Good morning and welcome to the Arhaus Third Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the 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 would now like to turn this call over to your host, Ms. Wendy Watson, Senior Vice President of Investor Relations. Thank you, ma'am. You may begin your presentation.

Good morning and thank you for joining Arhaus' inaugural earnings call. With me today are John Reed, Co-Founder, Chairman, and Chief Executive Officer, Jen Porter, Chief Marketing Officer, and Dawn Phillipson, Chief Financial Officer. John will begin with the company overview and operational details, Jen will discuss the status of marketing initiatives across our omnichannel footprint, and Dawn will cover our third quarter performance and outlook. After their formal remarks, we will open the call to questions. For Q&A, please limit to 1 question and 1 follow-up. If you have additional questions, you may return to the queue. We issued our earnings press release and our 10-Q for the quarter ended September 30, 2021, before market open today. These documents, along with supplementary slides, will be made available on our Investor Relations website at ir.arhaus.com. A replay of the call will also 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 contained in the Company's third quarter, 10-Q, as such factors may be updated from time to time in its other 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. I will now turn the call over to John.

Good morning, everyone. And thank you for taking the time to join our third quarter 2021 earnings call, our first as a publicly traded company following our IPO in early November. This is an exciting milestone for our company, and I want to thank more than 1,400 Arhaus team members for working together to get us to this point. We truly are the best in the business, and I am proud to be part of such a dedicated team who cares for one another, our clients, and what we do. We had a record third quarter performance with net revenue in both our retail and e-commerce channels up 69% and comparable growth up over 61% compared to the third quarter last year. Dawn Phillipson, our CFO, will cover our third quarter performance and the outlook for the remainder of the year in more detail later in the call. But we are extremely pleased with the trends in our business. Because this is our inaugural earnings call, I will take a few minutes to introduce our house, describe what makes our brand so special, and explain why I'm so excited about the growth going forward. I founded this company 35 years ago with a simple mission: that furniture should be responsibly sourced, lovingly made, and built to last. In order to fulfill our mission, we built a unique model that differentiates us in the marketplace in 4 key areas and offers multiple strategies for growth. We believe we are in a position to nearly double the size of our business over the next few years and drive profitable long-term growth for years to come. Our first key differentiator is our product. All of our products are designed in-house and sourced directly from leading artisan vendors around the world. By sourcing our own exclusive products, we control the design, we control the quality, the supply chain, and our costs. Through our vertical integration in designs and sourcing model, we offer a globally curated assortment of handcrafted products that represent our livable luxury aesthetic. The second key differentiator is our showrooms. From our very first showroom in Cleveland, Ohio, we have always believed that retail is theater. Our showroom should showcase our products in a way that is both inspirational and aspirational. When clients walk into our showrooms, we want them to envision that it can be an extension of their own home. We put as much detail and attention into our showrooms as we do in our products, and expanding our showroom base represents a tremendous growth opportunity and significantly builds our brand awareness. In the third quarter, we opened two new showrooms: a traditional showroom in Salem, New Hampshire, and a Design Studio in Burlingame, California. We also relocated a showroom in McLean, Virginia, to the Tyson’s Galleria and converted this showroom into the new format. We ended the third quarter with 77 showrooms across 28 states. We expect to end the year at 79 showrooms. In the U.S. alone, we believe we can grow to as many as 165 total showrooms, and we target to add 5 to 7 new showrooms per year for the foreseeable future. Within our showrooms, we are also growing our in-home designer program that offers clients the complementary service of having a designer personally come to their home. At the end of the third quarter, we had 65 designers in 54 showrooms, and the average order value when the client purchases through our in-home designers is more than 3 times greater than the standard order. We intend to at least have 1 in-home designer per showroom with locations accommodating more than 1. The third differentiator is our omnichannel experience, which Jen Porter will cover in detail later in the call. But we will take the same inspirational approach to showcasing our product online and in our catalogs as we do in our showroom. Our omnichannel approach serves to further increase our brand awareness and represents another level of our growth. We only recently began investing in digital capabilities, and with e-commerce comprising approximately 18% of net revenue today, we see a significant runway to grow our e-commerce sales as we enhance our omnichannel capabilities. The fourth key differentiator is our client-first mentality. This core value runs through our business. Everything we do, from the way we design our products, build our showrooms, hire, train, and retain associates, and invest in growth, is with our clients in mind. I invite you to visit one of our showrooms and experience our client-first mentality and our incredible design consultants firsthand. With our tremendous opportunity to continue growing and scaling our business, we are closely focused on the current supply chain dynamics and making investments to expand our distribution capabilities. On the inbound side of the supply chain, we are working closely with our vendor partners to fulfill orders and ramp up production. Our vendors have been incredibly resilient through the strong demand environment, increasing their capacity, growing with us, and further deepening our relationships. At the same time, we are also expanding our vendor base and bringing in more new products. In upholstery, we expect to see improvements in lead time with the opening of our new upholstery manufacturing and distribution facility in North Carolina. This facility will double our in-house upholstery manufacturing capabilities. On the outbound side of the supply chain, we are increasing our capacity and expanding our footprint. We have begun a 230,000 square foot expansion in Ohio distribution and corporate facilities as well as expanding our offices in North Carolina, which will add another 310,000 square feet of distribution capacity, in addition to 187 square feet of upholstery manufacturing. In the second half of 2022, we're planning to add a third distribution facility in the Western United States, where we have significant growth opportunities. Along with our ongoing efforts on the inbound side, the increases in our outbound capacity will further allow us to get products to our clients more quickly and more efficiently, reducing backlogs and shortening lead times. In summary, we feel very good about the trends of our business and the investments we're making to drive long-term growth. At a time when consumers are spending more and more time in their home, investing in their homes, and looking for more functional spaces, we think we're very well-positioned to continue to gain market share. The premium home furnishings market in the United States represents a $60 billion opportunity. Today, our market share is less than 1% of this large and rapidly growing market, and we have multiple avenues and a long runway to pursue sustainable growth. I could not be more excited about the future of Arhaus. We know our products are unique in the marketplace. We have built an incredible team and incredible infrastructure to grow and scale our business. Now I will pass the call over to Jen Porter to review the omnichannel and digital initiatives.

Thank you, John. And good morning, everyone. One of Arhaus' biggest opportunities to increase our market share is to grow our brand awareness. We are in the enviable position of introducing a meticulously crafted, improved and heritage brand, grown mostly organically over the past 35 years to a highly fragmented and arguably underserved market. In 2019, we began significantly increasing our investment in digital initiatives and brand marketing overall. We developed a test-and-learn strategy that balances brand awareness approach with high return on advertising spend as well as driven targeted campaigns. Our focus is on profitable and meaningful long-term growth of the brand. We have a proven ability to drive brand awareness by opening more showrooms, and we see continued opportunity by further enhancing and expanding our omnichannel marketing and technology capabilities. For the third quarter, we are excited to report healthy client growth over Q3 last year in terms of both existing client numbers and value, as well as new client acquisition numbers and value. Our approach to clients is omnichannel. Our direct mail channel continues to perform incredibly well for us with our Fall catalog hitting homes at the end of August. We mailed the catalog to our largest circulation ever while achieving a higher response rate than last year. We are particularly excited to see direct mail continue to perform not only with our existing client base but also as a significant driver of traffic to our website and new clients to the brand. Early results for our holiday catalog, which hits homes in the beginning of November, are looking very promising as well. Q3 saw us increasing our media advertising and partnership, participating in both House Beautiful's Whole Home and Architectural Digest's Iconic Home campaign, along with continuing to develop and expand upon our influencer program on social media. In September, we reached 1 million followers on Instagram. On the eCommerce front, we saw strong eCommerce growth driven by owned, earned, and paid marketing efforts. We continue to believe that eCommerce not only drives direct revenue but also serves as a gateway to the brand and a discovery tool for our products. We are thrilled to be launching our new website this month, which will immediately enhance our online user experience, allowing us to better showcase our brand and share product knowledge with our online clients. This site will also bolster our product merchandising capabilities, as well as position us for further optimization throughout 2022 and beyond. Along with other digital initiatives launched this year, such as our 3D Room Planner, Digital Catalogs, and Virtual Showroom Tour, we believe we have tremendous opportunities to continue to deepen our client relationships and grow our e-commerce business. We look forward to sharing more information about our omnichannel development and growth in future quarters once our new site is up and running. For now, I'll pass over to Dawn Phillipson.

Thank you, Jen, and good morning, everyone. As John mentioned, we're pleased with our third quarter results and the underlying trends in our business. Demand and net revenue were very strong in the quarter. We are working hard to address the supply chain challenges to deliver products in a timely manner to our clients, and we're investing for growth, as you've heard from John and Jen. As a reminder, because our IPO occurred in early November, we were a private company in the third quarter with minimal tax obligations. For the third quarter, net revenue increased 68.7% to $203 million. The growth was driven by increased demand for our products as well as elements of our supply chain beginning to catch up with client demand. We're pleased to announce comparable growth was 61.3% in the quarter. Demand remains strong in the quarter as well, with demand comparable growth of 28.3% on a one-year basis and 72% on a two-year stack basis. Given the substantial demand comp growth that we began to see in the third quarter of 2020 and the corresponding increase in our backlog, we've been focused on reducing delivery times from the peak levels experienced earlier this year. Accordingly, we expected comp growth to outpace demand comp growth in the quarter, and our results were in line with those expectations. Gross margin increased 87.6% to $85 million in the quarter, driven by our higher net revenue, partially offset by the related increase in product and transportation costs, as well as higher credit card fees related to demand. Gross margin as a percent of net revenue increased 420 basis points to 41.7%, reflecting our ability to leverage our fixed cost over higher net revenue. SG&A expenses increased 66.2% to $68 million, primarily from investments to support the growth of our business and corporate and warehouse expenses, higher demand-driven showroom compensation expense, increased marketing investments, and one-time costs related to the IPO. As a percentage of net revenue, SG&A expenses declined 50 basis points to 33.5%. Interest expense in the quarter was approximately $1 million. Net income of $14 million in the third quarter of 2021 was up significantly compared to approximately $1 million in the third quarter last year, and adjusted EBITDA increased over 3 times to $31 million, from $10 million in the third quarter of 2020. Year-to-date through September 30th, net income increased to $31 million and adjusted EBITDA increased over $90 million compared to $14 million and $41 million respectively in the first 9 months of 2020. Turning to the balance sheet. As of September 30th, cash and cash equivalents were $149 million, and the company had no long-term debt. Net merchandise inventory was $171 million as of September 30th, a 58% increase from December 31st, 2020, as we built inventories in response to our strong ongoing client demand. As I mentioned earlier, while we're focused on reducing our backlog and our comp growth is now outpacing our demand comp growth, demand remains very strong, and we are increasing our inventory levels accordingly. For the 9-month period ended September 30th, 2021, net cash provided by operating activities was $143 million. Post-IPO, the company remains in a net cash position. For the 9-month period ended September 30th, capital expenditures were nearly $30 million, and landlord contributions were $11 million. As a result, company-funded capital expenditures were approximately $18 million for the 9-month period. Regarding CapEx and investment in new showrooms, this is a good time to point out our strong unit economic model and return on investments from new showrooms. We target an average investment in a new showroom of approximately $1.4 million, with the landlord contributing the balance of the total $3 to $4 million cost. We expect new showrooms to be profitable within the first year of opening, and by year 3, they have an average net revenue of $6 million with a 27% contribution margin. As I mentioned, we completed our initial public offerings after the third quarter. We used the proceeds from the IPO to pay the $64 million exit fee due under our former term loan that we terminated in December 2020. We allocated the remainder of the IPO proceeds for general corporate purposes, including a replenishment of working capital after the payment of a pre-IPO distribution to Arhaus LLP unit holders. With our full year 2021 and implied fourth quarter outlook, please refer to this morning's press release. Underlying our outlook, particularly for net income, is the continued expectation that higher freight costs will pressure gross margins in the fourth quarter as higher-cost inventory is delivered. As a reminder, in the fourth quarter, we will also incur a $50 million derivative expense related to our former credit facility, $50 million in one-time IPO and reorganization costs, and we will begin to incur public company costs of approximately $3 million per quarter, all impacting SG&A expenses. These items are fully factored into our outlook for the full year and implied fourth quarter guidance. Note that going forward, we plan to issue annual guidance which will be updated quarterly. That concludes our prepared remarks. Thank you for your attention, and we would now like to open the call for questions.

At this time, we'll be conducting a question-and-answer session. Our first question comes from Curtis Nagle with Bank of America. You may proceed with your question.

Good morning. Thanks very much. The first one, one of your competitors obviously reported last night. I think there were some questions around whether they had seen any change in behavior in terms of where people were shopping in what channels or perhaps more demand due to Omicron. I think they should not really, but just curious if you guys have any comments on that and then I'll have just a quick follow-up.

We continue to see demand strong in both channels. E-commerce continues to perform really well as it has throughout COVID, but showroom traffic has picked up as well. So we aren't seeing meaningful trends differentiating in the third quarter or fourth quarter today based on the new variant.

Fair enough. And still very early, so that makes sense. And then forgive me if I missed this, but in terms of when we're thinking backlog's peak, is it fair to assume mid-next year or how is that looking right now and how has that changed in terms of your expectation from three months ago?

Yeah, our expectation for the backlog is consistent with how we were thinking about it a few months ago. We continue to see really strong demand as we noted in the press release. And based on that strong demand and continuing freight constraints, we do expect that backlog to remain elevated, and we will work through it throughout 2022. We're not seeing significant increases in cancellation rates, so clients continue to be willing to wait for the merchandise. So we feel confident in our strategy. We do continue to be opportunistic in bringing products as quickly as possible in a financially prudent manner. So we think our strategy is working and we'll continue to closely monitor cancellation rates. But to date, we feel good about how we're handling it.

And Curtis, just to add to that, we do expect the backlog to continue. However, the amount of wait time the clients have continues to get a little bit tighter. So in other words, they don't have to wait quite as long as they did 6 months ago. And that's really the key that we're looking at; is, we may not be 100% in stock, but you don't have to wait as long for the product. Clients are used to that. They've been trained around the world to wait now for two years for things almost. So they're willing to wait. They know it's product that they're investing in their home, not throwaway product. So it will be their long-term form.

And just to clarify, you guys are not seeing an increase in cancellations, is that correct?

That's correct, Curtis, those remain lower than 3% rates.

Perfect. Okay. Thank you, appreciate it.

Our next question comes from the line of Jonathan Matuszewski with Jefferies. You may proceed with your question.

Great. Good morning, John, Dawn, and Jen. Congrats on the strong quarter.

Thank you.

I had two questions. The first one is on just promotional activity. I think a key question in retail these days is how sustainable the pullback in promotional posture is once COVID fades. So maybe just take a chance to share management's confidence in being able to see success with more full-price selling in a future backdrop where there may not be a pandemic and there may not be long lead times. Just maybe talk to that dynamic. Thanks.

Hi, Jonathan, this is Jen Porter. Yes, we feel very confident in our current approach. We actually started pulling back on promotional activity back in 2019, so pre-COVID. And we were seeing really strong responses to it at that time. It really allows us, as a brand, to focus more on the quality of the product, the stories of our artisans, the uniqueness of what we are offering for our clients, and we see really strong responses to that. Our clients are looking for that quality aesthetic, and they're willing to pay for it. So we have continued to pull back on promotions throughout the COVID time period. We do still run promotions from time to time, particularly over three-day weekends. But we think that pullback can continue going into 2022.

Great. That's helpful, Jen. And then Dawn, just a follow-up question on freight costs. Curious how those are trending in October and November against maybe initial expectations you had for Q4. And not looking for specific guidance for next year, but just directionally, do you think freight costs, as a percentage of inventory, should still be higher versus the recent trend or do you think it's kind of practical that maybe that ratio could be more flattish or even down next year? Thanks.

Sure. We continue to be opportunistic and really thoughtful in our approach to inbound products, between bringing in product at the spot rates and the contracted rates. We don't have any material changes to the forecast regarding freight increases. I think we were appropriately conservative with how we thought about those for next year. We are seeing a little bit of favorability in the fourth quarter relative to what we had provided a few months ago. But that being said, the freight industry continues to be volatile. And so we have a very clear line of sight into any favorability that would be ongoing. We're going to hold steady with how we're thinking about 2022. So the gross margin rates for the fourth quarter, I would expect somewhere in the 38% or 39%, just slightly better than where we were anticipating a few months ago.

And Jonathan, just to add to that, keep in mind, you may or may not know, but over half of our product is purchased here in the United States. So we have not seen significant increases in freight costs like the containers are experiencing. So that's, we think, a competitive advantage of ours.

That's helpful. Thanks for the color and best of luck for the rest of the quarter.

Thank you.

Our next question comes from the line of Peter Keith with Piper Sandler. You may proceed with your question.

Thanks. Good morning, everyone and congrats on the first quarter out of the gate here. I wanted to ask about the new North Carolina facility with the upholstery production and DC capabilities. Could you give us the timing on when you expect that's going to open? And then, are you seeing any potential delays just as it would relate to hiring or build-out.

Sure. I can take that, Peter. The building is built. We're actually getting permits hopefully this week or next week. We fully intend to be in there before the year is out, putting product in there and getting going. As far as the team goes, they are almost hired. It's been a great response to the building to work out of. We get great benefits and so forth. So we're pretty well, almost fully staffed. We're just waiting on one inspector, which we hope we hear from very soon.

Great. Okay, that's exciting. And maybe on a separate question, I'll direct to Dawn on the model. A really nice increase in the outlook for Q4 versus what you were looking for earlier. We're looking at, if our math is right, midpoint raising revenue by about $14 million, raising EBITDA by about $6 million. So it's a really healthy mid-40s contribution margin if our math is right. So what do you think is unique about Q4 that allows you to get that type of margin? Or is that something we could see in later quarters as well?

We're continuing to work through the backlog. Our strategy to bring product in at some of those higher spot rates, you're seeing some of that on the top line flow-through. We also have worked diligently in the warehouse and with our third-party providers, to expand the capacity flowing out of our existing headquarters building. So we're really pleased where we expect the fourth quarter to come in, and hopeful that we'll be able to continue that cadence.

Okay, sounds great. Well, good luck with the holiday season.

Thank you.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed with your question.

Hey, good morning, everyone. My first question is on sales. Can you talk about how you'd characterize the underlying momentum of the business? Do you feel like it's accelerating? Do you think it's holding? It looks like the top end of your sales guide implied a modest acceleration, in like the way we calculate this geometric stack. But curious if you think is that fair, or do you think things are getting sequentially stronger?

Hi, Simeon. While we don't provide guidance on demand, we haven't seen any meaningful change in demand trends in the fourth quarter on a two-year stack basis. We are facing larger year-over-year comparisons in the fourth quarter, so we're looking at it on a two-year stack basis. I will note that similar to what we anticipated and saw in the third quarter, we would expect comp sales growth to outpace the demand comp growth as we continue to work through the supply chain constraints and deliver against the backlog of orders. But demand continues to be healthy and we're pleased with what we're seeing in our client base.

Okay, thanks. And then my follow-up on adjusted EBITDA. In the fourth quarter, despite the revision higher, it still looks like it will be down on a year-over-year basis. And we know why; investment and maybe some freight pressure. Can you talk about the drivers between those two when we lap them both and then whether there's anything different in timing as far as the investments go, whether they're shorter on duration, longer on duration, and when we might see EBITDA flip? I know I'm not trying to get quarterly guidance for next year, but just conceptually, when we see EBITDA growth year-over-year.

As we think about the investments we're making in the business, in the fourth quarter, we're going to see the expenses and the investment in North Carolina and some IT initiatives come into play in the P&L. And as we think about next year and onboarding a western distribution center that is larger in size than North Carolina, it will take time to start to see some leverage on those. We don't expect to come out of the gate on both of those facilities with everything running smoothly and 100%. So we have thoughtfully forecasted a ramp-up out of those facilities. So I think you can think about the timing of those as a scale or slope. As we think about freight costs, I mentioned earlier we are forecasting those to remain elevated through next year until we have line of sight into those clearly coming down consistently. It's just prudent for us to expect those to remain elevated.

Okay, thanks. Happy holidays, good luck in the fourth quarter.

Thank you.

Thank you.

Our next question comes from the line of Adrienne Yih with Barclays. You may proceed with your question.

Yes. Good morning and congrats again on your first quarter out of the box, very successful. John, I was wondering, or Dawn, can you discuss the price increases that you took early fall? I believe it was in the high single-digit range. When did you take them? What was the customer reaction? Clearly, there's no noticeable impact on demand. And what's the opportunity for 2022 for further increases? And then Dawn, if you can talk about what is the assumption for spot versus contract in your fourth quarter guidance? What does it look like for Q1, and does Q1 have any more or similar pressure on freight and inventory deliveries? Thank you.

Sure. I can start with that. Yes, we did take price increases. We have not seen any demand falling off, if any. The clients seem to be fine, sales teams adjusted to it, and things seem to be good to go. As far as the future goes, your guess is as good as mine. Prices are going up all over the place. We think things have stabilized quite a bit from beginning of this year where lumber prices were 2 or 3 or 4 times higher, and then they came back down. At least things don't seem to be as volatile as they were. So we're hopeful, as I'm sure everybody in the world is, that inflation will get under check here. But if we do get price increases, we intend to pass them along and raise prices to really protect our margin.

Yes. Hi, Adrienne. With regards to the spot versus contract rates, it varies by origin and it really is contingent on what's going on at each individual port. What I'll say is that the fourth quarter is relatively consistent with how we approached it and the promotional rates that we deployed in the third quarter. We are forecasting those to continue throughout 2022, but it's really just contingent upon container availability and what's happening at each individual port, which, as you know, is not just subject to Arhaus shipping. So that's how we forecast it. We think we're appropriately conservative in 2022.

Okay. Thank you very much. Best of luck with the holidays.

Thank you very much.

Our next question comes from the line of Peter Benedict with Baird. You may proceed with your question.

Great. Hey. Good morning, everybody. My first question, maybe for Jen, just on the new web platform that's going to be launching here later this month. Just curious, maybe can you expand on maybe two things: 1. As a customer, what are we going to see that's most notable or most different? And then what is it really going to allow you to do next year that you have not been able to do in the past or the Q3 data analytics, or just what would you call out as the biggest deliverables there? That's my first question.

Hi, Peter. We're really excited about the new site launching. We're in final testing mode right now. So coming very quickly, I think the biggest thing that we're really excited about for the immediate impact is just the huge step-up in customer user experience. So really focusing in on that immersive, creative content and imagery, and storytelling, and really working to bring the Arhaus brand to life on that digital channel. I think one of the most amazing things about the Arhaus story, as you look, this brand has been getting built for 35 years. And our showrooms, we know what happens when clients are in there. And we've had a good site experience, but we're really excited for clients to be able to deeply dive into the brand, into the product. Get that wow factor when they see imagery, and then get into the details of the story. And then also making shopping and purchasing easier and more seamless, and ultimately less stressful for clients. So we're excited about things like navigation and merchandising capabilities to really help that client journey as they're starting to explore the product, get the information they need, find other products that they might like, and really be able to do that in their homes and then connect that to their in-showroom experience or do the entire thing digitally online. Looking forward to next year, I think with the replatform, we're really excited about the increased analytics capabilities and backend functionality. Over time, we'll really be able to lean more into AI-assisted product discovery, content personalization, and the like. Analytics will really allow us to understand how clients are engaging with the platform so we can constantly test and improve conversion, optimization, and opportunities. And really just getting to know our clients better. The other key thing for us is it really improves our speed to market for new innovation as well. So we really see that as a great step up. And that's going to be an immediate impact on our eCommerce business, but it's really setting us up for success in the future to stay ahead of enhancements that we can make to that online part of our business.

That's great content. Thank you. And I guess, maybe somewhat related. Certainly over the brand awareness and just curious, some of the strategies around that. I know opening the showrooms on their own drives some brand awareness. But maybe talk about your plans from a marketing perspective, where you're allocating your spend over the next year or two. Just how your brand awareness sets up right now nationally and maybe there's any pockets regionally that are particularly strong or underdeveloped, any context around that. Your plans for driving brand awareness would be helpful. Thank you.

Definitely. I think you nailed the big one. Our showrooms are just such an incredible new client acquisition vehicle for us. They introduce the brand to new pockets and markets around the country. And so we've been seeing incredible success with that. We've been opening up new showrooms, we have additional new showrooms planned for next year, and we're excited to continue to support that. We are very purposeful about the marketing support we put around those showrooms. Knowing we have this key tool in those markets allows us to really amplify our efforts of digital marketing, catalogs, and social media in those pockets as well to amplify those effects. Overall, as we think about brand awareness, we really look at it as an omnichannel opportunity and holistically across the marketing mix. Within our direct mail program, we are very focused on our prospecting audience and have really been working over the last few years to increase our prospecting circulation and getting these incredible introductions to the brand into the homes of clients. We've been really excited by the results we've been seeing this year and looking to continue that next year. Digital marketing and more broad-based marketing is a great opportunity to support what we're seeing. But I think there are also opportunities, as we touched a little bit on the call, about some of our partnerships and media efforts. We really haven't done much for this brand before. Arhaus really grew relatively organically for 35 years, and so we're just at the beginning of investing in those areas and really looking to continuously try new things, test, and optimize what works. And then social media and influencers, I noted that we had a million followers on Instagram in Q3. We see a lot of runway and potential in those areas, both in our channels, but also partnering with influencers and partners to spread that message to a wider audience. So we have a lot of levers to pull and we're really excited to continue pushing into those areas and seeing what works best.

That's great. Thanks so much, and good luck.

Thank you.

Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. You may proceed with your question.

Good morning and congratulations on your first report here. I wanted to ask also on supply chain, but specifically on Vietnam. What are you seeing there from your partners as far as production and perhaps any color you can share on your exposure and the ramp-up in manufacturing out of that country?

Yeah, Vietnam has probably been one of the sore subjects over in Asia. They were basically shut down for quite a while, but they are up and running now. We believe that our shipments will be pretty much on time going forward here. One thing to note is Vietnam is a very small part of our business. I think we only have 2 or 3 vendors there. So it hasn't impacted us much at all. We had pretty good inventory stock. So we're not seeing a decrease in sales just of Vietnamese products. I'm sure if we had a lot more eggs in the Vietnam basket, it would be a whole different story.

Thank you. My second question is about stores. Can you share insights on your store pipeline for next year? Are there any locations you are particularly excited about? Additionally, I would appreciate any updates on the performance of your design centers, particularly the smaller format stores, even though there are only a few of them. Thank you.

Sure. Yes, we're constantly working on new stores. I think the guidance has been that we're going to open 5 to 7. We feel confident we'll be in that range. We're not giving out locations at this point. As far as design studios, we've only had one open the whole year, very happy to see the results of that one. We've had another one open for a few months and another one open a few weeks ago. The newer ones also have started strong on demand sales, of course, turning those into actual sales usually takes a little bit, just for the backlog and so forth. We do have two more design studios being opened before the year is out. So we'll have 5 total by January 1st. After that, we're very excited to really tweak them and merchandise them, re-merchandising if we need to, learn a lot into 2022, and then from there we'll see if we can really grow that business as well as the regular stores.

Thank you.

You're welcome.

Our next question comes from the line of Steve Forbes with Guggenheim Securities. You may proceed with your question.

Good morning. Just maybe for Jen. Curious if you could discuss any client demographic or client engagement differences that you are seeing with a new customer base relative to the existing base. I think you mentioned something about new customer growth. So just curious what you are seeing anything notable to call out?

We've been really excited by our new customer growth over the last year-and-a-half and we continue to see that, so that is really exciting. It's really too early to have a full picture as to how those clients are behaving relative to clients who joined the business earlier, but really the initial result is that they're spending more than new clients who were before COVID, but we're seeing that trend in our existing client base as well. Currently, that behavior, the repeat behavior seems similar. We're going to be monitoring it closely and paying very close attention to it. But overall, it's looking like they're coming in and being really great clients to the brand.

And then maybe just a quick follow-up on the in-home designer initiative. Can you update us on the percentage of demand generated from that group? Your hiring plans, for the next couple of years. And whether the average order value generated from those designers has changed at all, relative to what was discussed during the IPO process?

Hey, Steve. The average order value we said earlier a few months ago is over 3 times that of a non-in-home designer assisted sale and we continue to be consistent with that. When we think about their penetration, we are seeing increases in that program relative to where we were last year. We're pleased with how that program is continuing to perform. We will continue to expand that program. By the end of this year, we'll have several more in place, and then next year we'll continue to ensure that our existing store fleets have the appropriate staffing levels, and all new showrooms will also have this program deployed as well. So we're really confident, we're excited about this program. It seems to be working really well for us.

Thank you. Best of luck.

Thank you very much.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Ms. Wendy Watson for closing remarks.

Thank you, everybody and we will look forward to talking to you again next quarter.

Happy holidays, everyone, and thank you for your time.

Thank you, everyone, for your participation in the call and interest in Arhaus. We look forward to speaking to you next quarter.