Earnings Call Transcript - ARHS Q1 2025

Operator, Operator

Good morning, and welcome to the Arhaus First Quarter 2025 Earnings Conference Call. Please note that this call is being recorded, and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Tara Atwood, Vice President of Investor Relations. Please go ahead.

Tara Atwood, Vice President of Investor Relations

Good morning, and thank you for joining us for the Arhaus First Quarter 2025 Earnings Call. Joining me on today's call are John Reed, our Founder, Chairman, and Chief Executive Officer; Jennifer Porter, our Chief Marketing and eCommerce 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 press release and 10-Q for the quarter ended March 31, 2025, 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 and subsequent 10-Q. 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 reconciliation. Now I will turn the call over to John.

John Reed, Founder, Chairman and CEO

Good morning, everyone, and thank you for joining us today. We're pleased with our performance this quarter, delivering first quarter results in line with our expectations, supported by showroom growth, healthy client engagements across our retail and e-commerce channels, and continued disciplined execution of our operating model. Net revenue grew a healthy 5.5%, and demand comparable growth was up an impressive 4.1%. We ended the quarter with $214 million in cash and cash equivalents and remain debt-free. Our strong financial position provides us the flexibility to invest in strategic growth opportunities and create value for our shareholders. Since the huge uncertainty shock the past couple of months, we're focused on what we can control, executing with discipline, investing strategically, and growing our showroom footprint to support long-term profitable growth. We believe our differentiated model built on artisan-crafted, high-quality design and a premium client experience continues to be a distinct competitive advantage. Now let me walk through seven proof points that give us confidence in the road ahead, starting with our people. We're building Arhaus for the long term, and that begins with talent. I'm incredibly proud of our depth bench of experienced leaders across the company, individuals whose creativity, passion, and discipline continue to drive our success. We're also excited to welcome Michael Lee as our new Chief Financial Officer starting May 12. Mike brings extensive experience and financial leadership that will be instrumental. And across our showrooms, our team remains our secret sauce. Their expertise in connection with our clients are the key competitive advantage, one that consistently sets Arhaus apart. The strength of our people is reflected in our ability to execute, especially through the agility of our sourcing and supply chain operations, which brings me to my second proof point, our supply chain and sourcing agility. Today, our sourcing footprint is diversified across North America, Europe, and South Asia, enabling us to adapt quickly to global dynamics while upholding the exceptional quality standards that define Arhaus. It's important to emphasize that our diversification strategy has been in place for many years, long before the current headlines, and reflects our commitment to sourcing from a broad range of trusted global vendors. At Arhaus, product development isn't about sourcing diversification as a starting point. It's about going around the world to find the best of the best. That commitment to exceptional craftsmanship, authentic materials, and trusted relationships naturally lead to a sourcing model that is diverse, balanced, and resilient. In April, the United States represented approximately 36% of our total receipts, including our internal manufacturing operation. We continue to invest in U.S. manufacturing, particularly in our domestic upholstery business. Over 70% of our upholstery business comes from the United States, with the largest portion coming from our own North Carolina facility, supporting proprietary design, cost control, and our premium positioning. We also recognize the heightened focus on China sourcing amid evolving tariff dynamics. In April, China represented approximately 13% of our total product receipts. We expect this to decline to approximately 5% or less in the third quarter, and we believe we can reach approximately 1% in the fourth quarter. Our sourcing evolution underscores the agility of our operating model and the successful execution of our teams. Of course, the strength of our supply chain wouldn't be possible without our vendor relationships, my third point. These relationships enable us to maximize agility, minimize financial risk, and move with speed and confidence during times of uncertainty. They are not simply transactional. They're built on mutual trust, shared values, and a long-standing commitment to delivering exceptional quality. My deep-rooted passion for sourcing keeps me closely connected to this work, from scouring hidden gem artisan markets to building direct relationships with vendors and artisans around the world. Over the past month, I've had the opportunity to meet face-to-face with many of our global vendors alongside members of our leadership team. These visits reaffirm what we've long known. When it matters the most, our vendors show up as an extension of our team. Our success is mutually beneficial, and many vendors and artisans have scaled with us, in some cases, for decades. Whether it's helping to offset cost pressure, prioritizing resources and production, or adapting quickly to the dynamic environment, our vendors consistently help us navigate. Together with our vendors, we continue to deliver exceptional value without ever compromising the quality our clients expect and love, which brings me to my fourth proof point, our resilient high-end client base. We believe we are meaningfully over-indexed to an affluent consumer who has historically been less reactive to macro volatility. Importantly, this client has consistently been the last to pull back and the first to return when conditions stabilize. And while stock market volatility may be weighing on consumer sentiment more broadly, overall demand was healthy in the first quarter. Our clients remain deeply invested in their homes and consistently prioritize quality, craftsmanship, and long-term value in their purchase decisions. Proof point five, consistent strategic execution. We remain focused on executing our long-term strategy by continuing to invest in what matters most, best-in-class product quality, thoughtful innovation, newness that resonates with our clients. We're expanding our physical footprint while deepening client engagement through a multi-touchpoint model, including our catalogs, which remain amongst our most powerful storytelling tools. At the same time, we're making strategic investments in technology and e-commerce to further elevate the client experience and strengthen our omnichannel capabilities. This disciplined execution is a key reason we gained market share and recovered faster than many peers coming out of the pandemic and why we remain confident in our approach going forward. Proof point #6, showroom growth and investment. In 2024, we opened 11 new showrooms, which are performing well, while relocations enhance brand visibility and deepen client engagements. Looking ahead, we have 28 total showroom projects in the pipeline through the end of 2027 with even more opportunities likely. This momentum reflects our disciplined focus on scaling thoughtfully, elevating the showroom experience, expanding market share, and supporting long-term revenue growth. And underpinning all of this is my seventh and final point, our financial strength. We continue to operate from a position of discipline, debt-free, with ample liquidity and a healthy balance sheet. We believe that a strong financial foundation allows us to invest confidently in long-term growth, navigate near-term uncertainty, and deliver long-term value for our shareholders. In short, Arhaus is well positioned for the future, powered by the strength of our brand, the passion of our people, and the disciplined execution of our strategy. Now let's take a closer look at our performance in the quarter, beginning with showrooms. In the first quarter, we completed five total showroom projects, one new traditional showroom and four strategic relocations. The highlights include Winter Park, Florida, a new traditional showroom opened in Winter Park Village in an upscale lifestyle center; Sarasota, Florida, a relocated showroom opened in Center Port at Waterside, a key Florida market; and Burlingame, California. We relocated a showroom in downtown Burlingame tailored to the local clientele. Looking ahead, I am pleased to share that we are raising our outlook on this front and now expect to complete approximately 12 to 15 total showroom projects in 2025. This includes four to six new showrooms up from the prior three to five and eight to nine strategic relocation, remodels, and expansions. Our long-term remains an average of five to seven new traditional showrooms annually. Importantly, our timing is driven by readiness, not just the calendar. We open locations when we believe they are prepared to deliver the experience our clients expect. We encourage you to view our footprint growth through the lens of total showroom project activity. For every project, whether new opening, relocation, remodel, or expansion, is evaluated through the same disciplined return on investment approach. Our showroom strategy is clear, target premier locations with strong foot traffic, complementary co-tenancies, and opportunities to enhance brand visibility and grow market share. Every decision is made with a focus on sustainable, high-quality growth and attractive expected returns on investments. Turning to our product. Design is the core of who we are. This season, clients are responding to warmer products, softer silhouettes, eclectic use of color and pattern. Highlights include our outdoor collection featuring premium teak, all-weather wicker, and our first Italian upholstered collection. Upholstery remains a hallmark, handcrafted by skilled artisans. Across collections, rich textures, warm woods, and unexpected materials create a fresh yet familiar look and feel. Looking ahead to 2025, we'll continue to innovate in materials, silhouettes, and personalization, keeping us at the forefront of design, comfort, and quality. Turning to demand. As I shared earlier, we delivered an impressive demand comparable growth of 4.1% in the quarter. However, demand comparable growth was not linear through the quarter, with strong performance in January, up approximately 10%, March up approximately 7%, partially offset by February, which was down approximately 6%. As we said before, a week, even a month doesn't define a trend. And while there was more volatility, we are very pleased with the overall strength of the quarter. Looking ahead to the second quarter. April demand was softer than expected, with demand comparable growth down 10%, impacted by the shock of the tariff news and the stock market. While near-term volatility remains, our model is built on resilience, and we believe our continued unique positioning is a powerful long-term advantage. In closing, our long-term strategy remains clear and focused and anchored by our four key priorities: increasing brand awareness to drive net revenue, growing our showroom footprint, enhancing our omnichannel client experience, and investing in the growth to build scale. As we look ahead, we remain confident. We have a strong business, a solid foundation, and a strategy that's working. Our team is proactively managing tariffs through sourcing diversification, and we continue to adapt as needed to protect both margin and momentum. With a premium brand, a loyal and growing client base, and a balance sheet that allows us flexibility, we're well-positioned to invest in long-term value creation. I'm proud of what we've accomplished this quarter and even more excited about the opportunities ahead. Thank you to our team, clients, and shareholders. Your continued support drives everything we do. With that, I'll turn it over to Jen Porter, our Chief Marketing and eCommerce Officer.

Jennifer Porter, Chief Marketing and eCommerce Officer

Thank you, John, and good morning, everyone. We had a solid quarter across both our retail and e-commerce channels despite operating in a more volatile environment. Our omnichannel strategy designed to meet clients wherever and however they choose to shop continues to drive meaningful engagement and conversion across all touchpoints. This strategy is anchored in six core pillars: showrooms, e-commerce, catalogs, in-home design services, digital and content, and client personalization. Our showrooms remain a cornerstone of the Arhaus experience, delivering immersive, elevated environments that inspire clients and drive conversion. Approximately 90% of our clients live within 50 miles of a showroom. And that proximity, combined with high-touch personalized service, continues to fuel brand awareness and market share expansion. New showrooms opened in recent quarters are performing well, supported by our long-tenured, experienced teams. Our showroom growth contributed meaningfully to healthy net revenue in the first quarter, and showroom-driven demand was a key contributor to our overall demand strength. Client engagement remained strong, driven by our unique product mix, refreshed seasonal assortments, and the exceptional performance of our highly trained showroom teams, including our in-home designers who bring trusted expertise to every interaction. These designer-led services continue to be a key competitive differentiator and growth driver. Designer-driven demand was strong, both in-store and virtually, and clients who engage with our design team generate order values four times higher than average. In the quarter, we saw meaningful growth in orders above $5,000 and $10,000 along with record-high average order value. These transactions, we believe, deepen loyalty and increase order depth across categories. Just as we deliver elevated, personalized experiences in our showrooms and through our design services, we're creating that same level of inspiration and ease online. Online engagement remained healthy throughout the quarter, and our e-commerce business delivered strong performance. Growth was driven by strategic investments in technology, platform enhancements, product storytelling, and a compelling product mix. We continue to invest in e-commerce to further elevate the client experience and drive long-term growth. The online experience is more than transactional. It's a platform to inspire, educate, and connect with our clients. Our digital and content engagement continues to drive impressive traffic and deepen brand engagement across channels. Earlier this spring, I visited several of our global partners in Italy and Romania; seeing their craftsmanship firsthand was a powerful reminder of the care and precision behind every piece, the foundation of our storytelling and emotional client connection. What sets Arhaus apart and what we do best is clear: exceptional product quality, broad aesthetic appeal, and our artisan-led approach. Even in a more challenged consumer environment, our storytelling resonates. Clients respond not only to how our products look and feel but also to the intention, values, and meaning behind them, something we take pride in and believe we do better than anyone else. Our pricing and promotion strategy remains unchanged. We continue to drive high-quality growth through a differentiated value proposition, educating clients on what makes Arhaus unique, artisan-crafted, high-quality design, and a premium client experience. This disciplined approach supports margin stability, protects brand integrity, and reinforces the long-term value of our product while preserving flexibility when needed. On tariffs, we are actively monitoring the evolving landscape and remain prepared to respond with discipline. Should targeted pricing adjustments be necessary, we will implement them thoughtfully and communicate clearly, always with a focus on maintaining client trust and delivering exceptional value. In closing, while the environment remains dynamic, we are staying close to our clients, leaning into our unique strengths, and maintaining discipline in how we engage, price, and promote. We remain focused on executing across our six omnichannel pillars to drive sustainable, high-quality growth and deepen client relationships. 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.

Ryan Brody, Senior Vice President of Finance

Thanks, Jen. Good morning, everyone. Today, I will walk through our first quarter 2025 financial performance, key business drivers, and our outlook for the second quarter and full year 2025 before turning it over to Q&A. Key items from our first quarter 2025 income statement include net revenue was $311 million, up 5.5% year-over-year, landing near the midpoint of our guidance. Growth was primarily driven by increased demand across both our retail and e-commerce channels, supported by continued showroom expansion, partially offset by a comparable growth of negative 1.5%, which landed near the midpoint of our guidance range. Demand comparable growth was 4.1%, driven by healthy client response to our products and strong engagement across both our retail and e-commerce channels. Gross margin was $116 million, up 0.4% year-over-year. The increase was primarily due to higher net revenue, partially offset by increased product costs of $7.1 million, higher showroom occupancy costs of $5.2 million, and higher delivery and transportation costs of $1.7 million. As a percentage of net revenue, gross margin decreased 190 basis points to 37.1% of net revenue, primarily driven by higher showroom occupancy costs, which increased 120 basis points, and a product margin decrease of 40 basis points. Selling, general, and administrative expenses were $110 million, up 13.9% year-over-year, primarily due to a $7.2 million increase in general and administrative costs primarily related to warehouse expenses, marketing investments, and strategic investments to support and drive the growth of the business, including supply chain and technology improvements, in addition to a $6.2 million increase in selling expenses primarily related to new showrooms and variable compensation due to higher demand. Net income was $5 million, landing near the midpoint of our guidance. And finally, adjusted EBITDA was $19 million, landing at the lower end of our guidance, resulting in an adjusted EBITDA margin of 6.0%. Turning to our balance sheet. We ended the quarter with $214 million in cash and cash equivalents and remain debt-free. Looking ahead, we remain focused on executing against our long-term strategic priorities, including disciplined growth, strategic investments, and continued expansion of brand awareness while remaining agile in the face of ongoing macro uncertainty. Given increased volatility driven by tariff shifts and softening consumer sentiment, we are revising and widening our full year 2025 outlook to reflect a more cautious stance. Notably, the midpoint of our previous outlook now represents the high end of the updated range. For full year 2025, we now expect net revenue between $1.29 billion and $1.38 billion, reflecting an updated comparable growth range of negative 5% to up 1.5%. As a reminder, comparable growth and demand comparable growth may diverge over shorter time periods, but align more closely over the course of the year. Net income of $48 million to $68 million and adjusted EBITDA between $123 million and $145 million. For second quarter 2025, we anticipate net revenue between $320 million and $350 million, reflecting a comparable growth range of negative 2% to up 5%, net income of $17 million to $24 million, and adjusted EBITDA between $41 million and $48 million. As it relates to tariffs, our outlook includes the full impact of currently implemented tariff actions, including a 170% tariff on goods imported from China, 10% tariff on goods imported from all other countries of origin, and 25% tariffs on imported steel and aluminum. We estimate the total potential P&L impact from incremental 2025 tariffs currently in effect to the net amount of approximately $10 million, which has been factored into the updated guidance. We believe a portion of the larger tariff impact can be mitigated through strategic sourcing shifts to other countries and vendor cost concessions. There are several factors contributing to this number, including the timing of product receipts and deliveries as well as the mitigation actions already underway. Simply put, there are a lot of moving parts. While pricing remains a potential lever, no targeted increases are currently reflected in our guidance. We are actively monitoring the evolving trade environment and will respond with discipline. Let me briefly highlight the strategic investments we're making to drive long-term growth, operational efficiency, and client experience, and how they've impacted our 2025 guidance. In 2024, we completed important foundational upgrades, including a new warehouse management system at our Ohio distribution center, already delivering measurable improvements. Looking ahead to 2025 and beyond, we're investing in systems and infrastructure to support scalable growth. We're strategically transitioning distribution management at our Dallas distribution center in-house, building on proven expertise and implementing our warehouse management system there, with completion expected in the second quarter. We've begun rolling out a new payment platform expected to be fully implemented across all showrooms by late May, enabling mobile features like tap-to-pay, Apple Pay, and Google Pay while driving operational and expense efficiencies. We're also implementing a new inventory planning system to improve forecasting and inventory optimization and a new ERP platform at our North Carolina upholstery manufacturing facility to increase production visibility and improve efficiency as we scale. These strategic investments, as well as other key projects, are expected to be approximately $15 million to $20 million in SG&A in 2025, mostly in the second half of the year as system implementations ramp up. We are making these investments from a position of strength, debt-free with a healthy cash position and disciplined capital allocation. We believe these investments are foundational to expanding long-term margin potential and enhancing client experience. With the deep experienced team, we're confident in our ability to execute. In closing, our focus is clear. We're executing with discipline and staying agile. We believe our differentiated brand, resilient operating model, and long-term strategic priorities position us to navigate uncertainty and deliver sustainable value for our shareholders. We look forward to sharing continued progress and are pleased to welcome our new CFO, Michael Lee, to the next earnings call. Thank you for joining us. We are happy to take your questions.

Operator, Operator

The first question comes from Steven Forbes from Guggenheim Securities.

Julio Marquez, Analyst

This is Julio Marquez on for Steve. John, very quickly, just given the balance sheet strength in your comments around receipts from China at year-end, can you speak to how Arhaus will manage the holistic value proposition you're bringing to market? And I think you mentioned something about pricing and no plans yet, but I guess, how is the management thinking about protecting margin during 2025? Or do you see 2025 as a year to drive brand awareness and volume share capture?

John Reed, Founder, Chairman and CEO

Yes, you're going to have to clarify the first part of your question. But the second part is, yes, we feel good about our margins. With everything going on, it's very, very fluid, as you can all know and imagine. But our plans are to try to hold our margin as it is and proceed as business as usual. We're going to focus on what we can do. We cannot do the things that are going on outside our control, but we know what we can control. We've been in business for decades. We've been through recessions and so on and so forth and crashes. And we know how to handle these kind of things and these times. We've always been extremely successful at it. We've always come out of them stronger than ever, and that's what we're planning on doing. We're focusing on the long term, and that includes healthy margins, healthy sales, and executing our plan. I'm sorry, what was the first part of your question?

Julio Marquez, Analyst

Just given your balance sheet strength and just some of the comments around like the receipts from China by year-end. Like anything you can provide on just the holistic value position and managing that.

John Reed, Founder, Chairman and CEO

The balance sheet is looking great. As I mentioned, we are committed to the long term, and we will continue to invest in the future. We will review our progress every 30 days, and make adjustments if necessary. Regarding China, we have not been as heavily invested there as many of our competitors, and our strong presence in the United States has put us in an excellent position. Achieving 1% by the end of the year is impressive, thanks to our long-standing partners both overseas and domestically. They are truly collaborative partners. If we need to make changes, we are also building new factories in other countries. Overall, we are in a strong position.

Julio Marquez, Analyst

Excellent. Just a very quick follow-up on consumer behavior. Are you guys seeing any change in engagement trends? I know you mentioned a meaningful step-up in sales over $5,000 and $10,000, but anything that's changed since early April that may have informed that change in sales guidance? Just curious of the data points that were considered behind the new outlook.

John Reed, Founder, Chairman and CEO

Yes. In April, we experienced what we referred to as Liberation Day, alongside the stock market crashing. This situation impacts everyone, including our customers who are savvy investors in the stock market. Such events cause uncertainty, which leads to soft sales. We believe this is the reason for the weaker sales figures in April. However, this is temporary; people will continue to buy furniture because they cherish their homes. The pandemic has actually benefitted the home business, particularly in high-quality products. There is some pent-up demand as customers may have delayed purchases for a few weeks or months. As for what occurred in April, you are all aware of the news just as I am.

Operator, Operator

The next question comes from the line of Seth Sigman from Barclays.

Unidentified Analyst, Analyst

This is Sabrina on for Seth. Regarding the low end of the comps guidance, can you just give more perspective on how you came up with that negative 5% number? And can you reconcile Q2 versus the drop-off implied for the rest of the year?

Ryan Brody, Senior Vice President of Finance

Yes. Based on the information we've shared regarding year-to-date demand comp performance, it has been quite inconsistent. The expansion of the guidance range reflects the possibility that this volatility may continue for the remainder of the year. We are, as John mentioned, regularly reassessing our situation every 30 days and making necessary adjustments to our plans. This is the primary factor driving our approach to address potential fluctuations throughout the year.

Operator, Operator

The next question comes from the line of Cristina Fernandez from Telsey Advisory Group.

Cristina Fernandez, Analyst

I wanted to ask about the tariff mitigation strategy. You talked about $10 million embedded in the guidance for the impact. I guess, how much of that do you think can be mitigated versus strategic from strategic sourcing shifts and vendor concessions? And can you talk about the timing of how that $10 million will flow through the rest of the year?

John Reed, Founder, Chairman and CEO

Yes, sure. I can start, and Ryan can fill us in on the timing of it. But as you know, every country has been put on a 10% tariff other than China, which is 170%. As we move stuff out of China, which we've done, I think, brilliantly, we're in great shape there. The other tariffs are the other tariffs. So that's what we're planning on. We have worked with our great, great partners to absorb some of that, and I'd be thrilled to announce every partner that we've talked to, every meaningful partner has really contributed and has really helped us. So what's left is the $10 million. And we think that's a pretty darn good number, a very good number, considering all these tariffs all over the world. And don't forget, a big, big part of our business is still produced right here in the United States. So that helps quite a bit as well. I don't know when it's going to flow through. Ryan can give you some more specifics on that.

Ryan Brody, Senior Vice President of Finance

In terms of timing, Q1 was not affected by this, and similarly, in April, we did not see any of these additional costs reflected in the profit and loss statement. We are anticipating the impact to arise later in the year. As mentioned, we aim for China receipts to be around 5% in Q3, which means the tariff impact would correlate with that decrease from China. However, this is subject to change based on when we receive and deliver inventory to customers. We have estimated an impact of about $10 million, primarily expected in the second half of the year.

Cristina Fernandez, Analyst

I would like to follow up on the real estate strategy. You are opening one or more new showrooms, and I was curious if you are finding better incremental real estate opportunities. I also noticed that you closed two design studios during the quarter. Can you discuss the strategy behind that? Were you disappointed with their performance, and how are you planning to approach that format in the future?

John Reed, Founder, Chairman and CEO

Sure. As we grow the business and open new showrooms, they are profitable and help build brand awareness, bringing more people to both the showrooms and the website. We're strategically focused on the long term rather than just this month or the next six months. We're committed to sustainable growth, and while developing new locations takes time, we're pleased to maintain our growth momentum. We encountered an opportunity that moved up into this year from our original plans for next year, and we're consistently seeking new opportunities as well. We're a dynamic yet disciplined company, ready to capitalize on opportunities as they arise. Exciting new prospects are on the horizon that we believe will significantly advance our business.

Operator, Operator

The next question comes from the line of Robert Ohmes from Bank of America Merrill Lynch.

Robert Ohmes, Analyst

Maybe one follow-up on the gross margin. Could you provide some insight regarding the increase in occupancy costs that applied pressure and how we should consider that when modeling gross margin for the remainder of the year? Additionally, do you have any thoughts on gross margin in the first quarter compared to what we might expect in the next three quarters?

Ryan Brody, Senior Vice President of Finance

Yes. As we mentioned on the call last quarter, we expect gross margin to be roughly flat to LY. So this is more of just a function of deleveraging off of the fixed costs related to showroom occupancy in Q1 because of the lower revenue versus what you'd see like in our Q2 guide for revenue.

Robert Ohmes, Analyst

Got you. That's helpful. Can you provide more insight on customer behavior regarding the record-high average order value? Are larger purchases holding up better compared to impulse buys? Additionally, could you share what people were doing during the quarter and what trends you might be seeing in April?

John Reed, Founder, Chairman and CEO

Yes, studying the sales of big-ticket and small-ticket items, we haven't seen any decline on either side, whether customers are coming in to buy a couple of pillows or furnishing an entire home. Jen can provide you with more details on this, as she closely monitors it.

Jennifer Porter, Chief Marketing and eCommerce Officer

We are very pleased to see increases in orders over $5,000 and $10,000. As we mentioned, we continue to experience solid strength, similar to what we observed at the end of last year when clients were working with interior designers on larger projects for rooms and homes. However, as John pointed out, there hasn't been a significant change in consumer behavior among any of our customer groups. For more detail on Q1 and April, Q1 was strong yet inconsistent, with increases in January and March, and a decline in February. April showed about a 10% decrease in sales, alongside reduced traffic. Nonetheless, we are excited to see that clients engaging with us, whether online or in showrooms, are still responding positively to our products and maintaining high purchase levels. Although there may be some reluctance influenced by the broader economic situation, leading to delays in commitments to projects, we believe this is merely a matter of timing. When customers are ready to enter our stores, they continue to respond well to our products, and we are pleased to see higher average order values.

Tara Atwood, Vice President of Investor Relations

And I would just add a little color to April. If you think about April, we also exited April a little bit stronger, and that might be slightly helpful.

Operator, Operator

The next question comes from the line of Andrew Carter from Stifel.

Andrew Carter, Analyst

I want to ask about the significant disconnect in comparable sales growth and comparable demand? I got that you were like double digits in November, December. You said 10% January. That should inform the quarter, and of course, deposits are up, I think, to 20% of trailing 12. So anything can you speak to there around kind of the extended delivery times for customers? Do you see any risk of cancellations?

John Reed, Founder, Chairman and CEO

We monitor cancellations closely, and there has been no change in that area. Demand for the product remains strong, even after the news and excitement in April. Overall, there are no cancellations to report. While there might be some minor issues, they haven't affected the situation at all. I checked the data yesterday, and everything looks good year-to-date.

Andrew Carter, Analyst

But then just also kind of focusing in within that, how much of delivery times or wait times increased for customers? And have you had to go back? This is just focusing on the deposits and the disconnect.

John Reed, Founder, Chairman and CEO

Yes, we haven't seen any change in that. A lot of customers are still making large purchases and are waiting for their homes to be constructed before we can deliver. We're holding a good amount of products, but the percentage of orders hasn't changed compared to the past year. We aren't noticing any significant changes in that area either. There is always a segment of customers who aren't ready yet because they are behind on renovations or other reasons. However, once they are ready, we are prepared. Our inventory and delivery capabilities are in excellent shape, and we can provide consumers with their products when they need them.

Ryan Brody, Senior Vice President of Finance

The increase in client deposits you're referring to reflects the difference between the demand side, where we indicated a 4.1% comparable increase in Q1, and the lower net revenue performance in the same quarter. This accounts for the increase seen in Q1. Looking ahead to our Q2 guidance, we aim for the high end of the range with a plus 5% comparable increase on the delivered side, which is when we expect to see that flow through the profit and loss statement.

Operator, Operator

The next question comes from the line of Peter Benedict from Baird.

Peter Benedict, Analyst

I apologize for missing part of the call and if this question has already been addressed. I'm interested in the consumer response to the changes in the discount levels related to the buy more, save more spend threshold. I understand you've mentioned some strong performance at higher price points. Are you really noticing a significant change in consumer engagement when comparing the 20% and 25% off pairings to the 15% to 20% off pairings? I'm curious about your thoughts on this and how you plan to approach your pricing strategy moving forward.

John Reed, Founder, Chairman and CEO

Yes. What we like about this model is it can be incredibly flexible. And as we started this model back in the fall of last year, we saw that it's working very well. Customers are responding. They're trading up. So if they're close to a threshold, they'll trade up. So they can get to it, which makes perfect sense, and we love that. So the different percentages, we're playing around with to see what responds, what doesn't respond. If 20% or 15% responds just as well as a 25%, then we adjust things every month. And that's what's nice about the model is we can adjust it and we're very flexible. So we're seeing certainly the higher percentages, obviously, customers are going to take it. And they've been responding and trading up even more so because of that. So we've been pleased with what we've seen.

Operator, Operator

The next question comes from the line of Jeremy Hamblin from Craig-Hallum.

Jeremy Hamblin, Analyst

I wanted to discuss the timing of the showroom openings. Given the recent softening in overall orders and demand trends, are you noticing any impact on the newer showrooms? Looking ahead, considering the ongoing macro uncertainty, what is the plan for showroom openings in 2026? Will you maintain the current number and locations, or is there a possibility of a more moderate opening schedule?

John Reed, Founder, Chairman and CEO

Yes. As you can imagine, you sign leases years in advance, and you get locked in for the next year or so. But with that said, we decided as a management team that we've got, we think, the best model in the business. We got the best product. We're executing very well. And we see no reason to slow down for '26 and '27 and so forth. We're in a great cash position. We can fund these things and not be at all scared about running out of cash or so forth. So again, we're in it for the long term. And in 2027, we think business is going to be good. If business slows down for a while here, as I've seen for many, many years, it'll come back, and there's pent-up demand. When there's pent-up demand, if you're ready to capture that, you take more market share. And if we have new stores, that's even more new market share. So that's exactly what we're planning on doing.

Ryan Brody, Senior Vice President of Finance

I think we expect to see maybe slight deleverage, but not as pronounced as what you saw in Q1.

Jeremy Hamblin, Analyst

Okay. And then implying that product margin would be up year-over-year?

Ryan Brody, Senior Vice President of Finance

Approximately, yes, slightly, yes. That's the main other piece that would be offsetting the occupancy side when I mentioned earlier on the call that we expect gross margin to be approximately flat year-over-year.

Operator, Operator

We take the next question from the line of Simeon Gutman from Morgan Stanley.

Simeon Gutman, Analyst

I wanted to follow up on gross margin for a sec. The outlook for the total year being flat, and yet the sales outlook, it looks like it's getting worse, and the main factor for the first quarter was occupancy deleverage. And then on top of that, you mentioned that you have this $10 million tariff hit, but you're not putting anything back into price. It didn't sound like you're raising price. So how does this flat gross margin come out unless you're planning to offset with product margin in other places?

Ryan Brody, Senior Vice President of Finance

Yes. So in general, if you recall, the second half of the last year wasn't our strongest performance. So this year, we're up against some easier comps starting in May from a demand comp perspective. And as we talked about earlier, we layered in the volume discount starting in October, and we've been pretty happy with the results so far. And so there's puts and takes across the P&L and our estimates for the second half of the year. But we still expect it to be roughly flat year-over-year.

Simeon Gutman, Analyst

Okay. And then as a follow-up, the new space productivity that our models punch out, it's in the 40s. I think you probably have a more accurate number, and you said you're happy with new store performance. What does that look like? Because I think ours is affected by the timing. And then if you take like mature comp and then implied in the back half, I think it's somewhere down high single, maybe low double digits. So what's happening at non-new stores? Is it maturation? Is it just a soft market? Is there some cannibalization happening? Can you talk about the performance in more mature stores?

Ryan Brody, Senior Vice President of Finance

Yes, you're correct. From the back half, yes, we have implied, on the demand comp side, a high single-digit comp in the back half of the year, which as mentioned earlier, reflects a continuation of the choppiness that we've seen from April year-to-date. Yes, there's definitely a component to when they open and when we actually start to see deliveries flow through.

Operator, Operator

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

Tara Atwood, Vice President of Investor Relations

Thank you, everyone, for joining the call. We appreciate your time, and have a great day.

John Reed, Founder, Chairman and CEO

Thanks, everybody.

Ryan Brody, Senior Vice President of Finance

Thank you, everyone.

Operator, Operator

Thank you. Ladies and gentlemen, thank you for your participation and interest in Arhaus. You may now disconnect your lines.