Arhaus, Inc. Q4 FY2021 Earnings Call

Good morning and welcome to the Arhaus Fourth 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 will now turn the call over to your host, Wendy Watson, Senior Vice President of Investor Relations.

Good morning, and thank you for joining Arhaus' Fourth Quarter and Full-Year 2021 Earnings Call. On with me today are John Reed, Co-Founder, Chairman, and Chief Executive Officer; Jen Porter, Chief Marketing Officer; and Don Phillipson, Chief Financial Officer. John will start with a summary of the main points we made in this morning's press release, along with operational details. Jen will discuss the status of marketing initiatives, and Don will cover our financial performance and our outlook for 2022. After their formal remarks, we will open the call for questions. For Q&A, please limit to one question and one follow-up. If you have additional questions, you may return to the queue. We issued our earnings press release and our 10-K for the year ended December 31st, 2021, before market open today. These documents are 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 described in our annual report on Form 10-K, as such, factors may be updated from time to time in our 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.

Thank you everyone for joining our Fourth Quarter and full-year 2021 Earnings Call. We are very pleased with our record performance this year. In 2021, net revenue increased by 57% to $797 million, with retail and e-commerce channels growing significantly. Comparable growth increased net by 51%, net and comprehensive income rose by 117%, adjusted net income was up by 118%, and adjusted EBITDA increased by 77%. We ended the year with 79 showrooms across 28 states. Dawn will later provide a detailed overview of our financial performance and outlook for 2022. We are encouraged by the positive trends in our business. 2021 was a significant year for Arhaus. Along with our strong financial results, we made key investments for long-term growth, including the opening of a nearly 500,000 square foot distribution center and upholstery production facility in North Carolina. We also began a 230,000 square foot expansion of our distribution and corporate offices in Ohio and launched a new website to enhance our client experience. Additionally, we transitioned to a public company with our initial public offering in early November. Our success is attributable to the hard work of our over 1,700 associates, to whom I extend my personal thanks for their efforts in growing Arhaus and delivering exceptional products and client service. We see significant opportunities to expand our showroom presence across the United States. In 2021, we opened seven new showrooms, including several locations across Florida, New Jersey, New Hampshire, and California, as well as converting some existing locations to our new format and closing older stores in redundant areas. Regarding our supply chain, we are seeing substantial improvements. Although lead times are still longer than usual, we anticipate further enhancements throughout 2022, aided by our expanded outbound capacity. Our new North Carolina facility is operational and exceeding expectations, and the Ohio expansion is on track to be operational later this year. We are eagerly looking forward to opening a third distribution center in Texas in the second half of 2022. Overall, we are very optimistic about our business and its trends. Demand remains strong across all channels, and we are dedicated to delivering exceptional products to our clients. We operate within a rapidly growing $60 billion premium home furnishings market in the United States. Our clients, primarily from high-income households, continue to invest in their homes, and we are executing our growth strategy by opening showrooms and enhancing our brand awareness. With our market share currently at less than 2% of this large fragmented market, we have a promising growth trajectory ahead. I will now hand it over to Jen to discuss our current marketing initiatives in more detail.

Thank you, John. And good morning, everyone. I'm so happy to be able to share some of our marketing efforts from 2021 with you. As a quick reminder, Arhaus is a 35-year-old heritage brand that offers unique, artisan-crafted quality products to our clients. We are building out an omni-channel approach to marketing, anchored by our inspirational showrooms and extending through our website, our catalogs, and across digital channels and tools. We know what happens when a client sits on one of our sofas or sees the beauty and durability of a reclaimed wood table for themselves. So, our priority is to bring the same experience to life across channels. Digital continues to be an exciting area of opportunity for us. As John mentioned, our 2021 e-commerce revenue was up over 60% compared to 2020. We saw critical digital enhancements with the launch of our 3D room planning tool, our shoppable digital catalogs, a virtual showroom tour, and a new email platform, all in the first half of the year. In December 2021, we launched our new ir.arhaus.com experience, which I encourage you to check out. While still early days, the launch immediately stepped up our online client experience by better showcasing our brand and allowing us to share more product knowledge. The site also bolsters our product merchandising and customer analytics capabilities. Our initial feedback and analytics are positive, with an increase in page views, time on-site, as well as a reduction in cart abandonment since the launch. Earlier this month, we launched an omni-channel outdoor living campaign in support of our new and expanded outdoor product collection. This campaign is a great example of the experience we can bring to life in our showrooms, through our catalogs, and online. Along with showcasing an exciting new product assortment, we are inviting our clients to journey with us to Greece and get caught up in the magic of the Greek isles. We believe that by being inspired by the world around us, we can help each client create their own personal oasis at home. Print media is a critical piece of our omni-channel strategy, and in addition to targeted mailings, we have two large catalogs each year in January and September. On our last call, I mentioned the fantastic results we were seeing with our fall catalog. We are seeing this trend continue with our January catalog sales significantly outperforming last year. Looking forward into 2022, we doubled the circulation of our outdoor catalogs, which hit homes earlier this month as part of our outdoor living campaign. Client growth was another highlight in 2021. New customer acquisition, both number of new clients and new client average order value, significantly increased over both 2020 and 2019. We achieved this growth across channels. Our seven new showrooms that opened in 2021 are a great source of new client acquisition for us. We also saw significant success in reaching new clients through our direct mail and social media channels. We continue to see strong results whenever we reach new mailboxes or partner with new influencers and media partners to share our story. Existing client numbers and value increased as well, both in showrooms and online, driven by our targeted marketing initiatives and a great response to new product offerings. Looking forward to 2022, our focus is on client acquisition, engagement, and retention. We continue to learn and act on data from our new website launch, and we'll share more detail on upcoming enhancements in future calls. We have some exciting campaigns and product launches planned for this year, as well as new showrooms planned for the second half of the year. As I mentioned earlier, we are thrilled with this month’s launch of our outdoor living campaign, and I encourage everyone to check it out when you have time. We look forward to sharing more information about our omni-channel development and growth throughout the year. For now, I'll pass over to Dawn Phillipson.

Thank you, Jen. And good morning, everyone. As John mentioned, we're pleased with our 2021 fourth quarter and annual results and the strong underlying trends in our business. Please note that we have recast our financial statements to reflect an entity under common control with our operating company. The prior periods reflected in our Form 10-K have been adjusted to combine the entities for presentation purposes. The future impact to our financial statements is not expected to be material. For details and the recap of financial information, please refer to our Form 10-K filed this morning. For the fourth quarter, net revenue increased 46.3% to $238 million. The growth was driven by increased demand for our products in both showrooms and e-commerce channels, as well as delivery of orders in the backlog as our supply chain continues to catch up with client demand. Comparable growth was 40.5% in the quarter. Demand remains strong in the quarter with demand comparable growth of 17.9% on a one-year basis, and 79.8% on a two-year stacked basis. Gross margin increased 39.1% to $97 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 and other store costs. Gross margin as a percent of net revenue decreased 210 basis points to 40.7%, better than our expectations, reflecting higher product and transportation costs, partially offset by our ability to leverage our fixed showroom occupancy costs over higher net revenue. SG&A expenses increased 57.5% to $100 million, primarily from investments to support the growth of our business, share-based compensation expense for equity awards, higher demand-driven commissions in our showrooms, and one-time costs related to the IPO. As a percentage of net revenue, SG&A expenses increased 290 basis points to 41.8%. Interest expense was approximately $1 million. Fourth-quarter 2021 net income of $7 million includes a $12 million income tax benefit primarily related to the recognition of a deferred tax asset that arose from our reorganization related to the IPO. This compared to net income of approximately $3 million in the fourth quarter last year. Adjusted net income in the fourth quarter of 2021 was $17 million. Adjusted EBITDA in the quarter increased 14% to $33 million from $29 million in the fourth quarter of 2020. For the full year, net revenue increased 57.1% to $797 million. Full-year comparable growth was 51%. Demand was very strong throughout the year with demand comparable growth of 45.3% on a one-year basis and 70% on a two-year stacked basis. Gross margin increased 65.4% to $330 million for the year. And gross margin as a percent of net revenue increased 210 basis points to 41.4%. Net income of $37 million for the full year 2021 was up 116.7% compared to net income of approximately $17 million last year. This includes a $10 million income tax benefit primarily related to the recognition of the deferred tax asset I just mentioned. Adjusted EBITDA increased 77% in 2021 to $123 million from $69 million in 2020. Turning to the balance sheet as of December 31st, cash and cash equivalents were $124 million, and the company had no long-term debt. Net merchandise inventory was $208 million as of December 31, 2021, a 92.9% increase from December 31, 2020, as we build inventories in response to strong ongoing client demand. As I mentioned, while we are reducing our backlog and our comparable growth is now outpacing our demand comparable growth, demand remains strong and we continue to increase our inventory levels accordingly. For the year ended December 31, 2021, net cash provided by operating activities was $146 million, and net cash used in investing activities was nearly $48 million with landlord contributions of $18 million. As a result, total capital expenditures, net of landlord contributions, were approximately $30 million for the year. Regarding our full-year 2022 outlook, please refer to this morning's press release. Highlights include full-year net revenue of $1.13 to $1.17 billion, full-year comparable growth in the range of 35% to 45%. Net income of $70 to $80 million, and adjusted EBITDA of $145 to $155 million. We assume continued inflation in transportation, logistics, container, and product costs, which we will work to mitigate as needed. Regarding adjusted EBITDA margin, we expect year-over-year margins to stabilize in the third quarter and expand in the fourth quarter. We expect healthy demand comparable growth in 2022. As expected, we're seeing sequential declines for year-over-year growth. We will continue to ensure our inventory positions support our customer delivery time goals as we move through the year. As John mentioned, we expect our new distribution capacity to help alleviate our backlog. So far in 2022, our North Carolina facility is outperforming our expectations and is positively impacting net revenue more quickly than anticipated. Because of the timing of our fourth-quarter and full-year earnings release today near the end of our first quarter, we're also providing insight into our first-quarter expectations. We expect first-quarter net revenue of $232 to $236 million, net income of $12 million to $14 million, and adjusted EBITDA of $24 to $26 million. In future quarterly reports, we will only be providing updates to our annual guidance. For all other details related to our 2022 outlook, please refer to our press release. We're all pleased with the strong start of the year and feel well-positioned to deliver on our financial and operational goals in 2022. This concludes our prepared remarks. Thank you for your attention, and we would now like to open the call up for questions.

Thank you. We'll now be conducting a question-and-answer session. One moment, please, while we poll for your questions. Our first question comes from the line of Curtis Nagle with Bank of America. Please proceed with your questions.

Good morning. Thanks very much for taking the question. So, curious to note, a little more detail on the outperformance. Really strong quarter, really nice guidance. It sounds like some of that is due to clearing the backlog, maybe a little better than expected. I guess what are you guys seeing from a customer or macro perspective? One of your bigger competitors called out potential headwinds, and that was having an impact on near-term demand. Is that something you're seeing or anything else we should be thinking about in terms of what are just really, really nice set of numbers for you guys?

Good morning. This is John Reed. Yeah, we're seeing business pretty much as we had forecasted. Business is still strong. We've not seen a big drop-off. And we're marching forward here. Who knows what the future is going to bring with everything going on between inflation and wars and so forth but so far, we've seen demand pretty much on track of where we expected? We've not seen a big drop-off.

Great to hear. And then maybe just a question for Dawn. The gross margin. So, it came in much better than expected. I think you called out maybe some additional operating leverage on occupancy and anything else that was driving like a 200 basis point better than at least we were thinking. So, yes. What are the big factors? Morning.

Good morning, Curtis. Yes, container costs in the fourth quarter were lower than we had anticipated, which is a positive factor for that period. Additionally, there was some additional leverage from the higher revenues, as you would expect.

Thank you. Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your questions.

Great. Thanks so much for taking my questions and a nice quarter, guys. First one was just on pricing. Other competitors in the market have been more aggressive with price increases. In 2021, I think you guys introduced a small increase early in the year and a larger increase later in the year. How are you thinking about pricing for 2022? Is an increase contemplated? Any thoughts there would be helpful.

We adjusted prices a couple of times last year as needed, and we monitor this closely. We are raising prices in response to rising costs from vendors and containers. This remains a strategy for us, and we are prepared to adjust prices further if necessary. We have conducted extensive analysis on our products compared to our competitors and found that we remain very competitive, in many cases even more so, and we aim to maintain that edge. If further price increases are required, we will implement them, and we do not anticipate this will negatively impact our business.

Great. That's helpful. And then my follow-up was just on supply chain. Last night we heard from other executives that their view that supply chain hasn't gotten better at all. And I think you guys are painting a different tune this morning in terms of suggesting that inbound supply chain logistics are improving tremendously, and lead times are continuing to improve. So maybe just help us square those two observations. What do you guys seeing from vendors in terms of new factories that they are building, expanded capacity that they are installing, maybe greater allocation of resources to you guys. Any thoughts there would be helpful.

Absolutely. I can address that. First, our business model is somewhat unique compared to much of our competition in the United States, Mexico, and Europe. The United States still accounts for over half of our operations, so we did not experience significant interruptions like others did. We had some disturbances last year due to the foam issue in Texas, but that is behind us now. We don't rely heavily on China, which seems to be facing challenges currently, including the recent shutdown of Shanghai for about a week. We source from Asia, particularly South Asia, with Indonesia being one of our major suppliers, and thankfully, those countries have not been significantly affected. Our business remains strong, and our vendors have stepped up by increasing their capacity. I'm pleased to share that shipments are generally arriving on time, although it takes longer for them to reach us. We've adjusted our ordering practices accordingly, placing orders three or four months in advance compared to before. Now that we are implementing this strategy, we are successfully receiving more containers, and our inventory is steadily replenishing. Our aim is to keep everything in stock that customers see so they can receive their orders quickly, and that situation is improving. Additionally, we just opened a new upholstery facility in North Carolina last month, and it is performing as expected in terms of production for March. We are confident that we have ample capacity to handle more orders and expand the business.

Excellent. Thanks for all the color, best of luck.

Thank you. Our next question is coming from the line of Peter Keith with Piper Sandler, please proceed with your questions.

Good morning, Arhaus team. Great results here. I have a quick question for Dawn. Last year, when you were helping us shape the comparable growth for 2022, you were expecting mid-single-digit demand growth for the year. Is that still your expectation? Also, do you think it will remain steady throughout the year, or might there be changes from the beginning to the end of the year?

Sure. Good morning, Peter. While we don't provide guidance on demand comparisons, I can share that we anticipated some sequential slowdown. We experienced a 17.9% demand comparison in Q4 and have seen a reduction from that, which is to be expected. Continuous year-over-year increases at that level are not sustainable, and we wouldn't foresee that happening. Currently, we are trending above the mid-single-digit range for Q1 so far. We remain very pleased with the consumer response to our marketing, products, and showrooms. We believe we are effectively implementing all the right strategies.

Okay, fantastic. And maybe I'll take that and pivot it over to Jen. It just seems longer-term. You have this great brand awareness opportunity. So, any data you can share maybe if, I don't know if you would study it in recent months or just maybe how you saw brand awareness improve through 2021 would be interesting to see.

Yeah. Hi, Peter. We are really excited. We obviously pay very, very close attention to our customer numbers. So really looking at that new clients, existing clients split, and we're seeing that as the business has grown, really the percentage of sales there, we're still seeing hopping right around that 50/50% mark, which we feel really, really great about that considering how quickly the overall business is growing. We're seeing really strong results as we open up our new showrooms. So as John mentioned, we opened up seven new showrooms last year. And we see those outperform the rest of the chain in terms of new customer percentage. So definitely acting the way we would expect them to as billboards for the brand, encouraging people to come in. And then I think one of the other areas that we look at very closely as things like organic traffic to the website, response to our catalogs when we're doing prospecting, elements along those lines, and we're really pleased with all of the data that we are seeing there. We are not reporting on the specific brand awareness metric that we spoke to in the IPO process. But all of the things that we are looking at, we're seeing our marketing methods across the board, which really suggests to me that we're starting to gain traction in the recognition.

Sound great.

Yes.

So, I don't want to interrupt. Go ahead.

No, I was just going to plug there for the new website as well. And so, I think just the engagement that we are seeing on the website itself. Not only is that obviously immediate revenue driver, but the interaction, the time people are spending on the site, we're definitely seeing the brand resonates, which is a positive factor moving forward.

That sounds great. Thanks so much and good luck this year, guys.

Thank you.

Thank you. Our next questions come from the line of Simeon Gutman with Morgan Stanley, please proceed with your questions.

Hi, this is Jacquelyn Sussman for Simeon. Could you provide some insights into the breakdown of the comp in the fourth quarter between traffic and ticket sales, as well as how customer acquisition and traffic are starting and trending in the current quarter?

Sure. Good morning. Both transactions and ticket are up healthily year-over-year. AOV increased about 7% in the fourth-quarter relative to prior year and the number of transactions is up about 14% versus prior year. So, we're seeing healthy growth in both of those metrics.

Awesome. Thank you so much. And just a quick follow-up on the questions that have been there on demand comp. How are you guys thinking about backlog and when they will peak? How has that changed in terms of what your expectations were from the last quarter? And is this embedded into the guide?

The demand comparison will not take into account any backlog included in our comp growth number. We anticipate a comp growth of 35% to 45% for the year, which does factor in the backlog. As John mentioned, we are actively working to ensure we have the right inventory available at the right time to help reduce the backlog. We expect our lead times to improve significantly by the end of the year.

Awesome. Thank you guys so much and congrats on a great quarter.

Thank you.

Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your questions.

Good morning. I wanted to start with the new store performance, so John or Dawn, curious if you could comment on the performance ramp of the '21 class of new stores relative to expectations, or relative to the traditional sort of store model build. And then just provide us some insight on the current thoughts around 2022s class and maybe inclusive of the new versus existing market outlook.

Good morning, Steve. So, we don't typically give guidance on performance metrics on specific showroom fleets. But what we will say is that we're pleased with the performance we're seeing. Showrooms are continuing to execute well and in line or above expectations on the demand side. So, we're pleased with it. And Jen mentioned earlier that customer metrics are doing well in those showrooms. So, we think we're on target with our locations and our strategies for opening those showrooms.

Thank you. And maybe just a quick follow-up. Maybe John, for you. You think about the opportunity here in 2022, given the brand awareness ramp that has transpired and all the work that you guys seem to have sort of executed on. What are your sort of view as the categories of greatest opportunity? I mean, the outdoor launch. Is there any sort of framework you can help us sort of contextualize as you think about where Arhaus is really leaning into in terms of a category perspective or just this driving the value proposition to a broader customer demographic?

We adopted a strategy when COVID began to keep developing new products across all categories to enhance our selection and introduce more exciting items, which includes upsizing some offerings. Our team has excelled in this effort. One notable distinction from our competitors is our aggressive launch of new products. The January catalog, released a couple of months ago, featured over 200 new products. Additionally, we recently showcased our new outdoor catalog, which we believe is a game-changer for that category. It was photographed in Greece, and we consider it the best-looking outdoor catalog in the business. We are thrilled about that category, as well as all others, thanks to our talented team who is consistently delivering great new products. During times when companies tend to cut back and scale down their offerings, we chose a different path, and it appears to be paying off for us.

Thank you.

Thank you. Our next questions come from the line of Adrienne Yih with Barclays. Please proceed with your question.

Good morning, everyone, and congratulations on the fourth-quarter results and the successful start to the year. My first question is about digital sales. Did you provide the percentage of digital sales penetration? Also, could you give us some insight into the EBITDA segment margins compared to the store?

Good morning, Adrienne. So, for the full-year e-comm penetration was right around 18% in line with our expectations and we're pleased with the performance of both segments and e-commerce and showrooms. As we think about inventory, it's important to keep in mind that we use a landed cost. And so, as those container costs are increasing, the inventory levels are increasing. So, I think that's just important to note as we think about this year and go forward. Apologies. What was the other portion of your question, Adrian?

It was basically on the breakdown between what's in-transit and then the difference between the actual dollar costed inventory versus units, right? So, what's the spread? Is it 10%? Is it 5%? Basically, it's the cost of inflation is effectively the cracks to the question.

Yes, we don't typically give units just given that there is a lot of volatility as you think about, so far as versus decor. So, I'm not sure if that metric would be terribly helpful for you. As we think about in-transit, there's a decent amount of inventory in transit.

Yeah.

When considering how we invoice and pay for our inventory, we usually take possession of it at the foreign port before bringing it in. With international transportation and inventory comprising 50% to 60%, you might assume a certain number. It’s a good question, but I wouldn’t say the amount is significant. It typically takes around 20 days for products to arrive internationally, in case that information is useful to you.

Yes. We get back into it. And then my final is on the basis point impact to gross margin in the fourth quarter, and I know you had them in the third quarter, when you're giving your guidance for 2022, everything seems to be getting on a track to be improving. Are you expecting embedding in that guidance a reversal? Like a net good guide in 3Q and 4Q in that guidance on the GM line.

Yeah, not yet. So, we've seen container costs stabilize in the end of the fourth quarter, first quarter and that you saw is driving some gross margin benefit in the fourth quarter. As we think about the number of containers that we're bringing in this year that would have container costs applicable to it and the percentage that we've managed to secure on a contract rate versus a spot rate, I'm not comfortable taking those container costs down yet. I just think it's not prudent, there's other things that are factoring into that gross margin rate as well in 2022, things like fuel surcharges that we're seeing on the outbound side, transportation from the DC to the hubs in the client homes. That's also factored into the 2022 guidance. So, we want to be prudent, we want to forecast in a responsible way. So as of yet, I don't think it's the right time to take those container costs down for the balance of the year.

That's prudent. Thank you very much. And best of luck.

Thank you.

Conference. Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed with your questions.

Hi, good morning, everyone. I have a couple of questions. First, regarding the backlog, it's still quite substantial at over 40% of your last twelve months revenue. I'm interested in how you plan for that to translate into the profit and loss, specifically regarding revenue for 2022. Could you provide insights about the first quarter or the first half, as well as the second half? Additionally, I'm trying to gauge what a typical backlog looks like for your business. You seem to have a strategy in place, so where do you anticipate that backlog will be by the end of this year based on the numbers you've outlined? Any clarity on that would be appreciated. That's my first question.

Sure. So, as we think about delivering the backlog, one of the constraints we have is our capacity to ship out of our facilities that we currently have. So, Boston Heights, we have this one facility and have had it, North Carolina we opened up on the shipping side in the end of Q4. That is outperforming expectations which we're really pleased about. But as you think about deliveries, once we get our Dallas, Texas facility open in the third quarter this year, we'll see a nice uptake in those delivered sales in the revenue lines. So, capacity constraints on our side, on the outbound side certainly is one of the items that's inhibiting catching up on that backlog. So, we're excited for Dallas to open and it's on track that we're pretty thrilled about that.

That's helpful. Any perspective on what's normal? I know you guys are doing a lot here with the distribution side. And so maybe your experience two, three years ago is not informing maybe what is possible here from a backlog perspective. So, it's north of 40% of your revenue or your trailing revenue. Is there a framework you can help us think about when maybe the business is "back to normal" where that might be landing, if not no problem, but just curious?

Sure. So, in the transaction, we had noted that the growth rate for 2022 and 2023 would be right around 30% on net revenue with '22 being a bit higher, '23 being a bit lower, and then we would normalize as we move into '24 and beyond. So, we do think there will still be some backlog to deliver, it is a rolling backlog so clients are not waiting. We wouldn't expect them to be awaiting that length of time. But as far as a backlog number for the end of this year, we're going to push through as much of it as we can. It's the right thing for the client, it's the right thing for the company. So, more to come on that I guess as we move through the year, but it's a bit early to speculate on that at this point.

That's fair enough. Thank you for that. Our next question, perhaps for Jen, is about 2022 being a year focused on customer acquisition and retention. Can you share some of the most impactful marketing initiatives you have planned for this year? Additionally, could you provide some insight into the trends in customer acquisition costs and your outlook on that moving forward? Thank you.

Good morning. We have a lot happening, and what's exciting about Arhaus is our established brand and extensive product line developed over 35 years. We're focused on sharing our story with more people. We have a diverse range of marketing strategies to utilize. As mentioned earlier, we're thrilled with our outdoor marketing efforts, which are enhancing our ability to reach more consumers, both in showrooms and through digital channels, direct mail, and collaborations with media and influencers. There are more initiatives to come this year, and I'm particularly excited about our upcoming major launches. This fall, we'll be introducing our next big catalog along with new products. At the beginning of this month, we celebrated the opening of our Aspen store with a local event, demonstrating our commitment to community engagement. As we open new showrooms, we look forward to connecting with neighbors and presenting our brand directly to potential clients. While the Aspen event was local, its impact resonates nationwide. Expect to see more initiatives like this. Regarding customer acquisition and costs, as you may have noticed across the industry, digital marketing is continually changing due to privacy regulations and rising costs. We're seeing increased expenses and reduced effectiveness in some campaigns, but we're pleased with our diverse marketing mix. We are opening new showrooms, maintaining a strong print marketing program, and are just beginning to collaborate with influencers and partners outside our brand. Our in-house team has worked hard to optimize our campaigns and expenditures. We're flexible with our spending across different channels to meet our business objectives. We're excited about the year ahead and will closely monitor market developments while looking forward to sharing more exciting plans later this year.

That's great. Super helpful. Thanks very much.

Thank you. Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your questions.

Hi, good morning. I had a question for John following on the supply chain comment around the lead times coming down. Will you be able to give some color of where are they maybe on weeks versus peak? And how is that translating to the order wait times you're quoting customers? Have those been able to come down and how are they trending versus key competitors?

Good morning, Cristina. Yes, lead times have definitely decreased significantly; they are much lower than the peak levels. Currently, our customers are waiting an average of eight to nine weeks, compared to 16 to 25 weeks last year. This decline has been consistent month after month. For our upholstery business, which is a substantial segment for us, the custom lead times decreased by one month last month, and I anticipate another reduction next month. The ongoing decreases are well received by customers who prefer quicker delivery of their products. We've made good progress across the board with shorter lead times, especially on our best-selling items, which is crucial. We also monitor our competitors, and their lead times vary widely; some are still at 20 weeks while others are working to increase their stock. So, the situation is quite varied at the moment.

That is very hopeful. And then my second question, I wanted to ask about the interior designers with shave, a team initiative for the company and enable to get more. How did that trend in the fourth-quarter as far as penetration, are you seeing that increase? And so is talks about expanding the interior designer community in 2022.

Right, we have our own internal designers, as well as we work a lot with the trade. And both have been growing very, very nicely last year. And the trend seems to be continuing for this first quarter. We're thrilled with that business and we're going to continue to grow it. And we've got initiatives in place to grow both internal designers and outside trade designers.

Thank you.

Hey, Cristina, demand penetration continues to increase with those designers. So we're finding that the program is really resonating. And we're pleased with the performance, but it's up nicely versus last year.

Thanks for that.

Thank you. There are no further questions at this time. I would like to turn the call back over to Wendy Watson for any closing comments.

Thank you, everyone for participating, and we look forward to talking to you again next quarter.

Thanks, everybody. I appreciate your time. Have a great day.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.