change: Thank you.

Dawn Phillipson: Maybe maybe you start with Dawn as a follow up to Simeon's question. You think you think through the sort of decrement the margin profile implied by the guidance change, it's really high. And I think that's what we're trying to get our arms around. And so you mentioned promotional activity. You also mentioned freight costs, right, investment to marketing. Any way to help frame, you know, sort of how you had to explain that the high decrement the margin profile.

Speaker Change: Question is from the line of Philip Lee with William Blair. Please go ahead.

Ravi: Hi, This is Sabrina and thanks for taking our question can you talk some about some of the progress. Your team has made on the internal system investments and what benefits do you expect a gain when the new system launches over the next few months, maybe from inventory purchasing or youre forecasting abilities.

Operator: Morning, Sabrina. Yeah, you know, we're excited to continue to invest in the systems that we've been talking about. Our warehouse management system launched in April, and we're continuing to refine that and build on some of the operating efficiencies that we've, you know, seen in the system to date. So excited for how that's continuing to progress. And as we continue to tweak that, our planning software is in the process, as we've said before, and, you know, there's a couple of different unlocks and different phases that we'll have with that program, and it's on track with where we expect it to be.

Speaker Change: Good morning, Sabrina Yeah, you know, we're we're excited to continue to invest in the systems that we've been talking about our warehouse management system launched in April and we're continuing to refine that and build on some of the operating efficiencies that we have you know seen in the system today.

Dawn Phillipson: And then as you think through sort of this promotional activity comment, can you parse it out into the various impacts? I mean, how much is being driven by inventory management? Is there any sort of price value correction? And or is this simply just to stimulate conversion given the macro?

Speaker Change: So excited for how that's continuing to progress and as we continue to tweak that.

Dawn Phillipson: Thank you. Yeah, good morning, Steve. So as we're thinking about the second half, you know, we are expecting the leverage of about 280 basis points versus prior year. So you can think about that is about 70% of that is coming through an SGNA and about 30% of that is coming through in gross margin. On the gross margin slide, as you said, there's there's we've left ourselves some operating flexibility around promotions. But we're still feeling good about our product margin relative to prior year.

Speaker Change: Our planning software is in process as we've said before and yeah. There's a couple of different unlocks are in different phases that we'll have with that program and it's it's on track with where we expect it to be so you know it.

Operator: So, you know, some great opportunities with that are improved demand forecasting at a more granular level, both geographically and then on a SKU basis. So really looking forward to getting some unlocks there and driving some labor efficiencies with the teams here.

Speaker Change: Some great opportunities with that is improve demand forecasting them, you know that a more granular level, both geographically and then on an SKU basis. So I'm really looking forward to getting some unlocks they're driving some labor efficiencies with the teams here and so over the next several months will be.

Dawn Phillipson: And so over the next several months, we'll be kind of launching the first phase of that, and then our manufacturing ERP, which is going to provide quite a bit of increased margin visibility and production capability enhancement. So, you know, that is also slated to launch in the next several months. As you can imagine, upgrading an entire ERP for a manufacturing facility is extensive, and we want to make sure that we're doing it correctly and really thinking through the different benefits and making sure that we're doing it correctly.

Dawn Phillipson: We are seeing the leverage is we're continuing to invest in our in our growth strategies, which is, you know, the new showroom runs are rolling through gross margin. So the balance is an SGNA and really, you know, our spend as we think about what we guided to three, six months ago versus where we're at today is still consistent. So we are continuing to invest in new showrooms. We're continuing to invest in our strategic growth initiatives around our planning system, our manufacturing ERP or warehouse management system.

Speaker Change: <unk> will be kind of launching the first phase of that and then our manufacturing ERP, which is going to provide quite a bit of increased margin visibility and production capability enhancement. So you know that is also slated to launch over the next several months as you can imagine lifting and entire ERP for manufacturing facility is.

Ravi: His extensive and we want to make sure that we're doing it correctly and I'm really thinking through the different benefits and making sure that we are deploying that.

Dawn Phillipson: And really thinking through the different benefits and making sure that we are deploying that responsibly. So excited for all those things to launch. No major delays or anything that I would call out here. And so, yeah, looking forward to getting those up and running for the team. Thanks, that's helpful. And then quickly back to the competitive landscape. Have you been seeing any?

Dawn Phillipson: We are going a little bit deeper in marketing in the back half of this year, really excited to continue to drive brand awareness, increase our spend and prospecting a bit for the September catalog, which is going to be beautiful and really supports the product launches that are rolling out at the end of this month. And then, you know, a bit of deliberage on the warehouse expenses, Dallas is continuing to ramp up in productivity.

Speaker Change: It responsibly, so I'm excited for all of those things to launch no major delays or anything that I would call out here.

Speaker Change: So yeah looking forward to getting those up and running for the team.

Sabrina Baxamusa: Thanks, that's helpful. And then quickly back to the competitive landscape: have you been seeing any?

Speaker Change: Thanks, that's helpful. And then quickly back to the competitive landscape have you been seeing a lift from the local independent mom and pops going out of business along with maybe the other regional brands in the premium space any thoughts there would be helpful. Thank you.

Dawn Phillipson: So, you know, I think from a certain perspective, we're consistent with what we said all along. There's just some noise as you think about, you know, how that how that math is all working relative to where we thought revenue would be, you know, for the year six months ago versus where we think revenue will be this year, you know, in back half now, where we think it'll be today.

Operator: Yeah, I don't have any data on that. And we're in so many different markets now, so that's hard to see. I haven't seen anything locally here, you know, that would be more local marketing and so forth. And I'm not seeing anything here. And I haven't heard anybody report on anything.

Speaker Change: Yeah, I don't have any data on that and we're in so many different markets now.

Speaker Change: Hum that's hard to see I havent seen anything locally here you know you would.

Sabrina Baxamusa: That's hard to see. I haven't seen anything locally here. You know, that would be more local marketing and so forth. And I'm not seeing anything here, and I haven't heard anybody report on anything.

Speaker Change: That would be more local marketing and so forth.

Speaker Change: I'm not seeing anything here and I haven't seen her at anybody report on anything.

John Reed: Then maybe a follow up for John, you think about this sort of lean into share and being very optimistic right about sort of the strengthening of the position during a challenging backdrop. The product product, obviously a big, a big focus there. So can you can you expand on the product pipeline? I mean, what are some of the product initiatives that you're excited about, whether it's an expansion breath depth. What are you sort of leaning into any teases for the fall here or early thoughts on new income to spring?

Speaker Change: Sabrina.

John Reed: Thank you. Thank you. Thank you. Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

Operator: Thank you. Thank you. Thank you.

Sabrina: Thank you Cynthia.

Sabrina: Okay.

Sabrina: Thank you.

Speaker Change: Our next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

Operator: Hey, thanks. Good morning.

Peter Benedict: Hey, thanks. Good morning.

Peter Keith: Hey, Thanks, Good morning, I'm Gonna take the competitive question with a different angle. So you do have a large competitor in the space It seems like.

Peter Keith: I'm going to take the competitor question from a different angle. So you do have a large competitor in the space that seems like they've tried to knock off some of your product lines. And so maybe as you look at that direct overlap where you've been copied, are you seeing any impact on that area of your business in the last month or two?

Peter Benedict: I'm going to take the competitor question from a different angle. So you do have a large competitor in the space. It seems like they've tried to knock off some of your product lines. And so maybe as you look at that direct overlap where you've been copied, are you seeing any impact on that area of your business in the last month or two?

Peter Keith: They've tried to knock off some of your product lines and so maybe if you look at that that direct overlap where where you'd been copied are you seeing any impact on that area of your business in the last month or two.

John Reed: Sure, I can talk a big picture about that. You know, we are launching new product in every category, first of all. Very, very excited about the upholstery end of the business, you know, which is the largest category we have. And it drives, when you think about it, it drives a lot of other purchases, rugs, lamps and tables, so forth. So we've really focused on that part, and we're rolling out some incredibly strong product, incredibly great designs, some of the most comfortable best quality things I've ever seen in my lifetime.

John Reed: And we're hitting both sides, you know, we're pushing the envelope as far as on the high end, and we're also having some really great, you know, kind of starting price point products that we feel will bring new clients in the door. And the people are, you know, looking to save a little bit of money or not spend as quite as much, then we have that covered. So I think that's probably our most exciting part that I think is we've got the entire gamut of upholstery. And, you know, and again, that's how I've always seen the business drivers, especially in times, you know, in times, do dip a little bit. That's usually what, how we come out really strong.

John Reed: Thank you.

John Reed: Good morning, Peter. To answer your question, no, we have not. Great quality, incredible prices, and we have not seen we've not seen any change in those particular products that you may be referring to.

John Reed: Good morning, Peter. To answer your question, no, we have not. You know, we feel, again, our product is... great quality, incredible pricing, and we have not seen, we have not seen any change in those particular products that you may be referring to.

Peter Keith: Good morning, Peter to answer your question no we have not.

Speaker Change: You know what.

Peter Keith: We feel again our product.

Peter Keith: As is.

Peter Keith: A great quality incredible pricing and.

Speaker Change: We have not seen we've not seen any change in in those particular products that you may be referring to it.

Peter Keith: Okay. Good and then maybe for Don I'm I'm, just trying to play around with the model and wondering why there was such a large sales and comp drop off in Q4. So if I just take the midpoint of the Q3 comp guide it seems to imply Q4 comp, but down nine two are down 20 in Q4 revenue.

Peter Keith: Okay, good. And then maybe for Dawn, I'm just trying to play around with the model and wondering why there's such a large sales and comp drop off in Q4. So if I just take the midpoint of the Q3 comp guide, it seems to imply Q4 comp of a down nine to a down 20 and Q4 revenues below Q3. Can you walk us through why that is the proper outlook?

Dawn Phillipson: Okay, good. And then maybe for Dawn, I'm just trying to play around with the model and wondering why there's such a large sales and comp drop off in Q4. So if I just take the midpoint of the Q3 comp guide, it seems to imply Q4 comp of a down nine to a down 20 and Q4 revenues below Q3.

Don: It is below Q3.

Speaker Change: I guess can you walk us through why that is the proper outlook.

Don: Yeah, so mostly its timing Peter as you think about you know if we are anticipating a kind of low double digit comp tepid demand comp decline.

Dawn Phillipson: Yeah, so mostly it's timing, Peter, as you think about, you know, if we are anticipating a kind of low double-digit comp, demand comp decline, the timing to get that product delivered, there's just a bit of a lag. So, really, as you think about the timing of the demand to deliver realization, and then also just remember last year against a really strong abnormal backlog. So every quarter, as we progressed through last year, we had a higher number of or a higher amount of abnormal backlog that we were delivering. So just the year over year comparison is still skewed by that component.

Don: You know the timing to get that product deliver it there's just a bit of a lag. So so really as you think about about a the timing of the demands that delivered a realization and then also just remember last year up against a really strong abnormal backlog. So every quarter as we progress through last year we.

Don: Had you know a higher number of or a higher amount of abnormal backlog that we were delivering them. So just the year over year comparison, they'll skewed by buyback component.

Seth Sigman: Our next question is from the line of set, Sigmund, Whitbach, please go ahead. Great, good morning, everyone. If you go back and think about the drop-off you've seen in the business the last few months, I guess I'm trying to better understand just the consumer engagement. Any more perspective on, you know, how much of that drop-off is actual traffic versus maybe conversion and consumers pushing things out? Do you have a way to measure that? Just trying to think through, you know, is it just deferral that comes back at some point?

Speaker Change: Okay. Thank you.

Peter Keith: You're welcome. Thank you, Peter. Our next question is from the line of Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.

Speaker Change: You're welcome Thank you Peter.

Jeremy Hamblin: Our next question is from the line of Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.

Speaker Change: Our next question is from the line of Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

Dawn Phillipson: Thanks. And I want to come back to, you know, the commentary around gross margin. I think, Dawn, that you noted that in the back half of the year, you expect some deleverage. I was hoping you might be able to provide a bit more kind of guardrails around what you're expecting, kind of Q3 deleverage versus Q4.

Operator: Thanks, and I want to come back to, you know, the commentary around gross margin. I think, Dawn, that you noted that in the back half of the year you expect some deleverage. I was hoping you might be able to provide a bit more kind of guardrails around what you're expecting, kind of Q3 deleverage versus Q4.

Jeremy Hamblin: Oh, Thanks, and want to come back to you know the commentary around gross margin I think Don that you noted that in the back half of the year you expect some deleverage I was hoping you might be able to provide a bit more.

John Reed: Just help us frame that a little bit. Thank you. Yeah, I can start that set. Yeah, I mean, people are coming in there. They're not as excited as they were, you know, two years ago when COVID was going on, where they would take anything at any price and wait any length of time for it. They just seem to be, you know, busy with other things in their life right now. And they're still engaged.

Speaker Change:

Speaker Change: Kind of guardrails around what you're expecting kind of Q3 deleverage versus Q4.

Jeremy Hamblin: Yeah, absolutely. So, you know, I think the important thing to note is that the reasons are the same as we think about the third quarter and we think about the fourth quarter, continuing to invest in, you know, new showroom expansion, continuing to invest in, our strategic investments, you know, those aren't there; there isn't necessarily a significant spike in one quarter versus another, as we think about the back half. So to the extent that it is helpful.

Speaker Change: Yeah, absolutely and so you know I think the E M or anything to note is that there is.

Dawn Phillipson: The reasons are the same, you know, as we think about the third quarter and we think about the fourth quarter, continuing to invest in, you know, new showroom expansions, continuing to invest in, our strategic investments, those aren't there, there isn't necessarily a significant spike in one quarter versus another, as we think about the back half. So, to the extent that is helpful.

Speaker Change: The reasons are the same you know as we think about the third quarter and we think about the fourth quarter continuing to invest and you know new showroom expansion I'm, continuing to invest and and our strategic investments you know those aren't there there isn't necessarily a significant spike in.

John Reed: They're still coming in. You know, we haven't seen this huge, huge traffic drop. The new stores are doing fantastic. The response is unbelievable, especially out in California. And so we're going to just keep focusing on that.

Jennifer Porter: I don't know if you guys have any other things to say. Yeah, so interestingly enough from a data perspective, we've really seen some mixed results around different components. Traffic on a comp basis, decelerated in the second quarter. The number of orders over $5,000 and $10,000 were up versus last year. So still seeing some strength there. Number of transactions increased healthily versus last year, but the average order was down slightly. Units per transaction is up though.

Speaker Change: One quarter versus another as we think about the back half so to the to the extent that is a helpful.

Dawn Phillipson: I would just note, you know, continue to note that last year we would have been getting incremental de-leverage, or sorry, incremental leverage last year from the higher abnormal backlogs, you know, as we move through the year. So when you're looking at a margin rate basis for the quarters, just keep in mind that there might be incremental de-leverage in the fourth quarter relative to the third, just driven by the abnormal backlog of last year.

Speaker Change: I would just no you know continue to note that last year, we would've been getting incremental deleverage.

Speaker Change: Oh, sorry incremental leverage last year from the the higher abnormal backlogs you know as we move through the year. So when you're looking at a margin rate basis in the quarter. Just just keep in mind that there might be incremental deleverage in the fourth quarter relative to the third just driven by the abnormal backlog.

Jennifer Porter: So the data is really mixed. So it kind of speaks to what John was saying. You know, it's the folks are maybe coming in more often to look at things prior to making a transaction pretend anything additional in the consumer. Yeah, I mean, I think Dawn and John sort of said it's all we're seeing a lot. I think we are really pleased to seeing those $5,000 to $10,000 in above orders performing really healthfully.

Speaker Change: Of last year, and then as we think about the price action Skus that we were deploying in June of last year and as those were getting deliver deliveries of those would have been heavier in the fourth quarter versus the third quarter. So you know just a little bit of noise. There I would say between the quarters on timing of deliveries versus when we did.

Dawn Phillipson: And then as we think about the price action skews that we were deploying in June of last year, and as those were getting delivered, deliveries of those would have been heavier in the fourth quarter versus the third quarter. So, you know, just a little bit of noise there, I would say between the quarters on timing of deliveries versus when we deployed those price actions.

Jennifer Porter: As you think about, you know, consumer behavior when they're buying furniture. And you know, if you have bought a new home or if you are updating and doing a renovation, you have a time frame and you have that drive to complete that purchase. But as as both Dawn and John mentioned, we're seeing less of that sense of urgency to complete for maybe some of those more less urgent purchases. They're browsing, they're exploring.

Lloyd: Lloyd the price action.

Speaker Change: Got it Okay, and then I just wanted to come back to the traffic trends in conversion I'm here for a second because I think there was a little bit of mixed messaging in terms of you know trade. It sounds like traffic is down and wanted to get a sense. If you could share how much.

Speaker Change: You know traffic has fallen off.

Jennifer Porter: As I mentioned, we're seeing that heightened traffic to the website. We're seeing that heightened engagement with the product. You know, and as we've always spoken about, we know that that's where a lot of our clients are. You know, doing their exploring, they're engaging with the website before they make that purchase. So there's definitely that interest level. We're just seeing less of that urgency to make the purchase today.

Speaker Change: May June July you know.

Speaker Change: Just to get a sense for what you're seeing from conversion and in kind of those that are more or less window shopping, but not purchasing in the near term.

Dawn Phillipson: Yeah, interestingly enough, traffic was down more year over year in the first quarter than in the second quarter. So while traffic on a comp basis was still down in the second quarter, it was sequentially up. So interesting, you know, I call it the kind of a mid single-digit decline for the second quarter.

Speaker Change: Yeah, Interestingly enough traffic was down more year over year in the first quarter than in the second quarter and so while traffic on a comp basis was still down in the second quarter. It was sequentially ups. So interesting you know I call. It in the kind of the mid single digit decline.

Jennifer Porter: And as with what we've all been saying, I think that, you know, what we are all focused on, that is really at the core of our strategy. We want to be here for our clients wherever they are ready and continuing to present them all of the great products, the inspiration, the reasons, you know, that separate our house apart from, you know, everybody else out there in the markets. And then we'll be here when they're ready to convert. That's helpful.

Speaker Change: For the second quarter.

Speaker Change: And what about it is you've started in Q3.

Dawn Phillipson: You know, we haven't disclosed that. And so, you know, we're seeing, I would say nothing, no meaningful change in metrics, but recognize that, you know, one month doesn't make a quarter either. So we're tracking it, we're paying very close attention to the demand metrics; we look at those on a daily basis to see, you know, what's happening in each showroom. But, you know, we'll report more on that when we report the third quarter.

Speaker Change: You know, we havent disclose that and so you know, we're seeing I would say nothing no meaningful change and metrics, but recognize that you know one month doesn't make a quarter either so we're tracking that we're paying very close attention to the demand metrics. They look at those on a daily basis to see.

Seth Sigman: And I guess just the follow up there is thinking about, you know, Arhaus has been able to really navigate a very difficult environment the last couple of years, right? It's been tough out there and a lot of your peers have been seeing that for some time. So to some extent, it's caught up to you now, and I guess the question we're getting is why now. I do think if you look at your business on a four or five year basis, you just for all the swings, it's actually much more stable than the big drop off that you're talking to.

Speaker Change: You know whats happening any showroom, but you know we'll report more on that when we report the third quarter.

Speaker Change: Yeah.

Seth Sigman: But anyway, I guess the real question is, what gives you confidence that it's not something more competitive that's changing? What gives you confidence in, you know, price points where they are today that they don't need to be adjusted further? Just any more context. Thank you. Yeah, I think, you know, as you mentioned, we were the first ones to kind of or the last ones. I should say to see this effective of, you know, sales slowing down and our competitors have seen it a lot earlier.

Jeremy Hamblin: Got it. Okay.

Speaker Change: Thanks for the color and best wishes.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question is from the line of Cristina Fernandez of.

Cristina Fernandez: Telsey Advisory group. Please go ahead.

Cristina Fernandez: Thank you good morning, I wanted to ask about inventory.

Cristina Fernandez: Inventory slow and if you look at the demand trends.

Speaker Change: The past few months what is your flexibility in adjusting your inventory to be to remain in a clean position here over the next you know.

Seth Sigman: All I can say is we're going to come out of it a lot quicker as well. We've always seen these things where, you know, we do, we do start them at, you know, later than our competitors, but we also come out of them a lot quicker because of what we do. We get an amazing product. We're not absolutely don't think this is a competitor's taking our business by any means whatsoever. You know, we look at that backwards and forwards.

John Reed: 6 to 12 months.

Speaker Change: Six to 12 months.

Speaker Change: Yeah.

John Reed: Yeah, I mean, it's incredibly meaningful to our suppliers, and they're our partners, so they work with us both ways, and ideally, everything is perfect, they can make exactly the same amount of pieces every single month, but that just isn't reality, so they're very flexible. We don't see any issues with that. They'll do whatever they can in their power to help us out with smoothing out inventory.

Speaker Change: Yeah, I mean, it's.

Speaker Change: Again, we've been through many many cycles up cycles, where wherever neither our partners to make more products and and if we're having a down cycle. Then we asked them to make less product. So it's fairly.

Speaker Change: Straightforward, we're very very flexible were incredibly meaningful to our to our suppliers.

Seth Sigman: We, you know, we're, we're in touch with our stores or store managers or top salespeople literally every week and we've not heard of people about that one, one little bit. I think that the other thing that I would add on to there is that confidence is we've never seen price be the driving factor of our purchases. And what's interesting. Looking at Q2 and particularly going into July, we're actually, although we were more aggressive with our promotional strategy, we're actually starting to see promos be a little bit less effective in driving traffic and conversion.

Speaker Change: And there are partners. So they you know they they work with US both ways and ideally you know everything is perfect and everything they can make exactly the same amount of pieces every single month, but that's just isn't reality, so they're very flexible.

Speaker Change: We don't see any issues with that.

Speaker Change: If we get in an overstock position or an understock position, we've worked with them to fix it and level it out.

Speaker Change: We've got a great.

Speaker Change: Planning team and and a great sourcing team and a great product team that are very very close to the vendors and.

Seth Sigman: And, you know, I think what that speaks to with us is it's not price that's a factor. Our clients want what they want. They are able to pay for it. I'm up to everybody likes to deal. But it's not a question of if they can get a better price point. They'll make the purchase and if they can, they won't just john mentioned. You can't find the same product with the same quality at upper competitors.

Speaker Change: They'll do whatever they can in their power to to help us out with a smoothing out of inventory.

Speaker Change: And then the second question was going back to the promotions. It seems like your increased promotions in the second quarter and are willing to step them up.

Seth Sigman: So it's not a pricing conversation. So, you know, we're continuously monitoring that. But I think that sort of speaks to the fact that we're seeing sort of this slow down across promo and non promotional business as something more to the macro level. I got it. Thank you so much. Good luck. Thank you.

Speaker Change: How are you balancing.

Jennifer Porter: You know, making sure that you don't damage the brand or train the consumer to wait for the promotion, especially if the promotions are not as effective in driving traffic and conversion.

Speaker Change: You know, making sure that you don't damage the brand or trained the consumer to wait for that promotion, especially the promotions right not being as effective in driving traffic and conversion.

Dawn Phillipson: And What about as you started in Q3?

Dawn Phillipson: And then I just want to come back to the traffic trends and conversion here for a second, because I think there was a little bit of mixed messaging in terms of, you know, sounds like traffic is down. And wanted to get a sense if you could share how much, you know, traffic has fallen off. May, June, July, you know, just to get a sense for what you're seeing from conversion in kind of those that are more or less window shopping but not purchasing in the near term.

Speaker Change: Yeah. Good morning, Kristina that's it that's a great question and that's at the heart of what we talk about and focus on every single day here I think you know the way we are approaching that and the way we've always approached that as you know we right now are looking forward to our fall launch we're looking forward to the fall product, we're looking forward to the fall marketing.

Robbie Ohm: Our next question is from the line of Robbie Ohm with Bank of America. Please go ahead. Oh, good morning. Thanks for taking my questions. There's kind of two follow ups here. The, well, the first question is you guys called out the, you know, that you're pleased with the new showroom performance. And I was just curious. Are, is new showroom performance better than you would have expected relative to existing showrooms in the way they've been performing, you know, the last couple of months.

Jeremy Hamblin: Yeah, interestingly enough, traffic was down more year over year in the first quarter than in the second quarter. So while traffic on a comp basis was still down in the second quarter, it was sequentially up. So interesting, you know, I call it the kind of a mid single-digit decline for the second quarter.

Robbie Ohm: And then the second question, just to follow up on the promotional question. Are there any sort of changes to the way our house would be promotional historically? Are there any new things you guys are looking at that you can share with us to, you know, to specifically for this environment. Thanks. Yeah, the new showrooms are performing very well. We're very excited. The traffic's in there. The response has been absolutely phenomenal, especially out in the California, where we've focused on opening some incredibly beautiful, most beautiful showrooms we've ever done.

Jeremy Hamblin: Got it. Thanks for the color. Best wishes.

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

Speaker Change: You know that there are two reasons why you were increasing we increased the investment in our fall marketing campaign. One was do you know off that what we are starting to see in the macro but the other is because we loved the campaign and the products that we're launching so much I truly believe it's the best catalog that we've ever put out into the market.

Speaker Change: And we have great great product that we're really proud of as well and so I think to your point. It really is having those conversations on balancing and making sure that we don't lose sight of our long term opportunity with any short term decisions or needs that we're making I think on the on the flip side, though we have proven over the last.

Robbie Ohm: And the response is great. So, you know, to compare them to other stores, I mean, we really come up with a solid, conservative sales plan for new stores, and we're very happy to see how their business is doing. So, it's not necessarily comparing them to a store in Cleveland, Ohio, or Campa, Florida, or something like that, because they're all totally different markets, different size stores, and so forth.

Speaker Change: Four to five years now that buy.

Jennifer Porter: speaking to and emphasizing the product assortment, the quality, the artists and stories, the differentiation, the showroom experience, and everything that we do in the majority of the marketing and messaging that we put out there. It allows us to be promotional when we want to be without damaging the brand, as you mentioned. If that is a balance, that is something we want to do, but our clients are very smart. They know what they want. They know how the markets work. They know how promotions work.

Speaker Change: Speaking to and emphasizing the product assortment the quality the artisan stories, the differentiation of showroom experience and everything that we do and the majority of the marketing and our messaging that we put out there. It allows us to be promotional when we want to be without damaging the brand as he mentioned it that is a balance.

Speaker Change: It is something we want to do but our clients are very smart they know what they want they know how the markets work. They know how promotions work and so we're constantly constantly telling that line and that's also how are you going into the back half of a year, we're not going to overreact.

Jennifer Porter: And so we're constantly constantly towing that line. And that's our strategy going into the back half of the year. We're not going to overreact in any way. We're going to keep doing what works for us and what we do best. And we'll be watching our fall launch very closely here over the next two months.

Speaker Change: Any which way we're going to keep doing what works for us and what we do best and we'll be reading our fall launch very closely here in the next two months.

John Reed: And then to jump in and if you'll allow me for a second, I just have to do a marketing plug. If you guys haven't visited our house.com in August, I strongly encourage you to do so. We've recently launched a campaign celebrating our showroom experience, and it features a lot of incredible imagery from some of these new showrooms that we've opened this year. And it's absolutely stunning, but it's just something, it celebrates something that we're really proud of as a business as how incredible our showroom experience is and how unique it is.

John Reed: So, if you haven't visited, please go check it out. But to touch on your point about just promotional strategy and how we're thinking about the rest of the year, and if we're going to make any changes, you know, as I mentioned earlier, and Dawn mentioned, the guy does allow us that flexibility on how we're looking at promotion for the rest of the year. We're currently looking at, you know, our same strategy of those holiday weekends, Black Friday, those key promotional periods.

Speaker Change: Thanks.

Speaker Change #100: Thank you.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, if you wish to ask a question Please press star and one.

Cristina Fernandez: Thank you, and good morning. I wanted to ask about inventory flow, and as you look at the demand trends you've seen in the past few months, what is your flexibility in adjusting your inventory to remain in a clean position here over the next, you know, 6 to 12 months?

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

Speaker Change: Our next question is from the line of Peter Benedict with Bad. Please go ahead.

Peter Benedict: Hey, good morning, guys. I was a little late to join, so I apologize if either of these have been asked before. But my first question is, just could you clarify the revenue headwind from the warehouse management system implementation that went on in April?

John Reed: Yeah, I mean, Again, we've been through many, many cycles, up cycles where we need our partners to make more products, and if we're having a down cycle, then we ask them to make fewer products. So it's fairly Simeon Gutman, Justin Kleber, Peter Keith, Steven Forbes, Jeremy Hamblin, Jonathan Matuszewski, Peter Benedict, Seth Sigman, Jonathan Marquez, Jennifer Porter, Sabrina Baxamusa. If we get in an overstock position or an understock position, we work with them to fix it and level it out.

Peter Benedict: Oh, Hey, good morning, guys.

John Reed: We've got a great planning team and a great sourcing team and a great product team that are very, very close to the vendors, and they'll do whatever they can in their power to help us out with smoothing out inventory.

Peter Benedict: Was a little late to join so I apologize. If these have been asked but my first question is just could you clarify the revenue headwind.

Speaker Change: <unk> from D. A warehouse management system implementation that went in April.

Cristina Fernandez: And then the second question is going back to the promotions. It seems like, you know, you increase promotions in the second quarter and are willing to step them up. How are you balancing making sure that you don't damage the brand or train the consumer to wait for the promotion, especially if the promotions are not as effective in driving traffic and conversion?

Dawn Phillipson: Yeah, good morning, Peter. So certainly, there was a little bit of an impact, which we had talked about, you know, on prior calls, just from a timing perspective, as you call it, about one week of revenue, you know, that that was shifted into a different time period.

Speaker Change: Yeah. Good morning, Peter So certainly there was there was a little bit of an impact, which we had talked about you know on prior calls just from a timing perspective as you.

John Reed: You know, we've been talking over the last few calls about how we've started lengthening those promotional periods. We're always looking at, you know, how we're setting those up, what those look like, how we are optimizing our marketing messaging of those promos that we are going to continue to do that instead of back off. But as of now, really looking, you know, that's similar, those similar time periods as our ongoing strategy. Terrific. Thank you. Thank you, Robbie.

Speaker Change: How about one week call. It of our revenue you know that that was shifted into a different time period.

Speaker Change: Okay. Thanks for that.

Speaker Change: Given the investments you're making in stores. It systems I'm just curious what level of revenue growth you think would be required to kind of hold your EBITA margins flattish.

Peter Benedict: I mean, obviously, in the back half of this year, you guys are pushing ahead with the investments. Kind of as a related question, as you think maybe more towards 2025, if a soft demand environment persists, do you continue on that path, or do you make any adjustments to try to cushion the margin impact? Thank you.

Speaker Change: I mean, obviously in the in the back half of this year you guys are pushing ahead with.

Speaker Change: With the investments.

Speaker Change: I.

Jennifer Porter: Thank you. Our next question is from the line of Philip Lee with William Blair. Please go ahead. Hi, this is Sabrina. Thanks for taking our question.

Speaker Change: Kind of as a related question as you think maybe more towards 2025, if a soft demand environment persists you continue on that on that path or do you or do you make any adjustments to try to Cushing.

Sabrina Baxamusa: Can you talk about some of the progress your team has made on the internal system investments and what it benefits you expect to gain on a new system launches over the next few months, maybe from inventory purchasing or your forecasting abilities? Morning, Sabrina. Yeah, you know, we're excited to continue to invest in the systems that we've been talking about our warehouse management system launched in April. And we're continuing to refine that and build on some of the operating efficiencies that we've seen in the system to date.

Speaker Change: The margin impact thank you.

Dawn Phillipson: Yeah, so there are kind of two things that I would call out in response to your question. The first is that we firmly and strongly believe that continuing to invest in showroom expansion, new product introductions, and our marketing campaigns is incredibly important, even in a down cycle. So as we think about, you know, the investments in the organization, to come out of a down cycle in a very strong position and take market share, continue to build on our market share gains, we need to continue to invest in those three components, in particular. So we will continue to do that.

Speaker Change #101: Yeah. So I wouldn't say, there's there's kind of two things that I would call out in response to your question. The first is that we firmly and strongly believe that continuing to invest in shower them expansion, new product introductions and our marketing campaigns are incredibly important and even in a down cycle. So as we think about.

Speaker Change: Yeah, the investments in the organization and to come out of a down cycle in a very strong position and take market share and continue to build on our market share gains we need to continue to invest in those three components in particular, so we will continue to do that.

Sabrina Baxamusa: So excited for how that's continuing to progress. And as we continue to tweak that, our planning software is in process as we've said before. And, you know, there's a couple of different unlocks and different phases that we'll have with that program. And it's on track with where we expect it to be. So, you know, some some great opportunities with that is improved demand forecasting, you know, to a more granular level both geographically and then on a ski basis.

Dawn Phillipson: As we think about, as I think about your broader question, you know, we are still in growth investment mode. So as you think about the investments we're making in the back office, we've talked about our warehouse management system. We've talked about the planning system, our manufacturing ERP.

Speaker Change: As we think about it as I think about your broader question.

Speaker Change: We are still in a growth investment mode. So as you think about the investments we're making in the back office, we've talked about our warehouse management at this time, we talked about the planning system and our manufacturing ERP. We've also been assessing over the last several months what other system changes need to be deployed in order to.

Dawn Phillipson: We've also been assessing over the last several months what other system changes need to be deployed in order to support the size of the organization today and then drive future efficiencies as we continue to scale the top line. So, you know, I would say near-term investments are going to drive that longer-term margin expansion. But in the near term, we need to be thinking about that. You know, I would encourage you to think about it in terms of there being additional investments.

Sabrina Baxamusa: So really looking forward to getting some unlocks there, driving some labor efficiencies with the teams here. And so over the next several months, we'll be kind of launching the first phase of that. And then our manufacturing ERP, which is going to provide quite a bit of increased margin visibility and production capability enhancements. So, you know, that is also slated to launch over the next several months as you can imagine lifting an entire ERP for a manufacturing facility is expensive.

Speaker Change: <unk> support the size of the organization today, and then drive future efficiencies.

Speaker Change: Need to scale the top line.

Speaker Change: So you know I would say near term investments are going to drive that longer term you know margin expansion, but in the near term we need to be thinking about that and I would encourage you to think about it in that theres going to be additional investments. We've said, we're investing $10 million to $15 million this year and our corporate strategic investment yeah.

Dawn Phillipson: We've said we're investing 10 to 15 million dollars this year in our corporate strategic investments. You know, you could anticipate that number will be comparable next year, if not a little bit higher. And we'll give more detail and insight into that as we continue to refine internally and confirm our timing plans on those. The other item that I would just call out as a reminder is that on the incremental flow through of revenue, you know, flow through down to adjust EBITDA is between 30 and 40%. So if that's helpful as you're kind of building out your models, that's the flow through.

Sabrina Baxamusa: And we want to make sure that we're doing it correctly and really thinking through the different benefits and making sure that we are deploying that responsibly. So excited for all those things to launch, no major delays or anything that I would call out here. And so, yeah, looking forward to getting those. That's been running for the team.

Speaker Change: You could anticipate that number will be comparable next year, if not a little bit higher and then we will give more detail and insight into that as we continue to refine internally and and confirm our timing plans on those the other item that I would just call out as a reminder is that on the incremental flow through.

Speaker Change: Revenue flow through down to adjusted Ebitdas is between 30 and 40%. So that's helpful. As you're kind of building out your models basketball there.

John Reed: Thanks, that's helpful. And then quickly back to the competitive landscape, have you been seeing a lift from the local independent mom and pops going out of business, along with maybe another regional brand in the premium space? Any thoughts there would be helpful. Thank you. Yeah, I don't have any data on that and we're in so many different markets now. That's hard to see. I haven't seen anything locally here. You know, it would be more local marketing and so forth and I'm not seeing anything here and I haven't seen hurt anybody report on anything. Sabrina?

Sabrina Baxamusa: Thank you.

Dawn Phillipson: Great. Thanks so much, Dawn. I appreciate it.

Speaker Change: Right. Thanks, so much Don appreciate it.

Peter: Thanks Peter.

Dawn Phillipson: Thank you.

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

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

Jennifer Porter: Yeah, good morning, Cristina.

Jonathan Matuszewski: Hey, good morning, Thanks for taking my question I wanted to ask about the typical consumer purchase cycle and I'm sure. It varies but is there a standard you know decision one that you observed between maybe an initial visit to the website or initial visit to the showroom.

Speaker Change: And maybe when that consumer decide to pull the trigger on.

Peter Keith: And next question comes from the line of Peter Keith with Piper Sanlo. Please go ahead. Hey, thanks. Good morning.

Jonathan Matuszewski: Purchase just trying to think about whether you know this is a dynamic where consumers are just being more choice full and and maybe just need more time to make a decision and maybe you'll see kind of that demand flow through you know later in the year, but any perspective on on that kind of decision process and <unk>.

John Reed: I'm going to take the competitor question with a different angle. So you do have a large competitor in the space that seems like they've tried to knock off some of your product lines. And so maybe if you look at that direct overlap where you've been copied, are you seeing any impact on that area of your business in the last month or two?

Speaker Change #102: He kind of changes you've been observing lately. Thanks, so much.

John Reed: Yeah, I can start that. Touch steel things.

Jennifer Porter: Yeah, good morning, Cristina. That's a great question. And that's at the heart of, you know, what we talk about and focus on every single day here. I think, you know, the way we're approaching that, and the way we've always approached that is, you know, we are right now looking forward to our fall launch, we are looking forward to the fall product, we are looking forward to the fall marketing. You know, there are two reasons why we're increasing; we increased the investment in our fall marketing campaign. One was to, you know, offset what we are starting to see in the macro.

Speaker Change: Yeah, I can start that.

Jennifer Porter: But the other reason is that we love the campaign and the product that we're launching so much, and we truly believe it is the best catalog that we've ever put out into the market. And we have a great, great product that we're really proud of as well. And so, to your point, it really is having those conversations and balancing and making sure that we don't lose sight of our long-term opportunity with any short-term decisions or needs that we're making.

John Reed: Good morning, Peter. Answer your question. No, we have not. You know, we feel, again, our product is a great quality, incredible pricing and we have not seen, we've not seen any change in those particular products that you may be referring to.

John Reed: Yeah.

Jennifer Porter: On the flip side, though, we have proven over the last, you know, four to five years now that by speaking to and emphasizing the product assortment, the quality, the artists and stories, the differentiation, the showroom experience, and everything that we do in the majority of the marketing and messaging that we put out there. It allows us to be promotional when we want to be without damaging the brand, as you mentioned. If that is a balance, that is something we want to do.

Jonathan Matuszewski: Jonathan and then John can jump in.

Dawn Phillipson: Okay, good.

Jennifer Porter: But our clients are very smart; they know what they want, they know how, you know, the markets work, they know how promotions work. And so we're constantly, constantly toeing that line. And that's our strategy going into the back half of the year; we're not going to overreact in any way; we're going to keep doing what works for us and what we do best. And we'll be watching our fall launch very closely here over the next two months.

Speaker Change: You know in the store the store model you know typically books come in a store they.

Operator: Ladies and gentlemen, if you wish to ask a question, please press star and 1. Our next question is from the line of Peter Benedict with Baird. Please go ahead.

John Reed: You know, they go back, they take swatches home, things like that. And, you know, they figure out what they want and need. And then if they need more help, we could put them together with one of our interior designers. So, you know, they can certainly come back. They come back at least twice before they buy, on average. Certainly, there are people who walk in and say, Hey, I need a sofa tomorrow. And, you know, they buy it, and we deliver it in five days or so. But, you know, most people are more thoughtful. They have to measure everything. They're not, you know; they're not experts at that thing.

Peter Benedict: Oh, hey, guys. I was a little late to join, so I apologize if either of these have been asked before. But my first question is, just could you clarify the revenue headwind from the warehouse management system implementation that went on in April?

John Reed: Touch feel things.

Speaker Change: You know they go back they takes watches home.

John Reed: Things like that and you know they.

John Reed: Figure out what they want and need and then if they need more help they.

Dawn Phillipson: And then maybe for Dawn, I'm just trying to play around with the model and wondering why there's such a large sales and comp drop off in Q4. So if I just take the midpoint of the Q3 comp guide, it seems to imply Q4 comp of a down nine to a down 20 and Q4 revenues below Q3. I guess, can you walk us through why that is the proper outlook? Yes, and mostly it's timing, Peter.

John Reed: We could put them together with one of our interior designers.

John Reed: You know they can come certainly they come back at least twice before they buy it is as an average.

Speaker Change: Certainly those people walk in and say, Hey, I need a sofa tomorrow and they buy it and we deliver it in five days or so but most part people are more thoughtful they have to measure or they're not they're not experts at that saying what colors go together what run goes with what fabric on the sofa.

Peter Benedict: Okay, thanks. And then, given the investments you're making in stores and systems, just curious what level of revenue growth you think would be required to kind of hold your EBITDA margins flattish? I mean, obviously, in the back half of this year, you guys are pushing ahead with the investments. I kind of have a related question, as you think maybe more towards 2025, if a soft demand environment persists, do you continue on that path? Or do you make any adjustments to try to cushion the margin impact?

Dawn Phillipson: Thank you.

Dawn Phillipson: Yeah, so I would say there are kind of two things that I would call out in response to your question. The first is that we firmly and strongly believe that continuing to invest in showroom expansion, new product introductions, and our marketing campaigns is incredibly important, even in a down cycle. So as we think about, you know, the investments in the organization, to come out of a down cycle in a very strong position and take market share, continue to build on our market share gains, we need to continue to invest in those three components, in particular. So we will continue to do that.

Peter Benedict: As we think about as I think about your broader question, you know, we are still in growth investment mode. So as you think about the investments we're making in the back office, we've talked about our warehouse management system, we've talked about the planning system, our manufacturing ERP, we've also been assessing, over the last several months, what other system changes need to be deployed in order to support the size of the organization today and then drive future efficiencies as we continue to scale our top line.

Peter Benedict: So, you know, I would say near-term investments are going to drive that longer-term, you know, margin expansion. But in the near term, we need to be thinking about that, you know, I would encourage you to think about it in that there are going to be additional investments. We've said we're investing 10 to $15 million this year in our corporate strategic investments. You could anticipate that number will be comparable next year, if not a little bit higher.

Peter Benedict: And we'll give more detail and insight into that as we continue to refine internally and confirm our timing plans on those. The other item that I would just call out as a reminder is that on the incremental flow through of revenue, you know, flow through down to adjust EBITDA is between 30 and 40%. So if that's helpful as you're kind of building out your models, that's the flow through.

Dawn Phillipson: Great. Thanks so much, Dawn. I appreciate it.

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

John Reed: What colors go together? What rug goes with what fabric on the sofa?

Dawn Phillipson: If you think about, you know, if we are anticipating a kind of low double digit demand comp decline, you know, the timing to get that product delivered, there's just a bit of a lag. So really, as you think about the timing of the demand to deliver realization, and then also just remember last year, up against a really strong abnormal backlog. So every quarter, as we progressed through last year, we had a higher number or a higher amount of abnormal backlog that we were delivering. So just a year over your compare is still skewed by that component.

John Reed: Things like that so it's so it's a longer process and sometimes they'll come back twice, sometimes three times you know, sometimes four times, depending on the project and depending on how much. They they left because you know a lot of people love. This loved this process they are fixing up their own to be beautiful and.

Dawn Phillipson: Okay, thank you. You're welcome.

Jonathan Matuszewski: Really really important decision for them so they take it seriously and sometimes they they buy a little quicker than other times right now, they're buying a little slower than normal, but that's kind of the process and gencon fill you in on the rest yeah, Hi, Jonathan.

Dawn Phillipson: Thank you, Peter.

John Reed: I totally agree with everything I'm, John just said and I think that's you know what we really look at furniture is a considerable part of chest and I. You know you definitely see different behaviors. So we definitely see people, who walk in and buy a chair I'll go to the website and bite the core our soft goods accessories, but you know R. R.

Jonathan Matuszewski: Hey, good morning. Thanks for taking my question. I wanted to ask about the typical consumer purchase cycle, and I'm sure it varies, but is there a standard decision length that you observe between maybe an initial visit to the website or initial visit to the showroom and maybe when that consumer decides to, you know, pull the trigger on a purchase? Just trying to think about whether this is a dynamic way where, you know, consumers are just being more choiceful and maybe just need more time to make a decision But any perspective on that kind of decision process and any kind of changes you've been observing lately? Thanks so much.

Jeremy Hamblin: Our next question is from the line of Jeremy Hamlin with Craig Hallum Capital Group. Please go ahead. Thanks. And I want to come back to, you know, the commentary around gross margin. I think, Dawn, that you noted that in the back half of the year, you expect some deleverge. I was hoping you might be able to provide a bit more kind of guardrails around what you're expecting kind of Q3 deleverge, versus Q4.

John Reed: Yeah, I can start that. Jonathan and then Jen can jump in, you know, at the store. The store model, you know, typically, folks come into a store, they touch, feel things. You know, they go back, they take swatches home, things like that. And, you know, they figure out what they want and need. And then, if they need more help, we can put them together with one of our interior designers. So, you know, they can come certainly come back at least twice before they buy, on average.

John Reed: Certainly, there are people who walk in and say, Hey, I need a sofa tomorrow. And, you know, they buy it, and we deliver it in five days or so. But, you know, most people are more thoughtful. They have to measure. They're not, you know, they're not experts at that thing. What colors go together? What rug goes with what fabric on the sofa?

Speaker Change #100: Clients are we believe are attracted to our house because of the quality because of the ability to really consider and build out our home theater family for years to come.

John Reed: things like that. So it's a longer process. And sometimes they'll come back twice, sometimes three times, you know, sometimes four times, depending on the project. And depending on how much they love it because, you know, a lot of people love this, love this process; they're fixing up their home to be beautiful. And it's a really, really important decision for them, so they take it seriously. And sometimes they buy a little quicker than other times; right now, they're buying a little slower than normal. But that's kind of the process. And Jen can fill you in on the rest. Yeah. Hi Jonathan. Now, Toby.

Speaker Change: You know I've just built to last at least the onset of purchases that people are making and then looking to you know we we do six months later, so I think it's really interesting when you look at the spectrum of those behaviors. One thing I think it's also interesting to remember as you think about our houseware system are prepared from a space as well as to remember that we are.

Jeremy Hamblin: Yeah, absolutely. So, you know, I think the important thing to note is that there's the reasons are the same, you know, as we think about the third quarter and we think about the fourth quarter, continuing to invest in, you know, new showroom, expansion, continuing to invest in our strategic investments, you know, there is necessarily a significant spike in one quarter versus another as we think about the back half. So, to be, to be extent that is helpful.

Speaker Change: More heavily weighted to those larger furniture or P says those larger average order values and so I think that does play around a little bit with a mix of how effective things like promotions, our Halifax since those things in terms of trying to drive that thus far at the moment impulse purchase them, we do see great success with that people.

Speaker Change: Going online, but really it is about allowing in providing that space and that experience for our clients Chile to take their time and to be inspired and built a home that they can really be powder.

Jeremy Hamblin: I would just know, you know, continue to, to note that last year we would have been getting incremental delivery, sorry, incremental leverage last year from the higher abnormal backlogs, you know, as we move through the year. So, when you're looking at a margin, you know, a rate basis in the quarters, just, just keep in mind that there might be incremental delivery in the fourth quarter, just a third just driven by the abnormal backlog of last year.

John Reed: Helpful. Thank you.

John Reed: Thank you.

Jennifer Porter: Yeah. Hi Jonathan.

Speaker Change: Our next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

John Reed: Oh, thanks for letting me back in. So, two follow-ups. The first one's for John. Yeah, no.

Jennifer Porter: No, I totally agree with everything John just said, and I think that's what we really look at. Furniture is a considered purchase, and you definitely see differing behaviors, so we definitely see people who walk in and buy a chair or go to the website and buy decor or soft goods or accessories, but our clients, we believe, are attracted to our house because of the quality, because of the ability to really consider and build out a home for their family for years to come.

Peter Keith: Oh, Thanks for letting me back in so two.

Jennifer Porter: Our furniture is built to last; these aren't the sort of purchases that people are making and then looking to redo six months later, so I think it's really interesting when you look at the spectrum of those behaviors. One thing I think that's also interesting to remember, if you think about our house versus some other peers in the space, is that we are more heavily weighted to those larger furniture pieces, those larger average order values, and so I think that does play around a little bit with the mix of how effective things like promotions are or how effective those things are in terms of trying to drive that sort of spur-of-the-moment impulse purchase.

Jennifer Porter: We do see great success with that with people going online, but really, it is about allowing and providing that space and that experience for clients to truly take their time and to be inspired and to build a home that they can really be proud of.

John Reed: Follow ups. The first one is for John.

Operator: Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

Jeremy Hamblin: And then as we think about the price action skews that we were deploying in June of last year. And as those were getting delivered deliveries of those would have been heavier in the fourth quarter versus the third quarter. So, you know, just a little bit of noise there, I would say, between the quarters on timing of deliveries versus when we deployed those, you know, price actions. Got it. Okay. And then I just want to come back to the traffic trends and conversion here for a second because I think there was a little bit of mixed messaging in terms of, you know, sounds like traffic is down.

John Reed: You've been in this business for quite a number of decades have you had a period, where you had one or two soft months that were just a hick up and then the business retrace back to to normal trends just seem like a familiar backdrop that you've seen before or this pace of slowdown is a bit unprecedented.

Peter Keith: Oh, thanks for letting me back in. So, two follow-ups. The first one's for John.

John Reed: Yeah, No I I am Peter this has happened before it just and it seems like it's a hiccup you know typically that happens in the summer months.

Peter Keith: You've been in this business for quite a number of decades. Have you had a period where you had one or two soft months that were just a hiccup, and then the business retraced back to normal trends? Does this seem like a familiar backdrop that you've seen before, or is this pace of slowdown a bit unprecedented?

Speaker Change: Where folks are focusing on other things are outdoors, they're traveling.

John Reed: Yeah, no, I have, Peter. This has happened before, it just, and it seems like it's a hiccup. You know, typically, it happens in the summer months when folks are focusing on other things, they're outdoors, they're traveling, trying to get all the vacations in with their kids and so forth, and it's not... You know, untypical. We haven't seen it lately because of COVID and so forth. So, you know, we were all spoiled by seeing double digit increases every every month.

Speaker Change: I'm trying to get all the vacations and with their kids and so forth and.

Jeremy Hamblin: And wanted to get a sense if you could share how much, you know, traffic has fallen off May, June, July, you know, just to get a sense for, you know, what you're seeing from conversion and kind of those that are more or less window shopping, but not purchasing in the near term. Yeah, interestingly enough traffic was down more year over year in the first quarter than in the second quarter. So while traffic on a calm basis was still down in the second quarter, it was sequentially up.

Speaker Change: If it's.

John Reed: Not.

John Reed: You know, untypical. We haven't seen it lately because of COVID and so forth. So, you know, we were all spoiled to see double digit increases every month. But

John Reed: Untypical, we havent seen it lately because of Covid and so forth. So you know we were all spoiled on seeing double digit increases every every month, but.

John Reed: But, But no, I absolutely have seen it in the past, for sure. And then it comes back, you know, in the past. It typically comes back pretty strong in the fall, when people are back in their homes and getting ready for the holidays and so forth.

John Reed: No I absolutely have seen it in the past.

Speaker Change: For sure and then it comes back to in the past.

John Reed: Typically he has come back pretty strong in the fall.

John Reed: When people are back in their homes and getting ready for the holidays and so forth.

Peter Keith: So that's kind of good for my final question to Dawn. You've had a really tough July. I don't think of July as a seasonally relevant month for furniture; to your point, it's a vacation month. So with the construct of the guidance, you've taken the EBITDA down 30% for the year. Are you taking, you know, I guess help us understand this like stack demand trends coming out of July; you're kind of holding that, and then, on the gross margin, it sounds like you've also given yourself some wiggle room to promote, but it could be upside if you don't promote. We're trying to understand the magnitude of this guy down after, you know, one soft summer month.

Dawn Phillipson: So that's kind of good for my final question to Dawn. You've had a really tough July. I don't think of July as a seasonally relevant month for furniture; to your point, it's a vacation month. So with the construct of the guidance, you've taken the EBITDA down 30% for the year. Are you taking, you know, I guess helping us understand this like stack demand trends coming out of July; you're kind of holding that and then, We're trying to understand the magnitude of this guy down after, you know, one soft summer month.

Don: So that's that's kind of a good for my final question to Don So.

Jeremy Hamblin: So interesting, you know, I call it in the kind of a mid single digit decline for the second quarter. And what about as you started in Q3? You know, we haven't disclosed that. And so, you know, we're seeing I would say nothing no meaningful change in metrics, but recognize that, you know, one month doesn't make a quarter either. So we're tracking it. We're paying very close attention to the demand metrics. We look at those on a daily basis to see, you know, what's happening in each showroom. But, you know, we'll report more on that when we report the third quarter. Thanks for the color of best wishes. Thank you.

Dawn Phillipson: You've had a really tough July I don't I don't think of July is a seasonally relevant month for furniture to your point, it's a vacation months so with the construct of the guidance you've taken the EBITDA down 30% for the year.

Dawn Phillipson: Have you taken I guess help us understand this like stack demand trends coming out of July you're kind of holding that and then.

Speaker Change: On the gross margin of your it sounds like you've also giving yourself some wiggle room to promote but.

Speaker Change: There could be upside if you don't promote.

Dawn Phillipson: What I'm trying to understand the magnitude of this guide down after one soft summer months.

Dawn Phillipson: Yeah, so I, you know, I'd clarify a little bit. We have seen, you know, deceleration in the May-June timeframe that was a stronger deceleration than we would have anticipated in those months, certainly accelerated into July. So, you know, while the second quarter demand comp was down 3%, we've had about 90 days, you know, three months of deceleration. And so, you know, I think it's prudent as we look towards the back half of the year. There's a lot going on with the economy, there's a lot going on with the election, which can be very distracting.

Dawn Phillipson: Yeah. So I you know I'd clarify a little bit we have seen a deceleration in the May June timeframe that was stronger deceleration than what we would've anticipated and that is mine. It certainly accelerated into July so you know while the while the second.

Christina Fernandez: Our next question is from the line of Christina Fernandez of Betelsey Advisory Group. Please go ahead. Thank you, good morning.

Speaker Change: Quarter demand comp was down 3%. We've had about 90 days you know three months deceleration and so.

John Reed: I wanted to ask about inventory flow, and if you look at the demand trends you've seen the past few months, what is your flexibility in adjusting your inventory to remain in a, you know, clean position here over the next, you know, six to twelve months? Yeah, I mean, it's, again, we've been through many, many cycles, up cycles, where we need our partners to make more products, and if we're having a down cycles, then we ask them to make less products, so it's fairly straightforward, we're very, very flexible, we're incredibly meaningful to our suppliers, and they're our partners, so they, you know, they work with us both ways, and ideally, you know, everything is perfect, and everything they can make exactly the same amount of pieces every single month, but that just isn't reality, so they're very flexible, we don't see any issues with that, you know, if we get in an overstocked position or an understocked position, we work with them to fix it and level it out, we've got a great planning team, and a great sourcing team, and a great product team that are very, very close to the vendors, and they do whatever they can in their power to help us out with.

Dawn Phillipson: No I think it's prudent as we look towards the back half of the year, there's a lot going on with the economy. There's a lot going on with the election, which can be very distracting. So certainly I don't have a crystal ball I don't know exactly how the balance of this year, it's going to play out I think this is a responsible way to think about the business.

Dawn Phillipson: So certainly, I don't have a crystal ball; I don't know exactly how the balance of this year is going to play out. But I think this is a responsible way to think about the business, think about the trends that we're seeing, think about, you know, we have a lot of additional customer information that we don't share publicly for competitive reasons. And those indicators are, you know, kind of telling us that maybe this could persist a little bit longer than just July and August.

Dawn Phillipson: I think about the trends that we're seeing we think about you know we have a lot of additional customer information that we don't share publicly for competitive reasons and those indicators are you now kind of telling us that maybe this is yeah could persist a little bit longer than just July and August so.

Dawn Phillipson: Yeah I think this is a responsible way to look at the business through the back half. We are I think that there's a nice opportunity and wanted to leave ourselves some.

Dawn Phillipson: So, you know, I think this is a responsible way to look at the business through the back half. We think that there's a nice opportunity, and we want to leave ourselves some wiggle room in the numbers for promotional activity as we move through the year. You know, in a great environment, in a perfect world, we wouldn't need it. And, you know, and the consumer will return very strongly in a couple months. But we don't have any evidence that that is going to be the case. So we're just, you know, prudently managing as we think about the business, and watching the consumer trends on a daily basis. And, you know, I think this is a reasonable expectation for the organization at this time.

Speaker Change: With over them and the number is for promotional activity as we move through the year.

Speaker Change: And a great environment in a perfect world, we won't need it and you know in the consumer Woolworths will return very strongly and in a couple of months.

Dawn Phillipson: But we we don't have any evidence that that is going to be the case, so or just you know prudently managing as we're thinking about the business watching the consumer trends on a daily basis, and you know I think that there's a reasonable expectation for the organization at this time.

Jennifer Porter: And then the second question is going back to the promotions, it seems like, you know, you increase promotions in the second quarter, and are willing to step them up, how are you balancing, you know, making sure that do you damage the brand or train the consumer to wait for the promotion, especially the promotions are not being as effective in driving traffic and conversion. Yeah, good morning Christina, that's a great question, and that's at the heart of, you know, what we talk about and focus on every single day here.

Peter Keith: Okay, and maybe just one very quick follow-up. You know, July is a tricky month for a lot of companies. We're fighting with earnings season. Hurricane, CrowdStrike, Goutage, anything of that sort that may have impacted the man comp that you'd want to flag.

Speaker Change: Okay, and then maybe just one very quick follow up Joe July is a quirky month for a lot of companies were finding with earnings season.

Speaker Change: You had a hurricane crowd strike outage.

Speaker Change: Anything and that sort that may have impacted that demand comp, but that you'd want to flag.

Peter Keith: Not that we've seen, no. Nothing we can put our fingers on, Peter. Okay, all right. Thank you.

Speaker Change: No not that we've seen no.

Dawn Phillipson: Nothing we can put our fingers on Peter.

Peter Keith: Okay. All right. Thank you very much.

Operator: Okay. All right. Thank you.

Speaker Change: Okay, Alright, thank you very much.

Speaker Change: Thank you.

Wendy Watson: Ladies and gentlemen, this concludes our question and answer session. I would now hand the conference over to Wendy Watson for her closing comments.

Operator: Ladies and gentlemen, this concludes our question and answer session I would now hand, the conference over to Wendy Watson for her closing comments.

Jennifer Porter: I think, you know, the way we're approaching that and the way we've always approached that is, you know, we right now are looking forward to our fall launch, we're looking forward to the fall product, we're looking forward to the fall marketing, you know, there are two reasons why we're increasing, we increase the investment in our fall marketing campaign. One was to, you know, offset what we are starting to see in the macro, but the other is because we love the campaign and the product that we're launching so much truly believe it is the best catalog that we've ever put out in the market and we have great, great product that we're really proud of as well.

Wendy Watson: Thank you everybody for joining us today, and we will look forward to talking to you again next

Operator: Thank you everybody for joining us today, and we will look forward to talking to you again next quarter.

Speaker Change: Thank you everybody for joining today and we will look forward to talking to you again next quarter.

Speaker Change: Thank you the conference off Art House has now concluded. Thank you for your participation you may now disconnect.

Operator: Yeah.

Operator: [music].

Operator: Yeah.

Jennifer Porter: And so I think to your point, it really is having those conversations and balancing and making sure that we don't lose sight of our long term opportunity with any short term decisions or needs that we're making. I think on the flip side, though, we have proven over the last, you know, four to five years now that by speaking to an emphasizing the product disortment, the quality, the artists and stories, the differentiation, the showroom experience in everything that we do in the majority of the marketing and messaging that we put out there, it allows us to be promotional when we want to be without damaging the brand, as you mentioned.

Operator: [music].

Operator: Yeah.

Operator: Okay.

Operator: Yeah.

Operator: [music].

Operator:

Jennifer Porter: And that is a balance that is something we want to do, but our clients are very smart, they know what they want, they know how, you know, the markets work, they know how promotions work, and so we're constantly, constantly towing that line. And that's our strategy going into the back half of the year, we're not going to overreact any which way we're going to keep doing what works for us and what we do best. And we'll be reading our fall launch very closely here in the next two months.

Operator: Thank you. Ladies and gentlemen, if you wish to ask a question please press star and one.

Peter Benedict: Our next question is from the line of Peter Benedict with bed. Please go ahead. Okay, good morning guys.

Dawn Phillipson: I was a little late to join so I apologize if either of these have been asked but my first question is just could you clarify the revenue headwind from the warehouse management system implementation that went in April? Yeah, good morning Peter. So certainly there was there was a little bit of an impact which we had talked about, you know, in prior calls just from a timing perspective as you, you know, about one week call it of revenue, you know, that that was shifted into a different time period.

Dawn Phillipson: Okay, thanks.

Dawn Phillipson: And then in giving the investments you're making in stores and systems just curious what level of revenue growth you think would be required to kind of hold your EBITDA margins flatish. And obviously in the back half of this year you guys are pushing ahead with the investments, I kind of as a related questions you think maybe more towards 2025. If a soft and an environment persist, do you continue on that on that path or do you or do you make any adjustments to try to cushion the margin impact.

Dawn Phillipson: Thank you. Yeah, so I would say there's kind of two things that I would call out in response to your question. The first is that we firmly and strongly believe that continuing to invest in showroom expansion, new product introduction and our marketing campaigns are incredibly important even in a down cycle. So as we think about, you know, the investments in the organization to come out of a down cycle in a very strong position and take market share, continue to build on our market share games, we need to continue to invest in those three components in particular.

Dawn Phillipson: So we will continue to do that. As we think about, as I think about your broader question, you know, we are still in growth investment mode. So as you think about the investments we're making in the back office, we talked about our warehouse management system, we talked about the planning system, our manufacturing ERP, we've also been assessing over the last several months. What other system changes need to be deployed in order to support the size of the organization today and then drive future efficiencies.

Dawn Phillipson: So, you know, I would say near term investments are going to drive that longer term, you know, margin expansion. But in the near term, we need to be thinking about that. You know, I would encourage you to think about it in that there's going to be additional investments. We said we're investing $10 to $15 million this year and our corporate strategic investments. You know, you could anticipate that number will be comparable next year if not a little bit higher and we'll give more detail and insight into that as we continue to refine internally and confirm our timing plans on those.

Dawn Phillipson: The other item that I would just call out as a reminder is that on the incremental flow through revenue, you know, flow through down to adjust the event as between 30 and 40%. So if that's helpful as you're kind of building out your models, that's the flow through.

Dawn Phillipson: Thank you. Thanks so much, Dawn. Appreciate it. Thanks, Peter.

Jonathan Matuszewski: Thank you. Our next question is from the line of Jonathan Matuszewski with Jeffries, please go ahead. Hey, good morning. Thanks for taking my question. I wanted to ask about the typical consumer purchase cycle, and I'm sure it varies. But is there a standard, you know, decision length that you observe between maybe an initial visit to the website or initial visit to the showroom, and maybe when that consumer decides to pull the trigger on purchase, just trying to think about whether this is a dynamic where consumers are just being more truthful and maybe just need more time to make a decision.

Jonathan Matuszewski: So maybe you'll see kind of that demand slope through later in the year. But any perspective on that kind of decision, process, and any kind of changes you've been observing lately. Thanks so much. Yeah, I can start that Jonathan and then Jen can jump in. You know, in the store, the store model, you know, typically folks come in the store, they touch field things, you know, they go back, they take swatches home, things like that.

Jonathan Matuszewski: And, you know, they figure out what they want and need and then if they need more help, they think we could put them together with one of our interior designers. So, you know, they can come, certainly they come back at least twice before they buy it as an average. Certainly those people walk in and say, I need a sofa tomorrow and you know, they buy it, we deliver it in five days or so.

Jonathan Matuszewski: But, you know, most people are more thoughtful. They have the measure. They're not, you know, they're not experts at that thing. What colors go together, what rug goes with what fabric and the sofa, things like that. So it's a longer process. And sometimes they'll come back twice, sometimes three times, you know, sometimes four times depending on the project. And depending on how much they love, because you know, a lot of people love this, love this process.

Jonathan Matuszewski: They're fixing up their home to be beautiful and to really, really important decision for them. So they take it seriously and sometimes they buy a little quicker than other times right now. They're buying a little slower than normal, but that's kind of the process and Jen can fill you in on the rest. Yeah, hi, Jonathan. No, totally agree with everything. John just said and anything that's, you know, what we really look at furniture is a considered purchase.

Jonathan Matuszewski: And, you know, you definitely see different behaviors. So, you know, we definitely see people who walk in and buy a chair or go to the website and buy decor or soft goods or accessories. But, you know, our clients are, we believe are attracted to our house because of equality, because of the ability to really consider and build out a home for your family for years to come. You know, our furniture is built to last.

Jonathan Matuszewski: These are sort of purchases that people are making and then looking to, you know, we do six months later. So I think it's really interesting when you look at the spectrum of those behaviors. One thing I think it's also interesting to remember, if you think about our house versus some other appears in the space as well as to remember that we are more heavily weighted to those larger furniture pieces of larger average order values.

Jonathan Matuszewski: And so I think that does play around a little bit with a mix of how effective things like promotions or how effective those things in terms of trying to drive that. So spur of the moment impulse purchase. We do see great success at that. People going online, but really it is about allowing and providing that space and that experience for clients truly to take their time and to be inspired and build a home that they can really be proud of. Helpful, thank you. Thank you.

John Reed: Our next question comes from the line of Peter Keith with Piper Sandlow, please go ahead. Oh, thanks for letting me back in. So, two follow-ups, first ones for John. You've been in this business for quite a number of decades. Have you had a period where you had one or two soft months that were just a hiccup and then the business retraced back to normal trends? Is this like seeing like a familiar backdrop that you've seen before or this pace of slowdown is a bit unprecedented?

John Reed: Yeah, no, I have Peter. This has happened before. It just seems like it's a hiccup. You know, typically it happens in the summer months where folks are focusing on other things, they're outdoors, they're traveling, trying to get all the vacations in with their kids and so forth. And it's not, you know, untypical. We haven't seen it lately because of COVID and so forth. So, you know, we were all spoiled on seeing, you know, double digit increases every month.

John Reed: But now I absolutely have seen it in the past, for sure. And then it comes back, you know, in the past, if you didn't typically have come back pretty strong in the fall, where people are back in their homes and getting ready for the holidays and so forth. So that's kind of good for my final question to Dawn. So, you've had a really tough July. I don't think of July as a seasonally relevant month for furniture at your point at the vacation month.

John Reed: So, with the construct of the guidance, you've taken the EBITDA down 30% for the year. Are you taking, you know, I guess, help us understand this like stack demand trends. Coming out of July, you're kind of holding that. And then on the gross margin, if you sound like you've also given yourself some wiggle room to promote, but you could be upside if you don't promote. Just, we're trying to understand the magnitude of this guy down after, you know, one soft summer month.

John Reed: Yeah, so I, you know, I'd clarify a little bit. We have seen, you know, deceleration in the May, June time frame that was stronger deceleration than, you know, we would have anticipated in those months, certainly accelerated into July. So, you know, while the, while the second quarter demand comp was down 3%, we've had about 90 days, you know, three months of deceleration. And so, you know, I think it's prudent as we look towards the back half of the year.

John Reed: There's a lot going on with the economy. There's a lot going on with the election, which can be very distracting. So, certainly I don't have a crystal ball. I don't know exactly how the balance of this year is going to play out. I think this is a responsible way to think about the business, think about the trends that we're seeing, think about, you know, we have a lot of additional customer information that we don't share publicly for competitive reasons.

John Reed: And those indicators are, you know, kind of telling us that maybe this is, you know, could push this a little bit longer than just July and August. So, you know, I think this is a responsible way to look at the business through the back half. We think that there's a nice opportunity, we want to leave ourselves wiggle room in the numbers for promotional activity as we move through the year. You know, in a great environment and a perfect world, we won't need it.

John Reed: And, you know, in the consumer world, we'll return very strongly in a couple months, but we don't have any evidence that that is going to be the case. So, we're just, you know, put it managing as we're thinking about the business, watching the consumer trends on a daily basis. And, you know, I think this is a reasonable expectation for the organization at this time.

Peter Keith: Okay, and maybe just one very quick follow-up. July is a quirky month for a lot of companies we're finally learning season, yet hurricane, crowd strike, outage. Anything in that sort that may have impacted that the main comp that you'd want to flag. Not that we've seen. No. Nothing we can put our fingers on, Peter. Okay, all right. Thank you very much. Thank you.

Operator: Ladies and gentlemen, this concludes our question and answer session.

Wendy Watson: I would now hand the conference over to Wendy Watson for her closing comment. Thank you everybody for joining today and we will look forward to talking to you again next quarter. Thank you.

Operator: The conference of our house has now concluded. Thank you for your participation. You may now disconnect your line. Bye. Thank you.

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