Good morning, and welcome to the Arhaus Third Quarter 2024 Earnings Conference Call. A question-and-answer session will follow the formal remarks. Please note that this call is being recorded, and any reproduction of this call is not allowed without written permission from the company. I will now turn the call over to your host, John Reed, Co-Founder, Chairman and Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to the Arhaus Third Quarter Conference Call. On with me today are Dawn Phillipson, Chief Financial Officer; and Tara Atwood, our new Vice President of Investor Relations. Tara is a seasoned Investor Relations professional, and we are excited to welcome her to the Arhaus team. Now I'll hand it over to Tara.

Good morning, and thank you for joining the Arhaus Third Quarter 2024 Earnings Call. After our prepared remarks, we will be joined by Jen Porter, our Chief Marketing and E-commerce Officer, for the Q&A session. During Q&A, please limit to one question and one follow-up. We issued our earnings press release and our 10-Q for the quarter ended September 30, 2024, before market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will 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 most recent annual report on Form 10-K and subsequent 10-Qs as such factors may be updated from time to time in our 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. Now I will turn the call back over to John.

Thanks, Tara. I'd like to begin the call by expressing my gratitude to our team for their exceptional execution this quarter. Our long-term success is driven by their dedication to delivering outstanding products and creating an inspiring showroom experience. This quarter, we launched some of the most compelling new product collections in Arhaus history. Thoughtfully presented across our showrooms to elevate the client experience. A highlight of our fall product launch is the Astor Collection, which builds on our leadership in design and commitment to artisan craftsmanship. This collection combines globally sourced materials and sophisticated elements, making each piece both functional and beautiful. Crafted from solid oak with natural stone tops, the Astor collection features beautiful brown espresso marble chosen for its rich tone and stunning movement. Our fall launch also includes elegant curved upholstery selections and unique collectible pieces that can define a home. Moving to our quarterly performance, in the third quarter, we delivered a net revenue of $319 million, net income of $10 million, and adjusted EBITDA of $23 million. During the quarter, we experienced a decline in demand, with comparable growth of 11.3%. However, demand trends improved meaningfully as the quarter progressed. In September, we recorded a low single-digit decline in comparable growth, following high-teens and mid-teens declines in July and August, respectively. Notably, September set a new record as the biggest total demand month in Arhaus history, up 10% compared to last year's strong comparable period. This performance was supported by our annual storewide sale held each January and September to coincide with our spring and fall launches. This promotion was well received by clients, and we continue to leverage our Arhaus marketing campaigns to drive engagement around these key launches. In October, our demand comparable growth declined in the low single digits. As the consumer environment remains pressured, however, total demand was up nearly double digits as our brand continues to resonate with clients despite ongoing macro pressures. While demand trends improved over the course of the third quarter, we're lowering our full-year sales and earnings outlook to reflect the continued tempered consumer environment, which we believe is temporary given our innovative product offerings and compelling marketing campaigns. Dawn will discuss the details later on the call. Despite these headwinds, we remain fully committed to our long-term growth strategy and the fundamentals of our business. Our key growth drivers include: first, enhancing and elevating our product assortment, which is essential for exceeding client expectations and reinforcing our leadership in premium artisan-crafted home furnishings; second, expanding our showroom base to bring the Arhaus experience to more clients in key markets; third, increasing our brand awareness, which will deepen our relationships with both new and existing clients; and finally, we are making strategic investments to upgrade our infrastructure and improve our business tools, ensuring we have a strong foundation to support our long-term growth. Turning to our showrooms, we are on track to meet the high end of our 2024 showroom opening goals with 10 new showrooms already opened this year and an additional opening tomorrow in Corte Madera, California. The Corte Madera showroom will be our 14th location in California as part of our ongoing West Coast expansion. This year, we expect to open five new traditional showrooms, bringing our total to 85 traditional showrooms at the end of the year, just halfway to our target of 165 traditional showrooms. In addition, we opened three new design studios and three Arhaus Loft outlet locations this year. As I mentioned in past calls, we continue to be pleased with our performance and the economics of our new showrooms in all formats. We're proud to have grown our total showroom count to now 103 as of tomorrow. Moving to product, we believe Arhaus leads the industry in setting design trends, often being seen ahead of when they emerge. As I mentioned earlier, we're excited about the new fall collection, which launched in the third quarter. We encourage you to experience the design, quality, and aesthetic appeal of our furnishings and decor, whether in our showrooms, on our website, or in our catalogs. We're already hard at work on the upcoming spring launch just two months away. Notable highlights include expanding our motion selection within the upholstery collections. We've been in the motion business for some time now, and we're thrilled to see the continued growth of our merchandise assortment with these offerings. Additionally, we're introducing exotic wood collections across bedroom and dining, adding distinctive character to enrich our product line. On the strategic investment front, as we previously communicated, we are setting the foundations for our long-term growth by improving operational efficiencies with upgraded infrastructure, technology, and processes. We are pleased to have implemented our new warehouse management system and are now focusing on the design and build phases of our new planning system and the new ERP at our upholstery manufacturing facility. We expect these systems to be implemented in 2025. As a reminder, the planning system will help optimize our inventory purchases and forecasting capabilities, and the new ERP at our upholstery factory facility will improve margin visibility and production capabilities. Before I turn it over to Dawn to discuss our financial results and outlook for the remainder of 2024, I want to, again, thank the Arhaus team for their hard work and dedication. Our long-term success is driven by our team's dedication to delivering the best products and an inspiring showroom experience. Their ongoing commitment highlights the resilience of our growth strategy and our commitment to creating value for our shareholders. Over to you, Dawn.

Thank you, and good morning. Net revenue in the third quarter was $319 million, with a 9.2% comp decline. The decrease in net revenue compared to the prior year was primarily related to the non-recurrence of prior year abnormal backlog deliveries and lower total demand in the quarter. As John mentioned earlier, our demand comp declined 11.3% in the quarter, with September's demand comps improving meaningfully to decline in low single digits from July's high-teen and August's mid-teen declines. Our third quarter gross margin decreased to $123 million, driven primarily by lower net revenue and higher showroom costs as we continue to expand our footprint. Gross margin as a percent of net revenue decreased to 38.6%, driven primarily by higher showroom costs, higher delivery and transportation costs, and deleverage on lower net revenue. Third quarter SG&A expense increased $5 million to $112 million, primarily driven by legal costs, marketing investments, and strategic investments to support and drive the growth of the business, including supply chain and technology improvements. This was partially offset by the nonrecurrence of last year's donation to the Nature Conservancy. Third quarter 2024 net income was $10 million. Adjusted EBITDA in the quarter was $23 million versus $34 million in the third quarter of 2023. Third quarter net revenue of $319 million and adjusted EBITDA of $23 million resulted in a 7.2% adjusted EBITDA margin in the quarter. As we reported this morning, we are lowering our full-year outlook for 2024. As a reminder, we experienced softening demand comps starting in May, with the negative trend accelerating into July and August. In September, we experienced sequential improvement with the demand comp decline in the low single digits as clients responded well to our product assortment, marketing, and planned promotions. As we mentioned last quarter, we believe the softer demand comps we're experiencing are a reflection of the continued pullback by the home furnishings consumer, which is now starting to impact our business, as well as the lapping of strong demand from last year related to the price action SKUs in the second half of 2023. For the year, we now expect net revenue in the range of $1.23 billion to $1.25 billion and adjusted EBITDA in the range of $115 million to $125 million. As the midpoint of our range implies, we expect net revenue to decline approximately 4% for the year as we lapped the delivery of $75 million in abnormal backlog that occurred in 2023, and we expect a negative demand comp for the year. In the fourth quarter of 2024, we anticipate net revenue in the range of $306 million to $326 million and adjusted EBITDA in the range of $23 million to $33 million. Our outlook contemplates a low double-digit demand comp decline for the fourth quarter. We remain focused on current demand trends and gross margin, and our outlook allows for continued flexibility around promotions for the balance of the year. We previously communicated the expectation to invest $10 million to $15 million in strategic investments this year. We now expect to invest approximately $10 million in strategic investments in 2024, with about 80% in SG&A and 20% in gross margin. These initiatives include investments in systems, e-commerce, client experience, and other corporate investments to support and drive the growth of the business. In 2025, we expect to spend approximately $15 million to $20 million in strategic investments, including the subscription fees for system enhancements deployed in 2024. For all other details related to our 2024 outlook, please refer to our press release. In closing, I want to reiterate our strong commitment to our growth strategy despite the current macro challenges. Our debt-free balance sheet is a meaningful competitive advantage that allows us to make the responsible investments to build on our share gains in the highly fragmented $100 billion premium home furniture market. We continue to navigate the current environment from a position of strength, and we believe we are well-positioned to maintain our client-first service and drive value for all stakeholders. This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we are happy to take your questions.

The first question comes from Steven Forbes with Guggenheim Securities.

Good morning, John, Dawn, Jen.

Good morning, Steven.

Yes, thanks, John. To start with the new showroom performance. Curious if you could expand on how the more recent store cohorts, right, the 2022, ‘3, and ‘4 store cohorts are performing relative to the internal pro forma model and how the current environment or performance of those stores are impacting your 2025 real estate plans.

Sure. Yes, we've been thrilled with the new stores. They have opened very solid. They seem to be growing. Some of them are super home runs that really surprised us. Other ones have been very steady right on projections. So yes, we're happy with that. As far as looking into the future, we're sticking with our plan. We've got a lot of runway to do. A lot of great real estate we're working on currently. Not only are we doing a lot of looking at new locations and so forth, but we're also going back and moving existing stores that maybe have become dated into better, bigger locations. As a matter of fact, we're opening one of those tomorrow as well in Fairfax, Virginia. A store we've had for the best 15 years or so in a location, we're moving it to a freestanding building, two stories. It's absolutely stunning. I just toured it yesterday, and it's going to be a huge success. So, we like doing both, keeping our current format fresh and relevant and cutting-edge and looking at all the new locations around the country that we're very excited about as well.

Thank you for that. I have a quick follow-up for Dawn. Regarding the $15 million to $25 million in strategic investment for next year, is that in addition to the $10 million? So, would that mean a total of $25 million to $35 million, or should we consider it more as an increase of $5 million to $15 million?

Great question, Steve. So, the total strategic investment spend for next year will be $15 million to $20 million. So, it's not incremental to the $10 million that is being spent in 2024. So, we tried to provide a comprehensive number for modeling purposes.

Next question comes from the line of Jeremy Hamblin with Craig-Hallum. Please go ahead.

Thanks for taking my question. I have a quick follow-up regarding the investments being made and the changes to the systems. I'm looking for more clarity on the timing of the different system components you'll be addressing in fiscal year '25 and into fiscal year '26. Also, I want to clarify whether the spending is expected to be $15 million to $25 million or $15 million to $20 million. Additionally, how much of that total is related to staffing needs or support teams as opposed to software licensing fees and other expenses?

Yes, great question. So, lots of moving pieces here. I'll try to answer all of them, but certainly, let me know if I missed something. So, with the planning software that is well underway with the build portion, we are anticipating that we'll launch in the first half of next year. That is the same timing we would anticipate for the manufacturing ERP sometime in the first half. For the other systems, the two other systems that we talked about for next year are the financial platform and the order management system. And those two are very flawed. We want to make sure we're doing those correctly, so it takes some time. Those will not be deployed next year, but they will likely be kicked off and launched next year. And those are the systems that we are incorporating into the $15 million to $20 million. So, it's $15 million to $20 million, not $25 million for next year. As for the split between subscription fees, implementation costs, and personnel, those are largely still being fleshed out. We have not yet selected new vendors. We are actively in the process of working through what that could look like. We think in the numbers that we've included here for targeting next year, we have a good handle on the different pieces as they could range and flex, but nothing is nailed down yet. And as you think about something like the OMS and the financial platform, there will be longer-term efficiencies. Once those are deployed, we will have operational efficiencies, likely process efficiencies, especially with the financial platform that might allow us to streamline headcount over time. All of that will be fleshed out, but it takes a little bit longer than just 12 months to determine those. Did I capture everything?

Yes. Great color. I have one additional question I wanted to hit on, which was, in terms of the kind of the pricing presentation and coming back to demand trends. September, in terms of online and even in stores, the presentation looked a bit more like traditional Arhaus over the last few years as the company kind of migrated away from consistent pricing presentations to look like things around sale all the time. Is there any kind of linkage to September? You saw a pretty notable improvement in your demand trends? You're running your kind of typical September promo in which you had percentage off storewide and online. Is there any kind of linkage to where you've seen degradation in overall demand comps that’s based on that presentation? And is there any thought to potentially going back to how it was before?

Hi, good morning. Great question. Yes. As you noted, the presentation of our pricing this year, we shifted to that more consistent pricing, and that's really reflective of our stance on how we price products and want to reflect the value of our products to our clients. I think it's a great question about September, which was reflective of our biannual store-wide sales promotion that comes every year, which is part of our strategy for the last 5 to 10 years that we do twice a year in spring and in the fall. We were really pleased with the improvement in comps in September. What's interesting is looking at the low single-digit negative comp in October as well. So that wasn't an isolated trend we saw in September and then saw a deceleration going into October; we're seeing similar trends continue into October, where we came off of that September promotional strategy. Pricing is something that we always pay close attention to. We've spoken a lot before about how our pricing strategy is built to reflect that product we build and create and design that will be high-quality, beautiful, and a work of art that can last a very long time for our clients, and then we price it accordingly. We're not price engineering our products, we're not active in our pricing strategies with what's going on in the market. We think very carefully about that, and we're happy with what we're doing right now, but we are paying close attention and are constantly evolving that change.

Great, thanks for the color. Best wishes.

Thank you.

Next question comes from the line of Robby Ohmes with Bank of America. Please go ahead.

Good morning. I appreciate you taking my question. I have two inquiries. First, I noticed that inventory growth was slightly higher than anticipated this quarter. Could you provide an update on how we should expect inventories to change as we move into the fourth quarter? Secondly, Dawn, could you share any insights on how we should view gross margin for the fourth quarter and into 2025?

Yes, I can take the inventory question, Robby. That's been my direction. We've hit on some amazing collections of products that are outselling the pace of our company and surprising us and growing on a lot of new things. As I mentioned, we're launching some incredible new products coming out at the end of this year and into the spring. So, I wanted to, a, get back in stock on things because we were still, believe it or not, playing catch-up with some products just because it surprises so much how much we're selling. So, our partners had to hire people and facilities and so forth. So, everybody has in line to grow with us now. We're thrilled with what everybody has done for us, and we're ready to grow. So, I wanted to get some more inventory. So, a, we're in stock on almost everything, and b, we can really fund these best-selling new collections that are really going to propel us into 2025.

Great. Regarding the gross margin, while we don’t provide specific guidance, there are a few important points to consider as you develop your models for the fourth quarter. Last year, we experienced $75 million in abnormal backlog, and the second half of the year had a greater volume of that backlog compared to the first half, with the fourth quarter being even more impacted than the third quarter. This means we are seeing effects of the revenue flow-through linked to that backlog. As a result, you may notice some pressure on margins. Steve mentioned the new showroom and 2025; it’s important to note that most of those projects are already underway. We’ve begun construction and taken possession, so expenses like rents are already impacting our profit and loss statement, leading to further margin compression in the fourth quarter. Overall, we are optimistic about our product margin compared to the previous year and have been discussing promotional strategies. We plan to provide more guidance regarding 2025 when we report the fourth quarter, rather than at this moment.

Next question comes from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Good morning, and thank you for taking my question. The first one was just on demand complexion. Can you help us understand how that trended throughout Q3 maybe relative to the first half? I'm thinking about things like traffic, conversion, AOV? Any insights would be helpful.

Yes. So that's across the board has been choppy this year. We're actively tracking those. We're paying close attention. We're trying to slice and dice the data about 50 different ways, much like you guys are to understand what's happening with the underlying consumer. Interestingly, in the third quarter, while comp traffic was down, comp transactions were down. We did see a really nice response in the average order units per transaction were up nicely as well. As we've mentioned in the past, those orders that are over $5,000 and over $10,000, what was interesting in the third quarter is that we did see those decline year-over-year. However, the penetration of those orders relative to total increased. So, we're seeing those higher-value customers decelerating like the total consumer base did, but at a slower rate. So, interestingly, this gives us some good feedback and feelings about the product assortment, the marketing, and as we kind of enter the last few months of the year.

That's really helpful. And then just my second question, if you could update us on the source of exposure to China and the extent to which maybe reliance on the U.S. and Indonesia and Vietnam may have changed since you went public. And if we do see higher tariffs, maybe what percentage of your COGS is tied to product spend?

Sure. We've been anticipating this election for quite some time, and now we have clarity on the outcome. For the past two to three years, we have been relocating our operations out of China. Although our business in China was significant, it represented a relatively small portion of our overall operations. We produce the majority of our upholstery in the United States, which is the core of our business, and we source materials from many countries worldwide, more than our competitors do. I'm pleased to report that all our major suppliers with which we've collaborated extensively have shifted operations away from China to countries like Mexico, Cambodia, and even locations in Eastern Europe. This transition has been in the works for a while, and our dedicated team has been preparing for this scenario over the past couple of years. As a result, we are in a strong position.

Thank you.

Next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

This is Lauren on for Simeon. I guess our first question is, are you satisfied with demand comp trends in light of the promotions you're running? Does it show that maybe the customer is weaker, competition is more intense, or maybe something else?

Good morning. Are we satisfied with demand comp trends? No, we want to see better results. It's been a challenging market, and the furnishings industry has faced macro conditions for a longer time than we have. We've experienced a very inconsistent year in terms of demand and we're eager to improve. We believe much of the macro situation is temporary. There have been discussions around interest rates and the housing market, and the recent election added to the noise. Still, we are confident in our business and strategies, and we are closely monitoring all relevant factors. Regarding promotions, there remains significant commercial activity. We continue to run promotions and our overall strategy has stayed consistent. We've been extending promotions and have discussed this in previous calls, and we're continually assessing this as we approach Q4 and next year. We're pleased with the recent launches and are optimistic about the future.

Yes. And just to add to that, we have an incredible lineup for 2025 in marketing, new products, and new stores that are all just hitting on the right cylinders. We had a little stumble this quarter. I think the last time we had a stumble was in 2016. So, what is that? Eight years ago or so. We've had a huge run, an incredible run. Our comps compared to our competitors are way up the last few years. If you look at a three-year comp stack or so forth, we're incredibly doing unbelievable. So yes, we had a little stumble here, but we have all kinds of plans to get our business back on track, and we think it's going to be great. We're happy the election is over. Hopefully, the housing market will offer us some better news going into next year. I know the interest rates are continuing to fall. So, we're happy and very excited about our future.

Great. That's helpful. And then my follow-up is just on the competitive landscape. It seems that you have a large competitor driving a lot of product newness and catalog intensity this year. Could you comment if you've seen any overlap or in general, what you're seeing in the market share versus the industry?

Yes. I mean, our products, our best sellers, and our designs are doing incredibly well, especially the new product. We're, I guess, flattered that some of our competitors are increasingly trying to emulate us. But that's part of competition; everybody does that. We don’t see any effect whatsoever from our competition taking market share from us on our products, which has been doing very well and exceeding our projections. So, we’ll continue to do what we do best. We've got the best design team, we think, in the country. We've partnered with the best manufacturers around that create the most unique products anywhere in the world. We've got a lot of exciting offerings coming up, and people, of course, are going to try to copy us. I guess that's flattering, and it's part of the business, but we're going to stay a few steps ahead of everybody and will continue to do what we do best.

Next question comes from the line of Cristina Fernandez with Telsey Advisory. Please go ahead.

Good morning. I wanted to see if you can give more color on the change in the outlook for 2024, particularly as it relates to demand. On the last call, you talked about the demand assumption for the back half being down low double digits. Third quarter came down 11%. Fourth quarter outlook is also down low double digits. So, it seems to be the same. So, I'm just trying to understand where things are falling short of the prior outlook.

Yes. Great question, Cristina. Low double digits, of course, there's a little bit of range there. So that's one component, just as we're looking at different metrics and contemplating our promotional cadence for the balance of the year. There's some flexibility in that range. And then secondarily, just keep in mind that as the demand comp picks up closer to November, December, that's a little bit tighter to get deliveries out and will impact net revenue, right? There's just this timing component that we are thinking about and contemplating as we're looking at the November and December sales trajectory or demand trajectories there. So those are the two reasons.

Thank you. And then just a follow-up on one of the earlier questions on the sourcing exposure. I know your China exposure is not as big as others, but can you remind us back in 2018, how you deal with the tariff? Did you have to increase prices, make cuts across the organization? To the extent that tariffs could be bigger this time around, what are the levers you can pull to offset any cost impact?

Yes, sure. The tariffs from a few years ago, with the 25% out of China, again, we did not have that much coming out of China. We worked with our partners, and they took a hit on their margins. We raised prices a little bit, I think it was about 7% to 10%, but our vendors helped with a cut on the product as well. We did not miss a beat in sales. If this happens across the board around the world, we'll do the same thing. Again, keep in mind, a big part of our production is right here in the United States. So, we don't have to worry about that. The things that are offshore, we will deal with it as they arise. Our product is such an incredible value, better than our competition and better than the $100 million designers out there. So, we have room to raise prices, and we don't think that's going to affect our sales.

Thank you.

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

Good morning. Apologies, I got on the call a little bit late. But John, you had just mentioned in our recent response that you stumbled a little bit in Q3. And I guess, with the benefit of hindsight, you look at those negative mid- to high-teen demand comp declines for July and August. Was there anything internal that you've identified that you could fix or that you maybe did wrong that now gets you back on track?

Yes. As Dawn mentioned, we've thoroughly examined this situation. We face some strong comparisons from last year. Additionally, we made significant markdowns last year to clear out inventory, which boosted our volume significantly. We thought we could recover from that, but it seems we did not account for it correctly. We believe these factors were the most impactful. During those months, we did not promote at all. We wanted to observe the outcomes of being quiet in our actions across various categories. In hindsight, we probably should have been more promotional. The key issues were last year's significant comparisons and all the cold products we were trying to clear.

Okay. Helpful. And then on just a guidance question for Dawn. The demand comp outlook for negative low double-digit for Q4. I'm just trying to piece together. I think what Jen said, the negative low to single-digit trend is continuing with October. November or December, I believe, offer easier compares. So, I guess, is the view write-down, I understand conservatism, but things are very choppy. That might get worse, and why might they get more challenged post-election?

Yes. It's a great question, Peter. And we've had a lot of internal dialogue about what we think November and December are going to look like for us. So, we’re really pleased, although with the acceleration in September and October, although certainly not where we want to be. And so really for just because it's been a choppy year, with the trends, the underlying trends and data sets being choppy, I guess that's the best word. We do have conservatism potentially baked in for November and December. I also think the election distraction caused some pullback. When the consumer returns to spending, it might be in furniture, but it likely will be in other categories, more holiday-oriented. We're really excited to jump into January and next year and what does that look like for us. In closing, I want to thank you for your input.

Okay, I appreciate the insight. Thank you so much.

Next question comes from the line of Philip Blee with William Blair. Please go ahead.

This is Sabrina on for Philip. Thanks for taking my questions. Could you provide some color on performance by income cohort or by geography? And has there been any notable strength or potential softening in any particular categories?

Yes, good morning, Sabrina. It's a great question, and we monitor our client demographics very closely. We don't really speak to any shifts we see in months or a quarter just because you can't make trends from one-month data, particularly when it comes to demographics. Obviously, there were some weather factors in the quarter, the hurricanes in Florida and North Carolina area, played a part in that. But in terms of general, what are we seeing from our clients, who they are, where they are, we’re seeing that remain pretty consistent. Nothing that we would see a significant amount to share this date, but we'll definitely keep you updated if we do see any shifts in trends in the future.

Next question comes from the line of Seth Sigman with Barclays. Please go ahead.

A few follow-up questions for me. As I think about the effectiveness of that September event and then you think about the dip in sales or demand that you saw over the summer, do you think there was any just waiting for that September event? Obviously, the consumer has responded to more promotional activity broadly across the industry. I'm not sure if you're seeing that type of elasticity. But does it change at all how you think about pricing and promotions? And then I guess just one related question was thinking about the scenario that you had talked about in recent quarters about maybe budgeting for more price investments, more promotional activity. I guess it was a more of a scenario, but how are you planning for that now relative to those expectations a quarter ago?

Yes, that's a good question. The answer is the summer, again, we're up against these high numbers from the year before and a lot of markdown products. Some people certainly waited, our tried and true customers who are there. You have to keep in mind, well over half of our customers are new every year. They don’t know when we do promotions; they just love our product. I look at it: It's all about the product. Our product is an amazing value and even more so just a uniquely incredible quality that you just cannot get anywhere else in the world. That said, we don't need to start promoting more than we have been by any means. We're not planning on it, nor do we plan to erode our margins for promotions because we don't have to. We are leaders in our business; we actually started a lot of trends in our business. With that, customers want what they want. Our customers can afford our product; they can afford to travel. I think last year, even during the summer, many people were traveling, trying to get out and about because of COVID and they did so last year. Now I think things are coming back to normal, following the elections so people will buy furniture, go out to dinner, and they will do all three. The home business, as you know from your look at the competitors and just the overall industry, just about everybody was off this past year or so. I think things are going to normalize again next year. We’ve got an incredible product lineup, incredible marketing strategies, and there's no need for us to erode our margin by thinking the competition is taking our business. We don’t believe that for a second.

I think just to add on to that, as you think about what's happening going from that June, July, and August period into the September and October period is we were doing a lot. We launched our fall catalog, that hit homes at the very end of August going into the beginning of September. We were launching incredible new products in August going into the back half of the year. We were doing all of those things that make Arhaus the brand, being able to show off that product, tell the artisan story, show off styling opportunities, the special-order customization capabilities. All the things that make Arhaus so special. Last time, we spoke a lot about promotional levers and pricing levers in order to drive the sales. I think one of the big things we focus on is doing what we do well. We launched a lot of those at the end of summer, and we're starting to see the results of getting out into the market and engaging people. There were a lot of distractions in June, July, August when the catalog hit in the mail or when there was a new showroom set in the stores and people walked in to inspire them. Those things really do make a difference.

So, when you think about the improvement in the exit rate, and it seems like the overall message is relatively positive on what you've seen from a demand perspective, at least the cadence. I’m curious, when you look at leading indicators in your business, customer engagement, store traffic, web traffic, is there anything that gives you confidence that underlying demand is there, there's just some hesitance on the consumer's part sort of waiting on housing and macro?

Yes. That's a great question. As Dawn mentioned a few questions ago, we've been digging into every metric and looking at everything. I'm hesitant to comment on any specifics because you see one metric that suggests one direction and then you see something else that suggests another. I think we did, to the comments about seeing really positive responses to our new products that we just launched, and we’re seeing nice responses to the marketing we put out. Those are all indications that confirm to us that what we're doing is working. People are buying the product as John mentioned, we’re surprised by the success of some of these new collections and how well they are doing despite everything that's going on in the market. I think that’s one of the big things we look at. I think the other point that isn't really a market indicator or consumer behavior indicator is all of the things that are going on behind the scenes. We are getting smarter every day, getting better every day. We're enhancing our data capabilities, and our internal analytics are improving, really understanding customer behavior. I think that gives us confidence going into 2025 as well.

Next question comes from Seth Basham with Wedbush Securities. Please go ahead.

Good morning. My first question is just thinking about the relative success you had in terms of sales over $500, $10,000. What do you think drove that? Was it because of bigger discounts or any other factors that you can point to?

We have been concentrating on, a, remodeling our stores and getting our stores absolutely beautiful. That absolutely helps with sales. People significantly increase their spending when they walk into our stores. On top of that, we focus very heavily on our internal interior designers that, again, have more than tripled the average sale, I believe. One of our own designers works with clients to get into their homes and really put together a plan to do the entire room or certainly the entire house, often working with many clients at once. That entails a larger sale as well. On top of that, our trade business with outside designers has been booming. More and more of those every month are finding us and tying up to our programs. Those also lead to larger sales. So the combination of those, we know is driving the bigger sales.

That's helpful color, John. And then secondly, in terms of product, you talked about some competitors emulating and knocking off some of your products. You don't feel like you need to get more aggressive on price to continue to drive strong sales of your competing products. Can you confirm that one? And then for two, thinking about some of the new products you highlighted like the Astor collection and reeded furniture seems to be a major trend, do you see that as having a lot of legs? Do you see a competitive environment there intensifying?

Yes, to answer the last question, yes, that trend is here for quite a while. From what we can tell, we really started that trend in any significant way, and now people are playing catch up. We're working on the next generation of collections beyond the red collections that are already well-known. I’m guessing the reeded collections are being picked up by everybody right now because once they see people jumping on a trend, they follow us. That's part of our culture here in the United States. We are on to the next trend and have added some more folks to our design team to come up with even more great new products. We've found some great new partners around the world that can handle our growth, and we are very, very happy with that. We’ll continue to keep doing what we do best and innovate new products. A lot of our products can't be copied easily because they are so handmade. Many of these bigger retailers can't replicate that quality because they focus on things that can be easily manufactured at scale. But we continue to keep our collections small in collaboration with those folks, bringing in one SKU even at a time.

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Tara Atwood for closing comments.

Thank you, everyone, for your participation in our call and interest in Arhaus.

Thanks, guys. I appreciate it. Have a great day.

Goodbye.

Thank you, everyone, for your participation in our call and interest in Arhaus.