Q1 2025 Arhaus Inc Earnings Call

This call is not permitted without written authorization from the company.

Jay: Our industry is full of aggregators but has very few operators.

I will now turn the call over to your host Ted Atwood <unk>.

Jay: Americal is a trusted and experienced operator that delivers value far beyond price propellant position, which is why we can take a more balanced approach to how we operate our business over the long term.

Speaker Change: Vice President of Investor Relations. Please go ahead.

Speaker Change: Good morning, and thank you for joining us for the our house first quarter 2025 earnings call. Joining me on today's call are John Reid, Our founder Chairman and Chief Executive Officer, Jennifer Porter, our Chief marketing and E Commerce Officer, and Brian <unk>, Our senior Vice.

Jay: I could not pick a better group of individuals to have on our team, and want to extend a heartfelt thank you to the 14,000 associates who worked tirelessly each day to bring our vision to life. I will now turn the call over to the operator for questions, operator.

Speaker Change: <unk> a finance after our prepared remarks, we will open the line up for a Q&A session. During Q&A. Please limit to one question and one follow up we issued our press release and 10-Q for the quarter ended March 31, 2025 before the market opened today those documents are available on our Investor Relations website.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. We ask analysts to limit themselves to one question and a follow-up so that others may have the opportunity to do so as well.

Speaker Change: At IR Dot our house Dot Com, a replay of the call will be available on our website within 24 hours I would like to remind everyone that our remarks today concerning future expectations events objectives strategies trends or results.

Speaker Change: You may press star 2 if you would like to remove your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys [inaudible]

One moment, please, while we poll for questions.

Speaker Change: Constitute forward looking statements.

Speaker Change: 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-Q.

Speaker Change: Our first question comes from Simeon Kenna with Bank of America. Please proceed with your question.

OK.

Samir Kano: Hey, good morning, everybody. Hey, George, I know on the one hand you said the impact from tariffs.

Speaker Change: should be modest, but the demand seems to be really impacted here. Maybe you can sort of separate the conversations.

Speaker Change: As such factors may be updated from time to time in our filings with the SEC. The forward looking statements are made as of today's date and except as may be required by law. The company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures in this morning's press release includes the relevant <unk>.

Speaker Change: You're having with customary sort of that, you know, let's call it before April 2.

Speaker Change: and post. And at what point did you really start to see a slowdown in demand? I mean, you reported in, you know, towards the end of February. So walk us through the conversations that started sort of in March.

Speaker Change: non-GAAP reconciliations now I will turn the call over to John.

You know, let's call it early April and late April . Thanks

John: Good morning, everyone and thank you for joining US today, we're pleased with our performance this quarter delivering first quarter results in line with our expectations supported by showroom growth healthy client engagements across our retail and e-commerce channels.

Thank you. Thank you.

Speaker Change: Yeah, good morning, Simeon. What I would say is that what we said in the script was the direct impacts of terrorists are relatively modest, however the indirect impacts including the

Impact on Consumer Confidence is significant. Yeah.

John: And continued disciplined execution of our operating model.

Speaker Change: and that's driven by inflation fears that the new tariffs are driving so I would say the environment's completely different from when we first announced our guidance for the year. It's changed drastically in the last 30 to 45 days for not just the miracle but just about everybody. Everybody.

John: Net revenue grew a healthy five 5% and demand comparable growth was up an impressive four 1%.

John: We ended the quarter with $214 million in cash and cash equivalents and remained debt free or.

Speaker Change: out there, and that's the number one driver of our revised guidance. Conversations with customers are around slowing down plans for expansion, slowing down plans for growth and waiting for the environment to stabilize. We elected to revise our guidance.

John: Our strong financial position provides us the flexibility to invest in strategic growth opportunities and create value for our shareholders.

John: Since the huge uncertainties shock the past couple of months.

John: We're focused on what we can control executing with discipline investing strategically in growing our showroom footprint to support long term profitable growth.

Speaker Change: because we thought it was the prudent thing to do given the environment we see today for the reasons I just mentioned.

Speaker Change: Okay, thank you. And then I guess just as a follow-up on maybe talk around pricing.

John: We believe our differentiated model built on artisan crafted high quality design and our premium client experience continues to be a distinct competitive advantage.

Speaker Change: seems like you're a little bit more optimistic than your peer that reported.

Speaker Change: Recently, what gives you the confidence in that sort of still having some growth in pricing given the demand headwinds you just spoke about? [inaudible]

John: Now, let me walk through seven proof points that gives us confidence in the road ahead, starting with our people.

John: Were building our house for the long term and that begins with talent.

Samir Kano: Well, the value we provide customers, Simeon, has not diminished in the last 60 days so we feel as though we create

John: Incredibly proud of our depth bench.

John: Experienced leaders across the company individuals who creativity passion and discipline continue to drive our success.

Speaker Change: and Environment. It's a win-win for our customers. They see the value in our customer service and we feel very confident that the pricing we have in the marketplace is appropriate. Now, we did say that

John: We're also excited to welcome Michael Lee as our New Chief Financial Officer, starting May 12, Mike brings extensive experience and financial leadership that will be instrumental.

John: And across our showrooms our team remains our secret sauce.

John: Their expertise in connection with our clients are the key competitive advantage.

Speaker Change: and that's why you saw our price go up, but maybe I'll hand it over to Rob for a few comments as well considering he's closer to the customers on a daily basis.

John: One that consistently sets our house apart the strength of our people is reflected in our ability to execute especially through the agility of our sourcing and supply chain operations.

Speaker Change: Sure, I mean, I think what I'd add, I mean, we came into the year and we're doing exactly what we said we were going to do. We implemented our annual general rate increases at the beginning of the year. Those are, you know, contractual in nature. You see that reflected in our Q1 results where our storage revenue was up.

John: Which brings me to my second proof point, our supply chain and sourcing agility today, our sourcing footprint. It is diversified across North America, Europe, and South Asia, enabling us to adapt quickly to global dynamics, while upholding the exceptional quality standards that define our house.

Speaker Change: Nearly 2% and our handling revenue for throughput power up over 3%

John: It is important to emphasize that our diversification strategy has been in place for many years long before the current headlines.

Speaker Change: So those will carry through throughout the course of the year.

Speaker Change: We are pricing new business consistent with what we think is market rates and in most cases market rates we believe are what existing customers are paying in those facilities. So, please, um...

John: And reflects our commitment to sourcing from a broad range of trusted global vendors and.

John: In our house product development isn't about sourcing diversification as a starting point.

John: It's about growing around the world to find the best of the best.

Speaker Change: You know, we said at the beginning of the year that we didn't think we'd be taking...

John: That commitment to exceptional craftsmanship authentic materials and trusted relationships naturally lead to a sourcing model that is diverse balanced and resilient.

Speaker Change: A lot of off-cycle increases like we have in years past, that's consistent with what

Speaker Change: What we're doing at the moment, and when we look at what...

Speaker Change: What others are doing, which is using price to drive volumes quite frankly, we would...

John: In April the United States represented approximately 36% of our total receipts, including our internal manufacturing operation. We continue to invest in U S manufacturing, particularly in our domestic upholstery business over 70% of our upholstery business comes from the United States.

Speaker Change: Expect that from some of the newer, less established providers in the industry, where, where price really is their only lever. They don't have the scale that AmeriCorps have, they don't have the technology that AmeriCorps have, they don't have the proven. And,

John: With the largest portion coming from our own North Carolina facility.

Speaker Change: Operating Platform that America will have. To see other supposedly more established providers following suit, we would consider unusual, but I think that highlights our position as the commercial leader in the space, the rational player here, and the one that offers the most value to our customers.

John: <unk> proprietary design cost control and our premium positioning.

John: We also recognized a heightened focus on China sourcing amid evolving tariff dynamics in April China represented approximately 13% of our total product receipts.

John: We expect this to decline to approximately 5% or less in the third quarter.

Speaker Change: You know, our customers are willing to pay for besting class offerings, and that's what we bring [inaudible]

John: And we believe we can reach approximately 1% in the fourth quarter.

Speaker Change: Our next question comes from Steve Zackler with Evercore ISI. Please proceed with your question.

John: Our sourcing evolution underscores the agility of our operating model and the success success.

Thank you. Thank you.

Steve Sacco: Yeah, thanks. Good morning. I guess following up on Simeon's line of questioning...

John: Successful execution of our teams of course, the strength of our supply chain wouldn't be possible without our vendor relationships My third point.

Speaker Change: You know, we've seen kind of a further drop in the physical occupancy that was down about 500 basis points, economic was down like call 420

John: These relationships enable us to maximize agility minimize financial risk and move with speed and confidence during times of uncertainty.

Speaker Change: But that spread between economic and physical has kind of continued to wide now. And I guess given Rob's comments about maybe customers maybe trying to keep inventory down. I guess how do you sort of? [inaudible]

John: They are not simply transactional theyre built on mutual trust of shared values and a long standing commitment to delivering exceptional quality.

Speaker Change: Monitor or Keith Tabs on that spread and when does that get worried some where physical might not drop but the economic occupancy may come under more pressure as you redo these kind of multi year agreements with customers. Thank you very much.

John: <unk> deep rooted passion for sourcing keeps me closely connected to this work from scouring hidden gem artisan markets to building direct relationships with vendors and artisans around the world.

Thank you. Thank you.

John: Over the past months I've had the opportunity to meet face to face with many of our global vendors alongside members of our leadership team.

Steve Sacco: Yeah, I'll just point out a couple things, Steve. One is Fixed Commits Group, again in this quarter. I think it's 25 quarters in a row now or something.

John: These visits reaffirm what we've long known when it matters most our vendors show up as an extension of our team our successes mutually beneficial and many vendors in artisans have scaled with us in some cases for decades.

Steve Sacco: I was a little high there, but grew again to 60% of the revenue in the rent and storage area, a target we set a couple of years ago and again achieve. So despite the gap between economic and physical and despite how people may characterize it.

John: Whether it is helping to offset cost pressure prioritizing sourcing resources and production are definitely quickly to the dynamic environment.

Steve Sacco: Customers still sign up for fixed commits because that's the way we sell and that's the way we engage customers.

John: Our vendors consistently helped us navigate.

John: Together with our vendors, we continued to deliver exceptional value without ever compromising quality, our clients expect and love.

Steve Sacco: But let me turn it over to Rob again, because he's, again, very close to the commercial side of the business and also talks to customers on a very frequent basis. But I just want to highlight again, while everybody points out the gap between physical and economic, we continue to sell fixed commits very aggressively, and customers continue to sign up for them.

John: Which brings me to my fourth proof point, our resilient high end client base.

John: We believe we are meaningfully over index to an affluent consumer who has historically been less reactive to macro volatility importantly, this client has consistently been the last to pull back and the first to return when conditions stabilize.

Rob: Yeah, and I think, see, again, remember, the point of the, to make sure that customers have their space when they need it, during seasonal peaks, and so...

John: And while stock market volatility may be weighing on consumer sentiment more broadly overall demand was healthy in the first quarter, our clients, who remain deeply invested in their homes and consistently prioritize quality craftsmanship and long term value and their purchase decisions.

center of the fairway staff for a customer, I mean [inaudible]

Rob: Again, if we use the example of somebody paying for 20,000 pallet positions and they're occupying 18,000 pallet positions.

Rob: You know, to have a 2,000 pallet flex is exactly what they're looking for. So, you know, we don't see that being a significant concern at this point. Most of our customers, when they sign up, sign up with the expectation of there being a gap between physical and economic occupancy.

John: Two five consistent strategic execution.

John: We remain focused on executing our long term strategy by continuing to invest in what matters. Most best in class product quality thoughtful innovation newness.

Rob: You know, I think, you look at the way we structure ours, which...

John: <unk> with our clients.

John: We're expanding our physical footprint, while deepening client engagement through a multi touch point model <unk>.

Rob: which are kind of akin to, you know, more traditional lease type structure. They don't have annual recess. These are minimum, these are longer term contracts. They don't involve true ups at the end of the year. We think that's the best model. And it actually, in the end, puts.

John: Including our catalogs, which remain a month.

John: Our most powerful storytelling tools at.

John: At the same time, we're making strategic investments in technology and e-commerce to further elevate the client experience and strengthen our omnichannel capabilities.

Rob: Cost savings, opportunities in our customers hands because they can turn their inventory faster and leverage that fixed space. And so it's a nice win-win structure for both. I'll just add one last thing, Steve.

John: This disciplined execution is a key reason, we gained market share and recovered faster than many peers coming out of the pandemic.

Rob: When a customer has the variable storage ability to have 2,000 pallets available in location A, maybe 1,000 extra in location B, maybe 5,000 in a particular market they want that type of space.

John: And why are we remain confident in our approach going forward.

John: Proof point number six showroom growth and investment in.

Rob: They feel that is a good deal because they are buying partial...

John: In 2024, we opened 11, new showrooms, which are performing well, while relations enhanced brand visibility and deepen client engagements.

John: Looking ahead, we have 28 total showroom projects in the pipeline through the end of 2027.

Rob: Buffer, let's say, that in their view, offsets capital, they would need to build that type of capability. So it's not nearly seen as the financial burden that maybe others have described it as. [inaudible]

John: With even more opportunities likely.

John: This momentum reflects our disciplined focus on scaling thoughtfully elevating the showroom experience expanding market share in supporting long term revenue growth.

Speaker Change: Okay, thanks. And then maybe just as a follow-up on the developments, you know, I guess can given your commentary about, you know, customers somewhat being cautious George on the outlook, you know, how does that affect your lease up expectations on the development projects and? [inaudible] you know, you know, you know, you know

John: And underpinning all of this is my seventh and final point, our financial strength, we continue to operate from a position.

John: Of discipline debt free with ample liquidity and a healthy balance sheet. We believe the strong financial foundation allows us to invest confidently in long term growth navigate near term uncertainty and deliver long term value for our shareholders.

Speaker Change: I guess I did notice there's still a fair amount of cost to complete on some of the projects like Kansas City That are opening up, you know effectively this quarter so I just wasn't sure why there was still so much money to spend kind of at the You know when you're kind of at the five-yard line of these projects and then how do you think about the timing of stabilization?

John: In short our house is well positioned for the future powered by the strength of our brands the passion of our people and the disciplined execution of our strategy.

Speaker Change: Yeah, so we have five properties coming online this year, Steve. I think we went through them on the call. Many of them are not demand-driven. Let me give you an example. The Kansas City Build and the Port St. John Build.

John: Now, let's take a closer look at our performance in the quarter.

John: Beginning with showrooms in the first quarter, we completed five total showroom projects, one new traditional showroom.

Speaker Change: Those are not demand-driven bills. They are just better ways for product to travel, cheaper, more reliable, greener ways for product to travel.

John: And for strategic relocations.

John: The highlights include.

John: Winter Park, Florida, New traditional showroom opened in Winter Park village in an upscale lifestyle Center, Sarasota, Florida, Florida relocated showroom.

Speaker Change: than the way they travel today. So we would say in many of those builds, including the Ahold builds, which is our 100% fixed commits, there's no risk to the ramp up. At least that's the way we feel. We're still in there.

John: Opened in center Port at water side, our key Florida market and Burlingame, California, we relocated a showroom in downtown Burlingame tailored to the local clientele.

Speaker Change: Where again Rob runs our development group, let me turn it over to him to answer a few questions Yeah, so I think you know door to spot on there you look at those that we have the partnership builds which are which are about out.

John: Looking ahead I am pleased to share that we are raising our outlook on this front and now expect to complete approximately 12 to 15 total showroom projects in 2025.

Rob: You know, more effective supply chain solutions. We have our expansions, which are largely going to be committed by existing customers. And then we have others that were customer dedicated, which are the fixed commitments.

John: This includes four to six new showrooms up from the prior three to five.

John: And eight to nine strategic relocation remodels and expansions.

Speaker Change: when you think about why we would have incremental or maybe outsized spend left based on how close we are to completion it's because we commercialize our agreements with our development partners and vendors. [inaudible] and our partners and our partners and our partners and our partners

John: Our long term remains an average of five to seven new traditional showrooms annually.

John: Currently our timing is driven by readiness not just the calendar we opened locations. When we believe they are prepared to deliver the experience our clients expect.

Speaker Change: You know, in a way that we also think is best in class, which is they get paid upon completion of these projects so we don't

John: We encourage you to view our footprint growth through the lens of total showroom project activity for every project.

Speaker Change: You know, we outlay our cash in a way that's consistent with the delivery of these facilities. We think that's best in class, that aligns our interests with our partners' interests, and if those buildings get completed, our partners, you know, are paid commiserately.

John: New opening relocation remodel or expansion is evaluated through the same disciplined return on investment approach.

John: Our showroom strategy is clear target premier locations with strong foot traffic complementary co tenancies and opportunities to enhance the brand visibility and grow market share.

Speaker Change: Our next question comes from Greg McInnes with Stoshian Bank. Please proceed with your question.

Hey, good morning. With regards to the guidance.

John: Every decision is made with a focus on sustainable high quality growth and attractive expected returns on investments.

Speaker Change: How did Q1 results compared to initial underwriting? How much of a slowdown are you seeing in current inventory levels and throughput and Q2 thus far?

John: Turning to our product design is the core of who we are.

Speaker Change: I guess we're trying to get a sense for how much of this change in occupancy throughput and rent and services rate guidance is based on business to date versus some conservatism or additional conservatism built into a future demand.

John: This season and clients are responding to warmer products softer silhouettes.

John: <unk> use of color and pattern.

John: Highlights include our outdoor collection, featuring premium cheek, all weather Wicker and our first Italian upholstered collection.

Speaker Change: I'll take that one. Good morning. You look at Q1 I would say it very much came and spot on to what we were expecting. So our change in full your guidance.

John: <unk> remains our hallmark.

John: <unk> crafted by skilled artisans across collections rich textures warm woods and unexpected materials create a fresh yet familiar look and feel.

have nothing to do with the operations in Q1.

John: Looking ahead to 2025, we will continue to innovate in materials silhouettes and personalization keeping us at the forefront of designed comfort and quality.

Speaker Change: You look at Q2 or a forecast, and that would be very similar to Q1.

Speaker Change: But it was really the overall seasonality build in the back half of the year and the timing of the new business coming on the sales pipeline. What we did based in the current environment, we viewed it. Those expectations a little bit in the back half of the year. So that's what really brought down the guidance.

John: Turning to demand as I shared earlier, we delivered an impressive demand comparable growth of four 1% in the quarter. However demand comparable growth was not linear through the quarter with strong performance in January up approximately 10%.

Okay. Thank you. And-

Speaker Change: For a follow-up, maybe another way to ask about the physical and economic occupancy gap that we all seem to be focusing on Did you see renewals in Q1 from customers that have a 10% plus gap currently on their usage versus what they've signed for? [inaudible] yeah, yeah, yeah, yeah

John: Up approximately 7%, partially offset by February which was down approximately 6%.

John: And as we've said before.

John: <unk>, even a month doesn't define a trend.

John: There was more volatility.

John: Very pleased with our overall strength of the quarter.

John: Looking ahead to the second quarter April demand was softer than expected with demand comparable growth down 10% <unk>.

Speaker Change: I'm just thinking, you know, with the longer contracts in place for the lack of annual renewals.

Speaker Change: You know, maybe it's just something that we haven't seen so far as customers decide to reset those levels of fixed commit. Yeah. Yeah. No, I mean, so, so, um.

John: Impacted by the shock of the tariff news and the stock market.

John: While near term volatility remains our model is built on resilience and we believe our continued <unk>.

when we report are that the number of fixed commitments.

John: <unk> positioning is a powerful long term advantage.

Speaker Change: It's the combination of new deals that are signed under fixed commitments. [inaudible]

Speaker Change: Any renewal that didn't occur and then any gaps, there are any changes that may have occurred at a renewal date and again we're up not just in percentage but we're up in absolute dollar value.

John: In closing our long term strategy remains clear and focused on anchored by our four key priorities increasing brand awareness.

John: To drive net revenue growing our showroom footprint enhancing our omni channel client experience and.

Speaker Change: revenue under fixed commitments. So, you know, we saw a mix, right? We saw new customers get added under fixed commitments. We saw existing customers upon their renewal increase their fixed commitments. And then we saw a few go the other way. So, the net was a positive as it has been now for 16 straight quarters.

John: And investing in the growth to build scale.

John: As we look ahead, we remain confident we have a strong business a solid foundation and a strategy. That's working our team is proactively managing tariffs to sourcing diversification and we continue to adapt as needed to protect both margin and momentum.

Thank you

John: With a premium brand a loyal and growing client base.

Speaker Change: Our next question comes from Mike Mueller with JP Morgan. Please proceed with your question.

John: And our balance sheet that allows us flexibility, we are well positioned to invest in long term value creation.

John: I'm proud of what we've accomplished this quarter and even more excited about the opportunities ahead.

Hi. Hi.

Speaker Change: Thank you to our team clients and shareholders continued support drives everything we do with that I'll turn it over to Jen Porter, our chief marketing and E Commerce Officer.

Speaker Change: I'm not sure I can answer that question, Mike. I don't know what multiples are doing today. I know what expectations were. I don't know that they've changed I think they're very unrealistic given where we are today, but I couldn't put a number on it.

Jen Porter: Thank you John and good morning, everyone, we had a solid quarter across both our retail and e-commerce channels. Despite operating in a more volatile environment.

Speaker Change: Okay, and then I guess maybe on the development front, maybe along the same lines of returns, can you talk a little bit about how you're underwriting and return requirements have changed and what you're expecting on spot new developments today compared to say a year or two ago.

Jen Porter: On the channel strategy designed to meet clients wherever and however, they choose to shop continues to drive meaningful engagement and conversion across all touch points.

Jen Porter: Our strategy is anchored in six core pillars showrooms e-commerce catalogs in home design services digital and content and client personalization.

Speaker Change: Yeah, I mean, our underwriting expectations haven't changed, right? You know, I think that we have-

Speaker Change: focused our development in the three areas that we've talked about that we believe are the the best three areas which are partnership builds, low-risk expansions, and customer data dedicated builds.

Jen Porter: Our showrooms remain a cornerstone of our house experience delivering immersive elevated environments that inspire clients and drive conversion.

Jen Porter: Approximately 90% of our clients live within 50 miles of a showroom and that proximity combined with high touch personalized service continues to fuel brand awareness and market share expansion.

Speaker Change: You know, when we do those types of developments, we think the returns associated with those are much more in the low risk category than the type of speculative development that you've seen out there in the industry. So we're going to focus on those in our return expectations have not changed. [inaudible]

Jen Porter: New showrooms opened in recent quarters are performing well supported by a long tenured experienced teams are.

Jen Porter: <unk> growth contributed meaningfully to healthy net revenue in the first quarter and show them dress and demand was a key contributor to our overall demand.

Speaker Change: Our next question comes from Keben Kim, with true securities, please proceed with your question.

Speaker Change: Thank you, good morning. So, go back to your internal operations this quarter. I'll just create.

Jen Porter: Client engagement remained strong driven by our unique product mix refresh seasonal assortments on the exceptional performance of our highly chain showroom teams, including our in home designers to bring trusted expertise to abbvie interaction.

Keevin Kim: So you guys hold onto pricing a little bit more than your peers. Thank you very much.

Thank you.

Speaker Change: So, when you think about the business cadence during the quarter, was it just all your customers doing a little bit less business or did you actually have some churn?

Jen Porter: These designer led services continued to be a key competitive differentiator and growth driver.

Keevin Kim: and if there was any difference between your more restaurant-orientated customers or grocers. Thank you.

Jen Porter: Dino driven demand was strong both in store and virtually and clients to engage with our design team generate order values four times higher than average in the quarter, we saw meaningful growth in orders about 5000 and $10000 along with record high average order value.

Speaker Change: I'd say customer churn stayed, I think we said in line on the call and I'll ask Rob to go into a little more detail but in general, keep in what we're seeing is exactly what we referred to in the last quarter and even for before that.

Jen Porter: These transactions, we believe deepen loyalty and increased audit that across categories.

Jen Porter: Just as we deliver elevated personalized experiences in our showrooms MTI design start with is we're creating that same level of inspiration and he's online online engagement remained healthy throughout the quarter and our E. Commerce business delivered strong performance growth was driven by strategic investments in technology platform enhancements.

Speaker Change: Just a general lowering of inventory across the entire system based on lower demand than when we gave guidance last quarter due to the terror situation and it exacerbating

Speaker Change: Fears of Inflation, Driving Consumer Confidence, pretty far down as we referenced in our prepare remarks.

Jen Porter: <unk> storytelling in a compelling product Max we continue to invest in e-commerce to further elevate the client experience and drive long term growth.

Speaker Change: I just turned it over for the more color. Yeah the only thing that I would go deeper on is just to say if you were to look at our customer mix as we said you know we didn't have any change in the composition of our large customer base.

Jen Porter: Yeah.

Jen Porter: The online experience is more than transactional platform to inspire educate and connect with our clients our digital and content engagement continues to drive impressive traffic and deepen brand engagement across channels.

Speaker Change: You know, as far as the turn gauge, you generally see that in some of the smaller, more price sensitive customers that carry, you know, smaller pile of inventory and are more transient.

Jen Porter: Earlier this spring I visited several of our global partners in Italy, and Romania seem that craftsmanship firsthand with a powerful reminder of the Cam position behind every piece the foundation of our storytelling and emotional client connection what sets.

Thank you.

Okay. Any difference between restaurant and grocery? [inaudible]

Speaker Change: I would say, you know, when it comes to restaurant, we break it into quick serve and kind of broad line distribution, I would say

Jen Porter: Our house apart and what we do best is clear exceptional product quality broad aesthetic appeal and our artisan led approach even in a more challenged consumer environment, our storytelling resonates clients respond not only to how our products look and feel but also to the intention values and meaning behind them something.

Speaker Change: It's more different by geography than line of business. So in the U.S., I would say the client is consistent across the board. But if you look at other parts of the world, particularly our age impact business, QSR and retail are doing great occupancy is 90 plus percent. So I'd say it's a U.S. phenomenon, and it is across every aspect of the business right now.

Jen Porter: We take pride in and believe we do better than anyone out our pricing and promotion strategy remains unchanged. We continue to drive high quality growth through a differentiated value proposition educating clients on what makes our house unique artisan crafted high quality design and our premium client experience.

Michael Carrows: Our next question comes from Michael Carroll with RBH. Please proceed with your question.

Michael Carrows: Thanks. George, maybe ask another way on some of these inventory questions. I mean, I know historically, or at least the past few quarters, the prevailing view is that customers have cut their inventories as much as they probably could cut them.

Jen Porter: Disciplined approach supports margin stability protects brand integrity and reinforces the long term value of our product while preserving flexibility when needed.

Jen Porter: Paris, we are actively monitoring the evolving landscape and remain prepared to respond with discipline should targeted pricing adjustments be necessary, we will implement them thoughtfully and communicate clearly always have a focus on maintaining client trust and delivering exceptional value.

Michael Carrows: I mean, A is that true? And if so, why are they able to cut them more or are you seeing inventories drop further from where we saw them at the end of last year kind of coming to beginning of this year? Yeah.

Thank you. Thank you.

Jen Porter: In closing while the environment remains dynamic we are staying close to our client leaning into our unique strengths and maintaining discipline in how we engage price and promote we remain focused on executing across our six omnichannel pillars to drive sustainable high quality growth and deepen client relationships.

Michael Carrows: Again, coming back to the terrorist situation and inflation fears associated with them, we quoted that Michigan Institute consumer confidence study and consumer confidence is lower than it has been

Jen Porter: With that I'll turn the call over to Ryan Brody Senior Vice President of Finance to walk you through our financial results Brian over to you. Thanks.

Michael Carrows: So that's what's driving down inventory levels. I still believe and we still have in our plan a seasonal build in the second half of the year. I'll be it muted as Jay mentioned, but I don't believe we can get through a summer at these inventory levels. I think we need some modest sequential build an inventory to do that.

Ryan Brody: Thanks, Jen good morning, everyone today, I will walk through our first quarter 2025 financial performance key business drivers and our outlook for the second quarter and full year 2025 before turning it over to Q&A.

Michael Carrows: We have a conservative view of that in our plan, as Jay mentioned in his part of the script and

Ryan Brody: Key items from our first quarter 2025 income statement include.

Speaker Change: You know, that's where we are, but this is demand related. It's not about how low a company can run their inventory. I'm sure every company in the food industry would like to sell more.

Ryan Brody: Net revenue was $311 million up five 5% year over year landing near the midpoint of our guidance.

Ryan Brody: Growth was primarily driven by increased demand across both our retail and E. Commerce channels supported by continued showroom expansion, partially offset by a comparable growth of negative one, 5%, which landed near the midpoint of our guidance range.

Versus, cut their inventory. Sorry.

Speaker Change: and we just need an environment where consumers feel comfortable spending more money.

And, like I said over the past quarter.

Speaker Change: That a normal seasonality sequential movement of inventory from Q4 to Q1 is two to three out of bips. We came in at 270 bips sequentially, so basically came in where expected. So, let's take a look at that.

Ryan Brody: Demand comparable growth was four 1% driven by healthy client response to our products and strong engagement across both our retail and e-commerce channels.

Generally Q2 was flattish.

Speaker Change: which we're still forecasting. It was more the seasonal holiday build of inventory. We're just becoming more conservative on based on the condition so it's not lowering current levels more. It's not building as much for the holiday season is what we changed our forecast on.

Ryan Brody: Gross margin was $116 million up 0.4% year over year.

Ryan Brody: The increase was primarily due to higher net revenue, partially offset by increased product costs was $7 $1 million higher showroom occupancy costs of $5 2 million and higher delivery and transportation cost of $1 7 million.

Speaker Change: Okay, great. And then, Rob, can you provide some color on the sales pipeline? I believe you were saying in the prepared remarks that you executed, what, 40% to 50% of that pipeline already. But at the same time, I think you guys are saying that customers are delaying decisions and are unwilling to kind of make expansionary type plans. Maybe can you tie those two comments together? Like, how are you executing on the sales pipeline if customers are generally not willing to make decisions?

Ryan Brody: As a percentage of net revenue gross margin decreased 190 basis points to 37, 1% of net revenue, primarily driven by higher showroom occupancy costs, which increased 120 basis points and a product margin decreased 40 basis points.

Ryan Brody: Selling general and administrative expenses were $110 million up 13, 9% year over year, primarily due to a $7 $2 million increase in general and administrative costs, primarily related to warehouse expenses marketing investments.

Rob: Yeah, well, so our sales pipeline that we came into the year with you're right Mike like we said we're executing that very well and

Speaker Change: We're ahead of not only where we were this time last year but we've closed a 50% of that.

Rob: Year-to-date, so we're very pleased with that. We'd like to see that inventory . . . . .

Ryan Brody: Strategic investments to support and drive the growth of the business, including supply chain and technology improvements. In addition to a $6 $2 million increase in selling expenses, primarily related to new showrooms in variable compensation due to higher demand.

Rob: for deals that we have won come into our system faster. Some of that, it does take, you know, we always know it takes time once you close a piece of business.

for that volume of transition into your network.

Rob: and I think in this environment that can take a little bit longer and so that's some of the impact of what worked.

Ryan Brody: Net income was $5 million landing near the midpoint of our guidance.

Ryan Brody: And finally, adjusted EBITDA was $19 million landing at the lower end of our guidance, resulting in adjusted EBITDA margin of 6.0%.

Rob: We talked about being more muted in the back half of the year.

Rob: So, you know, and then we're always focused on refilling the next tranche of our pipeline, and that's where you see, you know, you've got customers that we're having dialogue with which...

Ryan Brody: Turning to our balance sheet, we ended the quarter with $214 million in cash and cash equivalents and remain debt free.

Rob: You know the next deals up, you know there's some level of uncertainty around those but the pipeline that we came into the year with we feel very good about we're executing it strong and you know we know that business will come just I'll be at a little bit slower

Ryan Brody: Looking ahead, we remain focused on executing against our long term strategic priorities, including disciplined growth strategic investments and continued expansion of brand awareness, while remaining agile in the face of ongoing macro uncertainties.

Nick Stillman: Our next session comes from Nick Filman with Baird. Please proceed with your questions.

Nick Stillman: Hey, good morning. Maybe you wanted to touch a little bit on some of the non-seem store assets and kind of the components of that that's, um...

Ryan Brody: Given increased volatility driven by tariff shifts and softening consumer sentiment, we are revising and widening our full year 2025 outlook to reflect a more cautious stance.

Nick Stillman: On those, maybe the profile of those kind of eight leases you, the four-year leasing, the four-year looking to sell, are these older CAPEX profiles or underutilized assets and or markets that you just don't like, just a little bit more color on those specific instances would be helpful.

Ryan Brody: Notably the midpoint of our previous outlook now represents the high end of the updated range.

Ryan Brody: For full year 2025, we now expect.

Ryan Brody: Net revenue between $1, two 9 billion and $1 3 billion.

Nick Stillman: Yeah, so a lot of these are facilities, first of all, where we have other owned infrastructure in the existing...

Ryan Brody: Reflecting an updated comparable growth range of negative five.

Ryan Brody: The 5% to up one 5%.

Nick Stillman: Geography or in the same geography and we think it's most prudent to move some of that existing inventory into owned assets so that we can shed. . .

Ryan Brody: As a reminder, comparable growth in demand comparable growth may diverge over shorter time periods, but aligned more closely over the course of the year.

Nick Stillman: Some of those leases, a lot of those leases do have...

Nick Stillman: capital requirements that that we think is best spent on facilities that we own and so it becomes it ends up becoming a very good scenario for us where we're able to move business into own infrastructure in locations where we already have facilities and shed those leases longer term. That's the major catalyst behind it. And when you look at our non-same-store NOI guide

Ryan Brody: Net income of $48 million to $68 million.

Ryan Brody: And adjusted EBITDA between $123 million and $145 million.

Ryan Brody: For second quarter of 2025, we anticipate net revenue between $320 million and $350 million.

Ryan Brody: Reflecting a comparable growth range of negative 2% to up 5%.

It has been increased mostly for the Houston acquisition.

Ryan Brody: Net income of 17 million to $24 million.

a little bit of an improvement on the ramping.

Nick Stillman: of Lancaster and Plainville, but it's also been offset a bit by when we move these sites in, there's costs that go through non-sames to our NLI until we shut down the operation fair fully.

Ryan Brody: And adjusted EBITDA between $41 million and $48 million.

Ryan Brody: As it relates to tariffs our outlook includes the full impact of currently implemented tariff actions, including.

Nick Stillman: So when you really look at the new guidance we provided on the same store, we're not going to see a lot of positive NLI for the next two quarters but as

Ryan Brody: A 170% tariff on goods imported from China.

Ryan Brody: 10% tariff on goods imported from all other countries of origin.

Plainville, Blackass, we come fully wrapped.

Ryan Brody: And 25% tariffs on imported steel and aluminum.

Nick Stillman: as the cost associated with Allentown and Kansas City opening go away. And as we fully exit the operations in these sites, it's really you see the predominant benefit of non-same store NOI and Q4.

Ryan Brody: We estimate the total potential P&L impact from incremental 2025 tariffs currently in effect to be net amount of approximately $10 million, which has been factored into the updated guidance.

Ryan Brody: We believe a portion of the larger tariff impact can be mitigated through strategic sourcing shifts to other countries and vendor cost concessions.

Nick Stillman: Let me just add to the discussion on disposing assets, et cetera, getting out of leases that we're just setting up, we're optimizing our portfolio Nick, setting ourselves up when volume comes back to maximize NOI. That's the objective of the team working on our portfolio.

Ryan Brody: There are several factors contributing to this number including the timing of product receipts and deliveries as well as the mitigation actions already underway.

Ryan Brody: There are a lot of moving parts.

Nick Stillman: and obviously exiting some leases and growing the inventory in our own facilities. Not just for the Catholics reason, but obviously the margins are higher when we're not paying rent. It sets us up really well to grow very fast when volume comes back.

Ryan Brody: While pricing remains a potential lever no targeted increases are currently reflected in our guidance.

Ryan Brody: We're actively monitoring the evolving trade environment and will respond with discipline.

Ryan Brody: Let me briefly highlight the strategic investments, we're making to drive long term growth operational efficiency and client experience and how the how they are reflected in our 2025 guidance.

Nick Stillman: No, that's helpful. And the four that you're looking to sell, do you have like a rough guideline of the potential proceeds you could get from that?

Nick Stillman: They're all negotiated deals, and everybody who holds a lease has a different view on how long they want to hold it and how the deal will work. We'll do nothing that isn't accretive and nothing that doesn't fulfill the objective I just mentioned, but it's impossible to predict given how many leaseholders there are and what their motivations are.

Ryan Brody: In 2024, we completed important foundational upgrades, including a new warehouse management system at our Ohio distribution Center.

Ryan Brody: Delivering measurable improvements.

Ryan Brody: Looking ahead to 2025 and beyond we are investing in systems and infrastructure to support scalable growth.

Ryan Brody: We're strategically transitioning distribution management at our Dallas distribution Center in House building on proven expertise in implementing our warehouse management system, there with completion expected in the second quarter.

Speaker Change: Our next question comes from Vince Debone with Green Street. Please proceed with your question.

Vince DeBone: Hi, good morning. I wanted to follow up on the comments that your fixed commitment contracts don't involve annual resets. So just wanted to get a sense of what is the weighted average term of these agreements typically when they're signed, and also what is their weighted average remaining term.

Ryan Brody: We've begun rolling out a new payment platform expected to be fully implemented across all showrooms by late may enabling mobile features like tap to pay Apple pay and Google pay.

Speaker Change: and then also Howard Price changes structured for the multi-year agreements

Ryan Brody: While driving operational and expense efficiencies.

Ryan Brody: We're also implementing a new inventory planning system to improve forecasting and inventory optimization and.

Speaker Change: Yeah, so if you're a customer going into existing infrastructure, our fixed commitments tend to be between three and seven years when we signed them originally. So you can take that as an average of five.

Ryan Brody: And a new ERP platform at our North Carolina upholstery manufacturing facility to increase production visibility and improve efficiency as we scale.

Speaker Change: If you're going into a new build that we dedicated on your behalf, those can be 15 to 20 year fixed agreements.

Ryan Brody: These strategic investments as well as other key projects are expected to be approximately $15 million to $20 million in SG&A in 2025, mostly in the second half of the year as system implementations ramp up.

Speaker Change: So, I would think about that as we sign new deals, we do disclose in our supplemental or fixed commitment maturity schedule, so I'd refer you to that for the existing weighted average.

Ryan Brody: We are making these investments from a position of strength.

Ryan Brody: With a healthy cash position and disciplined capital allocation.

Ryan Brody: We believe these investments are foundational to expanding long term margin potential and enhancing client experience with.

Ryan Brody: With the deep experience team, we're confident in our ability to execute.

Ryan Brody: In closing our focus is clear.

Ryan Brody: Executing with discipline and staying agile, we believe our differentiated brand resilient operating model and long term strategic priorities position us to navigate uncertainty and deliver sustainable value for our shareholders.

Ryan Brody: We look forward to sharing continued progress and are pleased to welcome our new CFO Michael leads to the next earnings call.

Ryan Brody: Thank you for joining us we are happy to take your questions.

Ryan Brody: Thank you.

Speaker Change: Ladies and gentlemen, we will now be conducting the question and answer session.

Speaker Change: I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

recorded and the reproduction of any part of this call is not permitted without written authorization from the company.

Speaker Change: You May press Star two if you would like to remove your question from the queue.

Tara Atwood: I will now turn the call over to your host, Tara Atwood, Vice President of Investor Relations. Please go ahead. Good morning, everyone. And thank you for joining us today. We're pleased with our performance this quarter, delivering first quarter results in line with our expectations, supported by showroom growth, healthy client engagements across our retail and ecommerce channels. and continued disciplined execution of our operating model. Net revenue grew a healthy 5.5% and demand comparable growth was up an impressive 4.1%. We ended the quarter with $214 million in cash and cash equivalents and remain debt-free. Our strong financial position provides us the flexibility to invest in strategic growth opportunities and create value for our shareholders.

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

Speaker Change: One moment, please while we poll for questions.

Speaker Change: The first question comes from the line of Steven Forbes from Guggenheim Securities. Please go ahead.

Speaker Change: Hi, This is <unk> on for Steve. Thank you for taking my question and John very quickly just given the balance sheet strength and your comments around receipts from China at year end.

Speaker Change: Could you speak to how are also manage the.

Speaker Change: Holistic value proposition, you're bringing to market.

Speaker Change: And.

Speaker Change: You mentioned something about pricing no plans, yet, but I guess, how is the management thinking about protecting margins during 2025 or do you see 2025 as the year to drive brand awareness and our volume share capture.

Speaker Change: Yes, youre going to clarify the first part of your question, but the second part is yes, we feel we feel good about our margin.

Speaker Change: With everything going on.

Speaker Change: Yes.

Speaker Change: It's very very fluid as you can all now and imagine.

Speaker Change: But.

Speaker Change: Our plans are there too.

Speaker Change: Try to hold our margin as it is.

Speaker Change: And.

Speaker Change: Proceed as it is.

Speaker Change: As business as usual, we're going to focus on what we can do we can.

Speaker Change: Yes.

Speaker Change: The things that are going on outside our control.

Speaker Change: But we know what we can control we've been in business for decades, we've been through recessions and so on and so forth and crashes.

Speaker Change: We know how to handle these kind of things and these kind of times.

Speaker Change: Always been extremely successful at it we've always come out of them stronger than ever and that's what we're planning to do it we're focusing on the long term and.

Speaker Change: And that includes healthy margins.

Speaker Change: Healthy sales and executing our plan.

Speaker Change: I'm sorry, what was the first part of your question.

Speaker Change: Just given your balance sheet strength and just some of the comments around like the receipts from China by year end like anything you can provide on just the holistic cherish and managing that.

Speaker Change: Yes, I mean balance sheets looking great. We're again as I just said we're in this for the long term.

Speaker Change: So we are investing in the future.

Speaker Change: We're going to continue doing that.

Speaker Change: We're going to look at it every every 30 days or so and if we can have to tweak something we will.

John Reed: Since the huge uncertainty shock the past couple of months. We're focused on what we can control, executing with discipline, investing strategically, and growing our showroom footprint to support long term profitable growth. We believe our differentiated model built on artisan crafted high quality design and a premium client experience continues to be a distinct competitive advantage.

Speaker Change: As far as China goes.

Speaker Change: We've been working.

Speaker Change: But can we never were.

Speaker Change: Nearly as heavy in China, most of our competitors first of all.

Speaker Change: And being so strong in United States on production.

Speaker Change: We're in a great shape.

Speaker Change: Getting down there, we're hoping 1% by the end of the year is just is amazing and and that's thanks to some of our great Great partners, we've had over the overseas.

John Reed: Now let me walk through seven proof points that gives us confidence in the road ahead, starting with our people. We're building our house for the long term. And that begins with talent. I'm incredibly proud of our depth bench of experienced leaders across the company, individuals who creativity, passion and discipline continues to drive our success.

Speaker Change: And in the country for many many years and decades.

Speaker Change: There are truly our partners are working with us.

If we need to move things, we're building new factories in the other countries and so forth. So.

Speaker Change: We're in great shape there.

Speaker Change: I was just a very quick follow up on consumer behavior. How are you guys seeing any like change in engagement trends I know you mentioned, a meaningful step up in AR and sales over five cans on K, but anything.

John Reed: We're also excited to welcome Michael Lee as our new Chief Financial Officer. Starting May 12, Mike brings extensive experience and financial leadership that will be instrumental. And across our showrooms, our team remains our secret sauce. Their expertise and connection with their clients are the key competitive advantage. One that consistently sets our house apart. The strength of our people is reflected in our ability to execute, especially through the agility of our sourcing and supply chain operations. Which brings me to my second proof point, our supply chain and sourcing agility. Today, our sourcing footprint is diversified across North America, Europe and South Asia, enabling us to adapt quickly to global dynamics while upholding the exceptional quality standards that define Arhaus.

Speaker Change: Anything that's changed since early April that May have.

Speaker Change: Form that change.

Speaker Change: Sales guidance curious just curious with the data points that were considered by the new outlook.

Speaker Change: Yes.

Speaker Change: We had something called Liberation day in April we.

Speaker Change: We had something called.

Speaker Change: Stock market was crashing in April obviously that affects everybody, including our customers I mean, they're very intelligent people. They are invested in the stock market and things like that shake people is that going to be long term.

Speaker Change: But short term.

Speaker Change: Six people and I'm not sure what to do.

Speaker Change: That's why we think we add the softer sales well we know Thats why we have this offer sales in April.

Speaker Change: <unk>.

Speaker Change: Everything works its way out it's not like people are going to stop buying furniture.

John Reed: It's important to emphasize that our diversification strategy has been in place for many years, long before the current headlines. and reflects our commitment to sourcing from a broad range of trusted global vendors. At Arhaus product development isn't about sourcing diversification as a starting point. It's about going around the world to find the best of the best. That commitment to exceptional craftsmanship, authentic materials and trusted relationships naturally lead to a sourcing model that is diverse, balanced and resilient. In April, the United States represented approximately 36% of our total receipts, including our internal manufacturing operation. We continue to invest in US manufacturing, particularly in our domestic upholstery business.

Speaker Change: They love their homes ever since Covid.

Speaker Change: Ben it's been a wonderful thing for the home business, especially the good quality home business.

Speaker Change: And.

So there is some pent up demand that maybe people held off a few weeks a couple of months.

Speaker Change: That's it.

Speaker Change: I don't need to tell you guys what happened in April because he read the news as much as I did.

Speaker Change: Absolutely. Thank you much appreciated.

Speaker Change: You bet.

Speaker Change: Thank you.

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

Hi, Irina on for Seth.

Speaker Change: Regarding no low end to the comps guidance can you just give more perspective on how you came up with that negative 5% number.

Speaker Change: And can you reconcile Q2 versus the drop off implied for the rest of the year.

John Reed: Over 70% of our upholstery business comes from the United States. With the largest portion coming from our own North Carolina facility, supporting proprietary design, cost control and our premium positioning. We also recognize the heightened focus on China sourcing amid evolving tariff dynamics. In April, China represented approximately 13% of our total product receipts. We expect this to decline to approximately 5% or less in the third quarter, and we believe we can reach approximately 1% in the fourth quarter. Our sourcing evolution underscores the agility of our operating model and the success, successful execution of our teams. Of course, the strength of our supply chain wouldn't be possible without our vendor relationships.

Speaker Change: Yes, so as you.

Speaker Change: With some of the information that we've shared so far year to date trends with demand performance, it's been pretty choppy and so.

Speaker Change: Widening of the guidance ranges to account for that.

Speaker Change: The potential that continues throughout the rest of the year.

And really trying to like John mentioned every 30 days kind of read and react to what's going on in adjusting our plans as we need to at that point in time. So that's the main drivers just to account for that potentially occurring for the rest of the year.

Speaker Change: Great. Thanks.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Cristina Fernandez from Telsey Advisory Group. Please go ahead.

John Reed: My third point. These relationships enable us to maximize agility, minimize financial risk, and move with speed and confidence during times of uncertainty. They are not simply transactional, they're built on mutual trust, shared values and a long standing commitment to delivering exceptional quality. My deep rooted passion for sourcing keeps me closely connected to this work, from scouring hidden gem artisan markets, to building direct relationships with vendors and artisans around the world. Over the past month, I've had the opportunity to meet face to face with many of our global vendors, alongside members of our leadership team. These visits reaffirm what we've long known.

Cristina Fernandez: Hi, Good morning, I wanted to ask about.

Cristina Fernandez: The tariff mitigation strategy, you talked about $10 million.

Cristina Fernandez: The guidance.

Cristina Fernandez: Could the impact.

Cristina Fernandez: How much of that you think can be mitigated persistent.

Cristina Fernandez: UTD sourcing chips and vendor concessions and can you talk about the timing of that.

Cristina Fernandez: Well through the rest of the year.

Cristina Fernandez: Okay.

Cristina Fernandez: Yeah sure I can start and Brian can fill.

Speaker Change: So let's hit on the timing of it but.

Speaker Change: As you know every country.

Speaker Change: I haven't put on a 10% tariffs other than China, which is 170%.

John Reed: When it matters most, our vendors show up as an extent of our team. Our success is mutually beneficial and many vendors and artisans have scaled with us, in some cases for decades. Whether it's helping to offset cost pressure, prioritizing sourcing resources and production, or adapting quickly to the dynamic environment, our vendors consistently helped us navigate. Together with our vendors, we continue to deliver exceptional value without ever compromising quality our clients expect and love.

Speaker Change: As we move stuff out of China, which we've done I think brilliantly.

Speaker Change: We're in great shape, there the other tariffs as the other tariff so that's what we're planning on.

We have worked with our great great partners.

Speaker Change: To absorb some of that and.

Speaker Change: I'd be thrilled to announce.

Speaker Change: Every partner that we've talked to every meaningful partner has really contributed and it has really helped us so.

Speaker Change: What's left is the $10 million.

Speaker Change: We think thats pretty darn good number very good number considering all these tariffs all over the world and don't forget a big Big part of our business is still produced right here in United States, So that helps quite a bit as well.

John Reed: Which brings me to my fourth proof point, our resilient high end client base. We believe we are meaningfully over-indexed to an affluent consumer who has historically been less reactive to macro volatility. Importantly, this client has consistently been the last to pull back and the first to return when conditions stabilize. And while stock market volatility may be weighing on consumer sentiment more broadly, overall demand was healthy in the first quarter. Our clients remain deeply invested in their homes and consistently prioritize quality, craftsmanship and long term value in their purchase decision.

Speaker Change: So I don't know when thats going to flow through and give you some more specifics on that.

Speaker Change: In regards to the timing.

Speaker Change: As you would note Q1 wouldn't have been impacted by this as well as getting into April we wouldn't have had any of this incremental cost flow through the P&L. So obviously, we're looking into later in the year when that impact would occur and.

Speaker Change: As we've shared with trying to get.

Speaker Change: Targeting.

Speaker Change: China receipts to be about 5% in Q3, so as you can imagine the flow through of the tariff impact would kind of align with that step down.

John Reed: Proof Point Five, Consistent Strategic Execution. We remain focused on executing our long-term strategy by continuing to invest in what matters most, best-in-class product quality, thoughtful innovation, newness that resonates with our clients. We're expanding our physical footprint while deepening client engagement through a multi touch point model, including our catalogs, which remain among Our most powerful storytelling tools. At the same time, we're making strategic investments in technology and e-commerce to further elevate the client experience and strengthen our omnichannel capabilities. This discipline execution is a key reason we gained market share and recovered faster than many peers coming out of the pandemic.

Speaker Change: Coming from China.

Speaker Change: But it's fluid and it depends on when.

Speaker Change: The inventories received and then delivered to customers. So.

Speaker Change: While we've provided us approximately $10 million impact.

Speaker Change: Predominantly it's factored into the second half of the year.

Speaker Change: And then my follow up on the on the real.

Speaker Change: Okay.

Speaker Change: <unk>, you're opening one more showrooms. So wanted to see are you seeing I guess better incremental real estate opportunities and I also noticed that you're close to the time studios during the quarter. So can.

Speaker Change: Can you talk about.

Speaker Change: What what the strategy there.

John Reed: And why do we remain confident in our approach going forward? Proof point number six, showroom growth and investment. In 2024, we opened 11 new showrooms, which are performing well, while relations enhance brand visibility and deepen client engagement. Looking ahead, we have 28 total showroom projects in the pipeline through the end of 2027. with even more opportunities likely. This momentum reflects our discipline's focus on scaling thoughtfully, elevating the showroom experience, expanding market share and supporting long-term revenue growth.

Speaker Change: Appointment with that performance and how are you thinking about that.

Speaker Change: For medical and forward.

Speaker Change: Sure.

Speaker Change: And as we've been growing the business and opening new showrooms.

Speaker Change: Hey, there theyre profitable B, it's building brand awareness and more and more people come to the showrooms that come to the to the websites.

Speaker Change: So.

Speaker Change: Again, we are strategically you're running this business to look.

Speaker Change: More forward than this month and next month in the next six months I mean, we're in it for the long term.

Speaker Change: And when you work on showrooms and so forth, obviously youre out a year or so.

John Reed: And underpinning all of this is my seventh and final point, our financial strength. We continue to operate from a position of discipline debt free with ample liquidity and a healthy balance sheet. We believe this strong financial foundation allows us to invest confidently in long term growth, navigate near term uncertainty, and deliver long term value for our shareholders. In short, Arhaus is well positioned for the future, powered by the strength of our brand, the passion of our people, and the disciplined execution of our strategy.

Speaker Change: <unk>.

Speaker Change: New locations, but.

Speaker Change: We're happy to say that we're not slowing down our growth.

Speaker Change: Yeah.

Speaker Change: We have had an opportunity that fell back into.

Speaker Change: This year that maybe we had originally planned for next year.

Speaker Change: And we're always looking for new opportunities as well.

Speaker Change: We're a very fluid, but disciplined company and we take advantage of.

Speaker Change: Opportunities as they come about and we've come up with some incredible new opportunities coming up here in the future that we're really excited about and we think are really going to move the needle on keeping business going forward.

John Reed: Now let's take a closer look at our performance in the quarter. Beginning with showrooms. In the first quarter, we completed five total showroom projects, one new traditional showroom, and four strategic relocations. The highlights include Winter Park, Florida, a new traditional showroom opened in Winter Park Village in an upscale Lifestyle Center. Sarasota, Florida, relocated showroom opened in Centerport at Waterside, a key Florida market. In Burlingame, California, we relocated a showroom in downtown Burlingame tailored to the local clientele. Looking ahead, I am pleased to share that we are raising our outlook on this front and now expect to complete approximately 12 to 15 total showroom projects in 2025.

Speaker Change: Yeah.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Robert <unk> from Bank of America. Please go ahead.

Robert: Oh, thanks for taking my questions.

Maybe one follow up just on the gross margin.

Robert: A little help on so the occupancy kind of increase.

Robert: 120 basis points pressure from occupancy cost.

Robert: A little color on how we should think about that in modeling gross margin for the for the rest of the year and any any other kind of thoughts on.

Robert: Gross margin in <unk> versus how it could look as you move through the next three quarters.

John Reed: This includes four to six new showrooms up from the prior three to five. and 8 to 9 strategic relocation, remodels and expansion. Our long term remains an average of five to seven new traditional showrooms annually. Importantly, our timing is driven by readiness, not just a calendar. We open locations when we believe they are prepared to deliver the experience our clients expect. We encourage you to view our footprint growth through the lens of total showroom project activity for every project, whether new opening, relocation, remodel, or expansion is evaluated through the same disciplines return on investment approach.

Speaker Change: Yes, as we mentioned on the call last last quarter.

Robert: We expect gross margin to be roughly flat.

Speaker Change: So this is more just a function of deleveraging offer the fixed costs.

Robert: Related to this showroom occupancy in Q1.

Robert: Because of the lower revenue versus what you would see like in our Q2 guide for revenue.

Speaker Change: Got you that's helpful. And then just on the you talked about the record high average order value.

Speaker Change: Any more color on how the customers are behaving are you seeing sort of bigger ticket hold up better than impulse purchases or any any other color you can give on what.

Speaker Change: People were doing during the quarter and then maybe what theyre doing in April.

John Reed: Our showroom strategy is clear target premier locations with strong foot traffic, complimentary code tendencies and opportunities to enhance the brand visibility and grow market share. Every decision is made with the focus on sustainable, high quality growth and attractive expected returns on investment.

Speaker Change: Yes looking at studying.

Speaker Change: The sales big ticket small ticket.

Speaker Change: We haven't seen any drop off on.

Speaker Change: Either side, whether it's coming in and buying a couple of pillows or buying our entire home home furniture.

John Reed: Turning to our product, design is the core of who we are. This season, clients are responding to warmer products, softer silhouettes, eclectic use of color and patterns. Highlights include our outdoor collection featuring premium teak, all weather wicker, and our first Italian upholstery collection. Upholstery remains a hallmark, handcrafted by skilled artisans. Across collections, rich textures, warm woods, and unexpected materials create a fresh yet familiar look and feel. Looking ahead to 2025, we'll continue to innovate in materials, silhouettes, and personalization, keeping us at the forefront of design, comfort, and quality.

Speaker Change: John can give you maybe some more color on it.

Speaker Change: On that she follows very closely.

Speaker Change: Yes.

Speaker Change: But that said, we're really happy seeing Dallas and criticism, that's orders over five and 10-K as he spoke we're continuing to see.

John: As we spoke about end of last year as well web clients are engaging with NCI design Harrison doing those bigger projects at Robinson homes, but as John mentioned, there's no real shifts in consumer behavior across any of our cohorts.

John: I think to give you a little bit more color just on Q1 in April as we mentioned Q1 was good but it was choppy. So we are often that John in March were down in February obviously, we went down approximately 10% and April we did see some softness in traffic in April.

John Reed: Turning to demand, as I shared earlier, we delivered an impressive demand comparable growth of 4.1% in the quarter. However, demand comparable growth was not linear through the quarter. With strong performance in January up approximately 10%, March up approximately 7%, partially offset by February, which was down approximately 6%. As we've said before, a week, even a month, doesn't define a trend. And while there was more volatility, we are very pleased with our overall strength of the quarter.

John: What we're really excited to see is that as clients are coming in and engaging with us whether online or in showrooms. They are still responding really well to the products. They are still engaging at the levels that we saw before we're still seeing those high parts of SaaS. So we're really happy that there might be some hesitancy due to the macro people walking through the doors are coming.

Speaker Change: <unk> commenced that project, but as John mentioned earlier, that's a shift in timing it might delay some few weeks or a few months, but when they are in the doors are still responding really well to our products and we're continuing to see that was really nice higher average order value sales.

John Reed: Looking ahead to the second quarter, April demand was softer than expected, with demand comparable growth down 10%, impacted by the shock of the tariff news and the stock market. While near term volatility remains, our model is built on resilience. And we believe our continued unique positioning is a powerful long term advantage.

Speaker Change: I would just add a little color to April is when you think about April we also exited April a little bit stronger and that might be slightly helpful.

Speaker Change: Got you. Thank you.

Speaker Change: Thank you.

Speaker Change: Thank you. The next question comes from the line of Andrew Carter from Stifel. Please go ahead.

John Reed: In closing, our long term strategy remains clear and focused on anchored by our four key priorities, increasing brand awareness to drive net revenue, growing our showroom footprint, enhancing our omni-channel client experience, and investing in the growth to build scale. As we look ahead, we remain confident we have a strong business, a solid foundation and a strategy that's working. Our team is proactively managing tariffs through sourcing diversification, and we continue to adapt as needed to protect both margin and momentum. With a premium brand, a loyal and growing client base, and a balance sheet that allows us flexibility, we're well positioned to invest in long term value creation.

Andrew Carter: Hey, Thank you good morning, I wanted to ask.

Speaker Change: Ask about the significant disconnect in our comparable sales growth in comparable demand I got that you were like double digits November December you said, 10% January.

Speaker Change: That should inform the quarter and of course deposits are up I think 20% of trailing 12. So anything can you speak to there around kind of the extended delivery times for customers and you see any risk of cancellations.

Speaker Change: Yes, we watch cancellations that there has been zero change in cancellations.

Speaker Change: Everybody still wants the product and even after the.

Speaker Change: All the news.

Speaker Change: And.

John Reed: I'm proud of what we've accomplished this quarter and even more excited about the opportunities ahead. Thank you to our team, clients and shareholders. Your continued support drives everything we do.

Speaker Change: Excitement in April, but yes, we're all good there.

Speaker Change: People have not not canceled.

Speaker Change: The noise, if something doesn't fit in.

Jennifer Porter: With that, I'll turn it over to Jen Porter, our Chief Marketing and eCommerce Officer. Thank you, John. And good morning, everyone. We had a solid quarter across both our retail and e commerce channels, despite operating in a more volatile environment. Our omni channel strategy designed to meet clients wherever and however they choose to shop continues to drive meaningful engagement and conversion across all touch points. This strategy is anchored in six core pillars, showrooms, e commerce, catalogs, in home design services, digital and content and client personalization. Our showrooms remain a cornerstone of the our house experience delivering immersive elevated environments that inspire clients and drive conversion.

Speaker Change: Things like that but.

Speaker Change: Zero change in that.

Speaker Change: It just took a look at that yesterday.

Speaker Change: Year to date, it's all.

Speaker Change: All good.

Speaker Change: But then just also kind of focusing and within that how much how much of delivery times or wait times increase for customers and have you had to go back. This is just focusing on the deposits and the disconnect. Thanks.

Speaker Change: Yeah.

Speaker Change: Yes, we haven't seen any change in in that.

Speaker Change: A lot of customers still are.

Speaker Change: If it's the large the large purchases.

Speaker Change: They.

Speaker Change: Our building or whatever.

Speaker Change: We're just waiting for the hunger.

Speaker Change: Say deliberate.

Speaker Change: We're we're sitting on a lot of good products, but again its the percentage isn't changed from from the <unk>.

Jennifer Porter: Approximately 90% of our clients live within 50 miles of a showroom and that proximity combined with high touch personalized service continues to fuel brand awareness and market share expansion. New showrooms opened in recent quarters are performing well, supported by our long tenured experience teams. Our showroom growth contributed meaningfully to healthy net revenue in the first quarter, and showroom driven demand was a key contributor to our overall demand strength. Client engagement remains strong, driven by our unique product mix, refreshed seasonal assortments, and the exceptional performance of our highly trained showroom teams, including our in-home designers who bring trusted expertise to every interaction.

Speaker Change: Past year or so.

Speaker Change: So we're not seeing any significant changes in that as well.

Speaker Change: There is always an amount that people just don't want yet because they are.

Speaker Change: We're running late getting re remodeled or whatever it is and but when they're ready we're ready we're in great shape.

Speaker Change: Inventory wise, we're in great shape deliver.

Speaker Change: Delivery wise, and we can get get get consumers their product when they want it.

Speaker Change: And speaking to the increase in client deposits that you're referencing that's basically the difference between what you see on the demand side, which we.

Speaker Change: Aided the plus four 1% comp in Q1.

Jennifer Porter: These designer-led services continue to be a key competitive differentiator and growth driver. Designer-driven demand was strong both in-store and virtually, and clients who engage with our design team generate order values four times higher than average. In the quarter, we saw meaningful growth in orders above $5,000 and $10,000, along with record-high average order value. These transactions, we believe, deepen loyalty and increase order depth across categories. Just as we deliver elevated, personalized experiences in our showrooms and through our design services, we're creating that same level of inspiration and ease online. Online engagement remained healthy throughout the quarter, and our e-commerce business delivered strong performance.

Speaker Change: Well as the lower net revenue performance in Q1. So that's that's then the increase that you saw in Q1, which then looking towards the Q2 guide how we've guided on the high end of the range to plus 5% comp on the delivered side.

Speaker Change: That's when we're starting to see that flow through the P&L.

Speaker Change: And then just I mean, it's 20% of trailing 12, what is that what what should deposits be as a percentage of revenue and that would be my last question I'll pass it on.

Speaker Change: I would say that we're currently at as not Mike.

Speaker Change: Anything out of the ordinary with where it should be trending you may have some ebbs and flows from quarter to quarter, depending on when there's higher demand sales quarters versus delivered or net revenue.

Jennifer Porter: Growth was driven by strategic investments in technology, platform enhancements, product storytelling, and a compelling product mix. We continue to invest in e-commerce to further elevate the client experience and drive long term growth. The online experience is more than transactional. It's a platform to inspire, educate and connect with our clients. Our digital and content engagement continues to drive impressive traffic and deepen brand engagement across channels.

Speaker Change: But overall I wouldn't view us as having like increased backlog like we did over to 2022 and 2023 time periods.

Speaker Change: Thanks ill pass it on.

Andrew Carter: Thank you Andrew.

Speaker Change: The next question comes from the line of Peter Benedict from Baird. Please go ahead.

Peter Benedict: Oh, Hey, guys. Good morning, Thanks for taking the question I apologize I missed some of this call.

Jennifer Porter: Earlier this spring, I visited several of our global partners in Italy and Romania. Seeing their craftsmanship firsthand was a powerful reminder of the care and precision behind every piece, the foundation of our storytelling and emotional client connection. What sets our health apart and what we do best is clear. Exceptional product quality, broad aesthetic appeal, and our artisan-led approach. Even in a more challenged consumer environment, our storytelling resonates. Clients respond not only to how our products look and feel, but also to the intention, values, and meaning behind them. Something we take pride in and believe we do better than anyone else.

Speaker Change: But so I apologize if this has already been asked.

Speaker Change: I'm curious as the consumer response to the changes you guys have made and the kind of the discount levels related to the buy more save more spend thresholds I know you've talked about some good strength in some of the higher price points is that you're really seeing that when you go to the 20% 25% off.

Pairing versus the 15% to 20% off paring is that is that really driven a meaningful change in that consumer engagement.

Speaker Change: Just kind of curious about that and how youre thinking about your.

Speaker Change: Your pricing architecture going forward. Thank you.

Jennifer Porter: Our pricing and promotion strategy remains unchanged. We continue to drive high-quality growth through a differentiated value proposition, educating clients on what makes our house unique. Artisan-crafted, high-quality design, and a premium client experience. This disciplined approach supports margin stability, protects brand integrity, and reinforces the long-term value of our product while preserving flexibility when needed. On Paris, we are actively monitoring the evolving landscape and remain prepared to respond with discipline. Should targeted pricing adjustments be necessary, we will implement them thoughtfully and communicate clearly, always with a focus on maintaining client trust and delivering exceptional value. In closing, while the environment remains dynamic, we are staying close to our clients, leaning into our unique strengths, and maintaining discipline and how we engage, price and promote.

Speaker Change: Yes, what we like about this model is it can be incredibly flexible.

Speaker Change: Sure.

Speaker Change: As we started this.

Speaker Change: This model back in the fall of last year.

Speaker Change: Saw that it's working very well customers are responding they are trading up.

Speaker Change: So if they are close to a threshold that they'll trade up so they can get to it which makes perfect sense and.

Speaker Change: And we love that.

Speaker Change: So the different percentages.

Speaker Change: Playing around with to see what response with doesn't respond.

Speaker Change: 2015.

Speaker Change: <unk> responds, just as well as a 25 million.

Speaker Change: We adjust things every every month.

Speaker Change: And Thats whats nice about the model as we can we can adjust it and we're very flexible.

Jennifer Porter: We remain focused on executing across our six omnichannel pillars to drive sustainable high quality growth and deepen client relationships.

Speaker Change: No.

Speaker Change: So we're seeing certainly the higher percentages.

Speaker Change: Obviously customers are going to take it.

Speaker Change: And and they've been responding and trading up even more so because of that so so we've been pleased with what we've seen.

Ryan Brody: With that, I'll turn the call over to Ryan Brody, Senior Vice President of Finance, to walk you through our financial results. Ryan, over to you. Thanks, Jen. Good morning, everyone. Today, I will walk through our first quarter 2025 financial performance, key business drivers, and our outlook for the second quarter and full year 2025 before turning it over to Q&A. Key items from our first quarter 2025 income statement include net revenue was $311 million up 5.5% year over year, landing near the midpoint of our guidance. Growth was primarily driven by increased demand across both our retail and e-commerce channels, supported by continued showroom expansion, partially offset by a comparable growth of negative 1.5%, which landed near the midpoint of our guidance range.

Speaker Change: Got it thanks for the perspective.

Speaker Change: You bet Peter.

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Jeremy Hamblin from Craig Hallum. Please go ahead.

Jeremy Hamblin: Great. Thanks for taking the questions good morning I.

Jeremy Hamblin: I wanted to just get into the showroom opening.

Speaker Change: Cadence here.

Jeremy Hamblin: Just.

As you've seen a little bit of softening here in kind of overall orders and demand trends.

Jeremy Hamblin: Are you seeing some of that show up in newer showrooms and then.

Jeremy Hamblin: As we look ahead to maybe a little bit more macro uncertainty, that's probably not going to go away that quickly.

Jeremy Hamblin: Are you are you looking at as we get into 'twenty six kind of showroom openings is there plan.

Ryan Brody: Demand comparable growth was 4.1% driven by healthy client response to our products and strong engagement across both our retail and e-commerce channels. Gross margin was $116 million, up 0.4% year over year. The increase was primarily due to higher net revenue, partially offset by increased product costs of $7.1 million, higher showroom occupancy costs of $5.2 million, and higher delivery and transportation costs of $1.7 million. As a percentage of net revenue, gross margin decreased 190 basis points to 37.1% of net revenue, primarily driven by higher showroom occupancy costs, which increased 120 basis points and a product margin decrease of 40 basis points.

Jeremy Hamblin: Planned to kind of stay the course in terms of the number of openings and kind of the locations or was there any.

Jeremy Hamblin: Any consideration to maybe.

Jeremy Hamblin: A bit more moderate opening schedule.

Jeremy Hamblin: Yes.

As you can imagine.

Jeremy Hamblin: You signed leases years in advance.

Jeremy Hamblin: And you get locked in for the next year or so.

Jeremy Hamblin: But with that said.

Jeremy Hamblin: We have decided as a management team that we've got we think the best model in the business yet.

Jeremy Hamblin: Get the best product are executing very well.

Jeremy Hamblin: We see no reason to slow down.

Jeremy Hamblin: For 26, and 27% and so forth.

Jeremy Hamblin: It's.

Jeremy Hamblin: We're in a great cash position.

Jeremy Hamblin: We can.

Jeremy Hamblin: These things end and not be.

Ryan Brody: Selling general and administrative expenses were $110 million, up 13.9% year-over-year, primarily due to a $7.2 million increase in general and administrative costs, primarily related to warehouse expenses, marketing investments, and strategic investments to support and drive the growth of the business, including supply chain and technology improvements, in addition to a $6.2 million increase in selling expenses, primarily related to new showrooms and variable compensation due to higher demand. Net income was $5 million, landing near the midpoint of our guidance. And finally, Adjusted EBITDA was $19 million, landing at the lower end of our guidance, resulting in an Adjusted EBITDA margin of 6.0%.

Jeremy Hamblin: At all.

Jeremy Hamblin: Scared about running out of cash or so forth.

Jeremy Hamblin: So again, we're in it for the long term and.

Jeremy Hamblin: In 2027, we think business is going to be good business slowed down for a while here as.

Jeremy Hamblin: As I've seen for many many years it will come back and there was a pent up demand.

Jeremy Hamblin: And when there is a pent up demand if you are ready to capture that.

Jeremy Hamblin: You take more market share and if we have new stores, that's even more new market share.

Jeremy Hamblin: So.

Jeremy Hamblin: That's exactly what that is exactly what we're planning on doing.

Speaker Change: Okay, and then just a follow up question I think here for Ryan. So you saw occupancy deleverage of 120 bps in the first quarter.

Speaker Change: Wanted to get a sense for what you're expecting in terms of occupancy.

Ryan Brody: Turning to our balance sheet, we ended the quarter with $214 million in cash and cash equivalents and remain debt free. Looking ahead, we remain focused on executing against our long term strategic priorities, including discipline growth, strategic investments, and continued expansion of brand awareness while remaining agile in the face of ongoing macro uncertainty.

Speaker Change: Leverage or deleverage over the course of 2025.

Speaker Change: I think we would expect to see maybe slight deleverage, but not as pronounced as what you saw in Q1.

Speaker Change: Okay, and then implying that product margin would be up year over year.

Speaker Change: Approximately half slightly.

Ryan Brody: Given increased volatility driven by tariff shifts and softening consumer sentiment, we are revising and widening our full year 2025 outlook to reflect a more cautious stance. Notably, the midpoint of our previous outlook now represents the high end of the updated range. For full year 2025, we now expect net revenue between $1.29 billion and $1.38 billion. reflecting an updated comparable growth range of negative 5% to up 1.5%. As a reminder, comparable growth and demand comparable growth may diverge over shorter time periods, but align more closely over the course of the year. Net income of $48 million to $68 million.

Speaker Change: That's the main other piece, though it offset be offsetting the occupancy side.

Speaker Change: <unk> mentioned earlier on the call that we expect the gross margin to be approximately flat year over year.

Speaker Change: Got it thanks for the color.

Jeremy Hamblin: Thank you Jeremy.

Speaker Change: We take the next question from the line of Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Gutman: Hey, I wanted to follow up on gross margin for a SEC the outlook for the total year being flat.

Simeon Gutman: And yet the sales outlook it looks like it's getting worse and the main factor for the first quarter was occupancy deleverage.

Speaker Change: And then on top of that you mentioned that you have this $10 million tariff hit, but you are not putting anything back into price. It didnt sound like youre raising price. So how does just flat gross margin come out unless you're planning to offset with product margin in other places. Thank you.

Ryan Brody: and adjusted EBITDA between $123 million and $145 million. For second quarter 2025, we anticipate net revenue between $320 million and $350 million. reflecting a comparable growth range of negative 2% to up 5%. Net income of $17 million to $24 million. and adjusted EBITDA between $41 million and $48 million.

Simeon Gutman: Yes.

Simeon Gutman: Generally if you recall in the second half of last year wasn't our strongest performance. So this year, we're up against some easier comps starting in may from a demand comp perspective.

Simeon Gutman: And as we talked about earlier, we layered in the volume discount starting in October and we've been pretty happy with the results so far.

Simeon Gutman: And so theres puts and takes across the P&L and our estimates for the second half of the year, but.

Ryan Brody: As it relates to tariffs, our outlook includes the full impact of currently implemented tariff actions, including a 170% tariff on goods imported from China. 10% tariff on goods imported from all other countries of origin. and 25% tariffs on imported steel and aluminum. We estimate the total potential P&L impact from incremental 2025 tariffs currently in effect to be net amount of approximately $10 million, which has been factored into the updated guidance. We believe a portion of the larger tariff impact can be mitigated through strategic sourcing shifts to other countries and vendor cost concessions. There are several factors contributing to this number, including the timing of product receipts and deliveries, as well as the mitigation actions already underway.

Simeon Gutman: We still expect it to be roughly flat year over year.

Simeon Gutman: Okay, and then as the follow up.

Simeon Gutman: The new space productivity that our models punch out it's in the <unk> I think you probably have a more accurate number and you said you are happy with new store performance, what does that look like because I think ours is affected by the timing.

Simeon Gutman: And then if you take.

Simeon Gutman: Like mature comp and then implied in the back half I think it's somewhere down high single, maybe low double digits. So what's happening at non new stores is it maturation is it just the soft market is there some cannibalization happening can you talk about the performance in more mature stores. Thank you.

Simeon Gutman: Uh huh.

Simeon Gutman: Yes, you are correct from the back half because we would have been.

Ryan Brody: Simply put, there are a lot of moving parts.

Simeon Gutman: And then implied on the demand comp side are high.

Ryan Brody: While pricing remains a potential lever, no targeted increases are currently reflected in our guidance. We are actively monitoring the evolving trade environment and will respond with discipline.

Simeon Gutman: <unk> digit comp in the back half of the year, which as I mentioned earlier that that reflects.

Simeon Gutman: The continuation of the Choppiness that we've seen from April year to date.

Ryan Brody: Let me briefly highlight the strategic investments we're making to drive long term growth, operational efficiency and client experience, and how they've how they're reflected in our 2025 guidance. In 2024, we completed important foundational upgrades, including a new warehouse management system at our Ohio Distribution Center, already delivering measurable improvements. Looking ahead to 2025 and beyond, we're investing in systems and infrastructure to support scalable growth. We're strategically transitioning distribution management at our Dallas Distribution Center in-house building on proven expertise and implementing our warehouse management system there with completion expected in the second quarter. We've begun rolling out a new payment platform expected to be fully implemented across all showrooms by late May, enabling mobile features like tap to pay, Apple Pay and Google Pay, while driving operational and expense efficiencies.

Simeon Gutman: And anything on the new space productivity that our models are computing suggests a 40% I don't think Thats I don't know if thats right or wrong. If you can comment on that if we're just being skewed because of the timing of them.

Simeon Gutman: Oakland galleries of showrooms are opening during the quarters.

Simeon Gutman: Yes.

Simeon Gutman: The components of when they open and when we actually start to see deliveries flow through.

Simeon Gutman: Okay. Thanks, good luck.

Simeon Gutman: Thank you.

Simeon Gutman: Ladies and gentlemen, we have reached the end of the question and answer session I would now like to turn the floor over to Ted <unk> for closing comments.

Speaker Change: Thank you everyone for joining the call.

Simeon Gutman: We appreciate your time and have a great day.

Speaker Change: Thanks, Ed.

Speaker Change: Thank you.

Ladies and gentlemen, thank you for your participation.

Speaker Change: And interested in our house.

Speaker Change: May now disconnect your lines.

Ryan Brody: We're also implementing a new inventory planning system to improve forecasting and inventory optimization, and a new ERP platform at our North Carolina upholstery manufacturing facility to increase production visibility and improve efficiency as we scale. These strategic investments, as well as other key projects, are expected to be approximately $15 to $20 million in SG&A in 2025, mostly in the second half of the year as system implementations ramp up. We are making these investments from a position of strength, debt free with a healthy cash position and disciplined capital allocation. We believe these investments are foundational to expanding long term margin potential and enhancing client experience.

Ryan Brody: With the deep experience team, we're confident in our ability to execute.

Ryan Brody: In closing, our focus is clear. We're executing with discipline and staying agile. We believe our differentiated brand, resilient operating model and long term strategic priorities position us to navigate uncertainty and deliver sustainable value for our shareholders.

Ryan Brody: We look forward to sharing continued progress and are pleased to welcome our new CFO, Michael Lee, to the next earnings call. Thank you for joining us.

Speaker Change: Okay.

Unknown Executive: We are happy to take your questions. Thank you.

Unknown Executive: Ladies and gentlemen, we will now be conducting the question and answer session. 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 question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Unknown Executive: One moment, please, while we poll for questions.

Steven Forbes: The first question comes from the line of Steven Forbes from Guggenheim Securities, please go ahead.

Julio Marquez: Hi, this is Julio Marquez on... Thank you for taking our question and John.

John Reed: Given the balance sheet strength and your comments on receipts from China, you're © The Bulletproof Executive 2013 And I think he mentioned something about pricing and no plans yet, but I guess how is the management thinking about protecting margin during 2025 or do you see 2025 as a year to drive brand awareness? Yeah, you got to clarify the first part of your question. But the second part is, yeah, we feel we feel good about our margins. You know, with everything going on, it's It's very, very fluid as you can all know and imagine. But, you know, we're our plans are to try to hold our margin as it is.

John Reed: And, you know, proceed as as as business as usual. We're going to focus on what we can do. We cannot. You would, you know, the things that are going on outside our control. But we know what we can control. We've been in business for decades, we've been through recessions, and so on and so forth and crashes. And we know how to handle these kind of things. And these kind of times, we've always been extremely successful at it, we've always come out of them stronger than ever. And that's what we're planning on doing. You know, we're focusing on the long term.

John Reed: And And that includes, you know, healthy margins, healthy sales, and executing our plan.

John Reed: I'm sorry, what was the first part of your question? Given your balance sheet strength and just some of the comments around like from China by year end, like anything you can provide on, you know, just Yeah, sure. Yeah, I mean, balance sheets looking great. We're, again, as I just said, we're in this for the long term. So we are investing in the future. And we're going to continue doing that. Certainly, we're going to go look at it every 30 days or so. And if we have to tweak something, we will. As far as China goes, we've been working, we never were nearly as heavy in China as most of our competitors, first of all.

John Reed: And, and being so strong in the United States on production, that, you know, we're in great shape. Getting down that we're hoping 1% by the end of the year is just is amazing. And, and that's the thanks to some of our great, great partners we've had over the overseas and, you know, in, in the country for many, many years and decades. And they're, they're truly our partners are working with us. If we need to move things, we're building new factories and other countries and so forth. So we're in great shape there.

John Reed: Excellent, just a very quick follow up on consumer behavior. Are you guys seeing any like change in engagement trends? I know you mentioned a meaningful step up. sales over 5k and 10k but Transcripts provided by Transcription Outsourcing, LLC. Yeah, well, you know, we had something called Liberation Day in April. We had something called stock market was crashing in April. Obviously, that affects everybody, including our customers. I mean, they're very intelligent people. They're invested in the stock market. And things like that, you know, shake people, it's not going to be long term. But short term, it's, you know, shakes people up.

John Reed: And they're not sure what to do. That's why we think we had the softer sales. Well, we know that's why we had this offer sales in April. And You know, everything works its way out. It's not like people are going to stop buying furniture. They love their homes, you know, ever since COVID. It's really been, it's been a wonderful thing for the home business, especially the good quality home business. And so, you know, there's some pent up demand that maybe people held off a few weeks, a couple months, That's it. And, you know, I don't need to tell you guys what happened in April because you read the news as much as I did.

Julio Marquez: Absolutely, thank you, much appreciated. Thank you.

Seth Sigman: The next question comes from the line of Seth Sigman from Barclays. Please go ahead. Hi.

Ryan Brody: Regarding the low and Kenny Ragenthile. Yeah, so as you with some of the information that we've shared so far for year to date trends with demand performance, it's been pretty choppy. And so the widening of the guidance range is to account for the potential that that continues throughout the rest of the year. And in really trying to, like John mentioned, every 30 days, kind of read and react to what's going on and adjusting our plans as, as we need to at that point in time. So that's the main drive is just to account for that potentially occurring for the rest of the year.

Ryan Brody: Great, thanks. Thank you.

Cristina Fernandez: The next question comes from the line of Cristina Fernandez from Telsey Advisory Group. Please go ahead. Hi, good morning. I wanted to ask about the tariff mitigation strategy. You talked about $10 million embedded in the guidance for the impact. I guess, how much of that you think can be mitigated versus from strategic sourcing chips and vendor concessions? And can you talk about the timing of how that $10 million flows through the rest of the year? Yeah, sure. I can start and Ryan can fill us in on the timing of it. But, you know, as you know, every country has been put on a 10% tariff, other than China, which is 170%.

John Reed: As we've moved stuff out of China, which which we've done, I think, brilliantly. We're in great shape there. The other tariffs is the other tariffs. So that's what we're planning on. We have worked with our great, great partners to absorb some of that. And I'd be thrilled to announce Every partner that we've talked to every meaningful partner has really contributed has really helped us. So, you know, what's left is the $10 million. And we think that's pretty darn good number. Very good number, considering all these tariffs all over the world. And and don't forget, a big, big part of our business is still produced right here in the United States.

Ryan Brody: So that that helps quite a bit as well.

Ryan Brody: So, I don't know when it's going to flow through. Ryan can give you some more specifics on that. Yeah. So, in regards to timing, as you would know, Q1 wouldn't have been impacted by this as well as getting into April. We wouldn't have had any of this incremental cost flow through the P&L. So, obviously, we're looking into later in the year when that impact would occur. And as we've shared with trying to get – we're targeting China receipts to be about 5% in Q3. So, as you can imagine, the flow through of the tariff impact would kind of align with that step down coming from China.

Ryan Brody: But it's fluid, and it depends on when the inventory is received and then delivered to customers. So, what we've provided is the approximately $10 million impact and predominantly factored into the second half of the year.

John Reed: And then my follow up on the on the real estate strategy, you're opening one more new showroom. So wanted to see, are you seeing, I guess, better incremental real estate opportunities? And I also noticed that you closed two design studios during the quarter. So can you talk about What, you know, what the strategy is there? Was there any disappointment with that performance? And how are you thinking about that? for MedicOin Forward. Sure. You know, as we've been growing the business and opening new showrooms, A, they're, you know, they're profitable, B, it's building brand awareness, and more and more people come to the showrooms, they come to the to the websites.

John Reed: So, you know, again, we are strategically running this business to look more forward than, you know, this month and next month and the next six months. I mean, we're in it for the long term. And when you work on showrooms and so forth, obviously, you're out a year or so or two on new locations. But, you know, we're happy to say that we're not slowing down our growth. We had, we must have had an opportunity that fell back into this year that maybe we had originally planned for next year. And, you know, we're always looking for new opportunities as well.

John Reed: We're a very fluid but disciplined company, and we take advantage of. Opportunities as they come about and we've come up with some incredible new opportunities coming up here in the future that we're really excited about. And we think are really going to move the needle on keeping business going forward. Thank you.

Robert Ohmes: The next question comes from the line of Robert Ohmes from Bank of America. Please go ahead. Oh, thanks for taking my questions. Um, you know, maybe one follow up just on the gross margin, a little help on so the occupancy kind of increase that the 120 basis points, you know, pressure from occupancy costs. A little color on how we should think about that in modeling gross margin, you know, for the for the rest of the year and any any other kind of thoughts on, you know, gross margin in one cue versus how it could look because It's as we mentioned on the call last, last quarter, we expect gross margin to be roughly flat to LY.

Ryan Brody: So this is more of just a function of deleveraging off of the fixed costs with related to showroom occupancy in Q1. Because of the lower revenue versus what you'd see like in our Q2 guide for revenue. Gotcha, that's helpful. And then just on the you talked about the record high average order value. You know, any more color on how the customers are behaving? Are you seeing sort of, you know, bigger ticket hold up better than, you know, impulse purchases or any other color you can give on what? You know, people were doing during the quarter and then maybe what they're doing in April.

Jennifer Porter: Yeah, looking at studying the You know, the sales, big tickets, small tickets. We haven't seen any drop off on on either side, whether it's you know, coming in and buying a couple pillows or buying an entire whole home full of furniture. Jen can give you maybe some more color on on that. She follows us very closely. Yeah, I mean, I think that's it. We're really happy seeing those, you know, increases in those orders over 5k and 10k. As we spoke, we're continuing to see solid strength as we spoke about end of last year as well with clients who are engaging with interior designers and doing those bigger projects of rooms and homes.

Jennifer Porter: But as John mentioned, you know, there's no real shifts in consumer behavior across any of our cohorts. I think to give you a little bit more color, just on Q1 in April, you know, as we mentioned, Q1 was good, but it was choppy. So we were up in that Jan and March, we're down in February. Obviously, we were down approximately 10% in April, we did see some softness and traffic in April. But what we're really excited to see is that as clients are coming in and engaging with us, whether online or in showrooms, they are still responding really well to the products, they're still engaging at the levels that we saw before, we're still seeing those high purchases.

Jennifer Porter: So we're really happy. You know, there might be some hesitancy due to the macro of people, you know, walking through the doors or coming in to commit to that project. But as you know, John mentioned earlier, it's that's a shift in timing, it might delay them a few weeks or a few months. But when they're in the doors, they're still responding really well to our products. And we're continuing to see those really nice higher average order value sales. And I would just add a little color to April. If you think about April, we also exited April a little bit stronger, and that might be slightly helpful.

John Reed: Gotcha. Thank Thank you. Hi. Thank you. The next question comes from the line of Andrew Carter from Stifel. Please go ahead. Yeah, we we watch course cancellations, and there's been zero change and cancellations. Everybody still wants their products. And even after the, you know, all the news and, and Excitement in April, but yeah, we're all good there. People have not not canceled. I mean, you have the noise if something doesn't fit and things like that, but absolutely zero change in that. I just took a look at that yesterday. Dear data, it's it's it's all good.

John Reed: But then just also kind of focusing in within that, how much of delivery times or wait times increase for customers and have you had to go back? This is just focusing on the deposits and the disconnect. Yeah, we haven't seen any change in in, in that, you know, a lot of a lot of customers still are, you know, if it's the large the large purchases Our building or whatever. And, you know, we're just waiting for the home to be, for us to say, deliberate. We're sitting on a lot of good products. But again, it's the percentage hasn't changed from, you know, the past year or so.

Ryan Brody: So we're not seeing any significant changes in that as well. There's always an amount that people just don't want yet because they're, you know, running late, getting re remodeled or whatever it is. And but when they're ready, we're ready. We're in great shape. Inventory wise, we're in great shape delivery wise and we can get get get consumers their product when they want it In speaking to the increase in client deposits that you're referencing, that's basically the difference between what you see on the demand side, which we provided the plus 4.1% comp in Q1, as well as the lower net revenue performance in Q1.

Ryan Brody: So that's been the increase that you saw in Q1, which then looking towards the Q2 guide, how we've guided on the high end of the range to a plus 5% comp on the delivered side, that's when we're starting to see that flow through the P&L. And then just, I mean, it's 20% of trailing 12. What is that? What what what should deposits be as a percentage of revenue? And that'll be my last question. I'll pass. Um, I would say where we're currently at is not like anything out of the ordinary with where it should be trending.

Ryan Brody: You may have some ebbs and flows from quarter to quarter depending on when there's higher demand sales quarters versus delivered or net revenue. But overall, I wouldn't view us as having like increased backlog like we did over like the 2022 and 2023 time periods. Thanks, I'll pass it on. Thank you. Thank you Andrew.

Peter Benedict: The next question comes from the line of Peter Benedict from Baird. Please go ahead. Oh, hey, guys. Good morning. Thanks for taking the question. I apologize. I missed some of the call. But so I apologize. This has already been asked.

John Reed: I'm curious, just the consumer response to the changes you guys have made in the discount levels related to the buy more, save more, spend thresholds. I mean, you've talked about some good strength at some of the higher price points. Are you really seeing that when you go to the 20%, 25% off pairing versus the 15% to 20% off pairing? Is that really driven a meaningful change in that consumer engagement? Just kind of curious about that and how you're thinking about your pricing architecture going forward.

John Reed: Thank you. Yeah, what we like about this model is it can be incredibly flexible. And As you know, we started this This model back in the fall of last year, we saw that it's working very well. Customers are responding, they're trading up. So you know, if they're close to a threshold, they'll trade up so they can get to it, which which makes perfect sense. And, and we love that. So the different percentages, you know, we're playing around with to see what what responds, what doesn't respond. If, you know, 20 or 15 responds just as well as a 25, then, you know, we adjust things every every month.

John Reed: And that's what's nice about the model is we can we can adjust it and we're very flexible. So, so we're seeing certainly the higher percentages, you know, Obviously, customers are going to take it. And, and they've been responding and trading up even more more so because of that. So so we've been pleased with with what we've seen.

Peter Benedict: Got it. Thanks for the perspective. You bet, Peter.

Jeremy Hamblin: Thank you. The next question comes from the line of Jeremy Hamblin from Craig Hallam. Please go ahead. Great, thanks for taking the questions. Good morning. I want to just get into the showroom opening, you know, cadence here. And just as you've seen a little bit of softening here in in kind of overall orders and demand trends, you know, are you seeing some of that show up in newer showrooms? And then, you know, as we look ahead to, you know, maybe a little bit more macro uncertainty, that's probably not going to go away. That quickly, you know, are you, are you looking at as we get into 26 kind of showroom openings, you know, is there this plan to kind of stay the course in terms of the number of openings and kind of the locations?

John Reed: Or, you know, is there, you know, any consideration to maybe a more moderate opening Yeah, as you can imagine, you know, you sign leases years in advance. And, you know, you get locked in for the next year or so. But with that said, you know, we decided as a management team that, you know, we've got, we think the best model in the business, get the best product we're executing very well. And we see no reason to slow down. For, you know, 26 and 27, and so forth. It's, you know, we're an great cash position. We can, you know, fund these things and, and not be, you know, at all.

John Reed: you know, scared about running out of cash or so forth. So, you know, again, we're we're in it for the long term. And, you know, in 2027, we think business is going to be good, you know, business slows down for a while here. As I've seen for many, many years, it'll come back and there's a pent up demand. And when there's a pent up demand, if you're ready to capture that, you take more market share. And if we have new stores, that's even more new market share.

John Reed: So That's exactly what that's exactly what we're planning on doing.

Ryan Brody: And then just a follow up question, I think here for Ryan, so you saw occupancy deleverage 120 bits and in the first quarter, you know, wanted to get a sense for, you know, what you're expecting in terms of occupancy, leverage or deleverage over the course of 2020. I think we expect to see maybe slight deleverage, but not as pronounced as what you saw in Q1. Okay, and then implying that product margin would be up year over year? Approximately, yeah, slightly, yeah. That's the main other piece that would offset be offsetting the occupancy side. When I mentioned earlier on the call that we expect the gross margin to be approximately flat year over year.

Ryan Brody: Thanks for the caller.

Simeon Gutman: Thank you, Jeremy. We take the next question from the line of Simeon Gutman from Morgan Stanley, please go ahead. Hey, I wanted to follow up on gross margin for a sec, the outlook for the total year of being flat. And yet the sales outlook, it looks like it's getting worse, and the main factor for the first quarter was occupancy delivery. And then on top of that, you mentioned that you have this $10 million tariff hit, but you're not putting anything back into price. It didn't sound like you're raising price. So how does... flat gross margin come out unless you're planning to offset with product margin in other places.

Ryan Brody: Yeah, so in general, if you recall, the second half of last year wasn't our strongest performance. So this year, we're up against some easier comp starting in May from a demand comp perspective. And as we talked about earlier, we layered in the volume discount starting in October, and we've been pretty happy with the results so far. And so there's puts and takes across the P&L and our estimates for the second half of the year, but we still expect it to be roughly flat year over year.

Ryan Brody: Okay, and then as the follow up. The new space productivity that our models punch out, it's in the 40s, I think you probably have a more accurate number and you said you're happy with new store performance. What does that look like? Because I think ours is affected by the timing. And then if you take you know, like mature comp, and then implied in the back half, I think it's somewhere down high single, maybe, you know, low double digits. So what's happening at non new stores? Is it maturation? Is it just the soft market? Is there some cannibalization happening?

Ryan Brody: Can you talk about the performance and more mature stores? You're correct. From the back half, yes, we have an implied, on the demand comp side, a high single digit comp in the back half of the year, which as I mentioned earlier, that that reflects a continuation of the choppiness that we've seen from April year to date. And anything on the new space productivity that our models are computing suggests 40%. I don't think that's, you know, I don't know if that's right or wrong, if you can comment on that, if we're just it's being skewed because of the timing of, of when galleries or showrooms are opening during the quarter.

Ryan Brody: Yes, there's definitely a component to when they open and when we actually start to see deliveries flow through.

Ryan Brody: Okay, thanks, good luck. Thank you.

Tara Atwood: Ladies and gentlemen, we have reached the end of the question and answer session.

Tara Atwood: I would now like to turn the floor over to Tara Atwood for closing comments. Tara? Thank you everyone for joining the call.

Unknown Executive: We appreciate your time and have a great day. Thanks, everybody. Thank you.

Unknown Executive: Ladies and gentlemen, thank you for your participation and interest in Arhaus. You may now disconnect your line.