Greetings, and welcome to the Arhaus Fourth Quarter 2024 Earnings Conference Call. Please note that this call is being recorded and the reproduction of any part of this call has not been without written authorization from the company. I will now turn the call over to your host, Tara Atwood, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Arhaus Fourth Quarter and Full year 2024 Earnings Call. Joining me on today's call are John Reed, our Founder, Chairman and Chief Executive Officer; Jennifer Porter, our Chief Marketing and e-Commerce Officer; and Ryan Brody, our Senior Vice President of Finance. After our prepared remarks, we will open the line up for a Q&A session. During Q&A, please limit to one question and one follow-up. We issued our earnings press release and 10-K for the year ended December 31, 2024, before the 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. I would like to remind everyone that our 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, 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 the 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 over to John.

Thanks, Tara, and good morning, everyone. Thank you for joining our fourth quarter and full year 2024 earnings call. I want to begin by thanking our dedicated teams across the business, our clients, and our shareholders for their continued support of Arhaus. Despite macroeconomic uncertainty, 2024 was a year of strong momentum and disciplined execution of our strategy. We saw healthy demand, expanded our showroom footprint, and further strengthened our brand. Our artisan-crafted, high-quality furniture and a vertically integrated model continued to drive long-term customer loyalty and sustainable financial performance. Turning to growth. We continue to execute our strategic plan with disciplined high-return investments in our showroom footprint. This year, we celebrated a major milestone by opening our 100th showroom and expanding our presence to a total of 103 locations across 30 states and all four major geographic regions. 2024 was a record year of showroom growth, marking our largest expansion in nearly 40 years of history with 11 new openings and 5 strategic relocations in key markets. Showroom highlights include Greenwich, Connecticut, our third location in the state; the stunning new showroom is situated just above Greenwich Avenue in the Downtown Shopping District. Oklahoma City, Oklahoma, our first location in the state. This showroom is strategically positioned within a premier mixed-use luxury development. Palm Desert, California, an expanded showroom located in the heart of the Coachella Valley near Palm Springs. Los Angeles, California, located at The Grove, a highly anticipated showroom at the iconic shopping center further strengthening our presence in California; and Corte Madera, California, now our largest retail location in the state and our 14th in California. Lastly, just a few weeks ago, I had the privilege of hosting a client and trade event to relaunch our beautifully renovated Naples, Florida showroom. We have an incredibly loyal client base there, and we are thrilled to offer an elevated experience tailored to their needs. We see tremendous whitespace opportunities to drive future growth and market share expansion. Our long-term strategy includes opening an average of 5 to 7 new traditional showrooms annually, along with additional design studios and showroom relocations. Meanwhile, ongoing renovations and expansions will further enhance the client experience. The growth in our showroom footprint continues to strengthen brand awareness and engagement with higher client spending and strong showroom interactions, reinforcing our immersive showroom experience as a key differentiator. A major driver of our success is our showroom team whose expertise, passion, and best-in-class service elevate the client's experience. Digital managers curate inspiring showroom presentations while design consultants undergo extensive training to deliver personalized service. Weekly training ensures that they tell the stories behind our handcrafted pieces, emphasizing our brand artistry and craftsmanship. Our showroom team is our secret sauce and a key competitive advantage. I'm grateful for their contribution to our success. Their impact is evident in our fourth quarter performance where we saw demand comparable growth of 5.7%, driven by our strong product assortment, marketing initiatives, and planned promotions. While we experienced a decline in full-year demand comparable growth of 2.2% due to softness in the second and third quarters, on a 2-year stack basis, demand comparable growth was approximately 5.5%, underscoring the resilience of our brand and omnichannel strategies amid macroeconomic headwinds. Looking forward to 2025, demand comparable growth looks solid with positive client engagement. At Arhaus, we're driven by design and product innovation, leading the industry from the very start. We capture home enthusiasts by pioneering new designs, concepts that continuously set us apart. In a $100 billion market, where trends eventually become mainstream, we're consistently one step ahead, advancing to the next wave of creative thinking with every product and collection launch. After nearly 40 years in the industry, I firmly believe there are no products like our products, no people like ours, and no potential like our potential. I said it before, Arhaus stands out and Arhaus stands alone because we continuously push the boundaries of home design. It is no surprise that our competitors are watching closely. And while imitation is flattering, the reality is no one can match the craftsmanship, quality, and artistry of Arhaus products. Every Arhaus product is meticulously crafted from the best materials with an uncompromising focus on quality and comfort. As inspired world travelers, we partner with the world's most talented designers and artisans to create exceptional furniture at the core. This dedication to global collaboration and fine craftsmanship is the cornerstone of the Arhaus difference, ensuring we remain at the forefront of industry innovation that our clients seek. At Arhaus, we don't just compete; we lead. In 2024, we expanded our product offering by introducing expanded wood furniture selections, versatile designs with interchangeable components for greater customization, and an elevated approach to power motion furniture that seamlessly blends comfort with craftsmanship. Looking ahead to 2025, we'll bring additional innovations and technology to ensure we remain at the forefront of design and function. Our direct sourcing model is another key differentiator, allowing us to scale production to meet increased demand while bypassing wholesale markups. Arhaus' supply chain is strategically designed to support our commitment to innovation, quality, and efficiency while mitigating potential risks. We have built a diversified global supply network partnering with world-class artisans and manufacturers across North America, Europe, and Southeast Asia. We are proud to say that the United States accounts for the largest share of our net revenue, including our internal manufacturing, while the remainder is distributed across multiple countries. Our sourcing strategy remains dynamic and adaptable, ensuring a diverse and resilient supply network that responds to market conditions, geopolitical risks, and tariff changes. As we further diversify, we remain focused on long-term flexibility and strategic supply chain management. As we look ahead, our long-term strategy remains focused on four key pillars. First, increasing brand awareness to drive net revenue. We will continue to expand our showroom footprint and increase brand awareness through an omnichannel approach, including enhancing digital marketing, leveraging data-driven client engagement, and upgrading our website with improved analytics and continued product assortment optimization. Second, expanding our showroom footprint with the goal of 165 traditional showrooms or almost double our current footprint; we have a long runway for growth and a robust pipeline in place. Third, enhancing omnichannel capabilities and technology. We are focused on delivering a seamless customer experience with e-commerce, which we believe represents our fastest-growing revenue channel. Fourth, investing in growth to build scale and enhance long-term margins, following the implementation of our new warehouse management system and progress in upgrading our operational infrastructure. 2025 will see the launch of a new ERP system at our upholstery manufacturing facility and a planning system to optimize efficiencies and support our long-term growth. By executing these priorities, we will be well positioned to drive continued growth and long-term value. With that, I'll turn it over to Jen Porter, our Chief Marketing and e-Commerce Officer.

Thank you, John, and good morning, everyone. I'm excited to share today how we continue to elevate the Arhaus brand and drive long-term growth through our marketing and omnichannel strategy, an approach that builds brand awareness and deepens engagement across our showrooms, e-commerce, and in-home design services. As John mentioned, our partnerships with global artisans and our commitment to fine craftsmanship are key differentiators in today's competitive market. Building on that commitment, I'm proud to introduce Uphold, the third volume of our storied series, which we launched last week. Uphold celebrates the heritage and artistry of our North Carolina-based upholstery artisans, showcasing the timeless techniques and meticulous attention to detail that have helped shape our legacy of creating heirloom-quality pieces. These artisans use the finest materials sourced from around the world to craft some of the most beautiful, comfortable, and highest quality upholstery available today. Uphold is now available as a beautifully printed book in our showrooms and digitally at arhaus.com, bringing to life the passion and expertise behind our collections. I encourage you to explore Uphold and experience firsthand how our dedication to fine craftsmanship continues to set us apart. Now let's dive into our broader marketing initiatives. Our omnichannel strategy is focused on delivering a seamless, inspiring client journey across all touch points and is built around six key pillars. First, our showrooms, our cornerstone brand experience offering immersive engagement that drives conversion. Second, e-commerce. We are focused on delivering a seamless customer experience with e-commerce, which we believe represents our fastest-growing revenue channel. Our showrooms and digital channels work together. Showrooms drive high-touch engagement while e-commerce provides seamless accessibility. The combination of digital innovation and in-store expertise has fueled higher engagement, increased website traffic, and record high average order volume in 2024. Third, catalogs, a powerful storytelling tool driving demand growth. Our spring and fall 2024 collections resonated strongly with clients, reaffirming Arhaus as a leader in quality and innovation. Our latest spring 2025 catalog, delivered in December, has already demonstrated solid initial results. Fourth, in-home designer services, a key driver of higher engagement and order values with continued expansion planned both in-showroom and virtually. Our growing showroom footprint fuels our in-home design service, delivering order values that are four times higher than those from non-design clients. As John mentioned, our showroom team is our secret sauce, a key competitive advantage at Arhaus. We will continue to invest in our in-home designers and team to generate demand and deepen the engagement with clients. Fifth, the digital and content strategy. At Arhaus, we believe that purchasing furniture is more than just a transaction; it's a lifestyle journey. We understand that selecting the perfect pieces unfolds over several months, and we engage our clients on their terms, when, where, and how they prefer. Whether through thoughtfully curated catalogs, digital-first content, or immersive in-person experiences, we consistently reinforce our premium positioning and unparalleled craftsmanship. Our recent participation in the St. Regis Aspen Snow Polo tournament in Aspen is a perfect example of this lifestyle approach. The events brought together Polo enthusiasts, the local community, and key partners, providing a unique platform to showcase our product artistry and design while engaging with a discerning audience. At every stage of a client's journey from initial awareness and consideration to purchase and post-purchase engagement, our goal is to deliver a seamless and inspiring experience that is distinctly Arhaus, offering not just furniture but a lifestyle and way of living. Lastly, client personalization. Our strategy leverages data-driven insights to deeply understand client preferences, allowing us to tailor our marketing, curate dynamic site merchandising, and deliver smart product recommendations for optimized engagement that resonates at an individual level with our clients. This targeted approach creates a seamless, personalized experience throughout the entire customer journey. Continuous testing and refinement of our client personalization strategy ensures that we are driving loyalty and enhancing our brand's connection with each client. Before I close, I want to highlight our pricing and promotional strategy. In 2024, reinforcing our premium positioning remained a key focus of our marketing efforts, and our pricing and promotional decisions were aligned with this strategy. Our goal was to emphasize high-quality craftsmanship and our premium brand identity. Quality is what our clients and stakeholders expect from a high-end luxury brand. In closing, with a strong marketing roadmap in place, we are well positioned for the year ahead. I encourage everyone to visit arhaus.com or stop by a showroom to experience our craftsmanship firsthand. When you do, be sure to sit on one of our sofas; you'll immediately feel the difference in comfort and quality. With that, I'll turn the call over to Ryan Brody, Senior Vice President of Finance, to walk you through our financial results. Ryan, over to you.

Thanks, Jen. Good morning, everyone. Today, I will walk through our fourth quarter and full year 2024 financial performance, key business drivers, and our outlook for 2025 before turning it over to Q&A. Key items from our fourth quarter 2024 income statement include net revenue of $347 million, up 0.9% year-over-year. We experienced a decline in comparable growth of 6.4% primarily due to lapping the impact of abnormal backlog fulfillment in the prior year. Meanwhile, demand comparable growth was 5.7%, reflecting strong client demand. Fourth quarter gross margin decreased $2 million or 1.8% to $139 million, primarily due to a $2 million increase in showroom occupancy costs as we continue to expand our footprint. As a percentage of net revenue, gross margin declined 100 basis points to 40.0%, reflecting the impact of higher showroom occupancy costs. Fourth quarter SG&A expense increased $11 million or 11.1% to $111 million, primarily driven by higher showroom-related costs in addition to the continued strategic investments to support business growth. In the quarter, net income decreased $10 million or 31.8% to $21 million, while adjusted EBITDA declined $10 million or 19.6% to $41 million, resulting in an adjusted EBITDA margin of 11.9%. Key items from our full year 2024 income statement include net revenue of $1.271 billion, down 1.3% year-over-year. We experienced a decline in comparable growth of 8%, primarily due to lapping the impact of abnormal backlog fulfillment in the prior year. Meanwhile, demand comp declined 2.2% largely driven by softness in the second and third quarters. However, strength in new showroom growth helped offset some of the decline. Full year gross margin decreased $139 million or 7.3% to $501 million, primarily driven by lower net revenue, increased showroom occupancy costs, and higher delivery and transportation costs. As a percentage of net revenue, gross margin declined 260 basis points to 39.4% primarily reflecting the impact of higher showroom occupancy costs. Full year SG&A expense increased $39 million or 10.5% to $415 million primarily driven by general and administrative costs, which were related to legal costs and strategic investments to support and drive the growth of the business, including supply chain and technology improvements, marketing investments, and increased warehouse expenses, as well as selling expenses primarily related to new showrooms. These increases were partially offset by lower expenses following the non-recurrence of a donation last year to the Nature Conservancy. SG&A expense as a percentage of net revenue increased 350 basis points to 32.7%. This increase reflects continued investment in new showroom openings and strategic investments to support business growth. For the year, net income decreased $57 million or 45.3% to $69 million, while adjusted EBITDA declined $70 million or 34.5% to $133 million, resulting in an adjusted EBITDA margin of 10.5%. Turning to our balance sheet and cash flow. We ended the year with $198 million in cash and cash equivalents and remain debt-free, reinforcing our ability to invest strategically while maintaining financial flexibility. Looking ahead, we remain focused on executing our long-term strategic priorities with an emphasis on disciplined growth, strategic investments, and growing brand awareness. With this in mind, we are providing the following outlook for selected full year and first quarter 2025 financial operating results. For full year 2025, we anticipate net revenue between $1.36 billion and $1.40 billion, reflecting a comparable growth range of 0% to 3%. We anticipate first quarter 2025 net revenue between $303 million and $323 million, reflecting a comparable growth range of negative 6% to positive 1%. We expect full year 2025 adjusted EBITDA between $140 million and $150 million and first quarter 2025 adjusted EBITDA between $17 million and $27 million. For all other details related to our 2025 outlook, please refer to our press release. As you heard from John and Jen, we remain confident in our ability to execute on our long-term strategy. Our focus on product innovation, brand differentiation, and customer engagement will continue to drive sustainable growth. In closing, I want to reaffirm our unwavering commitment to executing our growth strategy with discipline and focus. While the macroeconomic environment remains dynamic, our strong debt-free balance sheet provides us with the financial flexibility to make strategic high-impact investments that strengthen our competitive position in the premium home furnishings market. With that, I'd like to thank you for joining us this morning, and we are happy to take your questions.

Our first question is from Steven Forbes with Guggenheim Securities.

This is Julio Marquez on for Steve Forbes. Maybe if you could speak to the line of product newness in 2025 and how much newness there is in the pipeline versus the last couple of years? And then maybe any way to frame like a vitality score for some of the development pipeline, revenues generated off of some of that newness? Then maybe lastly, you can remind us of the inventory status across the showrooms. If it's up to stock with the latest inventory.

Yes, I think the 2025 lineup of product is extremely solid. As we said in our script there that we've really been leading the way on new styles, new designs, new colors, and so forth. We are very, very confident that 2025 is going to have just as much or more new product as in the past. Things have changed in our business where the consumers' tastes are changing, the styles are changing, and we are right there, which is fun. It's a lot of fun and very exciting colors of things, textures of products of woods, textures of fabrics, and designs are really changing ever since COVID has ended. So we're proud to say that we're right on top of the product and we're going to have some great new rollouts for 2025; very exciting stuff.

Our next question is from Peter Benedict with Baird.

This is Zach Beeck on for Peter. John, you spoke to the change in your pricing strategy earlier. Just curious on how demand maybe trended across price points in Q4. I remember this fall, you guys mentioned seeing traction with both some higher price point products and clearance items. I'm just curious if the new approach has led to those trends.

Yes. It's a great question. As we mentioned, we're pleased with Q4. I think it's important to note that our approach to pricing and promotions has stayed solid for the last number of years now. We're really focused on pricing and our promotional strategies, focused on the quality of our product, the artisan craftsmanship, the materiality; all of those elements. Our primary focus is on giving a good value to our clients. So we spoke last year and a little bit on today's call about how we've been testing and trying how we're messaging some of those promotions and the folks that approach that. Overall, we're really pleased with what we saw in Q4. More to come on that as we continue to monitor what we're doing. But the only other thing I'd add to that, as I mentioned on prior calls, we are very focused on what is working for our customers and for our business and really connecting that engagement that we're seeing.

Great. And then maybe as a follow-up, just curious how the promotional backdrop played out relative to your expectations in Q4? And maybe what does your guidance assume for the backdrop in 2025, both for Arhaus, but also more broadly with peers in the sector?

Yes. No, that's a great question. We continue to see a highly promotional market out there. We've been talking about that for a couple of years now. That definitely continued. We went in and executed our planned strategy for Q4, and we were happy with that. So I guess you could say the promotional environment met our expectations. Looking forward to 2025, in terms of what we factored in for product margin and planned promotions, we're seeing that continuing per our strategy in 2024. Really solid margins there, and we expected to continue that plan going into 2025.

Our next question is from Peter Keith with Piper Sandler.

So a nice solid finish to the year with your demand trends. We are hearing about some weakness in bigger ticket household products here to start the year. I know you said demand was solid, but could you put any quantification to what you're seeing with January and February? And then maybe on a related note, if the demand is good, why are the comps basically guided kind of flat to negative in Q1?

Peter, I can start on that one. We are separating out January versus February. But as you note, as John said, we're seeing spring off to a solid start. Obviously, I can't comment on what anybody else might be referencing and what they're speaking to out there. One thing I would remind us and something we've spoken to you in the past as well is one weekend, one month doesn't make a trend. So in terms of what we're looking at. Again, we're off to a solid start, and those results are factored into the guide. Also, February is not over, so we're continuing to see what's happening there.

Yes. Please continue, Peter.

Well, just trying to extrapolate the solid demand trends and then the negative comp. I understand there's delivery delays, but this pretty big disconnect.

Yes. So as we moved into 2025, we've now moved beyond the abnormal backlog from 2023. So the comp and the demand comp should be more aligned starting in '25. There may be some timing differences from quarter to quarter, but full year, they should be more or less aligned.

Okay. And then maybe separately, you talked about the promo strategy. So I mean, I guess I'm trying to understand where you are today because I think when you look back at that weakness in air pocket in Q2 and Q3, I think you moved away from promos; the consumer didn't like that. So you've kind of re-architected your promo strategy. Where are you today? Have you kind of landed in a spot that you like? Or is it still a work in progress? Maybe just get us up to speed on where you stand today versus a couple of months ago?

Yes. No, great question. I think just to clarify, I mean, 2024 was a choppy year. We spoke to the softness we saw in Q2 and Q3. I know we've talked about that on the prior calls as well. I think it's important to remember, there's a lot going on in that time period. There's summer travel; there's a lot of macro noise happening; there's the lead-up to the election; there's just a lot happening. As I mentioned earlier, we were playing around with how we were messaging and marketing our promotional strategy. But we were going in with the approach to pricing and promotions, and that's the same price we have really showcasing that value to our clients and really playing with how we showcase that value. We were happy with Q4. As John mentioned, that positive demand comp we saw in Q4. I'm pleased with the solid start that we're seeing in January. So in terms of sort of how our approach has changed maybe in the last few months versus prior and then going forward, our approach really hasn't changed. We've been testing and learning a lot, and we are going to continue to read those results and make updates as we always do. I think that's one of the strengths of how we approach our strategies at Arhaus, and we will continue to share more with you if and when we make any changes to that strategy.

Our next question is from Cristina Fernández with Telsey Advisory Group.

I wanted to ask about the store openings for 2025; 3 to 5 is a bit lower than your annual target. Is this due to absorbing some of the higher pace of openings last year? Are there any other stores you plan on opening, such as design studios or outlets, that we should consider?

Sure, Cristina. Yes, as we mentioned, I think we did 11 new stores last year. I believe we opened another 5 new stores that were relocations. A couple of those, I think, were slated for '25 that we were able to push into '24. If you look at a 2-year combination, we're right on track. With that said, we're pretty set for 2025. However, the design studio side of the business is a lot more flexible, and we can move quickly on those. So we are in the process of speaking to some landlords about some locations there that we can't announce today because we don't have deals done, but they easily could fall into 2025.

And then as a follow-up, on the inventory, which was up 17%, is there any timing that's leading to that increase or product newness? Or can you speak about it seems a little bit higher than your sales trends?

Yes. I can talk to it, then maybe Ryan can fill in some facts. But obviously, with all the new showrooms, they take quite a bit of inventory. Some of our new showrooms are larger than our traditional showrooms had been, which we're trying to grow the square footage a little bit so we can offer more products. In addition to that, we really went after expanding some categories that are just working so well for us and just balancing our inventory out, getting more things in stock so we can service the consumer a lot quicker than asking them to wait for products. So it's all, we think, good inventory, great investments, and it really is setting us up for the future. Ryan doesn't have any input on that?

The one other thing is we're moving into the outdoor season. So we ramped up the inventory to support that time of the year.

Yes. Last year, the outdoor season inventory came in a little later than this year. So you're right. That all moved in much quicker. We want to get that in stock for the season, so that does add to it as well.

Our next question is from Robbie Ohmes with Bank of America.

This is Mattie on for Robbie. I was just wondering if you could give any help on how we should think about gross margin or SG&A for the first quarter in 2025. Any first half or second half dynamics to remember; maybe could you remind us of the timing of when you plan to phase your software implementations this year? I think you mentioned the manufacturing ERP and planning software was expected to launch in the first half.

Yes. To start with gross margin for Q1, we expect some slight deleverage in Q1 from showroom occupancy costs. But for full-year gross margin is expected to be relatively consistent year-over-year. With SG&A, as we discussed over the past year or so with our showroom expansion, we expect to see increased costs as well as the strategic investments that we're making to support the growth of the business. In regard to some of the system implementation that you're talking about, we're still on track with our ERP at our manufacturing facility for later in the year as well as our inventory planning system. So those are both on track.

Great. And maybe just as a follow-up. Have you taken any preemptive measures ahead of potential tariffs? Maybe have you taken any price with new collections?

Yes. We're in great shape as far as tariffs go. And God knows what tariffs are going to be where and when, but we've done everything possible to be ready for them, including speaking to all our partners out there. If something happens, what if this, what if that, what do we have to do? Certainly, all our partners are willing to step up and help financially lessen that blow, so we don't have to just give straight large increases to our customers. We feel we're in good shape. Again, it's moving every day. I mean, I don't know what the tariff will be tomorrow. So we're doing what we can. Obviously, globally, we have an incredibly diverse population of different countries. Keep in mind, we have probably more of the largest part of our business is handmade in the United States. That gives us a huge competitive edge over our competitors because a big part of our business is the product that's made right here in the United States. We have our own manufacturing facility as well as work with a lot of great manufacturers right here in the states. We think that will be a big competitive advantage for us.

And the one thing to add, our current guidance includes the potential impact of tariffs that we know of today. So that has been reflected in what we have released this morning.

Our next question is from Jonathan Matuszewski with Jefferies.

Great. My first question is about the macroeconomic and housing assumptions in your guidance for 2025. I'm trying to determine if it aligns with 2024. Does this suggest that the recent housing momentum from the fourth quarter will carry into 2025? I’m looking for any signs of increased optimism in your outlook. That's my first question.

Yes. So a great question, Jonathan. I think right now, we're assuming sort of the same as last year. Obviously, we don't know what we don't know, so taking just a conservative approach to that. I think one of the things that we have talked about a lot on prior calls is that the housing market is obviously a factor that we pay close attention to being a furniture company; however, it is not the largest driver of our sales. As we've mentioned on past calls, we're looking primarily at drivers within our client base, such as light refreshes to contractor-led remodels, with the housing market being a third factor. As of now, the guide is assuming sort of status quo, but we'll be paying very close attention moving forward.

Alright. Great. That's helpful. And then just a follow-up, Ryan, you mentioned the guidance that was provided in terms of headwinds from tariffs that have been announced. Is it possible to understand kind of the magnitude of the headwind that's embedded in the guide, to the extent, as you mentioned, it's a fluid environment? So if there is any retraction, it would be helpful to understand the impact there.

Yes. We've been with some of our vendor partners and understanding what the potential impact could be. From there, we've worked on some contingency plans and potentially resourcing to other markets and just kind of waiting to see how the next few months play out from a timing perspective of when these things go into place.

Our next question is from Phillip Blee with William Blair.

My question is around the EBITDA guidance. So the midpoint implies around $5 million in EBITDA fall-through on incremental $100-or-so million in sales. I understand the incremental $5 million to $10 million in investment spend, but what else is weighing on earnings this year? Any sort of color on some bigger buckets that we should consider? Or is this more a function of conservatism given the choppy macro environment?

Yes. So you touched on the system investments that we're making there to continue to support the growth of the business. We also have the showroom expansion costs related to those. So there's that. And then, yes, with what we just talked about related to tariffs and other promotional expectations for the year, we've baked all those into our guide.

Okay, great. And then, I believe you've relocated about 5 stores last year. What are your plans this year for the number of relocations or refreshes? What sort of lift does that have on comps? And then how much of your fleet would you say has potential targets for a relocation or a larger-scale refresh over the next few years?

Sure. We just passed our 100th store. As leases come up, we are looking at locations, refreshes, and we're going through the fleet. I firmly believe that you need to keep your products fresh, you need to keep your stores fresh. The consumer, when they walk in, we just remodeled a store in Naples, Florida, for instance; it's an old store, probably 10 years, 15 years since we had remodeled it. Since we've remodeled it, the sales growth has been phenomenal. The reaction has been phenomenal. It's just building and building our brand. In addition to obviously opening new stores and new locations, we're going back and looking at anything that we can to remodel as needed. Certainly, the bigger markets we look at first and then we keep going down. But we're remodeling a store, moving a store in Dayton, Ohio this year to a great, great new little lifestyle center that we know is going to give Dayton, Ohio a nice boost. It works across the board. We're happy with the performance when we do move or remodel a store; we're very happy with the sales and the additional profits they're going to contribute. We're looking at the same amount this year as last year, and we'll continue kind of on that page; we take part of our capital expense and budget towards remodeling instead of all of it in new stores. So that's kind of the strategy we have, and we're going to continue with that going forward.

Our next question is from Jeremy Hamblin with Craig-Hallum.

Congrats. I wanted to come back to the showroom openings and just understand maybe the cadence that you expect during the course of the year. I think on the Q3 call, it did sound like you were still expecting at that time, the typical 5 to 7 new showrooms. I wanted to understand if there's been any change in that outlook and whether or not the timing or the shift of when you might expect the 3 to 5 showrooms to open up this year. Also, what are the geographies that you're targeting?

Sure. I think I know we have one slated; a quite impressive showroom, I think one of the most, if not the most iconic building in Pasadena, California, slated to open this year. We're looking to hit that 5 number for sure, which is what we're shooting for. Places like Pasadena, where they just had the fires, there’s huge labor shortages. So things may be delayed a little bit because people are trying to get their homes built and a shortage of product and so forth. We're dealing with that kind of stuff as well. I think we're in good shape everywhere else around the country. We're doing a couple in California. I mentioned Dayton, Ohio. That's a move store. I don't have the whole list of different locations in front of me; we normally don't want to divulge too much information to our competitors at this point. Just to open. We just opened a great store in Florida and Winter Park in Orlando just a few weeks ago, actually, and it's off to an incredible start. Florida is a booming market for us. We're finishing out California. We've got lots and lots of opportunities throughout the country. The Arizona area is just booming; Texas is booming. So we're in great shape, and we're going to take care as we find great locations, we'll open them. We're going to do it conservatively, but in a way that makes sense. We’re not going to open locations just to open them; they have to be the great locations, the right areas, the right size locations and so forth. So as we find them, we'll open them. We've got plenty of cash to do it. We're going to continue to grow, and we're going to continue to take market share for that matter.

Understood. Just a question here. You noted in January that you saw a lift in consumer confidence following the November election that resulted in strong written orders or demand comps in November and December, and it sounds like a good start in January. Just wanted to get a sense for how your core customer reacts. There has been a significant step down in consumer confidence as measured here in February. How does your customer typically react in these scenarios? Obviously, you've got a lot of attractive new products that you've just launched and it sounds like some great forthcoming launches. But how much of that buying decision is based on stock market trends and so forth? Just wanted to get an understanding of that history there.

Yes. It's a great question. I smiled a bit when you stated how do they react under these conditions because I think I don't know if we've ever seen these conditions per se before. We spoke in the past of how we've seen softness leading into elections, for example, as people are just wondering what's going to happen there. As you mentioned, we were happy with November and December; we definitely saw clients making purchases at that time. We spent all last year talking about noise and macro uncertainty and conversations happening in the news. I think we're starting off this year having a lot of those same conversations. We talk a lot about what our customers do and how they may have performed in the past. In the past, we've mentioned that our client has been more connected to the stock market rather than the housing market. But I would caution anybody about relying too much on what's happened historically. We are focused on staying very connected with our clients. The great thing is we have a leading indicator of demand sales. We are interacting with them every day in our showrooms. We are seeing how they're engaging with us and connecting with our traffic to our site, engaging with our marketing channels, and how they’re interacting with us, including what conversion rates look like. All of those elements, we're laser-focused on monitoring. As I've spoken about in the past, I'm focused on executing our strategies. We're doing what we do best, which is focusing on the product pipeline, making sure our showrooms look incredible, focusing on launching the right marketing campaigns at the right time, and being really targeted and purposeful with how we do that. As John and I mentioned earlier on the call, we feel really confident about our strategy going into next year, and we are going to focus on executing that while we read and react to the larger state of what's going on if we need to as we learn more.

Our next question is from Simeon Gutman with Morgan Stanley.

This is Pedro Gil for Simeon. My question is about the adjusted EBITDA guidance in the first quarter. You're guiding to an adjusted EBITDA decline of 24% year-on-year at the midpoint on a revenue increase of 6% at the midpoint. So can you help us understand a little better where the deleverage is coming from besides the showroom occupancy? And related to that, given the higher level of inventories year-on-year, how are you planning the promotional cadence through the first quarter?

So the first question, the two biggest drivers in Q1, as you mentioned, with the deleverage is the showroom occupancy and related costs associated with the additional showrooms and then the strategic investments that we're making in the business.

And then just to touch on your question about how we are planning the promotional cadence for Q1. As I touched on earlier, our approach to our promotional strategy going into 2025 is in line with our approach in 2024. Without getting into too much detail, I don't want to show all cards here, but I would just remind you to look at calendar shifts. So we saw some calendar shifts in those key holiday dates back in Q4 and we're seeing shifts in key holiday dates that correlate to key shopping periods and historical promotional periods in 2025 as well. Just being aware of those.

Does that feed through into the first quarter promotional calendar?

I'm sorry, can you repeat that question?

Yes. Just on your point about the calendar shift throughout the fourth quarter. How does that flow through into the promotional calendar during the first quarter? Help us understand.

I see. I apologize. I thought I confused you there. I was just referencing there are calendar shifts in 2025 in Q1 and Q2 as to when some of those peak holidays fall just on the calendar year. For example, Easter is later this year than it was last year. We've spoken a lot about how our promotional strategy aligns with those key shopping periods as well as key holiday periods. Similarly to how you saw some shifts in Thanksgiving, Black Friday, Cyber Monday timing in November and December, we're seeing some of those shifts such as Easter happen in Q1 as well.

Our next question is from Seth Basham with Wedbush Securities.

This is Matt McCartney on for Seth. Just real quick, I’m wondering if we could get an update on new showroom performance relative to your model. And if that performance is impacting some of your showroom plans for 2025?

No. Our plans are solid for 2025 and beyond. We've been very happy with the performance of the new showrooms; they are very solid, hitting our expectations in some cases. Our plan is not changing at all. We're going to continue to grow, and as we find great locations, we're going to open great stores.

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

Thank you, everyone, for joining. We appreciate your interest in Arhaus, and we hope you have a great day.

Thanks, everybody.

Thank you.

Take care.

Thank you, everyone, for your participation in our call and interest in Arhaus. You may now disconnect your lines.