Good morning, and welcome to the Arhaus Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow formal remarks. Please note that this call is being recorded, and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Wendy Watson, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining Arhaus for the fourth quarter and full year 2023 earnings call. On with me are John Reed, Co-Founder, Chairman and Chief Executive Officer who is joining us this morning from Italy; and Dawn Phillipson, Chief Financial Officer. After prepared remarks, they will be joined by Jen Porter, our Chief Marketing and eCommerce Officer for the Q&A session. 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 for the year ended December 31, 2023, before market opened today. Yesterday, after market closed, we filed an 8-K to inform investors that we identified an error in our unaudited, condensed consolidated balance sheet as of September 30, 2023, related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets rather than property, furniture, and equipment net. This error resulted in inaccurate cash flows ascribed to the operating and investing activities in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2023. As such, we will restate our financial statements for the third quarter of 2023, and revise the December 31, 2022, comparative balance sheet that will be included in the amended third quarter 10-Q. For more details, please refer to the 8-K. Those documents are available on our Investor Relations website at ir.arhaus.com. 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 most recent Annual Report on Form 10-K and subsequent 10-Qs as such factors may be updated from time to time in our filings with the SEC. The forward-looking statements are made as of today's date, and 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 and this morning's press release includes the relevant non-GAAP reconciliations. A replay of this call will be available on our website within 24 hours. Now, I will turn the call over to John.

Good morning, everyone, and thank you for joining us on the call today. We delivered a strong fourth quarter 2023 with net revenue of $344 million, net income of $31 million, and adjusted EBITDA of $51 million, and are very pleased to have exceeded our top and bottom line outlook for the quarter. Turning to our 2023 performance, it was another exceptional year for Arhaus, fueled by our long-term growth strategies to one, increase brand awareness; two, expand our showroom base; three, enhance our omni-channel capabilities and technology; and four, invest in growth to build scale and to enhance long-term margins. Highlights from our 2023 full year results include net revenue of $1.3 billion with our showroom channel up 2% and our e-commerce channel up 17%, on top of growth of 57% and 43% of each of these channels in the full year 2022. Comp growth of 1% and demand comp growth of 8%, both at or above the high end of our outlook for the year and cycling comp growth of 52% and a demand comp growth of 14% in the full year of 2022. Net and comprehensive income of $125 million and adjusted EBITDA of $203 million. Given our strong cash generation and balance sheet strength following 2023's outstanding performance, I am pleased to announce our Board of Directors approved a special cash dividend of $0.50 per share payable on or about April 4 of 2024, to shareholder holders of record at the close of business on March 21, 2024. We are very pleased to be able to return value to our shareholders, while retaining the balance sheet strength that will allow us to continue investing in the Arhaus growth. Dawn will cover our fourth quarter and full year 2023 financial results in more detail later on in…

Thank you, John, and good morning. As John mentioned, we are incredibly proud of our 2023 fourth quarter and full year financial results and our operating performance throughout the year. We delivered a solid fourth quarter that concluded another year of record net revenue and exceeded our expectations for both revenue and earnings. Key items from our fourth quarter 2023 income statement include net revenue of $344 million with a 6.8% comp decline against a comp growth comparison of 47% in the fourth quarter last year that reflected strong backlog delivery. We were pleased with our demand comp growth in the quarter, which was 1.6% on a one-year basis and 91.4% on a four-year stacked basis. Demand comp growth in the quarter was impacted by promotions in November of 2022 that we made a strategic decision not to repeat in November of 2023 to preserve margin. Our fourth quarter gross margin decreased $17 million to $141 million, driven primarily by lower net revenue, transportation costs, and showroom expenses, partially offset by lower costs related to the reduction in net revenue. Gross margin as a percent of net revenue decreased 330 basis points to 41%, driven primarily by product mix related to the sell-through of SKUs that were price-actioned in June of 2023, as well as increased showroom costs and transportation investments. Fourth quarter SG&A expense increased $7 million to $100 million, primarily driven by strategic investments in the business to support our growth and increased selling expense related to new showrooms and higher demand, partially offset by lower warehouse expense. Fourth quarter 2023 net income decreased $16 million to $31 million. Adjusted EBITDA in the quarter decreased $23 million to $51 million from $74 million in the fourth quarter of 2022. The fourth quarter net revenue of $344 million and…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Peter Keith with Piper Sandler. Please go ahead.

Hi, thanks. Good morning, everyone. Great results. I want to ask about the system rollouts, which are interesting. So ERP systems can send some fear down analyst spines. So talk about the risk of the ERP and then future benefits of the other systems that could come in the next two years.

Good morning, Peter. John here. Dawn has probably got more information on this than I, but we're kind of laying things out in stages. I don't believe we're doing a full ERP system anytime soon. We're doing a warehouse system and then a management planning system and then a totally separate system for our manufacturing plants that manufactures and upholstery. Dawn, do you have anything to add to that?

Yes. Good morning, Peter. I think we -- in the fourth quarter of last year, we deliberately -- we hired a consulting agency to help us really evaluate our full systems and business infrastructure and look at not only what we should be really contemplating for revision and updating, but also the sequencing and cadence of that for exactly what you're speaking to. We want to make sure that as we are continuing to grow the top-line, that we don't compromise the client experience, certainly, and that we don't compromise operational integrity. So we're certainly being very thoughtful, very mindful ERPs, I think send fear down the signs of everyone, implementers and analysts alike. So we are trying to be very thoughtful. We are excited for some of these new systems as we think about the planning and allocation software, really, that's going to help us just more seamlessly facilitate movement of product through our network, which is going to have not only operational efficiencies, but financial efficiencies once deployed. So we're really excited for that. There are some other systems that we have not yet started, but have mentioned in the past that we're under analysis, like an order management system, which will also do the same thing and help kind of facilitate making sure the product is coming from where it needs to be. So I think overall, I -- we're taking a very thoughtful, prudent, responsible approach, I would say, to systems, enhancements, and infrastructure changes, but we're certainly -- we're laser-focused on the operational impact as well.

Okay. Thank you. And then I just say, Dawn, for a little more financial technical question. With the warehouse management system rolling out in Q1, I guess it's probably causing a little bit of sales lag. So Q1 sales got a little bit worse than we thought. Is there a sales shift that you could quantify for us that's going to roll directly into Q2 or maybe also carry into Q3?

We think it's probably about a week worth. So, simple math, you could kind of just take what a typical quarter looks like and divide by the number of the weeks in the quarter. That being said, we also did see some impact on deliveries in January related to weather. So if you think about those drivers who are out there, if there's really icy conditions or snowy conditions that are particularly difficult at times, they will delay those deliveries. So I think as we're thinking about 2024, the first quarter certainly has kind of the lowest year-over-year impact or the least favorable year-over-year impact. And then as we look out to the following quarters, we're pretty excited. And we think that as we move through the year, we should see sequential acceleration in the deliveries and net revenue as we move through the year.

Very good. Thank you so much.

Thanks, Peter.

Thank you. Our next question is from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Good morning and nice results. Thanks for taking my questions. First one is just on underlying assumptions for your 2024 comp guide of down four to down two. Just help us give some color in terms of how you're thinking about large scale renovations, light refreshes, existing home sales, factors like that that you've said have the most weighting on demand for your business? That's my first question. Thanks.

Go ahead, Dawn.

Good morning, Jonathan. Yes, so as we're thinking about the macro, there certainly continues to be a lot of uncertainty. We do know that our client continues to renovate, continues to refresh their home, and a light refresh can be something as simple as painting a room. So we think there's still plenty of that happening. I think we also -- if you think about our market share of just a total $100 billion industry, we have a ton of runway. We're less than 2% of market. And so just so much opportunity for us as we continue to open showrooms, as the marketing team continues to really expand the brand awareness and kind of think outside the box on some of these different marketing campaigns. Jen, do you want to talk about the Italy campaign?

Sure. Hi, Jonathan, good morning. Yes, we're really excited. As Dawn mentioned, we're really excited opening up those new showrooms, but within marketing as well, we're really excited about the new opportunities that we have to not only present Arhaus in a similar way to more people, but also new ways that we're presenting Arhaus out to the audiences. So as John mentioned, we kicked off our story series with our rooted campaign featuring our Mexican artisans last fall. We just launched our Italy campaign in spring with a big rollout in February. And it really does give us a way to tell those stories, share the craftsmanship, share the things that really make Arhaus unique and special. John talks all the time about how proud we are of our product and what we're delivering to the market. And I think we as a marketing team are just thrilled to really be able to share those stories and let people see in to our world. And these are things that we are excited about and have been experiencing for decades. But these campaigns really allow us to go into detail and share those stories with a larger audience. Really, really excited by the responses that we are seeing to those campaigns. We are learning a lot. We are seeing some really great engagement and traffic results, particularly on digital, with those campaign. So as John mentioned, we decided to start telling these stories because of questions and interest we were getting from current clients. And just seeing existing clients and also future potential clients really engage with them is really, really exciting. So more to come from that, but really excited about what we'll see through the rest of the year there.

That's helpful. Thanks Jen for the color there. And then I guess just a follow-up, we could get an update on anything you're seeing regarding cancellation rates, whether you've seen any deviation there from historical levels. And I guess, relatedly, I think last year you called out at one point consumers choosing to postpone their orders and that kind of having an impact on when revenue may have been recognized or I guess postponed their receipt of deliveries. Are you still seeing that dynamic? Any color there would be helpful.

Yes, I don't delay, I'm certain we have not seen any increase in cancellation rates, number one. They hold steady as they have been the last quite a few years. So that's normal case. We're actually doing a little better than we had been. And we're not really seeing people now delaying orders either. Sometimes you see that obviously when people are renovating their homes, as we know, people aren't moving as much as they had been, but people are at least in our category, renovating quite a bit. And most builders in that have caught up at least telling the clients an actual date that they can stick to. So things are getting better in that field. We're not seeing people delaying like we did last year. So we're not seeing that it's going to be a factor at all.

Thank you. Our next question is from the line of Peter Benedict with Baird. Please go ahead.

All right, guys. Thank you. Thanks for taking the question. Good morning. Kind of a question around kind of the top-line cadence, how you're thinking about the recovery over the course of the year. You talked a little bit about some of the macro drivers there, but just maybe unpack that a little bit. What you're thinking in terms of just sector demand. You guys have clearly been doing better than the sector, but just your view there and help us understand that maybe the cadence of that $75 million backlog release that you saw in 2023. Just so we understand the comparisons on that. That's my first question.

Yes. Good morning, Peter. Dawn, you can help me with this one. But what we're seeing is, as we've been saying all along, last year was strong, very strong. Our new products are just resonating so well. And I think we're just dead on with what people want these days. And it's a very unique product. We think we're way ahead of the curve from our competition on products. So we think people are responding. And as we've opened up so many new stores every day, we're getting new and -- more and more new clients coming in, finding out who we are because we're a relatively unknown brand, especially on the West Coast, and they're resonating. It's amazing how people walking in who really don't know our brand and are purchasing from us because they just fall in love with our product, fall in love with our showrooms and fall in love with our designers who are just fantastic. So that part is great. And I'm seeing the lineup of new products and so forth strong. And that's what we're all about selling great products. And the more we have better products and the more people know about us, the better we're going to be. We'll just continue to grow. Dawn, you want to add on to the other part of that?

Sure. So I think just to reiterate what John was saying, we feel so great about the new product introductions, the marketing materials, the new showrooms that were opened in the fourth quarter of last year, we're so excited with how those are performing and the clients engagement within those locations. So as we think about demand in the first quarter, January was a bit soft. February accelerated nicely. So I think as we're thinking about the demand cadence that, that will impact a little bit in the first quarter, but really feeling great about all of our offerings, how we're engaging with clients and switching to think about net revenue. As we move through the year, we do expect sequential acceleration. So every quarter we expect net revenue to improve a bit. And that's really going to be driven by new showrooms that open not only in the fourth quarter of this year, but showrooms in 2024 are slated heaviest in Q2 and Q3. So we should see some nice benefit in the back half from those openings as well. As we think about backlog in 2023, it's relatively evenly split between first half and second half. It's slightly heavier weighted towards the second half.

Okay. That's helpful. Thank you. And then just maybe on the turn to the sourcing side of things, transportation was a benefit for you guys in 2023. Just curious what you have kind of assumed in your plan for 2024. Remind us kind of the geographic exposure you guys have in terms of where your product is coming from and just any thoughts on all the activity, the Red Sea and what that might be doing to your inbound rates, ocean freight. Thank you.

Yes. We have -- I mean, keep in mind, almost half of our product is made in United States, which we've always made our upholstery in the United States and some other products are being made here. So that takes almost half the business off the table. The other strong parts, where we're strong in Mexico, we buy a fair amount of product, and in Europe, we buy a fair amount of product, especially Italy. None of that is affected by the Red Sea at all. Some of the Asian things were, but we just have rerouted them and we're not seeing significant cost increases with that. So we're not -- right or wrong, we're not worried about the Red Sea part of the business. And again, it's maybe 20% of our business that may go through there, if that. So it's not going to be significant.

Yes. Just to layer on there, I think over the last few years we have seen some slight adjustments in products coming domestic versus international. So the number is a little bit lower coming from domestic these days, it's closer to probably 30% versus the 50% when we IPOed. But to John's point, we have layered in some slight increases in the back half of this year for freight costs related to Red Sea just from a guide perspective. We're cautiously optimistic that we won't see significant increases in the cost. But I think it's prudent just based off of what we know today and what we're seeing, to have something factored in there. And then just to reiterate John's point, we are seeing a few week delay in certain containers, but we're managing that really well up front with the clients and so far haven't seen any kind of client kind of issue or ordering issue related to the Red Sea delays.

All right. That was super helpful. Thanks so much, guys. Good luck.

Thank you.

Thank you. Our next question is from the line of Steven Forbes with Guggenheim Partners. Please go ahead.

Good morning, John, Dawn, Jen. I was wondering if you could expand on what's driving the acceleration in demand trends during February. It would simply the weather compare month-over-month? Or is the core accelerating? And any early reads on how the consumer is engaging with the new outdoor collections, noting it may be early, but John, you sound super excited about the product. So really would love to hear your sort of early thoughts on how the consumer engagement is.

Sure. The -- first of all, that February versus January, it was really the first two weeks of January that we were affected. Just I mean you guys heard the news. I mean, the news scared the hell out of basically everybody in the country except California and Florida, I think, and rightfully so there was some nasty weather there. Once we got through the first two weeks, we actually saw positive trends for the last two weeks of January, and then, of course, in the February. So it was kind of a blip with weather. And we're not giving that any worry whatsoever. Our product is strong. It's resonating very, very strongly. As far as the outdoor products, we just launched our new and by far best catalog. Hopefully, you've all received it. If not, let us know, we'll get one in the mail to you. But it is by far the best product ever. We put together, assembled a new outdoor team about three years ago, 3.5 years ago, and they are really running at full speed in 2024. So we've got great product. The results so far have been incredible on us. Literally, Cadillac just hit days ago. But the response we're hearing from the stores, from our clients is fantastic. We've got some very fresh things, things nobody else in the world are doing. And it's great style, incredible quality at a fantastic price. So we think outdoor is going to be strong this year.

Thanks for that. Maybe just a quick follow-up capital structure, extremely strong balance sheet, free cash flow profile. You announced a special dividend, but maybe sort of give us some preliminary thoughts on the 2025 pipeline. Is there an opportunity here to accelerate store growth? Are you thinking about potentially accelerating store growth, or how are you sort of thinking about the right rate of store growth or square footage growth over the coming years?

Right. Right. Well, as you know, we've been saying we did quite a bit of new store growth, renovations last year and also this year going into 2025 and beyond, we're shooting to go back to our very well planned, very strategic growth plan, which is five to seven full size stores a year, and then add on a couple more of the design centers as we see fit. So we're not looking to expand beyond what we been planning all along, and we're going to stick with our strategic plan.

Thank you. Our next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks. Congrats on the strong results. Just want to come back to the last point here on the showroom growth and just see if we could clarify, make sure that we're interpreting the right way. The mid to high-single-digit showroom growth on a long-term basis that you had mentioned on. So in term -- are we thinking about that on a percentage basis or are we talking about still five to seven showrooms per year FY2025 and beyond?

Go ahead, Dawn.

Thanks. Yes. So I think on a percentage basis makes sense in the near-term, the five to seven feels like the right number adding on, that's five to seven traditional with incremental design studios on top of that.

I see. Okay. That is -- that's helpful. And then in terms of just looking at your gross margin profile, I think you had said that you expect to see some nice improvement on that in second half of 2024. And it seems based on where your sales levels are falling, maybe fewer pricing action, dragging on mix on a go-forward basis, are you planning for like kind of a solid step-up in your gross margin profile as well as we get into the out years?

So we don't typically guide to gross margin and you haven't put out kind of medium long-term goals for the gross margin. But what I will say is that we feel very good about our product cost. In June of 2023, we did take some price actions, really to kind of make sure that our inventory was right sized primarily, and so we'll clear through those in the first half of this year from a delivery perspective. The second half P&L will benefit having been through that. But as we think about longer-term, we are investing in our in-home delivery experience, which that rolls through gross margin, and we'll kind of continue to invest in that, as we really focus on making sure that client experience is where we want it to be. And I think over time we'll see how that kind of plays out and as we have a relatively dynamic strategy. I think as we continue to scale the top-line and really drive some of these growth initiatives that we have around our in-home designer program, our trade program, new showroom expansion, we really -- we would expect to see leverage over time, over long-term on that revenue, right? So the goal is always to scale those fixed costs. This doesn't mean it won't be -- it may not be linear, like I said, as we continue to reinvest strategically in some of these areas where we feel we can continue to elevate and really provide that luxury premium experience. But yes, we remain laser-focused on driving margins and fixed cost leverage across the Board.

If I could just sneak a follow-up on the pricing actions, what would you characterize the impact on kind of Q4 gross margins and then in the first half of 2024, just from kind of the pricing actions and the impact on mix and gross margin?

Yes. We haven't really disclosed from the P&L flow through because a bit of that is contingent upon just timing. But what we did say was that we took about a mid-single-digit price decrease when you're looking at it across the full assortment. So we are really pleased to say that those prices have largely normalized back to kind of where we think they should be as a go-forward assortment. So, feeling good about our price position going forward.

Great. Thanks for taking the questions. Best wishes.

Thank you.

Thank you.

Thank you. Our next question is from the line of Max Rakhlenko with TD Cowen. Please go ahead.

Great. Thanks a lot. So, first, I know it's early, but how do you think about the new unit economics in the West Coast galleries? What could those look like compared to what you outlined for your legacy markets? How much more robust is the revenue side in some of those bigger galleries as costs are higher as well? And then if there's any differences in paybacks that we should be thinking about.

Yes. I mean I don't have any specifics, but we do know that with the new stores we've already opened on the West Coast in the last year, and the ones that's coming, we feel they're going to be very strong. The current ones are already very strong. And the economics, the sales should be stronger than, say, a store in back in Ohio, where we have a store. And it's just -- it's more people, more people with money. And our product really resonates on the West Coast; I mean they're absolutely loving. So we feel very confident about it. Dawn, I don't know if you have specific numbers or anything, you want to disclose [ph]. .

Yes. I mean, I don't think we'd want to disclose kind of geographically, but what John says certainly holds true. You would expect larger location in California to perform better than maybe a smaller Midwest market. But we still remain focused on kind of the average adjusted EBITDA contribution for a showroom at 32%. And then the top-line is a minimum of $10 million. So some of those locations may significantly outperform, some may come in a little bit under, but we remain laser-focused on the payback, which is under making sure that we have payback within two years. So feeling good about our overall strategy and Dallas opening up that Dallas distribution center really unlocked the West Coast for us. So excited to continue to develop that geographic region.

Got it. And I'm sure I was going to ask a question on Dallas DC, but how is that going? How are those efficiencies? Is that DC now where you need it to be, or is it still ramping? And then what could the stem mile savings look like as over time, you will be depending less and less on some of those Midwest facilities as you deliver out to the Western markets.

Yes. So Dallas is performing. It continues to, I would say, underperform where we expected it to be at this point in time, primarily because of inventory allocation, which as we mentioned a little bit ago, we are expecting to get the allocation software up and running kind of early next year. So we won't fully be able to unlock the Dallas productivity until we have the allocation software or an order management system in place. So those are kind of two pieces. In the interim, we are shuttling products back and forth as necessary to kind of try to get that inventory allocation in line with where we'd like it to be. So importantly, we remain laser-focused on making sure the client receives their product on time and that the experience is seamless for them. We're excited to get these systems deployed to unlock the stem savings. Certainly, I remain focused on that. I know that the team is as well, so -- but there's a couple of big platforms that we need to implement in order to really unlock it. So, more to come in 2025, I would say, on what those savings could look like.

Great. Thanks a lot and best regards.

Thank you.

Thank you. Our next question is from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, good morning, everyone. Hey, John, I wanted to ask you about newness. You've touched on it a bit in prepared and even in some of the Q&A, putting your design hat on and looking across your product. And it's okay if you're biased, but I am curious about trends, where your product stands in terms of style and price point. I heard you made some price adjustments. Just thinking about where it sits. And I know you also said like we're not one design fits all. Can you talk about any specific trends, even within your product assortment, that rung faster than others?

Sure. Yes, I'd love to. Yes. I mean, like I said before, I think we're hitting on all cylinders on our products. It's obviously the fun part of the business as consumers are looking for new looks, fresh looks for their homes, and we've gotten into a lot of products, especially in the wood categories that are brand new and upholstery categories where things have gotten softer, gotten rounder, curvier, woods have changed, they've warmed up a lot. They've gone away from the dark grays and so forth. That was so hot a few years ago. We saw those trends a few years ago and we've been all over it. And so yes, when we walk to our store and seeing our sales, it's -- the new product is really what's getting our clients excited. And so we continue to look at work on large collections that we're going to launch and quite a few more in 2024. So as far as the new products as well, the margins are very strong on those. We're setting them where we want to be. I don't want to be, and I tell my buyers and so forth that let's not be greedy on margin. Let's get our margin where we can have a healthy business long-term, that we're very profitable, but don't get so greedy that we're going to cut half the clients out. So we think our prices the way we buy things, direct from the manufacturers, right from the factories, right into our warehouse, and from there right to the consumer. You can't get a better business model of giving clients the best value, us getting our great margins, but not being totally greedy on. And it works. Customers are happy, they come back, they tell their friends, and our business keeps growing. So, yes, the trends are great. Again, things have gotten softer, curvier. Anything we're doing that's in those types of shapes are doing very well. And I foresee that to continue certainly into 2024 and 2025. Is that helpful?

And then maybe one follow-up. Yes, that's great. Thank you. My follow-up, I think it's more for Dawn. It's got two parts that are connected to some of the WMS and the disruption in the first quarter. Can you -- the demand comps, I think were running positive at the end of last year. Correct me if I'm wrong. So I'm thinking about the anatomy of getting to this -20 or so that you're putting -- that you're expecting for the first quarter, even with a negative high-single-digit in January. Meaning, why are -- is it just comparison based? Why is there not enough throughput from the prior demand comps to get you to a better outcome? And then just related to this, you have this ERP rollout. Can you talk about that in terms of benefits and then any risks that could pose or with the WMS, the biggest hurdle in terms of systems investments that could have created some type of disruption to your business? Thank you.

Sure. So I would remind you that the demand comp has, that's a clean calculation year-over-year from a comp basis. That is not a clean calculation year-over-year because the base of 2023 has backlog in it. So there's still going to be a divergence between the demand comp and the comp number as we move through 2024 because of the backlog in 2023. Once we clear 2024 and we hit 2025, those two will be more in tandem. So there is still some disparity there. With regards to the ERP, I would just remind everyone it is our manufacturing ERP. So it's not kind of the -- it's not the retail ERP. So it has a lesser impact on the overall organization when it comes to its not impacting deliveries, it's not impacting kind of the retail organization's day-to-day. Some great benefits we're going to have some increased visibility to costing, which is going to really give better visibility to the teams, the product teams as they're costing product and just some other operational benefits to the actual manufacturing team. So no significant risk to the overall organization, I would say. We're closely monitoring it, managing it, but it's not meaningful from -- no meaningful risk that we're anticipating.

Okay. Thanks, everyone. Good luck.

Thank you.

Thank you. Our next question is from the line of Robbie Holmes with Bank of America. Please go ahead.

Hi, this is Maddie Chuck [ph] on for Robbie Holmes. Thanks for taking our questions. So I think you called out that showroom openings should be heaviest in 2Q, 3Q. And I just wanted to ask specifically on the outlets, you expect three openings this year. It's still a pretty small part of the overall showroom count. But how is demand in response to these outlets? How do the economics compare to the traditional showrooms? And where you -- how are you deciding where to put these?

Sure. Yes. I mean, as we've more than doubled our business in the last couple of years, we just haven't kept up with the outlet growth. So this is really just balancing out what we needed to keep up with the outlet product. The outlet product is sold at a substantial discount. So certainly, the economics are not as strong as a traditional store. But if you look at it as a percent of sales, we're actually not adding anywhere near what we need to add compared to how much our sales growth has happened, which means we're actually doing a better job delivering things, less people are returning things and so forth. So we think we're in good shape. Once we get these three open, it'll just steady things out, so we can move on. And then as far as locations, I believe ones in Colorado, ones in Pittsburgh, and ones in Kentucky. And all three are opening, I think second quarter I believe.

Thank you. Thank you. That's really helpful.

You're welcome.

And my last question is about maybe promotions. You dialed back on promotions, which helped margins in November. What are some of your assumptions for the promotional environment in 1Q and the rest of the year maybe just high level?

Yes. I mean, high level, we haven't really changed our strategy from what it has been. We certainly run some of promotions at certain times of the year. We're not looking to change that dramatically at this point. We have plenty of levers to turn on if we need to. But right now it's going to be as is -- as it has been the last year or so. And we do some promotions; we'll do whatever's coming up next memorial weekend, things like that. Well, that's already happened, hasn't it? Yes. So, or no, it's coming up. But anyway, so on and off, we'll do some promotions. But everything is typical of what we have been doing. Is that about right, Jen?

Yes. No, I would agree with that. And Maddie, hi, good morning. What I would add, and this is something that we spoke to on the last call as well. To John's point, our strategy to promotions hasn't changed what we have been doing those really focusing on the messaging of promotions. So we spoke about really focusing in on how we assort our sales section on our website, for example, how we speak to promotions, really paying close attention to those elements. But echo John's point about the overall promotional approach has not changed.

That's super helpful. Thank you.

Thank you. Our next question is from the line of Phillip Blee with William Blair. Please go ahead.

Hi, good morning. Thanks for taking my question. You guys have done a lot of remodels and relocations over the past few years and plan to continue in 2024. And you've elevated your store experience, which is clearly having a nice tailwind on demand. Can you talk about how many of your showrooms are still in maybe a legacy format and what kind of lift you see following a remodel or reload? Thank you.

Yes. Dawn, I don't have specific numbers, but I think we're about halfway through where we want to be. Does that sound about right, Dawn?

Yes, I think it does.

Yes. So we're trying to do -- again, we don't have a set schedule because a lot of stuff to do with leases, landlords. Do we want to move the store? Do we want to renovate it? When we move it down the Street, across the hall, whatever. So we don't have a set thing. But we are absolutely committed to remodel existing stores that are doing well in good areas that we know we want to stay at. And it definitely helps. We do see a lift in sales. It's a long-term investment. The last thing we want to do is get stale, like you've all seen many retailers gotten, and to a point where it's too late to remodel because there's too many of them to remodel and you just can't do them. So we're staying ahead of that curve big time. We think better than anybody, certainly any of our competitors that I see in remodeling, staying fresh, staying appropriate. And it really, really helps I mean, our clients come in. Again, we're driven by a female client, and they get so inspired, both females and males, they get so inspired when they walk into our stores, they say, oh my Gosh, what did you do this store? This is how I want my home to look. And that's very refreshing. And it sets us up for the future. I mean, that's the biggest thing, sets us up for a great, great, great future for many years to come.

Okay. Great. That's very helpful. And then Dawn, maybe a question on inventory is down 11% at the end of the year on a dollar basis. Can you maybe talk about how much is freight and price action versus unit driven and then how you feel about your positioning heading into 2024, particularly around some the newness. And then should we expect more muted inventory growth through the first half of the year? Thank you.

Yes. So we feel great that the price actions that we took in June of 2023 really positioned us pretty well as we exited 2023. There's still a little bit to clear through and have delivered in the first half, which we talked about. So I think we feel good freight has largely, container costs have largely normalized in the inventory relative to kind of the spikes that we saw in 2021 and 2022. So feeling good about kind of where the inventory is sitting as we continue to clear through those price action SKUs in the first half of this year and then really excited for the newness that is going to be launched or that was launched earlier this year and that we have a fall launch as well. And I would say that the team is taking a very responsible approach with buying into that newness. We spoke last quarter around how that backlog that is normalizing slightly higher than it was pre-pandemic, right? As we think about how do we buy into newness and can we make sure that we're getting a really solid read on the business before making meaningful purchases into that product. And we know that clients are willing to wait a little bit longer lead times for that newness because it's exciting, it's different, it's unique. So I feel good about where we'll be positioned in the next quarter and the buy plan for the year.

Great. Thank you. Best of luck.

Thank you.

Thank you. Our next question is from the line of Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Good morning and congratulations on a good quarter. I wanted to ask about the special dividend and the decision to pay that. Should we think of this as one-time? And then going forward, how would you consider dividends, perhaps a regular dividend or share buyback?

Sure, I can start. This is a one-time thing. We have no plans to continue on a consistent basis. We've done lot of -- we've done great the last couple of years. We are very well planned out how much cash we're going to need this year, next year, the year after, and we felt we could do this in the future very happy to be able to do it on time. Dawn, I don't know if you have anything to add to that.

Yes. I would just reiterate that the Board was really pleased to be able to return capital to shareholders. And we just -- we have a really strong balance sheet. We have a great cash position, the special dividend, which we are considering to be one-time in nature. We don't have plans to do anything additional in the future at this point in time. But we -- interestingly enough, we're in the very fortunate position to be able to do a dividend, a special dividend, and still continue to invest very heavily in the business when it comes to new showroom expansion and some of these other strategic investments in the back office function. So really, really pleased with the performance that we've seen within the company and our ability to return this value to shareholders.

Thank you. And then my other question was on the price action SKUs. I know you can comment on the timing of the deliveries, but where are you as far as like taking the orders from those SKUs? Have you kind of gotten through most of what you wanted to do or there's still more to go here in 2024.

We've cleared through the majority of it from the demand perspective, the order taking perspective. So there's still a little bit left. And it's not -- I wouldn't say it's meaningful. So we're excited to get these kind of products delivered in clients homes and then start to see some nice product cost and gross margin expansion sequentially in the back half.

Thank you and best of luck for this year.

Thank you.

Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Wendy Watson for her closing comments. Wendy?

Thank you, everybody, for participating in our call today, and we look forward to talking to you again next quarter.

Thanks, everybody.

Thank you. The conference of Arhaus has now concluded. Thank you for your participation. You may now disconnect your line.

Goodbye.