ARHS Q1 2025: Maintains Flat Gross Margins Despite $10M Tariff Hit
- Margin resilience amid tariff headwinds: Management emphasized their ability to protect margins despite a projected $10 million tariff impact through strategic sourcing shifts and vendor concessions, underlining disciplined cost management and operational efficiencies in challenging trade environments.
- Robust consumer engagement and high order values: Executives highlighted record high average order values and strong, consistent demand across store channels, with customers actively trading up to meet discount thresholds, which underscores the strength of their brand appeal even in a volatile market.
- Disciplined showroom expansion with strong financial backing: The company remains committed to strategic showroom growth—leveraging profitable new openings to boost market share—while operating from a debt-free balance sheet with ample liquidity, positioning it well for long-term revenue expansion.
- Tariff Exposure Impact: Management highlighted an estimated $10 million P&L impact from tariffs—with significant rates on China imports—that remains a material risk amid ongoing macro uncertainty and could pressure margins further if mitigation efforts fall short.
- Choppy and Volatile Demand Trends: Q&A comments underscored inconsistent demand growth—with periods of up to 10% growth followed by declines (e.g., -10% in April) and a disconnect between comparable sales and deposits—raising concerns about the sustainability of near-term revenue momentum.
- Margin Pressure from Rising Costs: The discussion pointed to rising showroom occupancy costs (adding 120 basis points pressure) and increased product costs, which have already compressed gross margins, potentially challenging profitability if these trends persist.
-
Margin Protection
Q: How maintain margins amid tariffs?
A: Management stressed that despite tariff challenges, they plan to hold margins steady through disciplined operations and strong balance sheet fundamentals—benefiting from a low dependency on China (targeted near 1% receipts) and long‐term cost control. -
Tariff Mitigation
Q: How mitigate the $10M tariff hit?
A: They are offsetting the anticipated $10 million impact by shifting sourcing away from high‐tariff regions, with most effects expected later in the year as China receipts drop to about 5% in Q3. -
Comparable Guidance
Q: Why include negative 5% comp guidance?
A: Management widened guidance to account for volatile, choppy demand trends in Q1, leaving room for adjustments as market conditions evolve. -
Real Estate Strategy
Q: What is the showroom strategy going forward?
A: They continue to expand their showroom footprint for long‐term growth while strategically closing underperforming design studios and seizing new opportunities. -
Gross Margin Outlook
Q: How should we view the Q1 gross margin?
A: Despite increased showroom occupancy costs, gross margins remained flat year‐over‐year, with expectations that volume improvements will help normalize margins in future quarters. -
Consumer Behavior
Q: Any change in customer purchase behaviors?
A: While there was some softness in April, customers continue to make high-ticket purchases with solid average order values and unchanged delivery wait times. -
Deposit Levels
Q: Are deposit percentages normal?
A: Deposits remain in line with historical patterns, reflecting stable demand and typical quarterly variations without an abnormal increase in backlog. -
Pricing Strategy
Q: Are higher discount thresholds effective?
A: The flexible pricing model is working well—customers are trading up to reach higher discount thresholds, which supports higher average order values. -
Showroom Cadence
Q: Will showroom openings slow due to softness?
A: Management remains committed to scheduled showroom launches, relying on pre-signed leases to secure market share, even amid some short-term softening. -
Occupancy Costs
Q: What is the expected trend for occupancy leverage?
A: They expect only slight deleverage in later quarters as improvements in revenue volume help offset fixed occupancy costs. -
Space Productivity
Q: How is showroom space productivity trending?
A: New showroom productivity is influenced by opening timing, but mature stores continue to perform solidly despite current market choppiness.
Research analysts covering Arhaus.