Greetings, and welcome to Arhaus First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wendy Watson, Senior Vice President, Investor Relations. Thank you and over to you.

Good morning, and thank you for joining Arhaus' first quarter 2022 earnings call. On with me today, are John Reed, Co-Founder, Chairman, and Chief Executive Officer; and Dawn 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. Dawn will cover our financial performance and outlook for 2022. And then, they will be joined by Jen Porter, our Chief Marketing Officer for the Q&A session. During Q&A, please limit your questions 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-Q for the year ended March 31, 2022 before market open today. Those 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, and subsequent 10-Q 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.

Good morning, everyone, and thank you for participating in our first quarter call. We are very pleased with our first quarter 2022 performance. This morning, we reported record quarterly net revenue of $246 million, a 44% increase from Q1 last year, with our retail channel up 46% and our e-commerce channel up 34%. Comp growth was 40%. Net and comprehensive income increased 74%, and adjusted EBITDA increased 22%. Key operational highlights in the first quarter include, first, the launch of our spring product assortment, which has performed very well. We are also pleased with early reads of our outdoor 2022 catalog, which hit homes in March. Our new arhaus.com website experience continues to connect very well with visitors. Clients are not only spending more time on the site but they are also engaging with our interactive content, providing a more robust overall brand experience. We welcomed a new CHRO, Jen Henkel, who comes to us after 20 years with various divisions of L Brands, most recently as Senior Vice President, Human Resources for Bath & Body Works. Jen is focused on growing and enhancing our talent acquisition and talent management processes. We are encouraged by current supply chain dynamics. Our inbound supply chain continues to improve and vendors are focused on helping us return to having our top sellers back in stock. On the outbound side, our teams are working diligently to get product to the clients, as reflected in our better than expected net revenue in the first quarter. While lead times are still longer than historical averages, they are steadily improving from their peak in the second quarter of 2021. We expect the improvement to continue. Additionally, we believe the new distribution capacity coming online later this year from the expansion of our Ohio distribution facility and the opening of our third distribution center in Texas will further positively impact our lead times. In closing, we are pleased with the trends in our business and with our long runway for growth. I'll now turn it over to Dawn to discuss our first quarter financial performance and outlook for the remainder of the year.

Thank you, John, and good morning, everyone. As John mentioned, we are pleased with our first quarter 2022 results. For the first quarter, net revenue increased 44% to $246 million. This growth was driven by delivery of orders in the backlog, as our supply chain continues to improve, along with increased demand for our products in both showroom and e-commerce channels. Our first quarter net revenue outperformance relative to our expectations was primarily driven by delivering products to our clients more quickly than anticipated. Comparable growth was 40.3% in the quarter. Demand comparable growth was 8.3% on a one-year basis and 98.6% on a two-year stacked basis. Gross margin increased 39% to $98 million in the quarter, driven by our higher net revenue, partially offset by higher product, transportation, and variable rent expenses related to the increase in net revenue and credit card fees related to demand. Gross margin as a percent of net revenue decreased 140 basis points to 39.7%, reflecting the expected higher product and transportation costs, as well as higher variable rent expense, partially offset by our ability to leverage our fixed showroom occupancy costs over higher net revenue and leverage on credit card fees related to demand. SG&A expenses increased 27% to $75 million, primarily driven by investments to support the growth of our business, including increased corporate and warehouse expenses as new showrooms open and we expand distribution capacity, as well as public company-related costs. These were partially offset by the non-recurrence of a prior year derivative expense. As a percentage of net revenue, SG&A expenses decreased 410 basis points to 30.4%, with the decrease driven by leverage of fixed costs on the 44% net revenue increase. Excluding the impact of the prior year derivative expense of $11.5 million, SG&A expenses as a percent of net revenue in the first quarter of 2022 would have increased versus the prior year, driven by the higher corporate and warehouse expenses, as well as public company-related costs. First quarter 2022 net income increased 74% to $16 million. Our first quarter net income outperformance versus our expectations was driven by higher than expected net revenue and gross margin. Gross margin was driven by stabilization of freight costs, as well as leverage from our higher net revenue. Adjusted net income in the first quarter of 2022 was $17 million compared to adjusted net income of $19 million in the first quarter of 2021. Adjusted EBITDA in the quarter increased 22% to $31 million from $25 million in the first quarter of 2021. The factors that led to higher than expected net income also contributed to our first quarter adjusted EBITDA outperformance versus our expectations. Turning to the balance sheet. As of March 31, 2022, cash and cash equivalents were $149 million, and the company had no long-term debt. Net merchandise inventory was $247 million, an 18% increase from December 31, 2021, as we built inventories in response to strong ongoing client demand, and is the value of our inventory increased due to higher freight and product cost. As I mentioned, while we are reducing our backlog and our comp growth is now outpacing demand comp growth, demand remains strong, and we continue to increase our inventory levels to support this demand, as well as to continue the trajectory of improvement on lead times, as John discussed. For the quarter ended March 31, 2022, net cash provided by operating activities was $35 million, and net cash used in investing activities was $10 million, with landlord contributions of $2 million. As a result, total capital expenditures, net of landlord contributions, were approximately $8 million in the quarter. As we announced this morning, we are raising our full-year 2022 outlook to reflect our first quarter outperformance. Highlights include full-year net revenue of $1.145 billion to $1.185 billion, full-year comparable growth in the range of 36% to 46%, net income of $73 to $83 million, and adjusted EBITDA of $151 million to $161 million. This outlook assumes continued inflation and transportation logistics container and product costs. Regarding adjusted EBITDA margin, we continue to expect year-over-year margins to stabilize by mid-year and expand in the fourth quarter. Our new distribution capacity is helping alleviate our backlog, and we expect this to continue throughout the balance of the year. For all other details related to our updated 2022 outlook, please refer to our press release. This concludes our prepared remarks. Thank you for your attention, and we would now like to open the call up for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Thank you. The first question comes from the line of Jonathan Matu with Jefferies. Please go ahead.

Hey. Good morning. Nice quarter and thanks for taking the time for the question. First question was just on 2Q to-date trends. The press release indicated demand trends were positive throughout the quarter and remain solid going into 2Q. I'm wondering if you could just frame how the first couple of weeks of 2Q demand comp are shaping up relative to maybe that 8.3% in 1Q. Thanks so much.

Good morning, Jonathan. Thanks for your question. Demand in the second quarter, we’re really pleased with what we're seeing. It is positive year-over-year, and we are seeing some acceleration, but we don't guide to demand and don't want to get into the specifics of that apart from just saying we are pleased with what we're seeing now.

Got you. That's helpful. And just a follow-up question. Curious if you observed any trend during the quarter in terms of customers by household income. Obviously, there were a lot of market gyrations in late 1Q and into 2Q. I think half of your customers are earning over 200,000 in household income. Wasn't sure if there was any kind of trend in terms of customers earning double or triple that amount, whether you're seeing any relative under or over performance by income quintile in your customer base. Thanks.

Yeah. Hi, Jonathan. This is Jen Porter. Great question. We don't like to look too detailed into shorter time periods of our customer base just because, as you know, it can lead to false results or false assumptions. Overall, though, I can say that we really haven't seen any significant shift in our customer mix. We are seeing that average order values are still going up. So customers are still spending more, but nothing specific that we would speak to in terms of customer demographic or overall trends there.

Great. Thanks, Jen. Best of luck.

Thank you.

Thank you.

Thank you. The next question comes from the line of Curtis Nagle with Bank of America. Please go ahead.

So just a quick follow-up to Jonathan’s first question. I just want to make sure I got my facts straight. So, you said you saw an acceleration in demand in 2Q, is that off of the 8.3, as in demand counts are trending above 8.3%, and then I have a follow-up after that?

That’s correct, Curt. Good morning. Comps are trending above the quarterly rate.

Terrific. Great. Good to hear. And then just secondarily curious how online is trending, right? I think it was up about 60% if I might the facts right. In 4Q, you guys have made a bunch of investments. The brand is growing, and there’s plenty of room for increased penetration for you guys. So yeah, how did it perform in the quarter? How should we think about growth coming through the year?

Yeah. Hi, Curtis. This is Jen. We're happy with how e-commerce performed in Q1. I think the key thing that we look at — we've talked about in prior calls, is that all of the investments that we are making in e-commerce and our digital presence are really focused on the omnichannel experience, so we are really seeing those drive growth in retail showrooms as well as online. But having said that, we are really happy with what we're seeing online. I know it's only about a month and a half ago when I said nothing really revolutionary since then. But all of those trends that we’ve been seeing in terms of customer engagements, time on site decrease, and bounce rate are all continuing. We are seeing clients engage really well with some new and more interactive features that we've added onto the site as well. So we're really excited about that and what it means is we just continue to optimize that onsite experience, and then we're starting to see some really positive trends in mobile, which I think is really exciting anytime you're looking at our digital experience, improvements, and conversions and sales on mobile as well. So we're really happy with what we're seeing there. The other thing that I think is important to note, just with that e-commerce experience and how it's driving total brand is we're really thrilled with what it's allowed us to do in terms of the brands and campaign and storytelling.

Terrific. Good year. Thanks very much.

Thank you.

Thank you. The next question comes from the line of Simon Gutman with Morgan Stanley. Please go ahead.

Hi. This is Jacquelyn Sussman for Simeon. Thanks so much for taking our questions. So it looks like you guys put up another great comp and it sounds like you guys are expecting another good demand comp. I guess, could you give us some color as to whether or not the acceleration on a three-year stacked basis on the comp was due to more of new orders being placed in new demand versus working through the backlog? Any color there? And as a follow-up to that, could you give us the breakdown between traffic and ticket?

Sure. So I will start with that. For demand, the demand comp does not relate to that backlog; so demand comp is based on new orders. We are seeing average order value go up as Jen mentioned, related to our in-home designer program, which continues to perform extremely well and increase in penetration. We also implemented price increases last year that will impact average order value. Units per transaction are increasing nicely year-over-year; total number of transactions is somewhat down versus last year, as we did close one showroom in the quarter, but we're watching that metric very closely.

Great. Thank you so much. And just a quick follow-up. We know that supply chain has been a headwind to gross margin as you deal with higher costs, and we're just wondering if you are past the peak. I mean, we're hearing some potential relief in the freight market; where are you guys with that? Are you still on track? Any color there? Thanks.

Sure. The freight market remains volatile. We have seen stabilization in freight costs over the last few months. We did see an acceleration in the cost in April. Nothing that is outside of our expectations for the balance of the year. So everything that we're seeing is factored into our full-year guidance.

Thank you. The next question comes from the line of Steven Forbes with Guggenheim Securities. Please go ahead.

Good morning, John, Dawn, and Jen. I just wanted to start with your real estate plan. John, you just mentioned the one closure during the quarter. So I would love to just hear any color on the decision process there, just given the location of that store, if there's any anticipated business impact? And then just an update on the real estate pipeline for the year if 5% to 7% is still the correct number to plan.

Sure, Steven. I can take that. Yeah. We are on track to stay on our plans. We're actually finding more real estate than we think we should open in a year, which is a good thing. Again, as I've mentioned, we're really focused on the West Coast, so that's going to be one of the concentrations for the next few years, which we think will resonate with our product out there. And as far as the closure of the store, that won't be significant. It was a planned closure. We've opened stores and are planning on opening more stores around that area that will compensate for any change in that store's volume. So again, that has been a strategic plan of ours, and we think we're on track to do what we’re planning on doing. And everything is looking great on the real estate side, so we're marching forward and we're not backing off on opening stores by any means.

Steve, just to call up on that. This is Dawn. Much like the rest of the companies that are trying to build out, we are seeing similar logistical concerns around permitting and timing. So more to come on that, nothing that will impact our long-term strategic plan regarding real estate, but there may be movement just within a month or two here. So we'll keep you updated on that.

Thank you. And then just a quick follow-up. I think it was John who mentioned that your vendors are working really hard to get your best sellers in stock. So with that comment, any planned changes to the product introduction pipeline this year as we think about the breadth of assortment in general or should we expect sort of no change here and no issues as you planned for the fall?

Well, our stance on products has been going into COVID and coming out of COVID is that we have been aggressively working on new collections, and new products, and the ones that have already rolled out are performing extremely well. So our marching orders are to continue to roll out new collections, new products going into the summer here, into the fall and into early next year. So we're happy with that. Our vendors are just doing fantastic. You guys know as well as we do that China had some blips in shutting down and trying to contain COVID. But other than that, and that's more of an annoying delay than anything, our vendors are manufacturing at full force. We've got teams as we speak in different parts of the world right now working on new products and we're going to keep moving forward with that plan.

Thank you.

You're welcome.

Thank you. The next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Yeah. Good morning, John. I wanted to see if you can expand on the merchandise team. It looks like that's helping with demand. Is there any way you can frame for us how much newness is there this year versus last year or versus a normal year? It seems like it's a little bit more just, but any color there would be helpful.

Yeah. It's a little bit more, and it's finally now coming to fruition because these working on product can take a year or more time to make design things, have samples made, and get samples approved and so forth, and then getting it into the manufacturing process. So we have seen an increase in some of the new collections and items but nothing major. I mean, our goal is to roll out approximately 20% newness every year in different categories. Obviously, some categories we do more, some categories we do less. Well, I think I mentioned last time we focused on outdoor products this year as a major collection and expansion that's going to continue throughout this year into next year as well, but we're seeing a really nice response to collections between Bender and upholstery, dining, you name it, all the core product categories that our clients are furnishing their homes. So we continue to roll it out; it's not going to be double or triple a normal year. But we are pacing ourselves, so we can just keep going, and we think that's going to work, and we're excited about it.

Okay. And then the second question, given what you're seeing in costs, which seems like they've been stable for you, are there any additional price increases planned this year?

Nothing planned right now. We think we've got prices at the right levels. We've offset most of the expenses. Barring freight costs doubling again, which we can't imagine, we're trying to stay as is. As our partners get price increases and so forth on things, we take a look at them on an individual basis. We did adjust prices a little bit in April this year, so last month we did a mid-single digit price increase across the board for the most part on every SKU, but it came out to be an average of about mid-single digit increase that's been accepted. We don't see any impact from our clients and haven't heard anything from the store folks who we stay in touch with weekly. So we're going to stick with that for now.

Thank you.

Thank you. The next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

Hey. Thanks. Good morning. Great results, guys. Just a follow-up on the pricing. So I know you took pricing in Q4. Could you just help us think about the flow-through of that pricing or do you see some in Q1, will it start to show up in Q2? How should we think about the timing of those Q4 price increases? And then separately, now that your pricing in the market for premium home furnishings has moved up quite a bit in recent months, how do you feel about your price to value equation relative to some of your peers out there?

Good morning, Peter. This is Dawn. I'll start with the flow-through, and then pass it over to John for your second question. The flow-through for the fourth quarter price increases should start coming through in Q2, Q3 of this year. We did take some mid-single digit price increases last summer. We are seeing some of those flow through in the latter part of Q1. So from a timing perspective, we're still working through much of the backlog, but starting to see some of those summer price increases coming through and then the December Q4 ones will come through in Q2, Q3. John?

What was the second question?

Value proposition.

Right, right, Peter. So, yeah, we obviously study our competitors very closely and we've noticed price increases coming from all over the board. But we think our value is great; we get the best quality in the business, and our prices are extremely competitive. We're not seeing ourselves overpricing compared to others, and we think we're in a very good spot with that.

Okay. Good to hear. Maybe we'll move over to the backlog, and I'm just beginning to get some investor questions on this in recent weeks. And just to think about the flow-through of the backlog, it did increase quite a bit sequentially. You have talked about deliveries still above normal, but getting better and better. So I guess why is the backlog continuing to increase so much, and how long do you think it will take to wind down the entire backlog?

Good morning, Peter. So we will never wind down the backlog. When you're talking about backlog, you’re looking at that client deposit number. We will always have sort of a client deposit number out there as it's a rolling backlog, right? So we do have backlog heading into this year above what is normal. So orders from prior year in excess of what we would have historically seen—the outbound constraints are really what's holding us up from getting all those delivered. So we've seen inbound constraints alleviate nicely; getting our Texas distribution on is going to be critical to pushing through the backlog. So as we think about that, we do expect a ramp-up period for that facility. We don't expect that facility to come out of the gate operating at full capacity. Our North Carolina facility is outperforming expectations, and we are very pleased with what we're seeing there, but it will take some time. Most likely, we will have some backlog heading into next year, but we are working to get that down as quickly as possible. I want to just reiterate, though, the client deposit number that you see as our comps continue to grow—as our demand comps continue to grow—will increase. The two main factors in that are the demand comp, as we're taking new orders, and then as we're getting those delivered. I wouldn't expect that number on a nominal basis to revert back to historical levels because our demand is much, much higher than it has been historically.

Okay. Thank you very much, Dawn. Appreciate the help.

Thank you. The next question comes from the line of Daniel Hofkin with William Blair. Please go ahead.

Good morning. My first question is whether you can provide any insights into the performance of different products in terms of designs and price points, as well as any geographic differences that stand out.

Sure, I can take that. First off, we didn't know geographic performance; it was so wet and cold in the Midwest to the Northeast this spring that our outdoor product did not excel as much as it did in the southern states, where we did extremely well. We're now expecting that, as the weather has warmed up this week—we're expecting that to level off and catch up with the South. In other things, we're seeing our upper-end product selling as well or better than ever. Some of the more price-conscious products have had—we may not have seen that same level of increase even though we're still seeing increases, as far as design-wise, our product is still very clean. We utilize some of the different materials; our product is handmade. We think that's resonating really well. Some of our most handmade products and most expensive products are our best sellers in many categories, and we're doing—going after that upper-end client more and more. We're doing initiatives to look at other categories where we can really take it to the next level, as well as covering the entry client who can afford a $5,000 dining table. We're trying to provide options across the board.

So if I understand exactly, maybe just on a relative basis within, there’s a little bit of relative softness in lower price points and relative strength in higher price points. Is that fair to say?

No. I don’t think that’s a fair takeaway here, Dan. We saw strength across all categories. Outdoor is certainly performing better, like John mentioned, given it's the right time of year and is a seasonal category for us. But we're really pleased with what we're seeing across the board. I wouldn't say there's anything of note to communicate around price points or categories in particular apart from outdoor.

Okay. And then just the other question I had was from a competitive standpoint, any additional commentary that you could provide in terms of competitive promotional intensity, just what you're seeing out there? Thank you.

Hi, Dan. This is Jen. Yeah, I mean we're starting to see a little bit more promotional activity, particularly with the lower price point brands out in the market. We are still really happy with how we're positioned. So we've touched on prior calls; our strategy, which really began a few years ago, is to pull back on a lot of our promotions and really focus promotions around those three-day sale weekends. We did one of those over the Easter weekend in April, and that performed incredibly well for us. But yeah, I mean we're starting to see things like I said, right now, it does seem to be in those lower price point brands, so nothing that we are too concerned about, but we constantly monitor what's going on in the market. Our primary focus rather than promotions is our value proposition, and even while we are taking price increases, we're always very conscious to ensure the value, quality, and uniqueness of the product warrants those price increases.

Great. Thanks very much. Best of luck.

Thank you.

Thank you.

Thank you. The next question comes from the line of Adrienne Yih. Thank you and please go ahead.

Great. Thank you very much. Congratulations for a great report to hear in the midst of a tough Q1 for retail. So I guess my first question, John, can you help me sort of bridge the gap between say inventory growth? So inventory at the end of the quarter was about 100% versus the sales growth about half that. There's clearly average unit cost inflation in there, but also how much of that is sort of early receipts, and kind of things you saw that's built into that, as you think about the supply chain and the disruption there? Thank you very much.

Sure. Hi, Adrienne. Good morning. It's a great question. It's a complicated question. All the factors that you mentioned are certainly playing into it. So our inventory is up; as we think about freight costs being significantly higher than in the past. We do have a landed cost method, so all those freight costs are incorporated into the inventory. Product costs have increased in many cases. We are working very diligently to get product in stock. However, I want to be clear that it's not stock that we're sitting on for a long time. It's product that's coming in and able to meet demand, potentially new demand that's coming in as well. So all of those things we are working to make sure that our inventory levels are appropriate. We've expanded to three distribution centers. So as you can imagine, the allocation model has gotten more complicated. We believe we have the right inventory levels. We don't believe that we're too heavy, and we are working to bring in the right amount to clear through the backlog and ensure our lead times will decline throughout the year and get back to pre-COVID levels, and hopefully better than pre-COVID levels. So we're working diligently. We've implemented some planning software that will help with this and are constantly evaluating the right methodologies for inventory management.

Fantastic. A quick one for John. The comment is obviously that demand was strong throughout the entirety of the quarter. We heard another home furnishings retailer say that they were actually down in high point at news events or at a conference. The upholstery manufacturers there were saying that there was demand weakness from their customers – mid or end of March into April. Just wondering if you could address that comment for us?

I was going to say, we would love to take their production because we're trying to get in as much as our manufacturers, including our factory, can make. So we have not seen a slowdown in North Carolina at all.

Okay. That answers that. Jen, as you develop advertising and demand creation across various channels and strategies, what are you finding to be the most effective, particularly as you expand into markets like California?

Yeah. Hi. Nice to talk to you. That's a great question, and it's one that we talk about, we debate, and we change our minds on honestly every single day. I think—and I don't mean to give you a non-answer here, but I think what really works well for us is the mix and us pulling different levers depending on which markets we're entering or what our objectives are, as well as what we're seeing happening within the business. We have talked in prior calls, and the industry prices are going up with all of the privacy elements, which is affecting some of the efficacy within some digital channels, but we're identifying our channels and opportunities that have proven really effective for us. It's been an interesting mix as we split there. Direct mail continues to stand out as a shining star. I think particularly as we go into our new markets, the team has done a phenomenal job in evaluating what is working and really adapting our circulation strategies and our content strategies. We actually just switched up our content strategy a little bit this year and had the outdoor catalog hit homes a little bit earlier, and we've seen really positive response to that. So, I hate to not be able to give you a specific answer, but it does vary based on our objectives.

Okay. That's very helpful. Great product really does win the day. So congrats to the team.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Wendy Watson for closing remarks.

Thank you, everybody, for your participation and interest in Arhaus. We look forward to talking to you again next quarter.

Thanks, everybody.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.