Notes to Condensed Consolidated Financial Statements
(Unaudited)
1
1. Nature of Business and Basis of Presentation
Nature of Business
Arhaus, Inc. (the “Company,” “we” or “Arhaus”) is a Delaware corporation and is a premium retailer in the home furnishings market, specializing in livable luxury supported by heirloom quality merchandise. We offer merchandise in a number of categories, including furniture, outdoor, lighting, textiles and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. We position our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. The Company operated 101 Showrooms as of September 30, 2024.
Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process.
The accompanying condensed consolidated balance sheets at September 30, 2024 and December 31, 2023, the condensed consolidated statements of comprehensive income and changes in stockholders’ equity for the nine andthree months ended September 30, 2024 and September 30, 2023, the condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and September 30, 2023 and the related interim condensed consolidated disclosures are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position at September 30, 2024, the results of operations and changes in stockholders’ equity for the nine andthree months ended September 30, 2024 and cash flows for the nine months ended September 30, 2024. The condensed consolidated balance sheet as of December 31, 2023 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The results for the nine and three months ended September 30, 2024 and September 30, 2023 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accounting estimates and other matters included within our condensed consolidated financial statements and notes to the condensed consolidated financial statements we have assessed include, but were not limited to, revenue recognition, including a reserve for merchandise returns, inventory reserves, impairment of long-lived assets and fair value of financial instruments which include, but are not limited to, accounts receivable, payables and lease obligations.
Client Deposits
Client deposits represent payments made by clients on orders. At the time of order, the Company collects deposits for all orders equivalent to at least 50 percent of the clients’ purchase price. Orders are recognized as revenue when the
Notes to Condensed Consolidated Financial Statements
(Unaudited)
merchandise is delivered to the client and at the time of delivery the client deposit is no longer recorded as a liability. The Company expects substantially all client deposits as of September 30, 2024 will be recognized as net revenue within the next 12 months as the performance obligations are satisfied.
Gift Cards
The Company sells gift cards to clients in our Showrooms and through our website. Such gift cards do not have expiration dates. We defer revenue when payments are received in advance of performance for unsatisfied obligations related to our gift cards. The liability related to unredeemed gift cards at September 30, 2024 and December 31, 2023 of $0.4 million and $0.5 million, respectively, is recorded in the accrued other expenses line item of the condensed consolidated balance sheets. The Company recognizes income associated with breakage proportional to actual gift card redemptions. For the nine and three months ended September 30, 2024, breakage income was minimal. For the nine and three months ended September 30, 2023, breakage income was $0.8 million and $0.1 million, respectively.
Fair Values of Financial Instruments
The Company’s primary financial instruments are cash and cash equivalent investments, accounts receivable, payables, lease obligations and equity based compensation instruments. Due to the short-term maturities of cash and cash equivalent investments, accounts receivable and payables, the Company believes the fair values of these instruments approximate their respective carrying values at September 30, 2024 and December 31, 2023. See Note 5 — Leases for discussion of our lease obligations and Note 6 —Equity Based Compensation for discussion of our equity based compensation instruments.
The Company has established a hierarchy to measure our financial instruments at fair value, which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
Level 1Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.
From time to time, the Company invests in Level 1 cash and cash equivalent investments such as money market funds and interest-bearing checking accounts. For the nine and three months ended September 30, 2024, the Company earned $6.7 million and$1.9 million, respectively, in interest income. For the nine and three months ended September 30, 2023, interest income was $5.8 million and$2.5 million, respectively, which is included within interest income, net on our condensed consolidated statements of comprehensive income.
Accounts Receivable
The Company’s accounts receivables are $1.2 million and $2.4 million, respectively, at September 30, 2024 and December 31, 2023, net of allowance for expected credit losses of $0.3 million and $0.6 million, respectively. The allowance for expected credit losses is determined by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the client’s current ability to pay its obligations, and the current and future condition of the general economy and industry as a whole. Accounts receivable are written off when they become uncollectible and any payments subsequently received on such receivables are credited to the allowance for expected credit losses. Accounts receivable are recorded at the invoiced amount and do not bear interest.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (amounts in thousands):
September 30,
December 31,
2024
2023
Prepaid expenses
$
13,398
$
9,374
Right of return asset
1,867
2,844
Prepaid advertising
1,032
610
Prepaid cloud computing arrangements, net(1)
8,554
4,253
Deposits
5,513
4,470
Other current assets
2,166
4,753
Total prepaid and other current assets
$
32,530
$
26,304
(1) Presented net of accumulated amortization of $5.2 million and $2.7 million as of September 30, 2024 and December 31, 2023, respectively.
Restatement and Revision to Previously Issued Consolidated Financial Statements and Interim Unaudited Condensed Consolidated Financial Statements
As previously disclosed, in preparation of the December 31, 2023 consolidated financial statements, the Company identified an error within the unaudited condensed consolidated balance sheetsrelated to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets rather than property, furniture and equipment, net. The error resulted in inaccurate cash flows ascribed to operating and investing activities in the unaudited condensed consolidated statement of cash flows and the Company concluded to restate the interim unaudited condensed consolidated financial statements as presented below in Adjustment No.1.
In preparation of the March 31, 2024 unaudited condensed consolidated financial statements, the Company identified an additional error within the unaudited condensed consolidated balance sheets related to certain cash receipts from landlord reimbursements prior to showroom completion being incorrectly included in property, furniture and equipment, net. The error resulted in inaccurate cash flows ascribed to operating and investing activities in the unaudited condensed consolidated statement of cash flows and the Company concluded to revise the consolidated financial statements and restate the interim unaudited condensed consolidated financial statements as presented below in Adjustment No. 2.
The Company has evaluated the errors both quantitatively and qualitatively and concluded they were not material, individually or in the aggregate, to the prior period consolidated financial statements and interim unaudited condensed consolidated financial statements. The Company concluded to further revise: the unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of cash flows as of and for the three months ended March 31, 2023 and 2022, and as of and for the six months ended June 30, 2023 and 2022; the unaudited condensed consolidated balance sheet as of September 30, 2022; the consolidated balance sheets as of December 31, 2023 and 2022; and the consolidated statements of cash flows for the years ended December 31, 2023, 2022 and 2021.
In connection with the revisions, the Company determined it is appropriate to correct for certain other immaterial errors. The Company will effect the revisions of the consolidated financial statements for 2023 and 2022 within our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. The Company effected the restatement of the interim unaudited condensed consolidated financial statements for the nine and three months ended September 30, 2023 within the previously filed Quarterly Report on Form 10-Q/A.
The Company has also revised impacted amounts within the accompanying notes to the unaudited condensed consolidated financial statements, as applicable.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Recently Issued Accounting Standards
New Accounting Standards Adopted in Fiscal 2024
The Company adopted Accounting Standards Updates (“ASU”) 2023-01 — Leases (Topic 842): Common Control Arrangements in the nine months ended September 30, 2024. The adoption of ASU 2023-01 did not have a material impact on our accounting policies or our condensed consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
The following table summarizes accounting pronouncements which we have not yet adopted but will be adopted in the upcoming fiscal year. ASU 2023-07 is effective for annual periods beginning after December 15, 2023. We believe the adoption will not have a material impact on our accounting policies, financial position or results of operations but could require additional disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. We believe the adoption will not have a material impact on our accounting policies, financial position or results of operations but could require additional disclosures.
ASU
Description
Adoption Date
ASU 2023-07
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
Fiscal Year 2024
ASU 2023-09
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
Fiscal Year 2025
3. Merchandise Warranties
The Company warrants certain merchandise to be free of defects in both construction materials and workmanship from the date the performance obligation was fulfilled to the client for three to ten years depending on the merchandise category. The Company accounts for merchandise warranties by accruing an estimated liability when we recognize revenue on the sale of warrantied merchandise. We estimate future warranty claims based on claim experience which includes materials and labor costs to perform the repairs or replace products. We use judgment in making our estimates. We record differences between our estimated and actual costs when the differences are known.
A reconciliation of the changes in our limited merchandise warranty liability is as follows (amounts in thousands):
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Balance as of beginning of period
$
7,084
$
6,375
$
7,106
$
6,578
Accruals during the period
9,504
10,292
3,128
3,543
Settlements during the period
(9,369)
(9,854)
(3,015)
(3,308)
Balance as of end of the period(1)
$
7,219
$
6,813
$
7,219
$
6,813
(1) $4.1 million and $4.1 million were recorded in accrued other expenses at September 30, 2024 and December 31, 2023, respectively. The remainder is recorded in other long-term liabilities on our condensed consolidated balance sheets.
We recorded accruals during the periods presented in the table above, primarily to reflect charges that relate to limited merchandise warranties issued during the respective periods.
4. Debt
On November 8, 2021, the Company entered into a revolving credit facility (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment in an amount equal to the lesser of (a) $10.0 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan in an amount equal to the lesser of (a) $5.0 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility was initially $50.0 million. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a maximum rent-adjusted total
Notes to Condensed Consolidated Financial Statements
(Unaudited)
leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility initially bore variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at September 30, 2023), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.
On December 9, 2022, the Company amended the 2021 Credit Facility to increase the revolving credit commitment thereunder by $25.0 million. After giving effect to such increase, the aggregate amount of all commitments under the 2021 Credit Facility is $75.0 million.
On August 30, 2024, the Company amended the 2021 Credit Facility to adjust the index rate from the Bloomberg Short-Term Bank Yield Index to Term Secured Overnight Financing Rate. The 2021 Credit Facility bears variable interest rates at the prevailing Term Secured Overnight Financing Rate plus the applicable margin (1.75% at September 30, 2024). The 2021 Credit Facility expires on November 8, 2026.
At September 30, 2024 and December 31, 2023, we hadno borrowings on the 2021 Credit Facility. Deferred financing costs related to the 2021 Credit Facility of $0.4 million and $0.4 million as of September 30, 2024 and December 31, 2023, respectively, are recorded in other noncurrent assets on the condensed consolidated balance sheets and will be amortized over the term of the 2021 Credit Facility on a straight-line basis. Accumulated amortization related to deferred financing costs for the 2021 Credit Facility was $0.2 million as of September 30, 2024 and $0.1 million as of December 31, 2023.
The Company was in compliance with all applicable debt covenants at September 30, 2024 and December 31, 2023, and expects to remain in compliance over the next 12 months.
5. Leases
The Company leases real estate and equipment under operating and finance leases, some of which are from related parties as discussed in Note 10—Related Party Transactions. The most significant obligations under these lease agreements require the payments of periodic rentals, real estate taxes, insurance and maintenance costs. Depending on particular Showroom leases, the Company can also owe a percentage rent payment if particular Showrooms meet certain sales figures.
The following table summarizes the amounts recognized in our condensed consolidated balance sheets related to leases (amounts in thousands):
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of lease cost recognized within our condensed consolidated statements of comprehensive income for the nine and three months ended September 30, 2024 and September 30, 2023 are as follows (amounts in thousands):
Nine months ended
Three months ended
September 30,
September 30,
Condensed Consolidated Statements of Comprehensive Income Classification
2024
2023
2024
2023
Lease costs:
Operating lease costs
Cost of goods sold
$
38,807
$
31,894
$
13,463
$
11,518
Operating lease costs
Selling, general and administrative expenses
7,689
7,375
2,594
2,518
Finance lease costs
Amortization of right-of-use assets
Selling, general and administrative expenses
1,774
1,838
519
758
Interest expense on lease liabilities
Interest income, net
4,017
3,852
1,416
1,316
Variable lease costs(1)
Cost of goods sold
26,974
28,474
7,412
9,327
Short term lease costs
Selling, general and administrative expenses
107
165
68
29
Total lease costs
$
79,368
$
73,598
$
25,472
$
25,466
(1) For the nine and three months ended September 30, 2024, there were no month-to-month lease costs. For the nine months ended September 30, 2023, total lease costs includes $0.4 million of month-to-month lease costs. The Company did not have month-to-month lease costs for the three months ended September 30, 2023.
We often have options to renew lease terms for Showrooms and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination option at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease terms are as follows:
Nine months ended
September 30,
Weighted Average Remaining Lease Term (In Years)
2024
2023
Operating leases
9.04
9.27
Finance leases
20.25
21.02
When readily determinable, we use the discount rate implicit within the lease as determined at the time of lease commencement. However, the discount rate implicit within many of our leases is generally not determinable at the time of lease commencement and therefore the Company determines the discount rate based on its incremental borrowing rate (“IBR”). For leases in which the discount rate was not explicit, the Company utilized a market-based approach to estimate the IBR, which required significant judgment. The Company estimated the base IBR based on an analysis of (i) yields on the Company’s 2021 Credit Facility, as well as comparable companies and (ii) unsecured yields and discount rates. The Company applied adjustments to the base IBRs to account for full collateralization and lease term. The weighted average discount rates used to measure our lease liabilities are as follows:
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Future lease liabilities at September 30, 2024 are as follows (amounts in thousands):
Year Ending December 31,
Operating Lease Liabilities (1)
Finance Lease Liabilities
Total Lease Liabilities
Remainder of 2024
$
18,348
$
1,463
$
19,811
2025
77,630
5,851
83,481
2026
72,149
6,309
78,458
2027
68,519
6,110
74,629
2028
63,029
5,635
68,664
2029
60,192
5,224
65,416
Thereafter
256,557
104,712
361,269
Total lease payments
616,424
135,304
751,728
Less: Amounts representing interest
(149,345)
(80,860)
(230,205)
Total
$
467,079
$
54,444
$
521,523
(1) Includes leases with related parties. See Note 10—Related Party Transactions for amounts leased from related parties.
At September 30, 2024, the Company has entered into leases for Showrooms and equipment which have not yet commenced with expected lease terms ranging from 2 to 15 years. The aggregate minimum rental payments over the term of the leases of approximately $114.5 million are not included in the above table.
Supplemental cash flow information related to leases for the nine months ended September 30, 2024 and September 30, 2023 is as follows (amounts in thousands):
Nine months ended
September 30,
2024
2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
50,178
$
41,759
Operating cash flows for finance leases
3,920
3,642
Financing cash flows for finance leases
686
503
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
72,473
$
76,375
Finance leases
185
2,813
6. Equity Based Compensation
Activity of the Company’s Restricted Stock for the nine months ended September 30, 2024 and related equity based compensation expense for the nine and three months ended September 30, 2024 and September 30, 2023 are summarized in the following tables (amounts in thousands, except share and per share data):
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Equity based compensation expense - Restricted Stock(1)
$
1,829
$
2,028
$
498
$
668
(1) Total unrecognized equity based compensation to be recognized in future periods is $3.4 million at September 30, 2024, and will be recognized over a weighted average period of 1.68 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
The Arhaus, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) was adopted on November 8, 2021. The 2021 Plan authorizes the Company the ability to grant stock options (either incentive or non-qualified), stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance share units (“PSUs”) and other stock-based awards with respect to our Class A common stock to our employees, officers, consultants, advisors and directors. The maximum number of Class A common stock that may be granted under the 2021 Plan is 11,205,100 shares.
Per the 2021 Plan, each RSU and PSU represents a contingent right to receive one share of the Company’s Class A common stock upon vesting. The RSUs granted to award recipients vest in one-third increments on each of the first, second and third anniversary of the date of grant, provided that the award recipient continues to serve the Company through the applicable vesting date (“Continuous Service”). If the award recipient’s Continuous Service terminates for any reason other than death, disability or in connection with a change in control (as such terms are defined in the 2021 Plan), unless the Compensation Committee of the Board of Directors determines otherwise, all RSUs that are unvested at the time of such termination shall be forfeited and canceled immediately without consideration. RSU and PSU awards contain forfeitable rights to dividend equivalents. Dividend equivalents for outstanding awards are accrued when dividends are declared on the Company’s common stock but are not paid until the awards vest, and dividend equivalents accrued for awards that ultimately do not vest are forfeited. The RSUs issued to certain members of the Board of Directors will generally vest on the one-year anniversary of the grant date.
The number of PSUs earned will be based on the Company’s financial performance as measured against pre-established target goals for cumulative demand revenue and cumulative adjusted EBITDA (the “Performance Goals”) over the applicable performance period. PSUs will vest as of the end of the performance period subject to the award recipient’s Continuous Service, but will not settle and payout until the number of PSUs earned is determined by the Compensation Committee. The award recipient may earn between 0% and 200% of the PSU target award based on the Company’s achievement of the Performance Goals. The Company accounts for forfeitures as they occur.
Activity of the Company’s PSU and RSU awards for the nine months ended September 30, 2024 and their related equity based compensation expense for the nine and three months ended September 30, 2024 and September 30, 2023 are summarized in the following tables (amounts in thousands, except share and per share data):
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Equity based compensation (benefit) expense - PSUs(1)
$
(158)
$
1,662
$
128
$
417
Equity based compensation expense - RSUs(2)
$
3,681
$
2,062
$
1,375
$
763
(1) Total unrecognized equity based compensation for the PSUs to be recognized in future periods is $2.6 million at September 30, 2024, and will be recognized over a weighted average period of 1.90 years. Equity based compensation (benefit) expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
(2) Total unrecognized equity based compensation for the RSUs to be recognized in future periods is $9.1 million at September 30, 2024, and will be recognized over a weighted average period of 2.04 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
7. Segment Reporting
Our chief operating decision maker is our Chief Executive Officer (“CEO”), who reviews financial information presented on a consolidated basis for purposes of making decisions, assessing financial performance and allocating resources. We operate our business as one operating segment and therefore we have one reportable segment that offers an assortment of merchandise across a number of categories, including furniture, outdoor, lighting, textiles, and décor. The assortment of merchandise can be purchased through our Retail and eCommerce merchandise sales channels.
The majority of our net revenue is generated through sales to clients in the United States. Sales to clients outside of the United States are not significant. Further, no single client represents ten percent or more of our net revenue.
Net revenue by merchandise sales channel for the nine and three months ended September 30, 2024 and September 30, 2023 is as follows (amounts in thousands):
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Retail
$
766,124
$
768,624
$
264,788
$
261,786
eCommerce
157,972
175,072
54,345
64,443
Total net revenue
$
924,096
$
943,696
$
319,133
$
326,229
8. Net and Comprehensive Income per Share
Basic and diluted net and comprehensive income per share for the nine and three months ended September 30, 2024 and September 30, 2023, was calculated by dividing net and comprehensive income by the number of basic and diluted weighted-average common shares outstanding. The Company has elected to not adjust net and comprehensive income for forfeitable dividend equivalents, when declared, related to unvested equity awards. The Company will recognize dividends paid on common shares when the dividend equivalents are no longer forfeitable, such as if the contingency is met or the share-based payment awards vest into common shares.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Basic and diluted net and comprehensive income per share are as follows (amounts in thousands, except per share data):
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Numerator
Net and comprehensive income
$
47,256
$
94,023
$
9,923
$
19,741
Denominator—Weighted Average Shares Outstanding
Weighted-average number of common shares outstanding, basic
139,990,522
139,365,870
140,166,990
139,628,776
Effect of dilutive restricted stock (1) (2)
741,815
655,800
555,925
512,123
Weighted-average number of common shares outstanding, diluted
140,732,337
140,021,670
140,722,915
140,140,899
Net and Comprehensive Income Per Share
Net and comprehensive income per share, basic
$
0.34
$
0.67
$
0.07
$
0.14
Net and comprehensive income per share, diluted
$
0.34
$
0.67
$
0.07
$
0.14
(1) During the nine and three months ended September 30, 2024, 397,337 and 495,462, respectively, shares of unvested restricted stock and RSUs were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the nine and three months ended September 30, 2023, 736,173 and 416,123, respectively, shares of unvested restricted stock and RSUs were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
(2) During the nine and three months ended September 30, 2024, 518,564 PSUs were excluded from the calculation of the effect of dilutive restricted stock because they did not meet the required performance criteria. During the nine and three months ended September 30, 2023, 704,952 PSUs were excluded from the calculation of the effect of dilutive restricted stock because they did not meet the required performance criteria.
9. Commitments and Contingencies
The Company is involved in litigation and claims that are incidental to its business. Although the outcome of these matters cannot be determined at the present time, management of the Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. As of September 30, 2024, the Company has accrued legal costs of $6.1 million that are recorded in accrued other expenses in our condensed consolidated balance sheet.
From time to time, the Company has received inquiries from a number of state and local taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions are currently conducting tax audits of the Company's records. The Company collects, or has accrued for, taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company. The Company adjusts its accrual when facts relating to specific exposures warrant such adjustment. As of September 30, 2024 and December 31, 2023, we recorded liabilities of $0.7 million and $0.2 million, respectively, in accrued other expenses on the condensed consolidated balance sheets for non-income tax matters that were probable and reasonably estimable.
In August 2023, the Company committed to make a $10.0 million donation to The Nature Conservancy. As of September 30, 2024, we have paid the donation commitment in full.
On February 29, 2024, the Board of Directors of the Company declared a special cash dividend on the Company’s Class A and Class B common stock of $0.50 per share, payable April 4, 2024, to shareholders of record at the close of business on March 21, 2024 (the “Record Date”). During the nine months ended September 30, 2024, the Company paid out $70.1 million of the aforementioned special cash dividend on its Class A and Class B common stock. As of September 30, 2024,
Notes to Condensed Consolidated Financial Statements
(Unaudited)
dividends payable of $0.5 million is recorded in accrued other expenses and $0.3 million is included in other long-term liabilities on ourcondensed consolidated balance sheet.
The remaining dividends payable balance recorded on our condensed consolidated balance sheet relates to dividend equivalents on outstanding equity awards under the Company’s equity incentive plans that were unvested as of the Record Date.
10. Related Party Transactions
Leasing transactions
In November 2000, the Company entered into a lease agreement with Pagoda Partners, LLC, a company of which John Reed, our CEO, indirectly owns 50%, for our warehouse in Walton Hills, Ohio. The base lease term was 17 years with a 5-year renewal option. In August 2020, the Company amended the lease agreement to extend the lease term to April 2024. The monthly rental payments were $0.1 million. In July 2023, the Company amended the lease agreement to extend the lease term to April 2034 with one additional 5-year renewal option. The monthly rental payments range from $0.1 million to $0.2 million. Rent expense was $1.3 million and $1.1 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. Rent expense was $0.4 million and $0.4 million for the three months ended September 30, 2024 and September 30, 2023, respectively.
In July 2010, the Company entered into a lease agreement with Brooklyn Arhaus, a company of which our CEO and Mr. Beargie, a Director of the Company, own 85% and 15%, respectively, for our Outlet in Brooklyn, Ohio. The base lease term is 15 years with no lease renewal options. The monthly rental payments are $20 thousand. Rent expense was $0.2 million and $0.2 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. Rent expense was $0.1 million and $0.1 million for the three months ended September 30, 2024 and September 30, 2023, respectively.
In March 2021, the Company entered into a lease agreement with Premier Conover, LLC, a company of which our CEO indirectly owns 40%, for a distribution center and manufacturing building, for which construction was completed in the fourth quarter of 2021. The base lease term is for 12 years, with a 10-year renewal option and two additional 5-year renewal options at the higher of the minimum base rent or the fair market rent at the time of renewal execution. The monthly rental payments range from $0.2 million to $0.3 million during the 12-year base lease term and from $0.4 million to $0.5 million during the 10-year renewal period. Rent expense was $3.0 million and $3.0 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. Rent expense was $1.0 million and $1.0 million for the three months ended September 30, 2024 and September 30, 2023, respectively.
Other transactions
The accounts payable due to related parties for state and federal income tax refunds were $0.2 million and $2.3 million at September 30, 2024 and December 31, 2023, respectively, and are included within accounts payable on the condensed consolidated balance sheets.
11. Income Taxes
Income tax expenses were $14.2 million and $31.8 million in the nine months ended September 30, 2024 and September 30, 2023, respectively. Income tax expenses were $1.5 million and $5.3 million for the three months ended September 30, 2024 and September 30, 2023, respectively. The effective tax rate was 23.1% and 25.3% for the nine months ended September 30, 2024 and September 30, 2023, respectively. The effective tax rate was 13.4% and 21.2% for the three months ended September 30, 2024 and September 30, 2023, respectively.
As of September 30, 2024, no unrecognized tax benefits have been recognized. The Company files income tax returns in the U.S. and various state and local jurisdictions. The tax years after 2019 remain open to examination by the state taxing jurisdictions in which the Company is subject to tax. As of September 30, 2024, the Company was not under examination by the Internal Revenue Service.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2023. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology, including, but not limited to, “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Past performance is not a guarantee of future results or returns and no representation or warranty is made regarding future performance. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond our control that could cause our actual results, performance or achievements to be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following:
•Our ability to manage and maintain the growth rate of our business;
•Our ability to obtain quality merchandise in sufficient quantities;
•Disruption in our receiving and distribution system, including delays in the integration of our distribution centers and the possibility that we may not realize the anticipated benefits of multiple distribution centers;
•The possibility of cyberattacks and our ability to maintain adequate cybersecurity systems and procedures;
•Loss, corruption and misappropriation of data and information relating to clients and employees;
•Changes in and compliance with applicable data privacy rules and regulations;
•Risks as a result of constraints in our supply chain;
•A failure of our vendors to meet our quality standards;
•Declines in general economic conditions that affect consumer confidence and consumer spending that could adversely affect our revenue;
•Our ability to anticipate changes in consumer preferences;
•Risks related to maintaining and increasing Showroom traffic and sales;
•Our ability to compete in our market;
•Our ability to adequately protect our intellectual property;
•Compliance with applicable governmental regulations;
•Effectively managing our eCommerce business and digital marketing efforts;
•Our reliance on third-party transportation carriers and risks associated with freight and transportation costs; and
•Compliance with SEC rules and regulations as a public reporting company.
The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2023. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. These statements are based on information available to us as of the date of this Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The following discussion contains references to the nine and three months ended September 30, 2024 and September 30, 2023, which represents the condensed consolidated financial results of Arhaus, Inc. and subsidiaries for the nine and three months ended September 30, 2024 and September 30, 2023, respectively.
Restatement and Revision of Previously Issued Condensed Consolidated Financial Statements
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been revised to give effect to the restatement and revision of our condensed consolidated balance sheets and condensed consolidated statements of cash flows, as more fully described in Note 1 - Nature of Business and Basis of Presentation to the Notes to Condensed Consolidated Financial Statements.
Arhaus is a rapidly growing lifestyle brand and premium retailer in the U.S. home furnishings market, specializing in livable luxury supported by globally-sourced, heirloom-quality merchandise. We offer a differentiated direct-to-consumer approach to furniture and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. We offer merchandise assortments across a number of categories, including furniture, outdoor, lighting, textiles and décor. Our products, designed to be used and enjoyed throughout the home, are sourced directly from factories and vendors with no wholesale or dealer markup, allowing us to offer an exclusive assortment at an attractive value. Our direct sourcing network consists of more than 400 vendors, some of whom we have had relationships with since our founding. Our product development teams work alongside our direct sourcing partners to bring to market proprietary merchandise that is a great value to clients, while delivering attractive margins.
We believe in providing a dynamic and welcoming experience in our Showrooms and online with the conviction that retail is theater. Our national omni-channel business positions our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle. Our seasoned sales associates and in-home designers provide expert advice and assistance to our client base that drives significant client engagement. Our omni-channel model allows clients to begin or end their shopping journey online, while also experiencing our theater-like Showrooms throughout the shopping journey.
As of September 30, 2024, we operated 101 Showrooms, 88 with in-home interior designers. At December 31, 2023, we operated 92 Showrooms, 78 with in-home interior designers.
September 30, 2024
December 31, 2023
Traditional Showrooms
83
80
Design Studios
11
8
Outlets
7
4
Total Showroom locations
101
92
Total square footage (in thousands)
1,623
1,438
For the nine months ended September 30, 2024, we generated $924.1 million of net revenue, $362.5 million of gross margin and $47.3 million of net and comprehensive income. For the three months ended September 30, 2024, we generated $319.1 million of net revenue, $123.1 million of gross margin and $9.9 million of net and comprehensive income.
How We Assess the Performance of Our Business
In addition to U.S. GAAP results, this Form 10-Q contains references to the non-GAAP financial measures below. We use these non-GAAP measures to help assess the performance of our business, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with U.S. GAAP, we believe that providing these non-GAAP financial measures is useful to our investors as they present an informative supplemental view of our results from period to period by removing the effect of non-recurring items.
The non-GAAP financial measures presented herein are specific to us and may not be comparable to similar measures disclosed by other companies because of differing methods used by other companies in calculating them. These measures are also not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect tax payments, debt service requirements and certain other cash costs that may recur in the future, including, among other things, cash requirements for working capital needs. Management compensates for these limitations by relying on our U.S. GAAP results in addition to using these non-GAAP financial measures. The non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We consider the following financial and operating measures that affect our results of operations:
Net Revenue and Demand. Net revenue is recognized when a client obtains control of the merchandise. We also track demand in our business which is a key performance indicator linked to the level of client orders placed. Demand is an operating metric that we use to measure the dollar value of orders (based on purchase price) at the time the order is placed, net of the dollar value of cancellations and returns (based on unpaid purchase price and amount credited to client). These orders are recognized as net revenue when a client obtains control of the merchandise. Because demand is measured net of cancellations, all demand will eventually become net revenue, with appropriate reserves, when delivered to the client.
Comparable Growth. Comparable growth is the year-over-year percentage change of the dollar value of orders delivered (based on purchase price), net of the dollar value of returns (based on amount credited to client), from comparable Showrooms and eCommerce, including through our catalogs and other mailings. This metric is a key performance indicator used by management to evaluate Showroom performance for locations that have been opened for at least 15 consecutive months, which enables management to view the performance of those Showrooms without the dollar value of orders delivered for new Showrooms being included. Comparable Showrooms are defined as permanent Showrooms open for at least 15 consecutive months, including relocations in the same market. Showrooms record demand immediately upon opening, while orders delivered take additional time because product must be delivered to the client. The dollar value of orders delivered for Outlet comparable locations is included.
Demand Comparable Growth. Demand comparable growth is the year-over-year percentage change of demand from our comparable Showrooms and eCommerce, including through our catalogs and other mailings. This metric is a key performance indicator used by management to evaluate Showroom demand performance for locations that have been opened for at least 13 consecutive months, which enables management to view the performance of those Showrooms without new Showroom demand included. For demand purposes, comparable Showrooms are defined as permanent Showrooms open for at least 13 consecutive months, including relocations in the same market. Outlet comparable location demand is included.
Demand comparable growth provides insight into business levels in a particular period by comparing the dollar value of orders (based on purchase price) placed in that period to the prior comparable period. Although these orders do not result in net revenue until the order is delivered at a later point in time, management utilizes this metric to evaluate core performance.
Comparable growth is an additional measure that management utilizes to compare the dollar value of orders delivered (based on purchase price) in a period compared to the prior comparable period. Since delivery generally coincides with recognition of net revenue, with appropriate reserves, comparable growth trends will more closely track trends in reported net revenue than demand comparable growth trends. While increases or decreases in demand comparable growth will translate into increases or decreases in comparable growth over time, the trends do not necessarily correlate in any particular period. This is partially due to the general lag in time between when an order is placed and when an order is delivered. When the time gap from order to delivery increases, due to supply chain challenges for example, it may take longer for comparable growth to reflect demand comparable growth. Notwithstanding these limitations, management considers it useful to assess both measures together to get a more complete picture of overall performance trends, and believes these measures can be useful to investors for the same purpose, when viewed together with our reported results and other metrics.
Gross Margin. Gross margin is equal to our net revenue less cost of goods sold. Cost of goods sold includes the direct cost of purchased merchandise, inventory reserves, inbound freight, all freight costs to get merchandise to our Showrooms, credit card fees, design, buying and allocation costs, our supply chain, such as product development and sourcing, occupancy costs related to Showroom operations, such as rent and common area maintenance for our leases, depreciation and amortization of leasehold improvements, equipment and other assets in our Showrooms. In addition, cost of goods sold includes all logistics costs associated with shipping product to our clients, partially offset by delivery fees collected from clients (recorded in net revenue on the condensed consolidated statements of comprehensive income).
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses include all operating costs not included in cost of goods sold. These expenses include payroll and payroll related expenses, Showroom expenses other than occupancy and expenses related to many of our operations at our distribution centers and corporate headquarters, including marketing, information technology, legal, human resources, utilities and depreciation and amortization expense. Payroll includes both fixed compensation and variable compensation. Variable compensation includes Showroom commissions and Showroom bonus compensation related to demand, likely before the client obtains control of the merchandise. Variable compensation is not significant in our eCommerce channel. All new Showroom opening expenses, other than occupancy, are included in SG&A expenses and are expensed as incurred. We expect certain of these expenses to continue to increase as we open new Showrooms, develop new product categories and otherwise pursue our current business initiatives. SG&A expenses as a percentage of net revenue are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are fixed.
EBITDA. We define EBITDA as consolidated net income before depreciation and amortization, interest income, net and income tax expense.
Adjusted EBITDA. We believe that adjusted EBITDA is a useful measure of operating performance as the adjustments eliminate items that we believe are not reflective of underlying operating performance in a particular period. Adjusted
EBITDA facilitates a comparison of our operating performance on a consistent basis from period-to-period and provides for a more complete understanding of factors and trends affecting our business.
Because adjusted EBITDA omits certain non-cash items and items that we believe are not reflective of underlying operating performance in a particular period, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and can be more reflective of our operating performance in a particular period. We also use adjusted EBITDA as a method for planning and forecasting overall expected performance and for evaluating, on a quarterly and annual basis, actual results against such expectations.
The following is a reconciliation of our net and comprehensive income to EBITDA and adjusted EBITDA for the periods presented (in thousands):
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Net and comprehensive income
$
47,256
$
94,023
$
9,923
$
19,741
Interest income, net
(2,582)
(1,731)
(544)
(1,080)
Income tax expense
14,186
31,771
1,542
5,297
Depreciation and amortization
27,895
21,439
10,186
7,299
EBITDA
86,755
145,502
21,107
31,257
Equity based compensation
5,352
5,752
2,001
1,848
Other expenses (1)
—
992
—
555
Adjusted EBITDA
$
92,107
$
152,246
$
23,108
$
33,660
(1)Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, severance and recruiting costs. For the nine and three months ended September 30, 2023, these expenses consisted largely of $0.7 million and $0.6 million of public offering costs, respectively.
Factors Affecting the Comparability of our Results of Operations
Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.
Showroom Openings and Closings
New Showrooms contribute incremental expense, new Showroom opening expense and net revenue to the Company. Our recent Showroom growth from January 1, 2023 to September 30, 2024 is summarized in the following table:
September 30, 2024
December 31, 2023
Showrooms open at beginning of period
92
81
Showrooms opened (1)
13
14
Showrooms closed for relocations
(4)
(3)
Showrooms closed permanently
—
—
Showrooms open at end of period
101
92
(1) Showrooms opened during the respective periods includes both new and relocated Showrooms.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes.
Condensed Consolidated Statements of Comprehensive Income Data (in thousands):
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Net revenue
$
924,096
$
943,696
$
319,133
$
326,229
Cost of goods sold
561,598
544,481
196,061
195,372
Gross margin
362,498
399,215
123,072
130,857
Selling, general and administrative expenses
304,085
275,890
112,401
106,977
Income from operations
58,413
123,325
10,671
23,880
Interest income, net
(2,582)
(1,731)
(544)
(1,080)
Other income
(447)
(738)
(250)
(78)
Income before taxes
61,442
125,794
11,465
25,038
Income tax expense
14,186
31,771
1,542
5,297
Net and comprehensive income
$
47,256
$
94,023
$
9,923
$
19,741
Other Operational Data (dollars in thousands):
Nine months ended
Three months ended
September 30,
September 30,
2024
2023
2024
2023
Net revenue
$
924,096
$
943,696
$
319,133
$
326,229
Comparable growth
(8.6)
%
4.8
%
(9.2)
%
(2.1)
%
Demand comparable growth
(4.6)
%
9.6
%
(11.3)
%
11.7
%
Gross margin as a % of net revenue
39.2
%
42.3
%
38.6
%
40.1
%
Selling, general and administrative expenses as a % of net revenue
32.9
%
29.2
%
35.2
%
32.8
%
Income from operations as a % of net revenue
6.3
%
13.1
%
3.3
%
7.3
%
Net and comprehensive income
$
47,256
$
94,023
$
9,923
$
19,741
Net and comprehensive income as a % of net revenue
5.1
%
10.0
%
3.1
%
6.1
%
Adjusted EBITDA(1)
$
92,107
$
152,246
$
23,108
$
33,660
Adjusted EBITDA as a % of net revenue
10.0
%
16.1
%
7.2
%
10.3
%
Total Showrooms at end of period
101
86
101
86
(1) See “How We Assess the Performance of Our Business,” for a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net and comprehensive income.
Comparison of the nine months ended September 30, 2024 and September 30, 2023
Net Revenue
Net revenue decreased $19.6 million, or 2.1%, to $924.1 million in the nine months ended September 30, 2024 compared to $943.7 million in the nine months ended September 30, 2023. The decrease was driven primarily by the non-recurrence of prior year abnormal backlog deliveries.
Gross Margin
Gross margin decreased $36.7 million, or 9.2%, to $362.5 million in the nine months ended September 30, 2024 compared to $399.2 million in the nine months ended September 30, 2023. Lower gross margin was primarily driven by lower net revenue, increased Showroom costs of $11.3 million and higher delivery and transportation costs of $3.0 million.
As a percentage of net revenue, gross margin decreased310 basis points to 39.2% of net revenue in the nine months ended September 30, 2024 compared to 42.3% of net revenue in the nine months ended September 30, 2023. The gross margin decrease as a percentage of net revenue was primarily the result of higher Showroom costs, which increased 140 basis points, a product margin rate decrease of 70 basis points and higher delivery and transportation costs, which increased 50 basis points.
Selling, General and Administrative Expenses
SG&A expenses increased $28.2 million, or 10.2%, to $304.1 million in the nine months ended September 30, 2024 compared to $275.9 million in the nine months ended September 30, 2023. The increase in SG&A expenses was due to an $11.7 million increase in selling expenses primarily related to new Showrooms and a $26.5 million increase in general and administrative costs primarily related to legal costs, marketing investments, strategic investments to support and drive the growth of the business, including supply chain and technology improvements and increased warehouse expenses. This was partially offset by the non-recurrence of a $10.0 million donation last year to The Nature Conservancy.
As a percentage of net revenue, SG&A expenses increased 370 basis points to 32.9% of net revenue in the nine months ended September 30, 2024 compared to 29.2% of net revenue in the nine months ended September 30, 2023.
Interest Income, net
Interest income, net increased to$2.6 million in the nine months ended September 30, 2024 compared to $1.7 millionin the nine months ended September 30, 2023. The increase was primarily due to interest income earned.
Income Taxes
Income tax expense was $14.2 million in the nine months ended September 30, 2024 compared to $31.8 million in the nine months ended September 30, 2023. The decrease was primarily due to lower income before taxes. Our effective tax rate was 23.1% and 25.3% for the nine months ended September 30, 2024 and September 30, 2023, respectively.
Net and Comprehensive Income
Net and comprehensive income decreased $46.7 million to $47.3 million in the nine months ended September 30, 2024 compared to $94.0 million in the nine months ended September 30, 2023. The decrease was driven by the factors described above.
Comparison of the three months ended September 30, 2024 and September 30, 2023
Net Revenue
Net revenue decreased $7.1 million, or 2.2%, to $319.1 million in the three months ended September 30, 2024 compared to $326.2 million in the three months ended September 30, 2023. The decrease was driven primarily by the non-recurrence of prior year abnormal backlog deliveries and lower total demand.
Gross Margin
Gross margin decreased $7.8 million, or 5.9%, to $123.1 million in the three months ended September 30, 2024 compared to $130.9 million in the three months ended September 30, 2023. The decrease was due to lower net revenue and higher Showroom costs of $2.6 million.
As a percentage of net revenue, gross margin decreased 150 basis points to 38.6% of net revenue in the three months ended September 30, 2024 compared to 40.1% of net revenue in the three months ended September 30, 2023. The gross margin decrease as a percentage of net revenue was primarily driven by higher Showroom costs, which increased 100 basis points, higher delivery and transportation costs, which increased 30 basis points as a percentage of net revenue and deleverage on lower net revenue.
Selling, General and Administrative Expenses
SG&A expenses increased $5.4 million, or 5.1%, to $112.4 million in the three months ended September 30, 2024 compared to $107.0 million in the three months ended September 30, 2023. The increase in SG&A expenses was primarily due to a $14.7 million increase in general and administrative costs primarily related to 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 non-recurrence of a $10.0 million donation last year to The Nature Conservancy.
As a percentage of net revenue, SG&A expenses increased 240 basis points to 35.2% of net revenue in the three months ended September 30, 2024 compared to 32.8% of net revenue in the three months ended September 30, 2023.
Interest Income, net
Interest income, net decreased to $0.5 million in the three months ended September 30, 2024 compared to $1.1 millioninthe three months ended September 30, 2023. The decrease was primarily due to lower interest income earned.
Income Taxes
Income taxes were $1.5 million in the three months ended September 30, 2024 compared to $5.3 million in the three months ended September 30, 2023. Our effective tax rate was 13.4% and 21.2% for the three months ended September 30, 2024 and September 30, 2023, respectively.
Net and Comprehensive Income
Net and comprehensive income decreased $9.8 million to $9.9 million in the three months ended September 30, 2024 compared to $19.7 million in the three months ended September 30, 2023. The decrease was driven by the factors described above.
Liquidity and Capital Resources
Liquidity Outlook
Our primary cash needs have historically been for merchandise inventories, payroll, Showroom rent, marketing catalogs and capital expenditures associated with opening new Showrooms and updating existing Showrooms, as well as the development of our infrastructure and information technology. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. As of September 30, 2024, we had cash and cash equivalents of $177.7 million.
For the nine months ended September 30, 2024, our principal sources of liquidity were cash flows from operations. We believe our operating cash flows will be sufficient to meet working capital requirements and fulfill other capital needs for at least the next 12 months, although we may enter into borrowing arrangements in the future.
While we do not require debt to fund our operations, our goal continues to be to position the Company to take advantage of the many opportunities that we may identify in connection with our business and operations. We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including new debt financing arrangements. In addition to funding the normal operations of our business, we have used our liquidity to fund investments and strategies such as growth initiatives, including supply chain and technology improvements. In addition, our needs and uses of capital may change in the future due to changes in our business or new opportunities that we choose to pursue. As of September 30, 2024, we have no material off-balance sheet arrangements.
On February 29, 2024, the Board of Directors of the Company declared a special cash dividend on the Company’s Class A and Class B common stock of $0.50 per share, payable April 4, 2024, to shareholders of record at the close of business on March 21, 2024. During the nine months ended September 30, 2024, the Company paid out $70.1 million of the aforementioned special cash dividend on its Class A and Class B common stock.
Credit Facility
In November 2021, the Company entered into a revolving credit facility (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment in an amount equal to the lesser of (a) $10.0 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan in an amount equal to the lesser of (a) $5.0 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility was initially $50.0 million. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a maximum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility initially bore variable interest rates at the
prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at September 30, 2023), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.
On December 9, 2022, the Company amended the 2021 Credit Facility to increase the revolving credit commitment thereunder by $25.0 million. After giving effect to such increase, the aggregate amount of all commitments under the 2021 Credit Facility is $75.0 million.
On August 30, 2024, the Company amended the 2021 Credit Facility to adjust the index rate from the Bloomberg Short-Term Bank Yield Index to Term Secured Overnight Financing Rate. The 2021 Credit Facility bears variable interest rates at the prevailing Term Secured Overnight Financing Rate plus the applicable margin (1.75% at September 30, 2024). The 2021 Credit Facility expires on November 8, 2026. At September 30, 2024, we had no borrowings on the 2021 Credit Facility. Refer to Note 4 — Debt to our condensed consolidated financial statements for further information on our 2021 Credit Facility.
Cash Flow Analysis
The following table provides a summary of our cash provided by operating, investing and financing activities (amounts in thousands):
Nine months ended
September 30,
2024
2023
Net cash provided by operating activities
$
115,426
$
147,870
Net cash used in investing activities
(88,686)
(58,475)
Net cash used in financing activities
(72,107)
(1,527)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(45,367)
$
87,868
Net cash provided by operating activities
Comparison of the nine months ended September 30, 2024 and September 30, 2023
Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, operating lease amortization, deferred income taxes, equity based compensation and the effect of changes in working capital and other activities.
For the nine months ended September 30, 2024, net cash provided by operating activities was $115.4 million and consisted of net income of $47.3 million and an increase of non-cash items of $85.4 million, which were partially offset by a change in working capital and other activities of $17.3 million. The use of cash from working capital was primarily driven by an increase in merchandise inventory of $40.3 million, a decrease in operating lease liabilities of $23.1 million primarily due to payments made under the related lease agreements, a decrease in accrued expenses of $8.1 million and an increase in prepaid and other assets of $6.5 million. This was partially offset by an increase in client deposits of $50.3 million and an increase in accounts payable of $9.0 million in the nine months ended September 30, 2024.
For the nine months ended September 30, 2023, net cash provided by operating activities was $147.9 million and consisted of net income of $94.0 million and an increase of non-cash items of $68.4 million, which were partially offset by a change in working capital and other activities of $14.6 million. The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $30.8 million primarily due to payments made under the related lease agreements, a decrease in accounts payable of $10.1 million and an increase in prepaid and other assets of $4.4 million. This was partially offset by a decrease in merchandise inventory of $17.4 million, an increase in client deposits of $9.8 million and an increase in accrued expenses of $3.5 million, in the nine months ended September 30, 2023.
Net cash used in investing activities
Investing activities consist primarily of capital expenditures related to investments in retail Showrooms, information technology and systems infrastructure, as well as supply chain investments.
Comparison of the nine months ended September 30, 2024 and September 30, 2023
For the nine months ended September 30, 2024, net cash used in investing activities was $88.7 million primarily due to investments in Showrooms, strategic investments in our supply chain, and information technology and systems infrastructure.
For the nine months ended September 30, 2023, net cash used in investing activities was $58.5 million primarily due to investments in Showrooms, supply chain expansion and information technology and systems infrastructure.
Capital Expenditures
Historically, we have invested significant capital expenditures in opening new Showrooms. These capital expenditures have increased in the past and may continue to increase in future periods as we open additional Showrooms. Our capital expenditures include expenditures related to investing activities and outflows of capital related to construction activities to design and build leasehold improvement assets. Certain lease arrangements require the landlord to fund a portion of the construction related costs through tenant improvement allowance payments directly to us. New Showrooms may require different levels of company-funded capital investment in the future.
Historical capital expenditures are summarized as follows (amounts in thousands):
Nine months ended
September 30,
2024
2023
Net cash used in investing activities
$
88,686
$
58,475
Less: Landlord contributions
27,365
11,940
Total capital expenditures, net of landlord contributions
$
61,321
$
46,535
Total capital expenditures, net of landlord contributions increased by $14.8 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.
We anticipate our total capital expenditures, net of landlord contributions to be approximately $80 million in fiscal year 2024, primarily related to the opening of new Showrooms.
Net cash used in financing activities
Comparison of the nine months ended September 30, 2024 and September 30, 2023
For the nine months ended September 30, 2024, net cash used in financing activities was $72.1 million primarily due to the payment of the special dividend on our Class A and Class B common stock.
For the nine months ended September 30, 2023, net cash used in financing activities was $1.5 million primarily due to the repurchase of shares for payment of withholding taxes for equity based compensation.
Critical Accounting Policies and Estimates
Accounting policies and estimates are considered critical when they require management to make subjective and complex judgments, estimates and assumptions about matters that have a material impact on the presentation of our financial statements and accompanying notes. For a description of our critical accounting policies and estimates, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
See Note 2 — Recently Issued Accounting Standards to our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rate fluctuations and the effects of economic uncertainty, which may affect the
prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.
Foreign Currency Exchange Risk
We believe foreign currency exchange rate fluctuations do not contain significant market risk to us due to the nature of our relationships with our vendors outside of the United States. We purchase the majority of our inventory from vendors outside of the United States in transactions that are primarily denominated in U.S. dollars and, as such, any foreign currency impact related to these international purchase transactions was not significant to us for the nine and three months ended September 30, 2024 and September 30, 2023, respectively. However, since we pay for the majority of our international purchases in U.S. dollars, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations. We currently do not use derivative instruments to manage this risk.
Interest Rate Risk
We are primarily exposed to interest rate risk with respect to borrowing under our 2021 Credit Facility and as of September 30, 2024, we have not drawn upon the 2021 Credit Facility. Based on the interest rate in the 2021 Credit Facility and to the extent borrowings were outstanding, we do not believe a 100 basis point change in interest rates would have a material impact on our financial condition or results of operations for the periods presented. We currently do not use derivative instruments to manage this risk.
Impact of Inflation
Inflation generally affects us by increasing our cost of labor, material, transportation, and our general costs. We have historically been able to recover these cost increases through price increases. However, we cannot reasonably estimate our ability to successfully recover any impact of inflation through price increases in the future. We currently do not use derivative instruments to manage this risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our CEO and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)) as of September 30, 2024. Based on their evaluation as of September 30, 2024, the CEO and CFO have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weaknesses in our internal control over financial reporting described below.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified four material weaknesses in our internal control over financial reporting.
•We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. Additionally, the lack of a sufficient number of professionals resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, amongst other things, insufficient segregation of duties in our finance and accounting functions. This material weakness contributed to the following additional material weaknesses.
•We did not design and maintain accounting policies, procedures and controls, or maintain documentary evidence of existing control activities over significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls over the period-end financial reporting process, the preparation and review of account reconciliations and journal entries, including segregation of duties and assessing the reliability of reports and spreadsheets used in controls.
•We did not design and maintain effective controls to address the identification of and accounting for certain non-routine or complex transactions, including the proper application of U.S. GAAP of such transactions. Specifically, we did not design and maintain controls to timely or appropriately account for our incentive unit plan.
These material weaknesses resulted in a restatement of our previously issued annual consolidated financial statements as of and for the years ended December 31, 2020 and 2019 principally related to selling, general and administrative expenses and other long-term liabilities, and misclassifications in the balance sheets and statements of comprehensive income. These material weaknesses also resulted in immaterial adjustments recorded prior to the issuance of the consolidated financial statements as of and for the year ended December 31, 2021 principally related to property, furniture and equipment, net; selling, general and administrative expenses; and misclassifications in the balance sheet and statement of cash flows.
In preparation of the December 31, 2023 consolidated financial statements and in preparation of the March 31, 2024 condensed consolidated financial statements, these material weaknesses resulted in restatements as of and for the interim period ended September 30, 2023 and revisions as of and for the annual periods ended December 31, 2023, 2022 and 2021, and as of and for the interim periods ended March 31, 2022, June 30, 2022, September 30, 2022, March 31, 2023 and June 30, 2023, principally related to prepaid and other current assets, property, furniture and equipment, net and operating lease liabilities, which resulted in misclassifications in the balance sheets and statements of cash flows and the timely recording of liabilities, operating right-of-use assets and operating lease liabilities. There were also immaterial misstatements. Additionally, each of the material weaknesses could result in misstatements to substantially all of our accounts or disclosures, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
•Lastly, we did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain: (i) program change management controls for financial systems to ensure that information technology program and data changes affecting financial applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored; and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.
These IT deficiencies did not result in material adjustments to our consolidated financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these IT deficiencies in the aggregate constitute a material weakness.
Remediation Activities
With the oversight of senior management and our Audit Committee, we have designed and begun to implement a remediation plan which includes:
•Updating our policies and procedures to establish and maintain effective segregation of duties for our accounting staff in relation to journal entries, reconciliations and other applicable processes.
•Designing and implementing internal financial reporting procedures and controls to improve the completeness, accuracy and timely preparation of financial reporting and disclosures inclusive of establishing an ongoing program to provide sufficient training to our finance and accounting staff.
•Enhancing the design and operation of user access control activities and procedures to ensure that access to IT applications and data is adequately restricted to appropriate personnel.
•Hiring additional competent and qualified technical accounting and financial reporting personnel with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements, including non-routine and complex transactions, to design, execute and/or provide appropriate oversight of activities related to internal control over financial reporting, or ICFR.
•Implementing additional program change management policies and procedures, control activities, and tools to ensure changes affecting key financial systems related to IT applications and underlying accounting records are identified, authorized, tested, and implemented appropriately.
•Designing and implementing a formal systems development lifecycle methodology and related program development controls to ensure significant IT change events are appropriately tested and approved.
•Enhancing the design and operation of control activities and procedures within the computer operations domain to ensure key batch jobs are monitored, processing failures are adequately resolved, and recovery capability is tested.
•Identifying and evaluating key IT dependencies including key reports, automated application controls, interfaces, and end user computer facilities.
•Enhancing the control activity design related to the review of our consolidated balance sheet and statement of cash flows to ensure the classification of operating and investing activities is appropriately presented in the statement of cash flows.
While the material weaknesses are not considered remediated until the related internal controls are designed, implemented, tested and deemed to be operating effectively, we have made progress under our remediation plan, including:
•Commenced the design and implementation of formal processes, policies, and procedures supporting our financial close process, including formalizing procedures over the review of financial statements.
•Commenced the design and implementation of policies and procedures to establish and maintain segregation of duties for our accounting staff in relation to journal entries and account reconciliations.
•Continue to hire additional competent and qualified technical accounting and financial reporting personnel with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements.
Although we have developed and begun to implement our plan to remediate the material weaknesses and believe, based on our evaluation to date, that the material weaknesses will be remediated in a timely fashion, we cannot project a specific timeline on when the plan will be fully implemented. The material weaknesses will not be remediated until the necessary internal controls have been designed, implemented, tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our consolidated financial statements. Moreover, we cannot provide assurance that we will not identify additional material weaknesses in our ICFR in the future. Until we remediate the material weaknesses, our ability to record, process and report financial information accurately, and to prepare our consolidated financial statements within the time periods specified by the rules and forms of the SEC, could be adversely affected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we have and we may become involved in legal proceedings arising in the ordinary course of business, including claims related to our employment practices, claims of intellectual property infringement and claims related to personal injuries and product liability for the products that we sell and in the Showrooms we operate. Any claims could result in litigation against us and could result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business. Defending such litigation is costly and can impose significant burdens on management and employees. Further, we could receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurance that favorable final outcomes will be obtained.
We are currently not a party to any legal proceedings, the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information with respect to repurchases of shares made by the Company during the three months ended September 30, 2024. The table reflects shares delivered to the Company by employees to satisfy tax withholding obligations due upon the vesting of restricted stock units. These shares were not repurchased in connection with any publicly announced share repurchase programs.
Period
Total number of shares purchased
Weighted average price paid per share
Total number of shares purchased as part of publicly announced plans
Approximate dollar value of shares that may yet be purchased under publicly announced plans
July 2024
—
$
—
—
$
—
August 2024
53,331
13.66
—
—
September 2024
—
—
—
—
Total
53,331
$
13.66
—
$
—
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
During the three months ended September 30, 2024, none of our directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K.
Second Amendment to Credit Agreement, dated as of August 30, 2024, among Arhaus, Inc., the Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A., as the Administrative Agent, the L/C Issuer and the Swingline Lender
Certificate of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith
101.INS
XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
Cover Page with Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)
Filed herewith
* The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates them by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 7th day of November, 2024.