ARHAUS THIRD QUARTER 2026 EARNINGS CONFERENCE CALL - ARHAUS INC

Financial Performance:

• Net revenue reached a record $368 million for Q3 2026, up 6.8% year-over-year, exceeding guidance.
• Gross profit was $144 million (up 8.2% YoY); gross margin expanded 50 bps to 39.2% despite 60 bps fuel cost headwinds, partially offset by 80 bps from TMS and 20 bps from delivery fee increases.
• Comparable written sales surged 13.9% (21.4% two-year stack), while comparable delivered sales grew 2.6% (1.8% YTD).
• Orders over $100,000 increased 30% in the quarter; orders over $25,000 rose 35%.
• SG&A rose 14.8% to $134.3 million (36.5% of revenue) due to marketing/tech investments, variable compensation timing, and legal costs, compressing Adjusted EBITDA margin to 7.4%.
• Net income was $7.8 million (down 36% YoY); Adjusted EBITDA was $27 million (down 12.3% YoY).
• Balance sheet: Cash and equivalents at $318 million (up 25.5% YoY); no long-term debt; inventory at $360 million; client deposits at $325 million (up 37.7% YoY).
• Operating cash flow for the first nine months was $173 million.

Guidance and Future Outlook:

• Raised full-year 2026 net revenue guidance to $1.465B–$1.485B (6.2%–7.7% growth) and comparable delivered sales to 2.5%–4.0%.
• Maintained full-year net income ($71M–$81M) and Adjusted EBITDA ($160M–$171M) guidance, with revenue upside expected to drive $4M–$5M in incremental profitability for reinvestment.
• Q4 2026 net revenue guidance raised to $398M–$418M (9.1%–14.6% growth); comparable delivered sales 6%–12%; net income $21M–$30M; Adjusted EBITDA $44M–$55M.
• Long-term e-commerce target: 25% of revenue by 2030 (current ~16–17%), projected to add $250M–$275M in revenue with higher gross margins due to lower occupancy costs.
• Gross margin trajectory for 2027 targets a "4 handle" (low 40s) via TMS full-scale savings ($4M–$5M annualized), delivery fee maturity, and price increases, offsetting expected elevated fuel costs and absence of prior tariff refunds.

Business Segments and Product Lines:

• Newness accounted for >25% of written sales; new product categories (natural stone, performance fabrics, hand-tufted upholstery) driving differentiation.
• Interior design-assisted sales grew significantly; trade channel expansion and new professional relationships continue to drive recurring project business.
• Made-to-order capabilities expanded, including 12 distinct stone varieties; domestic upholstery manufacturing in North Carolina scaling.
• Catalog circulation for Fall 2026 doubled; Spring 2026 catalog investment increased in Q4 to capitalize on $3M of new client acquisition spending.
• New Chief Digital Officer (Casey Moss) leading digital acceleration; digital imaging used to test products online before showroom rollout.
• Showroom expansion continues with new locations (e.g., Charlotte) and upgrades to existing sites, though new store costs temporarily pressured margins.

Market and Competitive Landscape:

• Demand is broad-based across geographies, product categories, and channels, driven by affluent consumers refreshing homes despite a suppressed broader housing market.
• Second and third-home transactions and luxury remodeling remain resilient; household assets exceed liabilities by 10x for the first time in 60 years.
• Competitive advantage cited includes craftsmanship, direct artisan relationships, immersive showroom experiences, and strong brand equity (40th anniversary).
• E-commerce traffic up double digits; 80% of online clients live within 50 miles of a showroom, indicating untapped potential beyond physical footprint.
• Market share gains observed in newer markets (e.g., California) and among high-net-worth segments via targeted catalog and digital marketing.

Risks and Challenges:

• Elevated fuel and transportation costs (surcharges >10% of delivery costs) remain a headwind, though TMS and fee hikes are mitigating impact.
• Supply chain challenges including ocean container costs ($6K–$7K annually) and availability backlogs in India/Vietnam; expected $5M–$6M rate impact in inventory.
• Timing mismatch between written sales (compensation) and delivered revenue creates near-term SG&A deleverage and expense pressure.
• One-time costs: Legal expenses expected to remain elevated for 1–2 quarters; new showroom pre-opening and occupancy costs temporarily suppress margins.
• Tariff environment: Estimated annual impact reduced to $30M–$40M (from $50M–$60M prior to Supreme Court ruling), but future refund benefits will lapse.

Management Commentary and Tone:

• Tone is confident and optimistic, emphasizing "broad-based," "resilient," and "record" performance; management highlights the 40th anniversary and brand strength.
• Leadership expressed strong conviction in the "premium positioning" strategy and the ability to capture share in the affluent luxury market.
• John Reed (CEO) emphasized product quality, craftsmanship, and the "family-founded" values as core differentiators.
• Michael Lee (CFO) acknowledged near-term margin pressure from investments but framed them as temporary, with a clear path to long-term operating leverage.
• Management reiterated discipline in capital allocation while actively reinvesting in growth levers (catalogs, digital, tech).

Analyst Questions and Answers:

• New Customer Metrics: New customers acquired in September had Average Order Value (AOV) 30% higher than existing customers; growth was 20% YoY, validating catalog investment.
• Written vs. Delivered Dynamics: Q3 saw written sales ~20% higher than delivered (compensation timing distortion); Q4 modeled with delivered growing 15% more than written, reversing the distortion.
• Marketing Strategy: Catalogs are expensed upon shipment; Fall doubling drove Q3 profitability impact but Q2/Q3 results validated ROI, prompting Spring catalog expansion.
• Digital Strategy: E-commerce growth is mutually exclusive to showroom expansion in terms of reach; digital enhancements expected to drive both online and in-store traffic.
• Order Mix: Significant growth in special orders (50% faster than business growth) and larger projects (multiple room buys), indicating "premiumization."
• Margin Trajectory: TMS savings expected to exceed initial $1M–$2M target for 2026, reaching $4M–$5M run rate in 2027; delivery fee hikes mature in Q1 2027.

Other Key Points:

• Casey Moss hired as new Chief Digital Officer in September to accelerate digital commerce and e-commerce capabilities.
• Senior VP of Global Sourcing appointed with 30 years of artisan relationship experience.
• "Made-to-order" natural stone assortment expanded to 12 varieties, sourced globally.
• Customer satisfaction metrics improved (fewer cancellations/returns/exchanges) despite high volume.
• E-commerce penetration currently 16–17% with a 5-year target of 25%, representing a $500M opportunity by 2030.
• Post-purchase logistics and supply chain throughput hit records in Q3, supporting the conversion of the large written order backlog.