ARHAUS THIRD QUARTER 2026 EARNINGS CONFERENCE CALL - ARHAUS INC

Explicit Guidance:

• FY2026 Net Revenue: Raised to $1.465–$1.485 billion (YoY growth of 6.2%–7.7%).
• FY2026 Comparable Delivered Sales: 2.5%–4.0%.
• FY2026 Profitability: Maintained at Net Income $71–$81 million and Adjusted EBITDA $160–$171 million.
• Q4 2026 Net Revenue: $398–$418 million (YoY growth of 9.1%–14.6%).
• Q4 2026 Comparable Delivered Sales: 6%–12%.
• Q4 2026 Net Income: $21–$30 million.
• Q4 2026 Adjusted EBITDA: $44–$55 million.

Business-Segment Outlook:

• Product & Newness: Anticipated continued strength in "newness" (fresh designs/materials) driving sales; special orders growing ~50% faster than overall business; focus on richer colors, florals, and layered patterns.
• Customization & Made-to-Order: Expanded made-to-order natural stone assortment (12 varieties); increased selection of fabrics, leathers, and hardware; expectation that customization capabilities will differentiate assortment.
• Customer Mix & Behavior: Focus on affluent clients refreshing homes (2nd/3rd homes, remodeling) rather than moving; expected growth in larger transactions (orders >$100k grew 30% in Q3); units per transaction and Average Order Value (AOV) expected to remain elevated.
• Channel Performance:
  • Showrooms: Expect continued growth in comparable written sales and traffic; disciplined evaluation for new locations while expanding footprint.
  • Trade Channel: Expansion of relationships with design professionals; expectation of growth in recurring project-driven business.
  • E-commerce: Long-term ambition to increase e-commerce penetration to 25% of revenue (from ~16–17% today) over the next five years; targeting $250–$275 million incremental revenue by 2030.
• Digital Capabilities: Accelerating digital/e-commerce growth under new Chief Digital Officer; prioritizing online experience, conversion, and reaching clients beyond 50-mile showroom radius.

Market and Competitive Outlook:

• Demand Trends: Strong underlying demand expected to continue; resilience among high-end consumers supported by wealth accumulation (household assets 10x liabilities); "broad-based" demand across geographies and product categories.
• Pricing Strategy: Implemented price increases in October 2026 to offset cost pressures; expected to normalize promotional activity to support margin expansion.
• Competitive Positioning: Differentiation via "exceptional product, authentic craftsmanship, and inspiring presentation"; leveraging domestic upholstery manufacturing (North Carolina) as a strategic advantage for speed and quality.
• Economic Context: Expectation that the "luxury market" will remain strong despite broader housing market suppression.

Macro / Industry Outlook:

• Tariffs: Annualized tariff costs estimated at $30–$40 million under current framework (down from prior $50–$60 million estimate); impact reduced by ~$20 million following Supreme Court ruling.
• Fuel & Transportation: Fuel surcharges expected to remain elevated into H1 2027 (hovering 8–12%); delivery fee increases (June) providing ~$5 million annualized benefit at full maturity in Q1 2027.
• Ocean Freight: Container costs and availability challenges (India/Vietnam) anticipated to moderate slightly in late 2026; ~$5–$6 million rate impact passed through to 2027 inventory/COGS.
• Supply Chain: Supply chain constraints expected to ease; focus on increasing delivery throughput to convert written orders to delivered revenue.

Strategic Initiatives:

• Marketing Investments: Increased Spring 2027 catalog circulation; ~$3 million expense recognized in Q4 2026 for catalog expansion; ~$2 million directed to digital/e-commerce initiatives in Q4.
• Technology Transformation:
  • TMS: Full implementation benefits targeting $4–$5 million annualized run-rate; expected to contribute to margin improvement.
  • POS/ERP/OMS: New POS piloting Q4 2026, go-live Q1 2027; OMS/ERP production-ready May 2027.
  • Long-term Savings: Targeting ~50 basis points of SG&A improvement by 2030 as technology spending normalizes.
• Talent: New Chief Digital Officer (Casey Moss) and Senior VP of Global Sourcing hired to accelerate digital capabilities and artisan relationships.
• Inventory Management: Targeting improved inventory productivity; clearance activity (loft locations) expected to be temporary.

Risks and Headwinds to Outlook:

• Cost Pressures: Persistent elevated fuel surcharges and ocean container costs; potential volatility in transportation rates.
• Execution Risks: Dependency on supply chain execution to convert high written order base into delivered revenue; risk of cancellations if delivery timelines slip.
• One-Time Impacts: Elevated SG&A in Q4 2026 due to legal expenses and catalog prepayments; variable compensation timing creating near-term expense deleverage (reversing in Q4).
• Macro Uncertainty: Potential for changes in demand if affluent consumer sentiment shifts; impact of future tariff policy changes beyond current framework.

Management Tone on the Future:

• Confidence: High confidence in demand strength ("eighth consecutive quarter of delivering results at or above guidance"); optimistic about "broad-based" momentum.
• Reinvestment Philosophy: Committed to reinvesting incremental revenue ($4–$5 million) into growth initiatives (catalogs, digital) rather than solely letting it flow to the bottom line; maintaining a "balanced approach" between investment and profitability.
• Margin Outlook: Expectation to target a "four-handle" gross margin (>40%) in FY2027, despite one-off tariff refund benefits lapsing in the prior year.
• Strategic Shift: Accelerated focus on digital/e-commerce as a primary growth vector; belief in long-term operating leverage from tech transformation.

Miscellaneous:

• Financial Position: Ended Q3 2026 with $318 million in cash (up 25.5% YoY) and no long-term debt; client deposits reached $325 million (up 37.7% YoY), providing visibility into future revenue.
• 40th Anniversary: Celebrating 40th anniversary on November 8, 2026; leveraging brand heritage in marketing and product strategy.
• Accounting: Catalog expenses recognized upon shipment (timing mismatch between expense and revenue); variable commissions recognized on written sales (timing difference vs. delivered revenue).