ARHS Q2 2024: 3% Revenue Decline, 280bp EBITDA Deleverage
- Strong New Showroom Performance: ARHS is rapidly expanding its showroom footprint with new formats and locations delivering impressive traffic and customer engagement, which boosts brand awareness and lays the foundation for long-term market share gains.
- Strategic Technology and System Investments: The company is investing in operational systems—such as its warehouse management system, planning software, and manufacturing ERP—to drive efficiency, improve inventory forecasting, and enhance margin visibility, positioning ARHS for improved profitability over time.
- Robust Product Pipeline and Quality Differentiation: ARHS emphasizes strong product innovation and quality, with a robust lineup across all furniture categories designed to attract discerning customers, fostering loyalty and setting the company apart from competitors in a challenging macro environment.
- Slowing Demand and Softening Consumer Engagement: Management noted a decline in demand comps, with sequential and year-over-year softness (e.g., a 3% decline in Q2 and expectations of a low double-digit decline in H2), which could persist if consumers continue to defer purchases amid macro uncertainty.
- Margin Pressure from Increased Investments and Promotions: The call highlighted an expectation of about 280 basis points of EBITDA deleverage due to increased SG&A, higher showroom costs, elevated promotional activity, and supply chain pressures. This aggressive reinvestment, while supporting growth, puts pressure on profitability.
- Heightened Uncertainty from Macroeconomic and Seasonal Factors: The company acknowledged a marked deceleration, particularly in July, driven by typical summer slowdowns compounded by broader economic headwinds and an election-year environment, introducing significant uncertainty into near-term performance.
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Revenue & Margins
Q: Required revenue growth to keep margins?
A: Management noted that near-term investments—including $10-15 million in corporate strategic initiatives—demand robust top‐line growth with a 30-40% EBITDA flow-through, ensuring margins remain resilient even amid a soft demand environment. -
Margin Deleverage
Q: Why high margin deleverage observed?
A: They expect about 280 basis points of deleverage, with roughly 70% from SG&A and 30% from gross margin pressures—primarily due to higher showroom costs and freight expenses—as they continue investing in growth. -
Guidance Update
Q: Why adjust guidance post-summer?
A: A 90-day slowdown from May through July led management to prudently lower full-year outlooks and allow flexibility on promotions, reflecting cautious expectations amid uncertain macro conditions. -
Quarterly Demand
Q: What are Q4 comp forecasts?
A: Management expects fourth quarter demand comps to decline in the mid-teens, as the overall slowdown sees customers deferring purchases across all product lines. -
System Investments
Q: How are internal system upgrades progressing?
A: With the warehouse management system launched in April and planned rollouts of new planning software and ERP, operational efficiencies and enhanced inventory forecasting are on track to support future margins. -
Competitive Pressure
Q: Has competitor pricing affected Arhaus?
A: Management reported no impact from competitor imitation, emphasizing that customers continue to value Arhaus’ superior quality and unique offerings, making price adjustments unnecessary.
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