Q3 2024 Arhaus Inc Earnings Call
Good morning and welcome to the AllHouse Third 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.
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, John Reed, Co-Founder, Chairman, and Chief Executive Officer. Please go ahead.
John Reed: Good morning everyone and welcome to the Our House third quarter conference call. On with me today are Dawn Phillipson, Chief Financial Officer, and Tara Atwood, our new Vice President of Investor Relations.
Tara is a seasoned investor relations professional, and we are excited to welcome her to the Our House team. Now I'll hand it over to Tara.
Tara Atwood: Good morning and thank you for joining the Our House third quarter 2024 earnings call. After our prepared remarks, we will be joined by Jen Porter, our Chief Marketing and E-Commerce Officer, for the Q&A session.
During Q&A, please limit to one question and one follow-up. We issued our earnings press release and our 10-Q for the quarter ended September 30, 2024, before market opened today.
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.
As a reminder, remarks today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements.
John Reed: 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.
John Reed: and subsequent 10-Qs, as such factors may be updated from time to time in our filings with the SEC.
The forward-looking statements are made as of today's date and accept as may be required by law.
Tara Atwood: 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 will turn the call back over to John.
John Reed: Thanks, Tara. I'd like to begin the call by expressing my gratitude to our team with their exceptional execution this quarter.
Tara Atwood: Our long-term success is driven by their dedication to delivering outstanding products and creating an inspiring showroom experience. This quarter we launched some of the most compelling new product collections in our house history.
thoughtfully presented across our showrooms to elevate the client experience.
Tara Atwood: A highlight of our fall product launch is the Aster Collection, which builds on our leadership in Reed and design and commitment to artisan craftsmanship. This collection combines globally sourced materials and sophisticated elements.
Tara Atwood: making each piece both functional and beautiful. Crafted from solid oak with natural stone tops, the Astor Collection features beautiful brown espresso marble chosen for its rich tone and stunning movement.
Our fall launch also includes elegant curved upholstery selections and unique collectible pieces that can define a home.
Moving to our quarterly performance.
Tara Atwood: In the third quarter, we delivered a net revenue of $319 million, net income of $10 million, and adjusted EBITDA of $23 million.
Tara Atwood: During the quarter, we experienced a decline in demand-comparable growth of 11.3 percent.
However, demand trends improved meaningfully as the quarter progressed.
In September, we recorded
A low single-digit decline in demand, comparable growth following high teens and mid-teens declined in July and August, respectively.
Tara Atwood: Notably, September set a new record as the biggest total demand month in the our house history, up 10% compared to last year's strong comparable period. This performance was supported by our annual store-wide sale.
held each January and September to coincide with our spring and fall launches.
This promotion was well-received by clients, and we continue to leverage our R-House marketing campaigns to drive engagement around these key launches.
Tara Atwood: In October, our demand-comparable growth declined in the low single digits as the consumer environment remains pressured. However, total demand was up nearly double digits as our brand continues to resonate with clients despite ongoing macro pressures.
John Reed: While demand trends improved over the course of the third quarter, we're lowering our full-year sales and earnings outlook to reflect the continued tempered consumer environment.
which we believe is temporary given our innovative product offerings and compelling marketing campaigns.
Dawn will discuss the details later on the call.
John Reed: Despite these headwinds, we remain fully committed to our long-term growth strategy.
and the fundamentals of our business.
John Reed: Our key growth drivers include first enhancing and elevating our product assortment, which is essential for exceeding client expectations and reinforcing our leadership in premium artisan crafted home furnishings.
John Reed: Second, expanding our showroom base to bring the R-House experience to more clients in key markets.
John Reed: Third, increasing our brand awareness, which will deepen our relationships with both new and existing clients. And finally, we are making strategic investments to upgrade our infrastructure and improve our business tools, ensuring we have a strong foundation to support our long-term growth.
John Reed: Turning to our showrooms, we are on track to meet the high end of our 2024 showroom opening goals, with 10 new showrooms already open this year and an additional opening tomorrow in Corto Madera, California.
John Reed: The Cordo Madero showroom will be our 14th location in California as part of our ongoing West Coast expansion.
John Reed: This year, we expect to open five new traditional showrooms, bringing our total to 85 traditional showrooms at the end of the year, just halfway to our target of 165 traditional showrooms.
John Reed: In addition, we opened three new design studios at three Art House loft locations this year.
John Reed: As I mentioned in past calls, we continue to be pleased with our performance and economics of our new showrooms in all formats. We're proud to have grown our total showroom count to now 103 as of tomorrow.
John Reed: Moving to product, we believe our house leads the industry in setting design trends, often seeing them before they emerge. As I mentioned earlier, we're excited about the new fall collection, which launched in the third quarter.
John Reed: We encourage you to experience the design, quality, and aesthetic appeal of our furnishings and décor, whether in our showrooms or on our website or looking on our catalogs.
John Reed: And we're already hard at work on the upcoming spring launch just two months away. Notably, highlights include expanding our motions selection within the upholstery collections.
John Reed: We've been in the motion business for some time now and are thrilled to see the continued growth of our merchandise assortment with these offerings. Additionally, we're introducing exotic wood collections across bedrooms, wall, dining, adding distinctive character and riches to our product line.
John Reed: On the strategic investment front, as we previously communicated, we are setting the foundations for our 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 are now focusing on the design and build phases of our new planning system and the new ERP and our upholstery manufacturing facility. We expect these systems to be implemented in 2025.
John Reed: As a reminder, the planning system will help optimize our inventory purchases and forecasting capabilities, and the new ERP at our upholstery factory facility will improve margin visibility and production capabilities.
John Reed: Before I turn it over to Dawn to discuss our financial results and outlook for the remainder of 2024, I want to again thank the Airhouse team for their hard work and dedication.
John Reed: Our long-term success is driven by our team's dedication to delivering the best products and inspiring showroom experience. Their ongoing commitment highlights the resilience of our growth strategy and our commitment to creating value for our shareholders. Over to you, Dawn.
Thank you, and good morning.
Dawn Phillipson: Net revenue in the third quarter was $319 million with a 9.2% comp decline. The decrease in net revenue compared to the prior year was primarily related to the non-recurrence of prior year abnormal backlog deliveries and lower total demand in the quarter.
Speaker Change: As John mentioned earlier, our demand comp declined 11.3% in the quarter, with September's demand comp improving meaningfully to decline low single digits from July's high teen and August's mid-teen declines.
Speaker Change: Our third quarter growth margin decreased to $123 million, driven primarily by lower net revenue and higher showroom costs as we continue to expand our footprint.
John Reed: Gross margin as a percent of net revenue decreased to 38.6%, driven primarily by higher showroom costs, higher delivery and transportation costs, and de-leverage on lower net revenue.
John Reed: Third quarter SG&A expense increased $5 million to $112 million, primarily driven by legal costs, marketing investments, and strategic investments to support and drive the growth of the business, including supply chain and technology improvements.
John Reed: This was partially offset by the non-recurrence of last year's donation to the Nature Conservancy.
John Reed: Third quarter 2024 net income was $10 million. Adjusted EBITDA in the quarter was $23 million versus $34 million in the third quarter of 2023.
John Reed: Third quarter net revenue of $319 million and adjusted EBITDA of $23 million resulted in a 7.2% adjusted EBITDA margin in the quarter.
John Reed: As we reported this morning, we are lowering our full year outlook for 2024.
John Reed: As a reminder, we experienced softening demand comps starting in May, with the negative trend accelerating into July and August.
John Reed: In September, we experienced sequential improvement with the demand comp decline in the low single digits as clients responded well to our product assortment, marketing, and planned promotions.
John Reed: As we mentioned last quarter, we believe the softer demand comps we're experiencing are a reflection of the continued pullback by the home furnishings consumer that is now starting to impact our business, as well as the lapping of strong demand from last year related to the price action skews in the second half of 2023.
John Reed: For the year, we now expect net revenue in the range of $1.23 to $1.25 billion and adjusted EBITDA in the range of $115 to $125 million.
John Reed: As the midpoint of our range implies, we expect net revenue to decline approximately 4% for the year, as we lapped the delivery of $75 million in abnormal backlogs that occurred in 2023, and we expect a negative demand comp for the year.
John Reed: In the fourth quarter of 2024, we anticipate net revenue in the range of 306 to $326 million and adjusted EBITDA in the range of 23 to $33 million. Our outlook contemplates a low double-digit demand comp decline for the fourth quarter.
John Reed: We remain focused on current demand trends and gross margin, and our outlook allows for continued flexibility around promotions for the balance of the year.
John Reed: We previously communicated the expectation to invest $10 to $15 million in strategic investments this year. We now expect to invest approximately $10 million in strategic investments in 2024, with about 80% in SG&A and 20% in gross margin.
John Reed: These initiatives include investments in systems, e-commerce, client experience, and other corporate investments to support and drive the growth of the business.
John Reed: In 2025, we expect to spend approximately $15 to $20 million in strategic investments, including the subscription fees for system enhancements deployed in 2024.
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 growth strategy, despite the current macro challenges.
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: 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.
John Reed: 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.
Thank you.
Speaker Change: Thank you. We will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please while we poll for questions.
Speaker Change: The first question comes from the line of Stephen Phobes with Guggenheim Securities. Please go ahead.
Good morning, John, Dawn, Ken.
Maybe you can start, can you show everyone the recording?
Speaker Change: Thanks, John. To start with the new showroom performance, curious if you could expand on how the more recent store cohorts, right, the 2022, 3, and 4 store cohorts are performing relative to the
Speaker Change: Internal Performa model and how the current environment or performance of those stores are impacting your 2025 real estate plans.
Sure. Yeah, we've been thrilled with the new stores.
Speaker Change: They've opened very solid. They seem to be growing. Some have been super home runs that, you know, really surprised us. Other ones have been very steady, you know, right on projections. So, yeah, we're happy with that. And, you know, as far as looking into the future, we're sticking with our plan. We've got a lot of runway to do.
Speaker Change: Not only are we doing a lot of, you know, looking at new locations and so forth, but we're also going back and moving existing stores that maybe have become dated and so forth into better, bigger locations.
Speaker Change: As a matter of fact, we're opening one of those tomorrow as well in Fairfax, Virginia.
John Reed: a store we've had for, gosh, 15 years or so in a location. We're moving it to a freestanding building.
John Reed: two stories. It's absolutely stunning. I just toured it yesterday and it's going to be a huge, huge success. So we like doing both, keeping our current, you know, format very, very fresh, sort of relevant and, you know, cutting-edge.
John Reed: and then looking at all the new locations around the country that we're very excited about as well.
Speaker Change: Appreciate that, and then maybe just a quick follow-up for Dawn. The $15 to $25 million of strategic investment spent for next year,
should we look at that sort of as a
More of an increment of 5 to 15.
Speaker Change: Great question Steve. So it is the total strategic investment spend for next year will be 15 to 20 million. So not incremental to the 10 million that is being spent in 2024. So we tried to provide a comprehensive number for modeling purposes really.
Appreciate that clarity. Thank you Thank you
Speaker Change: Thank you. Next question comes from the line of Jeremy Hamlin with Craig Hallum. Please go ahead.
Jeremy Hamlin: Thanks for taking the questions and just a quick follow-up in terms of...
Speaker Change: about the kind of the investments that are being made and the systems changes. I wanted to get a better sense of the timing of each of the different systems components that you're gonna be touching here, both FY25 into FY26.
and then, you know, in terms of...
Speaker Change: I wasn't sure if it was 15 to 25 million or 15 to 20 million of spend. And how much of that was really kind of staffing requirements that you need or your support teams versus.
you know, kind of the software licensing fees, etc.
Speaker Change: Yeah, great question. So lots of moving pieces here. I'll try to answer all of them, but certainly let me know if I missed something. So with the planning software that is well underway with the build portion, we are anticipating that will launch in the first half of next year. That is the same timing that we would anticipate for the manufacturing ERP is sometime in the first half.
Speaker Change: For the other systems, the two other systems that we've talked about for next year are the financial platform and the order management system. And those two are very flawed. We want to make sure we're doing those correctly, so it takes some time. Those will not be deployed next year, but they will likely be kicked off launch next year. And those are the systems that we are incorporating into the $15 to $20 million. So it is $15 to $20, not $15 to $25.
or Neck here.
Speaker Change: And then, as it pertains to the split between subscription fees, implementation costs, and personnel, those are largely still being flushed out. We have not yet selected new vendors. We are actively in the process of working through what that could look like, so we need a little bit more time. We think in the numbers that we've included here that we're targeting for next year, we think that we have a good handle on the different pieces as they could range and flush, but nothing is kind of
Speaker Change: nailed down. And then if you think about, you know, something like the OMS and the financial platform, there will be longer term efficiencies. So once those are deployed, we'll have operational efficiencies, likely have, you know, process efficiencies, especially with the financial platform that might make, you know, us able to streamline headcount over time. So all of that will be fleshed out, but takes a little bit longer than, you know, just 12 months to determine those.
Did I capture everything?
Speaker Change: Yeah, great color. I had one additional question that I wanted to hit on, which was, you know, in terms of the kind of pricing presentation and coming back to, you know, demand trends, you know, September, you know, in terms of online and even in stores,
Speaker Change: The presentation looked a bit more like kind of traditional R-House over the last few years, you know, as the company kind of migrated away from pricing presentation to look like, you know, things are on sale all the time.
Speaker Change: Is there any any you know kind of linkage to September you saw a pretty notable improvement?
Speaker Change: in your demand trends, you were running your kind of typical September, you know, promo in which, you know, you had percentage off storewide and online.
Speaker Change: You know, is there any kind of linkage to, you know, where you've seen degradation in overall demand comps, you know, that's kind of based on that presentation, and is there any thought to potentially going back to how it was before?
Speaker Change: Yeah, hi, good morning. Great, great questions. Yeah, and as you noted,
Speaker Change: You know, the presentation about pricing, you know, earlier this year we shifted, you know, to that more consistent pricing. And that's really reflective of our stance on how we price products and really wanting to reflect.
you know, the value of our products to our clients.
Speaker Change: I think it's a great question about September. So September, it was reflected of our biannual sort of store-wide sale promotion that comes last year, that comes, you know,
really the last.
Speaker Change: and I'm going to talk about the five to ten years strategy that we do in terms of doing that twice a year in spring and in the fall time. And we were really pleased with the improvement in comps in September. I think what's interesting is that I was looking at the low single-digit negative comp in October as well. So that wasn't an isolated trend shift that we saw in September and then saw a deceleration going in October. We're seeing that similar.
Speaker Change: trends continue into October, where we have come off of that September promotion to our new strategy.
Speaker Change: You know, pricing is something that we always are paying close attention to. You know, we've spoken a lot before about how, you know, our pricing strategy is built to reflect that product. We build and create and design products that will be high-quality, beautiful, works of art, and quality that can last a very long time for our clients, and then we price it accordingly. We're not price engineering our products. We're not reactive in our pricing strategies with what's going on in the market. So we think very carefully about that.
Speaker Change: And, you know, we're happy with what we're doing right now, but we are paying very close attention and, you know, constantly evolving that strategy.
Great. Thanks for the call. Our best wishes.
Thank you.
Speaker Change: Thank you. Next question comes from the line of Ruby Ohms with Bank of America. Please go ahead.
Ruby Ohms: Thanks for taking my questions. Two questions, a quick one. Inventory growth I think was a little bit higher than we were expecting in the quarter. Just some update on how we should think.
Speaker Change: inventories will trend into, you know, through the fourth quarter here. And my second question is just any, I don't know, Dawn, if you could give us any further puts and takes on how we should think about gross margin for the fourth quarter in 2025.
Speaker Change: Yeah, I can take the inventory question, Robbie. That's been my direction. We've hit on some amazing collections of product that are outselling, you know, the pace of...
Speaker Change: our company and surprising us and growing on a lot of new things. As I mentioned, we're launching some incredible new product coming out into this year and into the spring.
Speaker Change: So I wanted to, A, get back in stock on things.
Speaker Change: because, you know, we were still laying it up, playing catch-up with some products just because it surprises so much how much it was selling. So our, you know, our partners had to hire people at facilities and so forth. So everybody is...
Speaker Change: in line to grow with us now. We're thrilled with what everybody's done for us. And we're ready to grow. So I wanted to get some more inventory. So A, we're in stock on almost everything. And B, we can really fund these best-selling new collections that are really gonna propel us into 2025.
Speaker Change: Great. And then on the on the gross margin question. So while we don't guide to gross margin, I think there's a couple of things that will be really helpful for you as you're thinking about your models. And as we're thinking about the fourth quarter, I would encourage you to remember, we had $75 million of abnormal backlog last year. And keep in mind, the second half
Speaker Change: was heavier with those than the first half and the fourth quarter was heavier than the third quarter. So we are lapping toughest quarter from a just a, you know, revenue flow-through perspective related to the abnormal backlog. So you're going to see some deleverage.
related to that.
Speaker Change: Steve asked a question earlier on the new showrooms and for 2025 and so just keep in mind that most of those are already under construction. We started those, we've taken possession so you know expenses such as rents and and things like that nature are already flowing through you know the P&L and and you'll see additional compression and gross margin related to those.
in the fourth quarter.
Speaker Change: So those are some of the kind of key call outs I would take. We're feeling really good about the actual, you know, product margin relative to prior year and how we're, you know, as Jen mentioned, as we're talking about the promotional cadence and so.
Speaker Change: You know, more to come on 2025. We will likely give guidance when we report fourth quarter versus versus now.
Terrific, thank you
Speaker Change: Thank you. Next question comes on the line of Jonathan Matuszkowski with Jeffries. Please go ahead.
Jonathan Matuszkowski: Hey, good morning and thanks for taking my question. The first one was just on demand complexion. Can you help us understand how that trended throughout 3Q, maybe relative to the first half? I'm thinking of things maybe like traffic, conversion, A or B, any insights would be would be helpful.
Speaker Change: Yeah, so, you know, metrics across the board have been choppy this year, so we're, you know, we're actively tracking those, we're paying close attention, we're trying to slice and dice the data about 50 different ways, much like you guys are, to understand what's happening with the underlying consumer. And you know, interestingly, in the third quarter, while comp traffic was down, comp transactions were down, we did see really nice response in the average order, units per transaction were up nicely as well. And then as you know, we've mentioned in the past, those orders that are over $5,000 and over $10,000. And what was interesting in this
Dawn Phillipson: I'm going to turn it over to you, Dawn, to talk a little bit about what we've seen over the past few months. So we've seen in the third quarter that we did see those decline year over year. However, the penetration of those orders relative to total increased. So seeing those higher value customers decelerating like the total consumer base did, but at a slower rate. Over the last few months of the year.
Speaker Change: That's really helpful. And then just my second question, if you could update us on the source and exposure to
Speaker Change: China, and the extent to which maybe reliance on the U.S. and Indonesia and Vietnam may have changed since you went public. And if we do see higher tariffs, maybe what percentage of your COGS is tied to product spend. Thanks so much.
Sure.
As you know, we've all been waiting for this election.
Speaker Change: and now we know who's in. So we have been working on this, what, two years?
Speaker Change: Three years now, moving things out of China. China never was a very large country for us, relatively small basis. As you guys all know, we manufacture our own upholstery here in the United States, which is the biggest part of our business.
Speaker Change: and we get things from all over the globe and truly, probably more than, certainly more than our competitors do.
Speaker Change: various countries all over. But the things that were left in China, I'm very happy to please any of our major vendors that we're doing any kind of significant business with there.
have all migrated, you know, out of China.
Speaker Change: Mexico, Vietnam, Cambodia, even over to Europe, Eastern Europe. So they've been working on this, you know, we've had a team of people working on this now for a couple years, anticipating this may happen, so we're in great shape.
Thank you.
Speaker Change: Thank you. Next question comes from the line of Simeon Cartman with Morgan Stanley. Please go ahead.
Speaker Change: Hi, this is Lauren Ingham for Simian. I guess our first question is, are you satisfied with demand comp trends, you know, in light of the promotions you're running? Does it show that, you know, maybe the customer is weaker, competition is more intense, or maybe something else? Thank you.
Speaker Change: Hi, good morning. You know, are we satisfied with the launch? No, obviously we want it to be better. You know, it's been a really choppy, interesting market. A lot of the furniture industry has been, you know, dealing with what's going on in the macro for longer than we have. We've obviously been seeing a really choppy, you know, year here in terms of our demand. We obviously want that to get better. We're obviously working for that to get better, and we believe a lot of the macro is, you know, temporary.
Speaker Change: We've had a lot of conversations around interest rates, what it's doing on the housing market. Obviously, the election was earlier this week, and there was a lot of noise leading into that. So, we are really confident in what we are doing in our business, in our strategies, how we are monitoring all of our tax.
Speaker Change: In terms of promotions and what's going on in the market, it continues to be an elevated promotional activity. I'll speak to everything that's going on. We run promotions, as you know, our overall strategy and approach to promotions has remained pretty consistent.
Speaker Change: We have, you know, been lengthening promotions in certain cases, as I've spoken about on prior calls, and we're constantly evaluating that and have that as a lever to continue going into Q4 and then next year. But simple answer is yes, we're happy. The answer is no, but looking forward to the future.
Yeah, just to add to that.
Speaker Change: Yeah, we have an incredible lineup for 2025 in marketing and new products, new stores that are all just hitting on.
Speaker Change: the Red Cylinders and you know we had a little stumble this quarter. I think the last time we had a stumble was 2016.
Speaker Change: So, you know, what is that, eight years ago or so? So, you know, we've had a huge run, incredible run. Our comps compared to our competitors are way up the last few years. We, you know, if you look at a three-year comp or so, a stack comp or so forth, we are,
incredibly
Speaker Change: doing unbelievable. And so, yeah, we had a little bit of stumble here, but we have all kinds of plans to get out of that. And we think it's going to be great. We love that the election's over. Hopefully, the housing market, we start hearing some better news on that going into next year. I know the interest rates continue to fall.
So we're happy and very excited about our future.
Speaker Change: Great, that's helpful. And then my follow-up is just, you know, on the competitive landscape. It seems that you have a large competitor who is driving a lot of, you know, product newness and catalog intensity this year. Could you comment if you've seen any maybe overlap or in general what you're seeing in the market share versus the industry? Thank you.
Speaker Change: Yeah, I mean, our product, our best sellers, our designs are doing incredible. Especially the new product, you know, where we're...
Speaker Change: I got flattered that some of our competition has been copying us more and more.
Speaker Change: But, you know, that's part of competition. Everybody does that. So we don't see any effect whatsoever with our competition taking any of our market share. Certainly on product, that's been very similar to ours. As a matter of fact, ours has been beating our projections.
So, we'll continue to do what we do best.
Speaker Change: We've got the best design team, we think, in the country.
Speaker Change: You have the best manufacturers and partners around that make the most unique product anywhere in the world.
Mr. Cartman, are you done with the question?
Mr. Cutman, are you done with the question?
Yes, I am. Thank you. Thank you.
Speaker Change: Next question comes on the line of Christina Fernandez with Telsey Advisory Group. Please go ahead.
Do you have a question? No. Thank you.
Speaker Change: Hi, good morning. I wanted to see if you can give more color on the change in the outlook for 2024, particularly as it relates to demand. On the last call, you talked about the demand assumption for the back half being down low double-digit, third quarter came down 11%, fourth quarter outlook is also down low double-digit. So, it seems to be the same. So, I'm just trying to understand where are things falling short of the prior outlook?
Speaker Change: Yeah, great question, Christina. So, you know, low double-digit, of course, there's a little bit of a range there. So, you know, that's one component is just as we're looking at different metrics and as we're contemplating our promotional cadence for the balance of the year, you know, some flexibility there, just in that range, right? And then secondarily, just keep in mind that if, you know, as the demand comp picks up closer to November, December, that's a little bit...
Tighter to get
Speaker Change: deliveries out and then impact net revenue, right? So there's just this kind of timing component too that we're thinking about and contemplating as we're looking at November and December, you know, sales trajectories or demand trajectories there. So those are the two reasons though.
Speaker Change: Thanks. And then just to follow up on the one of the earlier questions on the
sourcing exposure. I know your China exposure is
Speaker Change: not as big as others, but can you remind us back in 2018 how you dealt with the tariff? Did you have to, you know, did you increase prices? Did you make cuts across the organization? And then, to the extent that tariffs could be bigger this time around, you know, what are the levers you can pull to offset any cost impact? Thanks.
Speaker Change: Yeah, sure. Yeah, the tariffs of a few years ago, 25% out of China. Hey, again, we did not have that much stuff coming out of China. The same product we did.
Speaker Change: We worked with our with our partners, you know, they took a cut on their margins
Speaker Change: and then the offset of that is we raised prices a little bit. I think it was 7 to 10 percent, something like that. But then our vendors gave us a cut on the product as well, and we didn't miss a beat in sales.
Thank you.
Speaker Change: If this happens across the board around the world, we'll do the same thing again Keep in mind a big part of our production is right here in the United States. So we don't have to worry about that The things that are offshore or out of this country I should say We'll deal with it, you know one by one
Speaker Change: Our product has such an incredible value, better than our competition, better than, you know, the $100 million designers out there that are doing business. So, you know, we have room to raise prices and we don't think that's going to affect our sales.
Thank you.
Speaker Change: Thank you. Next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.
Speaker Change: Hi, thanks, good morning. Apologies, I got on the call a little bit late, but John, you had just mentioned in a recent response that you stumbled a little bit in Q3, and I guess with the benefit of hindsight, you look at those negative mid to high team demand comp declines for July and August,
Speaker Change: Was there anything internal that you've identified that that you were able to fix or that you maybe did wrong that That now gets you back on track
The previous year, we had a lot of
Speaker Change: We're up against some big numbers, some big positive numbers, A.
also the previous year we had
Speaker Change: taken some big markdowns just to clear off some inventory, which was a big, big volume for us. And we didn't anticipate, we just assumed we could make that up. And obviously, we didn't plan for that. So we think those are the two biggest, you know, biggest things. See, we didn't really promote at all those couple of months. We wanted to see what was going to happen if we were just.
Speaker Change: very quiet with promotions and so forth in any categories and you know looking back we probably should have been a little more promotional on that but the big things were the prior year the big comps and and all the whole product we were clearing out
It's a big part of that.
Speaker Change: Okay, helpful. And then on a, just a guidance question for Dawn, the demand comp outlook for negative low double-digit for Q4, I'm just trying to piece together, I think what Jen said is that the negative low single-digit trend is continuing with October.
Speaker Change: November, December, I believe, face easier compares. So I guess the view right now, and I understand conservatism, but that things are very choppy, it might get worse, and why might they get more challenged post-election?
Speaker Change: Yeah, it's a great question, Peter, and we've had a lot of internal dialogue and debate about what do we think November and December are going to look like for us. So, you know, really pleased, although, you know, it's an acceleration, sequential acceleration in September and October, although certainly not where we want to be. And so, you know, really for just...
Speaker Change: Because it's been a choppy year, because the underlying trends and data sets are a little, you know, choppy, I guess is the best word. We do have conservatism, you know, potentially baked in for November, December. I also, I think I said this on the last quarter call maybe, but, you know, I do think the election distraction caused some pullback. And I think when the consumer returns to spending.
Speaker Change: Yeah, it might be in furniture, but it likely will be in other categories, more holiday-oriented. So, we're really excited to kind of jump into January and next year and what does that look like for us. But, you know, giving ourselves a little bit of flexibility as we finish out this year as it pertains to the guide, I think is prudent, just given that, you know, two months don't make a trend and we'll see how the consumer reacts, though. We were really pleased with the newness introductions in September and the marketing campaigns that came out to support those. So, great question. Yours is the question that we've been asking each other quite robustly for the last several weeks.
Okay, I appreciate the insights. Thank you so much.
Speaker Change: Thank you. Next question comes from the line of Philip Lee with William Blair. Please go ahead.
Speaker Change: Hi, this is Sabrina on for Phillip. Thanks for taking our question. Could you provide some color on performance by income cohort or by geography? And has there been any notable strength or potential softening in any particular category?
Speaker Change: Yeah, good morning, Sabrina. It's a great question and we monitor, you know, our client demo really, really closely. We don't really speak to any shifts we see in a month or in a quarter really just because.
Speaker Change: You can't, you know, make a trend off of one month's data, particularly when it comes to demo. We are, obviously, there were some, you know, weather factors in the quarter, the hurricanes, you know, in Florida and North Carolina area obviously play a part in that. But in terms of general, what are we seeing from our clients, who they are, where they are, we're seeing that remain pretty consistent, nothing that we would see as significant enough to share at this date. But we'll definitely keep you updated if we do see any shifts in trends in the future.
Thank you.
Thank you. Next question comes to the
Speaker Change: Hey, great, good morning everybody. A few follow-up questions for me, as I think about the effectiveness of that September event.
Speaker Change: and then you think about the dip in sales or demand that you saw over the summer.
Speaker Change: Do you think there was any just waiting for that September event?
Speaker Change: Obviously, the consumer has responded to more promotional activity broadly across the industry.
Speaker Change: that type of elasticity. But does it change at all how you think about pricing and promotions? And then I guess just one related question was thinking about the scenario that you had talked about in recent quarters about maybe budgeting for more price investments, more promotional activity. I guess it was more of a scenario, but how are you planning for that now relative to those expectations a quarter ago?
Speaker Change: Yeah, that's a good question and you know the answer is you know the summer again we're up against these high
Speaker Change: numbers the year before and a lot of, you know, markdown products.
Speaker Change: You know, some people certainly wait, you know, our old tried and true customers that are there, but you have to keep in mind, well over half of our customers are new every year. They don't know when we do promotions. They don't know us. They just love our product.
and, you know...
Speaker Change: I look at it, it's all about the product. Our product is an amazing value and even more so just a unique, incredible quality stuff that you just cannot get anywhere else in the world. So, you know, with that said,
Speaker Change: You know, we don't need to start promoting more than we have been by any means. We're not planning on it We're not planning on eroding our margin
for promotions.
because we don't have to. We've got the best product.
Speaker Change: One of the leaders in our business. We actually start a lot of trends in our business and people want what they want. Our customers can afford our product, they can afford to travel.
Speaker Change: Yeah, I think last, in the summer, in my opinion, so many people were traveling and so forth, trying to get that out of their system because of COVID. They maybe didn't do it the year before, they're doing it this year.
Speaker Change: And now I think things are coming, you know, election's over, things are becoming more normalized where if they're going to travel, they're going to buy furniture, they're going to go out to dinner, but they're going to do all three. And I think the home business has, as you guys know better than I have, with...
Speaker Change: you know, the competitors and just the industry, you know, just about everybody was off.
this past year or so.
Speaker Change: I think things are going to get more normalized next year, but we've got an incredible product, incredible lineup, and there's no need for us to erode our margin by thinking, you know, the competition is taking our business or anything like that, because we don't believe that for a second.
Speaker Change: I think just to add on to that as well, if you think about, you know, what's happening going from that June, July, August period into then the September, October period is, you know, we were doing a lot. We launched our fall catalog.
Speaker Change: that hit homes at the very end of August, going into the beginning of September. We were launching incredible new products in August.
Speaker Change: going into the back half of the year, you know, we were doing all of those things that are make our house special as a brand, being able to show off that product, show off the product quality, tell the artisan story, show off the styling opportunities, the special order customization capabilities, all the things that make our house so special. And I think, you know, a lot of times, you know, we talk a lot about
Speaker Change: I think one of the big things that we focus on a bit on a business is doing what we do well. And we launched a lot of that, you know, at the end of the summer there at the end of August going into the fall period. And I think we're seeing the results.
Speaker Change: about getting out into the market and invigorating people. You know, there are a lot of distractions going on in June, July, August, and sometimes getting that catalog in the mail or getting that new showroom floor set in the stores and people walk in to really be able to inspire them. Those are the things that really make a difference when you're furnishing a home.
So when you think about that impact...
Speaker Change: Well, so maybe just a good follow-up there is thinking about the improvement in the exit rate and
Speaker Change: It seems like overall message is relatively positive on what you've seen from a demand perspective, at least the cadence. I'm curious, when you look at leading indicators in your business, customer engagement, things like store traffic, web traffic, is there anything that gives you confidence that underlying demand is there, there's just some hesitation on the consumer's part, sort of awaiting housing and macro? Thank you.
Speaker Change: Yeah, that's a great question, and as Dawn mentioned a few questions ago, we've been digging into every metric and looking at everything, and I'm hesitant to even comment on anything specifically, because you see one metric or element that suggests one direction, and then you see something else that maybe suggests something else.
Speaker Change: We did, I think, post comments about seeing really positive responses to our new product that we just launched.
Speaker Change: I'm seeing some nice response to the marketing that we put out. Those are all of those indicators that confirm to us that what we're doing is working. People are buying the product. As John mentioned, we've been surprised by the success of some of these new collections and how well they're doing, you know, despite everything that is going on in the market. So I think that is one of the big things we look at.
Speaker Change: I think the other thing I would point to, you know, that isn't really a market indicator or maybe a customer behavior indicator, but
Speaker Change: All of the things that are going on behind the scenes, and we're getting smarter every day, we're getting better every day. We've talked in the past about how we're investing in our data capabilities, our internal team analytics capabilities, really understanding that customer behavior. And so I think we are getting better every single day, every single month at being able to give our clients what they want and meet them when they want us to be there. And so that gives us a lot of positive optimism going into 2025 as well.
Thanks so much.
Speaker Change: Thank you. A reminder to all the participants that you may press star and 1 to ask a question.
Speaker Change: Next question comes from the line of Saeed Basham with Web Push Securities. Please go ahead.
Saeed Basham: Thanks a lot, Ang. Good morning. My first question is just thinking about the relative success you had in terms of sales over five and ten thousand dollars. What do you think drove that? Was it because of bigger discounts or any other factors that you can point to?
You know, we've been concentrating on
Speaker Change: A, remodeling our stores and getting our stores absolutely beautiful, and that absolutely helps with sales. People walk in and say they want the whole room.
Speaker Change: So that's number one, is when you walk in our stores, and certainly our new stores and our renovated stores, people are just blown away.
Saeed Basham: They'll walk in and they just spend more money on top of that. We focus very heavily on our internal interior design designers That again, you know that triples the average sale I believe you know once one of our
Thank you.
Saeed Basham: One of our own designers works with the clients, gets out to the client's home, really puts together a plan to do the entire room or certainly the entire house, which was many, many of those.
that entails a larger sale as well.
Saeed Basham: On top of that, our trade business with the outside designers has been booming.
Saeed Basham: More and more of those every month are finding us, signing up for our programs and using us and those also are larger sales. So the combination of those we know is why it's driving the larger sales.
Speaker Change: That's helpful, Paolo and John. And then secondly in terms of product
Speaker Change: Can you confirm that for one? And then for two, thinking about some of the new products you highlighted, like the Astrid Collection and Regit Furniture, it seems to be a major trend. Do you see that as having a lot of legs, and do you see the competitive environment there intensifying?
yeah
Speaker Change: The last question, yes, that trend is here for quite a while. And, you know, from what we can tell, we really started that trend in any significant way, and now people are playing catch-up. So we're, you know, we're off to the next Reeded collection and the next design that's going to be.
Saeed Basham: The next phase of that once the re-collection gets, you know, a little stale and, you know, I'm guessing the re-collections all the way down to.
Saeed Basham: You know the lowest folks right now. I'm guessing everybody has it because you know once people jump on a trend they follow us
Saeed Basham: They want to copy us and, you know, all the way down to the lowest guys selling to, you know, not our customers, but everybody. So any trends in this country, you know, people love to jump on and follow.
Saeed Basham: We've got, you know, that's part of our culture here in the United States.
and so...
Saeed Basham: We're on to the next one. We've added actually some more folks to our design team coming up some great new products We found some great new partners around the world That can handle our growth, you know as we've grown that we've been very very happy with
Saeed Basham: So we're going to keep doing what we do best, and that is come up and innovate new products. And a lot of our products can't be copied because they're so handmade. A lot of these folks, these bigger folks, just can't do it. They want things that can be easily manufactured, that they can pump out, you know, a thousand of a day.
Saeed Basham: in one factory, and quite a bit of our product doesn't like that, but we keep the collections very small with those kind of folks, up to one SKU even at a time, so they can handle it. But that's a different model than a lot of our competitors.
So ours is a very unique model.
Thank you so much.
Thank you.
Speaker Change: Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Tara Atwood for closing comments.
Tara Atwood: Thank you, everyone, for your participation in our call and interest in our house. Thank you, guys. Appreciate it.
Have a great day.
Tara Atwood: Thank you, everyone, for your participation in our call and interest in our house.