Greetings ladies and gentlemen, and welcome to Arhaus Inc. Fourth Quarter and Full Year of 2022 Earnings Call. At this time, all participants are in listen-only mode. A question and answer session will follow the prepared remarks. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wendy Watson, Senior Vice President of Investor Relations.

Good morning and thank you for joining the Arhaus fourth quarter and full year 2022 earnings call. On with me today are John Reed, Co-Founder, Chairman and Chief Executive Officer; Jen Porter, Chief Marketing and Ecommerce Officer; and Dawn Phillipson, Chief Financial Officer. John will start with a summary of the main points we made in this morning’s press release along with operational details. Jen will discuss the status of our marketing initiatives and Dawn will cover our financial performance and our outlook for 2023. We will then open the call to questions. During Q&A, please limit to one question and one follow-up. If you have additional questions, please return to the queue. We issued our earnings press release and our 10-K for the year ended December 31, 2022 before market open today. These documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours. As a reminder, remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning’s press release and the cautionary statements and risk factors described in our annual report on Form 10-K 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 the law, the company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures and this morning’s press release includes the relevant non-GAAP reconciliation. I will now turn the call over to John.

Good morning everyone and thank you for joining us today. 2022 was another record year for Arhaus as we achieved the milestone of over $1 billion in net revenue, over 50% comp growth for the second consecutive year, and adjusted EBITDA of well over $200 million. We have exceeded our net revenue and profitability expectations in every quarter since our IPO in November of 2021. What our team accomplished this year was truly amazing. I need to thank my entire team for not only their hard work but their passion to succeed and to get better every single day. Home furnishings retail is made up of many different disciplines, and I was thrilled to see every department stepped up, performed incredibly well, and focused on delighting our clients. Congratulations, team. The tenure and strength of our relationship with our vendors has also been a key to our success. Our product development, sourcing and merchandising teams have worked tirelessly to build newness and depth in our product categories that have so clearly resonated with our clients, resulting in 14% demand comps for 2022 on top of 2021’s over 45% demand comps. Turning to some highlights from the 2022 full year results, net revenue of $1.2 billion was a $432 million increase over 2021 with our showroom channel up 57% and our ecomm channel up 43%, comp growth of 52% and demand comp growth of 14%, net and comprehensive income was up $100 million, and adjusted EBITDA increased by $100 million to $223 million. Dawn will cover our fourth quarter and full year 2022 in more detail, but we delivered an exceptional quarter of net revenue and earnings with net revenue up 50%, comp growth of 47% and strong 10% demand comp growth, notably lapping an 18% prior year demand comp increase.…

Thank you John, and good morning everyone. I am happy to recap our key marketing efforts from 2022 with you and discuss some of our initiatives for 2023. From our showrooms to our catalogs, social media presence, Arhaus.com and more, every Arhaus touch point is designed to deliver a seamless experience that engages and inspires our clients. We are incredibly proud of recent initiatives within our omnichannel ecosystem, including our powerful campaign photography that was shot on location in Nantucket, Greece and Costa Rica, the more impactful artisan-focused storytelling on our new easier to use ecommerce website, and the experiential collaborations with new partners like The Surf Lodge in Montauk, the Aspen Art Museum, and at the Round Top Antique Show, which have helped to elevate the Arhaus brand’s new and existing clients. We look forward to continuing these relationships and introducing even more compelling campaigns and partnerships in 2023. One of the biggest highlights from 2022 was the success we saw over the course of the year from our new Arhaus.com experience launched in late December of 2021. We are incredibly pleased with both the full year and Q4 2022 results, seeing increases in traffic, conversion, page views and time on site. We also saw decreases in cart abandonment and strong improvements in our mobile performance. In 2023, we are looking forward to even more enhancements to the customer experience onsite and our back-end analytics capabilities, which will help us to further drive engagement and conversion across channels. We know that most of our clients engage with us digitally even if their purchase is in one of our showroom locations, so we’re really enthused about continuing to build out this channel of discovery and research for our clients. From a brand perspective, we were really pleased with our key…

Thank you Jen, and good morning everyone. As John mentioned, we are incredibly proud of our 2022 fourth quarter and full year results and our operational performance throughout the year. Key items from our fourth quarter 2022 income statement include: net revenue of $356 million, comp growth of 47% and demand comp growth of 10% on a one-year basis, 27.9% on a two-year stacked basis, and 89.9% on a three-year stacked basis. During the quarter, we saw strong demand in both our showroom and ecommerce sales channels. Our net revenue growth was driven by both demand and the acceleration of delivery of our orders in our backlog related to our increased distribution capacity as our supply chain continued to improve, enabling us to substantially outperform our backlog delivery expectations to place product in our clients’ homes. The accelerated delivery of orders in the fourth quarter represented approximately $40 million in net revenue that we had expected to deliver in 2023. Our fourth quarter gross margin increased $61 million to $158 million in the quarter driven by our higher net revenue partially offset by higher variable costs related to the increase in net revenue, including product, transportation, and variable rent expense. Gross margin as a percentage of net revenue increased 370 basis points to 44% driven by favorable product costs and leverage on fixed showroom occupancy costs over the higher net revenue that benefited from the accelerated delivery of product in the backlog. This was partially offset by higher variable rent and transportation expense. Fourth quarter SG&A expense decreased $6 million to $94 million. The decrease was primarily driven by the non-recurrence of derivative expense related to the termination of our former credit facility, lower equity based compensation expense, the non-recurrence of one-time IPO expenses, and lower variable compensation in our…

Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. [Operator instructions] The first question comes from Curtis Nagle of Bank of America.

Good morning. Just wanted to focus a little bit on the ’23 sales guidance - you know, it came in a decent bit below the street. Appreciate, I guess, the commentary on the backlog, right. I guess anything else going on there in terms of just incorporating a weaker view on the consumer? I mean, if it’s just really due to the backlog, why not have communicated that earlier just for the purpose of basic expectation management? Then I have a follow-up after that.

Hi Curt, good morning. You know, we’re pleased with how we performed in the fourth quarter and extremely proud of how Dallas performed in particular and was able to really drive product into the clients’ homes in time for the holiday - great client response to that, so pleased with how the facilities performed. I think we’re being prudently cautious for this year when we’re thinking about the demand in that we don’t know what’s going to happen in the back half. It’s the same kind of commentary that I think every retailer has said really for the last couple of years, so we’re pleased with how we’re performing quarter to date. The first two months of the quarter, demand comps were up high single digits, so really proud of both the marketing materials that went out early January and the client response to our new product introductions as well, so pleased with how things are performing there and just taking what we think is a prudent approach to what we think the consumer might do this year.

Okay. Focusing on the store growth, great to hear that we’re now--we’ve set some targets for the design galleries. Could you give us some, I guess parameters in terms of sales productivity, just given that this is now kind of expressly part of the model, and I may have misheard this but are we still sort of targeting five to seven new stores a year? I thought that was just for the galleries, so if the design galleries are now in there, I would have thought it would have been a little higher but maybe I misheard.

No, you heard correctly. We are really pleased with how the design studios have performed and we feel it’s the right time to kind of move out of the test mode and kind of think about where the right locations are for these new design studios going forward. But you know, I think similar to how we approach overall financial spend and being prudent with our cash position and investments, historically prior to today, we had said that five to seven, the annual target was the traditional showrooms, but now we believe holistically looking at every market available to us, we believe five to seven is the right cadence of openings for us, kind of go-forward on an annual basis, so think that the opportunity now is to look and make sure that we are expanding into the right markets and the right locations, so we’ll continue to stick to the five to seven per year and just allocate between traditional and design studios as we evaluate each particular location.

Are we still targeting 150 galleries long term?

That is correct, yes.

Okay. Thanks John, appreciate it.

You bet.

Thank you. The next question comes from Steven Forbes of Guggenheim Securities.

Good morning John, Dawn, Jen. Congrats on a great year. Maybe just to expand on Dawn’s comments around the back half margin commentary, I think math sort of would--you know, that 700 to 800 basis point give-back would push the margin structure sort of in the low double digit range, which I think is sort of in line with where the IPO model was for 2023, so is that the right baseline to think about building off of as we look into 2024 and beyond, sort of that 12%-plus adjusted EBITDA margin profile?

You know, while we’re not prepared to guide to ’24 and beyond, we did put those long term targets out there earlier today in the adjusted EBITDA growth. The second half is really compressed - we have some incremental investments that we’re really excited about to drive the business and really help the business continue to scale, but in a really efficient way. Things like a warehouse management system, improvements in our planning software, our manufacturing ERP, things like that, we’re really excited about. We’re also looking at different ways to communicate with clients from a scheduling perspective, so I think ideally in a perfect world, we’d always leverage, right - that’s always going to be our goal, so more to come on ’24, I think is in the future, but excited for ’23 and all the new things that we have planned for this year to really help drive the top line and improve the efficiency of the organization.

Then maybe a reversal of Curtis’ question on demand - I mean, I look at the demand guidance really positively for this out year here in 2023, so I don’t know if you could maybe just take a step back high level, talk about what you’re seeing in terms of engagement and conversion on website engagement, sort of utilization of the designers in the stores, average order value strength, because I think the demand comp guidance you gave, I think is probably above underlying expectations here and really a highlight, right, as we think about 2023.

Yes, big picture, we’re thrilled with what we’re doing. When we look at all the news out there, we try to study some of our competitors, we think we’re blowing it away - we know we are. With all the negative stuff out there, we’re doing fantastic, and as we look in the future, we’ve got 12 new stores being opened. Once we get those opened and so forth, that’s more than double, I think, any year we’ve ever done, or pretty darn close to it. Once we get that open, I think our future is looking incredible and we’re very, very excited about it. So yes, we think we’re doing well. Jen can maybe fill in on some more of the facts on ecomm and so forth.

Yes, hi Steve, good morning. Just to echo what John said, we’re really happy with what we’re seeing, and obviously we pay very close attention to the market, we watch what our peers are doing, we read all the same news you guys do, but we’re seeing really great responses. As John mentioned on the call, clients are responding really well to the product, they’re responding really well to our campaigns. We’ve gotten a little bit more aggressive in some of our marketing tactics, as I mentioned, going after new client acquisition to set us up strong going into 2023 here, and we’re really pleased with the results we’re seeing there. Customer behavior is looking good to us and we’re very pleased with that, obviously. We are happy with what we’re seeing across the existing client base, new clients. We’re seeing particularly strong results within our existing client base, which is really nice to see, the product is really hitting. Online, as I mentioned earlier on the call, we’re really happy with all of those metrics we’re seeing. Traffic is up, sales up, conversion’s up, time on site is up, decreases in cart abandonment, really great mobile performance as well, and I think the big thing that we are focused on is really leaning into our business and doing more of what’s working for us, continuing to learn every day. I’ve spoken a lot in the past about we really think that we’re just at the beginning of a lot of these journeys with the new site just launching at the end of 2021. We are so pleased with what we saw in 2022, but we’re learning new things every day and are really excited about additional optimizations and launches for this year, within our marketing channels, learning and optimizing those every day, being able to increase investment. Again, just to remind everyone, back before the IPO, we really were just starting to get more aggressive in our marketing tactics [indiscernible] and outreach, proactive outreach, so looking at that optimization and strength combined with the new showrooms, combined with how great the product is working, we’re just really excited.

Appreciate the color, thanks.

Thank you. The next question comes from Jonathan Matuszewski of Jefferies.

Great, good morning. Nice quarter, and thanks for taking my questions. My first one is on the quarter-to-date high single demand comp mention. Could you comment on your promotional posture during the first two months of the year relative to the comparable period last year and relative to 4Q? Thanks.

You bet. Yes, it’s been the same - we’ve stayed on track, doing the same marketing, same promotions we’ve been doing for many years, quite honestly, and haven’t done any more, haven’t done any less. It seems to be working, responding very well. Our clients love our products and of course if they can get it for a little bit cheaper, they’d love that; if not, they tend to buy it as well, so we’ve been thrilled with that. But to answer your question, we’ve not changed our discounting or promotions at all.

Got you, that’s helpful. My follow-up question - you know, there’s been some softening in luxury home markets around the U.S. in terms of pricing and turnover as of late. I recognize your business has historically been more tied to movements in the stock market versus the housing market, but are you seeing any regional differences in markets where luxury housing is cooling more than others? Overall, you’re putting up really strong numbers, so just curious about any regional differences. Thanks so much.

Hey Jonathan. No, we’re not seeing any significant regional differences. We’re really pleased with how we’re performing and in particular in some of those luxury markets, we’re outperforming kind of balance of chain, so excited to continue seeing where the design studios can go from that perspective as well as traditional footprint, so nothing major to note there.

Great, best of luck.

Thank you.

The next question comes from Peter Keith of Piper Sandler.

Hey, thanks. Good morning everyone. Congrats on wrapping up a great year. Dawn, thanks for the puts and takes around the guidance. We’re still kind of working through the numbers here, but I wanted to dig into the second half year EBITDA margin declines - I think you said it was down high single digit basis points, or I guess percentage, however you want to say it. I understand sales are down a lot. At the same time, at the back half of the year, I was thinking your freight costs are going to be substantially lower, so that should be a gross margin benefit. You’re lapping the Dallas DC opening, so you should start leveraging those DC costs. Can you just frame up some of the puts and takes around that back half of the year, particularly in the context of notable EBITDA margin declines?

Yes, so you hit a couple of the main points. Revenue is certainly going to be down. Not implying anything wrong in the business - still feel really great about the demand, it’s just the function of the backlog in ’22 and then in ’23 and the timing of when that flows through is certainly going to impact year-over-year comparisons in the second half. We feel good about where container costs are - they’re still slightly elevated from pre-pandemic levels but have come down nicely. As you know, that will take some time to flow through the P&L just based on our inventory position and what we have on hand today at those higher container cost levels. Inbound fuel is still elevated, so the cost to get the product from the port to the distribution centers is included as well in that landed cost of inventory, so that still remains elevated. But as we really think about some of the other puts and takes, it’s investments in marketing, so continuing to make sure that we stay top of mind with clients, continuing to focus on new product introductions and all the relevant items that go with that. We’re also investing in IT capabilities, which I mentioned, so those can be pricey but extremely important to continue to help us be able to build scale in the Company and then to drive efficiencies, so near term investments to drive that medium, longer term growth and productivity. Then lastly, I think the new showroom openings is important to keep in mind, so we typically take possession of those about six to 12 months prior to opening, so we have all the associated costs, the rent costs associated with opening those locations, and as we’re thinking about this year, a lot of those locations are on the west coast, which are more expensive than locations in the midwest or on the east coast, so we have incremental expenses associated with those. Then as we think about the weighting of when those showrooms are going to open, it’s primarily back half, so we’ll have--you know, as we’re staffing up and kind of getting those locations ready and relevant marketing for those locations, there’s just more expenses associated with that. Those are kind of the biggest call-outs I would say for the margin compression.

Fair enough, and just to follow up on that, the lower container cost does take some time to flow through inventory. When does that start to decline for you year-on-year and become a gross margin tailwind?

Yes, I mean, we should see favorability this year at some point, certainly skewed more towards the back half, I would say, but a lot of it is contingent upon product mix and sell through. I’d also say our--we were less impacted than perhaps other folks in the retail space given that half of our product is sourced domestically and the rest of it is really geographically dispersed, so if you’re kind of thinking about us relative to maybe some other retailers, we do have a different impact. Just like we weren’t hit as hard over the last couple years, the associated relief of that will also not be quite as exciting, I guess I’d say, but should be more in the back half.

Okay, fair enough. Then maybe more for John and Jen, you talked about leaning into marketing and going after a lot of new customers. You flashed a brand awareness metric at the time of the IPO of 34% for the premium home furnishings market. That’s probably now two or three years old. Have you updated any brand awareness study to see if that’s been improving?

Yes, I can take that. We actually did. We updated that study at the end of last year, re-looking at those brand awareness metrics, and we were really pleased with the report, how we performed comparatively in the market. What’s exciting for us, though, is looking at the opportunity go forward, is that that brand awareness split between us and those main peers out in the market still remains very significant, so a lot of them are still more than twice where we are, so we’re pleased with the progress we’ve made over the last two years but I think even more thrilled about the continued opportunity we have over the next few years.

And does it maybe move higher than 34%?

It’s hard to compare direct stats like to like, looking at the percentage numbers. In terms of comparative performance, we believe we improved versus the market, but don’t want to really speak to specific numbers.

Okay, fair enough. Thank you so much for the insights.

Yes, just to add to that, we’re clearly adding a lot of new clients every month, which we’ve been thrilled with. Obviously that’s how you grow your business. To Jen’s point, we did some marketing in December-January to new clients, and we were just thrilled at the response rate, by far larger than we had thought, which means we’re getting new customers and more and more people are becoming aware of us. But you know, the future looks incredible because, again, our awareness is only half of some of the big guys out there, and every point we get to add to that is an enormous amount of clients, so even as we add a point or two, or three or four or five every year, we see our future just being incredible as people become aware of us and as they do, they’re thrilled with us. They love our product, they love our stores, our showrooms. They love our teams, our designers, and of course they love the quality of the product, and once they do that, they’re kind of hooked for life as one of our clients and they tell their friends. We think that’s a huge, huge part of why we’re growing, why the future looks so good, and why we’re performing so well.

Yes, I fully agree with all that, John, so that’s why I wanted to dig into it. Appreciate the comments.

Thank you.

Thank you. The next question comes from Cristina Fernandez of Telsey Advisory Group.

Yes, good morning, and thank you for taking my questions. Congratulations on a good year. I wanted to ask about what you’re seeing on product pricing on the orders you’re placing with your manufacturers and how does that impact just pricing in general for your products to consumers in 2023.

Yes, pricing has been very, very stable now for, I would say at least the last six, eight months or so. We’re truly not seeing price increases. Costs of lumber and so forth have settled down and, as you know, the freight costs have come down, but jus the pure manufacturing costs have been very, very steady. In some cases, we’ve been able to get them down a little bit as our manufacturing partners have gotten a little smarter on manufacturing and so forth and buying larger orders of, say, wood and raw materials so they get a discount if they buy more, and then they’re sitting on some of that inventory. But we’ve been flowing them orders and projections for a year, so they’re able to do that and invest in the materials, so all good. I’ve seen no--no one’s raising prices currently, which is good, a lot better than last year, the last two years, which were crazy.

Yes, and as a follow-up, with the 100 additional potential store target for the next two years, does that change your infrastructure needs or can you accommodate those additional stores with the expansion in distribution manufacturing you made last year? I guess, how does that impact your infrastructure needs over the next couple of years?

Yes, over the next couple years, we’re good. We’ve got plenty of space, plenty of capacity whether it’s a full blown showroom or a design studio. Logistically, they’re really the same. The folks buy our product, we deliver it to their homes, and it comes out of one of three warehouses, so it’s--we’ve got plenty of space. We’re going to do a new study as we have thought of opening and growing quicker than maybe we had thought of two years ago. We’ll keep studying that to make sure we have enough space so we won’t be caught with a shortage in the future.

Thank you.

Thank you. The next question comes from Peter Benedict of Baird.

Hey, good morning everyone. It’s actually Justin Kleber on for Pete. Thanks for taking the questions, and congrats on all the real estate projects in the pipeline. If I could just play devil’s advocate, though, for a moment, given what is likely to be a more difficult macro backdrop this year and potentially into 2024, why do you think now is the right time to be ramping store growth, and then maybe Dawn, what are some of the expense levers you can pull in order to protect the margin structure of the business if the top line backdrop does further deteriorate here?

First of all, every one of our stores is profitable. As we open new ones, we fully intend them to be profitable, so they’re definitely not a drag on the income. It does nothing more than give us more leverage on fixed expenses as we add volume, so we see--we don’t see any reason not to grow and to grow as aggressively as we can, and in a smart way. We think opening stores--and again a lot of these stores, kind of get the stores open, get the sale, get it delivered, we are talking towards the end of this year but into next year, we think it’s going to be fantastic. If there is economic issues next year, we’re fine with that. We know we’re going to make money in these new stores and we don’t worry about that one bit.

Hey Justin, just to follow up on that, of the 12 locations we have opening this year in ’23, three of those shifted from 2022, so I wouldn’t say that we have an overly aggressive cadence. It’s slightly above the five to seven that we’re articulated over the last several quarters, but we’re really excited about the locations that were presented to us this year and because of those particular locations and--you know, we run various scenarios on those, whether it’s potential recessionary or well performing locations, so these locations, we’re really excited about to open, so we thought it was prudent and made sense to stretch from that five to seven, upwards to nine this year, so we feel really good about that. Then in the--you know, with regards to your financial question, in the long term we kind of view every expense as variable, so we certainly have levers. As we always do, we are continually running downside scenarios and various scenarios if the macro softens, and we feel confident right now that, based on what we know, based on what we’re seeing, that we have strategies that will enable us to be successful this year. We do have demand as a really nice leading indicator, which we’ve talked about before. We have a couple months of visibility that when that demand starts to soften, before it ever hits the P&L, we have different levers we can take, whether that’s--you know, anything from additional marketing touch points to potential promotions, and I’m not saying we’re being more promotional but certainly remains a lever, so. You know, we evaluate in real time. I think we’re a really dynamic Company and a dynamic Management Team, and we’ll continue to do that just as we have historically.

And we certainly have taken into account that the luxury home business or building is slowing as we read, and may continue to, but the way that we look at it is we’re going to be in a position to really capture a lot of that client’s business when we do pull out of this, because we’re going to have our locations open and our showrooms open and our designers there. To me, it’s kind of silly to wait until it gets through this cycle and then say, oh, let’s go open a store. A store takes two or three years to open, so you’re lagging three years, so we’re going to be three years ahead of the competition, the way I’m looking at it, which is a huge plus for us.

Yes, that makes sense. Thanks for all that color, John and Dawn. Just to follow up on the new store economics, Dawn, you mentioned year three AUV, I think you said $10 million for the traditional showrooms. Can you just remind us how you model the maturation of a new store from year one to year three, just so we can think about the same store sales waterfall looking out over the next few years as these new stores start to ramp up the maturation curve?

Sure. I said it was a minimum net revenue target of $10 million for the traditional showroom, so some of those are far in excess, some are closer to the 10. We come out of the gate really strong on the demand side, so it ramps very quickly, really pleased with consumer response in the markets that we enter. As you know, there’s a timing lag between when we take the demand and when we deliver, which has been a little bit exacerbated in the last couple of years just given the supply chain constraints, but in a normalized world we ramp pretty quickly, so--yes, excited to get these showrooms open and start seeing them perform.

Got it. All right guys, well congrats on the year and best of luck in 2023. Thank you for taking the questions.

Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I would now like to turn the conference over to Wendy Watson for closing remarks.

Thank you everybody for your participation in our call and your interest in Arhaus. We look forward to speaking to you again next quarter.

Thank you. Ladies and gentlemen, that concludes today’s conference call. Thank you for joining us. You may now disconnect your lines.