W. Andrew Carter • Stifel, Nicolaus & Company, Incorporated

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CFO Michael Lee acknowledged the demand choppiness seen year-to-date and stated the Q3 and implied Q4 guidance reflect this ongoing uncertainty, despite strong July momentum. On long-term investments, Lee detailed the strategic importance of the new ERP system, emphasizing it will position Arhaus for scalable growth, improve data quality, remediate material weaknesses, and ultimately drive P&L leverage by improving SG&A efficiency and gross margins as the company grows towards its 165-store target.

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An unnamed executive stated there has been zero change in cancellation rates, with customers still wanting their products. SVP of Finance Ryan Brody explained the increase in customer deposits reflects the difference between the strong +4.1% demand comp and the lower net revenue growth in Q1. He added that the current deposit level is not out of the ordinary and does not represent an increased backlog like in 2022-2023.

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CFO Oliver Gloe acknowledged an unusual weather impact of $3-5 million in Q2, which affected packaged pools more than fiberglass. He confirmed that fiberglass sales returned to year-over-year growth in June and July. Gloe attributed the 400 basis point gross margin improvement to acquisitions, lean initiatives, and volume leverage, stating it was a 'fairly normal quarter' without significant one-time benefits, suggesting a structurally higher base.

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CEO Scott Rajeski clarified that the pool buying decision is a long-term process (6-18 months), minimizing risks from short-term economic shifts, and noted that demand from their affluent consumer base remains steady. CFO Oliver Gloe quantified the pre-mitigation tariff headwind at approximately $20 million, stating that over half is being mitigated through supply chain actions, with the remainder addressed by price increases to protect profit dollars.

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Executive Scott Rajeski explained that the company has diversified its supplier base, with only about $15 million in material buys from tariff-impacted countries. He outlined mitigation strategies including shifting to domestic suppliers, pre-buying materials, and adjusting production between facilities. Rajeski stated the Kingston plant would likely pivot to serve the local Canadian market, with U.S. plants backfilling Northeast demand. Regarding CapEx, he clarified that current investments focus on new pool models and expanding existing facilities in Florida and Oklahoma, with no need for a major new plant investment in the near term.

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CFO Oliver Gloe quantified the hurricane impact at approximately $1.5 million to $2.0 million in Q3 due to rescheduled orders and softer demand, with a similar impact expected in Q4. Regarding margins, Gloe stated that the gross margin profiles across all product categories are very similar and that mix is not a significant factor in overall profitability.

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CFO John Guthrie clarified that the 'slightly improved' gross margin comment was for the remainder of the year, not the full year. This improvement is driven by stronger pricing, contributions from acquisitions, and initiatives like private label growth. He noted that year-over-year, pricing is no longer the significant headwind it was in the prior year, which is a net positive.

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CEO Doug Black stated that unlike this year, suppliers are signaling modest, low single-digit price increases for non-commodity products in 2025. EVP & CFO John Guthrie attributed the majority of the gross margin decline to the price-cost relationship on inventory, with a smaller impact from aggressive pricing. He noted that while the agronomics/landscaping mix shift was not a huge factor, lower grass seed prices did compress margins but also drove volume.

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CEO Peter Arvan responded that dealer pricing strategies vary, as most face their own rising operating costs. He noted the average pool price has risen due to a mix shift toward higher-end projects, not just inflation. He also confirmed there are no widespread labor issues for dealers or significant product shortages, stating that industry supply chains are generally in good shape.

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CFO Melanie M. Hart confirmed that the high end of the EPS guidance is achievable with a flat gross margin. CEO Peter Arvan reiterated that the company raises prices on the effective date announced by vendors. He noted that while competitors largely do the same, there are market-by-market exceptions for pre-quoted jobs or competitive situations, but as a rule, the price increases are passed through promptly.

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SVP and CFO Melanie M. Hart confirmed that guidance accounts for continued pricing pressure in chemicals and PVC, particularly in Q1. President and CEO Peter Arvan agreed that the current market is skewed toward larger, more feature-rich pools, as affluent consumers are the primary buyers. He noted that the company continues to invest to capture share for when the entry-level market eventually recovers.

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President and CEO Peter Arvan stated that overall chemical pricing is fairly stable and he doesn't foresee major changes. He confirmed their supply chain is now much more diverse, partly due to their own packaging facility. On new construction, he noted that while underlying demand exists, a loosening of the housing market, likely spurred by further rate cuts, would be needed to see a significant pickup, with renovation and remodel likely recovering first.

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CFO Jack Preston and Chairman & CEO Gary Friedman declined to provide monthly demand details but reiterated confidence in their full-year guidance. Friedman confirmed that the 'To the Trade' business remains very strong, supported by dedicated teams in every gallery, and is a key part of their business model.

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Jack Preston, executive, attributed higher Q1 costs to the mailing of two sourcebooks versus one in the prior year. Gary Friedman, executive, asserted that no competitor has a cost advantage, as RH's scale provides superior buying power and nearly all competitors are similarly exposed to Asia-based sourcing, creating a level playing field.

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Chairman and CEO Gary Friedman confirmed the inventory build is to support the business transformation and supply chain shifts. He framed potential tariffs as a negotiation, particularly with Mexico. Regarding external investments, he stated the core business is always the priority, but projects like the Aspen ecosystem are strategic moves to amplify the brand. He emphasized that RH is now cycling its largest-ever investment phase, which will lead to significant free cash flow generation.

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CEO Gary Friedman and executive Stefan Duban explained that the opening cadence will vary year to year, as they prioritize making the right long-term real estate decisions over hitting a specific annual number. They confirmed the development pipeline is very strong for the next several years. White space opportunities exist for smaller design studios and even for mid-sized and large galleries in about a dozen North American markets.

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President and CEO Kevin Holleran explained that the USMCA exempts their Mexico-sourced materials from the main tariff impact. He detailed a four-part mitigation strategy: shifting manufacturing to U.S. facilities (raising U.S. production for U.S. sales from 85% to over 90%), supplier negotiations, inventory management, and broad-based price increases to avoid taking specific products out of the market. CFO Eifion Jones added that free cash flow guidance was slightly reduced to $150 million to cover CapEx for U.S. re-tooling and higher working capital costs.

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CFO Eifion Jones reiterated the two-year stack view, stating 2024's strong results were better than expected and that 2025 guidance aligns with their medium-term plan. He noted SG&A as a percentage of sales is expected to decrease modestly in 2025. On working capital, Jones credited focused initiatives that improved the cash conversion cycle by reducing inventory days and net accounts receivable days.

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An executive responded that there is low risk of pantry loading, citing data showing 40% of fertilizer purchasers were new or lapsed consumers, indicating category growth rather than just purchase timing shifts. CEO James Hagedorn and CFO Mark Scheiwer addressed the guidance. They acknowledged Hawthorne's EBITDA would fall short of its internal $20 million target but affirmed the consolidated $570-$590 million guidance. This confidence stems from outperformance in gross margin, SG&A flexibility, and savings from transformation initiatives, which offset the Hawthorne shortfall.

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An executive, likely COO Nate Baxter, confirmed the company is adding incremental promotions on top of last year's successful volume-driving programs, which should lead to further market share gains. CEO James Hagedorn emphasized a new, 'absolutely aggressive' competitive strategy, using increased brand investment and collaborative retailer programs to drive growth for both parties and establish a more 'dangerous' market presence.

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