Arhaus Inc

Previous wording

The following discussion contains references to the three months ended March 31, 2024 and March 31, 2023, which represents the condensed consolidated financial results of Arhaus, Inc. and subsidiaries for the three months ended March 31, 2024 and March 31, 2023, respectively.

Current wording

The following discussion contains references to thesix and three months ended June 30, 2024 and June 30, 2023, which represents the condensed consolidated financial results of Arhaus, Inc. and subsidiaries for thesix and three months ended June 30, 2024 and June 30, 2023, respectively.

Previous wording

As of March 31, 2024, we operated 92 Showrooms, 80 with in-home interior designers. At December 31, 2023, we operated 92 Showrooms, 78 with in-home interior designers.

Current wording

As of June 30, 2024, we operated 97 Showrooms, 84 with in-home interior designers. At December 31, 2023, we operated 92 Showrooms, 78 with in-home interior designers.

Previous wording

For the three months ended March 31, 2024, we generated $295.2 million of net revenue,$115.1 million of gross margin and $15.1 million of net and comprehensive income.

Current wording

For the six months ended June 30, 2024, we generated $605.0 million of net revenue,$239.4 million of gross margin and $37.3 million of net and comprehensive income. For thethree months ended June 30, 2024, we generated $309.8 million of net revenue, $124.4 millionof gross margin and $22.2 million of net and comprehensive income.

Previous wording

EBITDA. We define EBITDA as consolidated net income before depreciation and amortization, interest expense (income), net and income tax expense.

Current wording

EBITDA. We define EBITDA as consolidated net income before depreciation and amortization, interest income, net and income tax expense.

Previous wording

(1)Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, severance, signing bonuses and recruiting costs. For the three months ended March 31, 2023, these expenses consisted largely of $0.3 million of severance, signing bonuses and recruiting costs and $0.1 million of public offering costs.

Current wording

(1)Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, severance, signing bonuses and recruiting costs. For the six months ended June 30, 2023, these expenses consisted largely of $0.3 million of severance, signing bonuses and recruiting costs and $0.1 million of public offering costs.

Previous wording

Net revenue decreased $9.4 million, or 3.1%, to $295.2 million in the three months ended March 31, 2024 compared to $304.6 million in thethree months ended March 31, 2023. The decrease was driven primarily by the non-recurrence of prior year abnormal backlog deliveries and a weather-related impact on deliveries in January, partially offset by favorable demand versus prior year.

Current wording

Net revenue decreased $12.5 million, or 2.0%, to $605.0 million in the six months ended June 30, 2024 compared to $617.5 million in thesix months ended June 30, 2023. The decrease was driven primarily by the non-recurrence of prior year abnormal backlog deliveries and the implementation of our warehouse management system in our Ohio distribution center, partially offset by favorable demand versus prior year.

Previous wording

Gross margin decreased $13.2 million, or 10.3%, to $115.1 million in the three months ended March 31, 2024 compared to $128.2 million in thethree months ended March 31, 2023. Lower gross margin was primarily driven by the decrease in net revenue and increased Showroom costs of $4.0 million.

Current wording

Gross margin decreased $29.0 million, or 10.8%, to $239.4 million in the six months ended June 30, 2024 compared to $268.4 million in thesix months ended June 30, 2023. Lower gross margin was primarily driven by increased Showroom costs of $8.7 million, higher delivery and transportation costs of $2.7 million and lower product margin of $2.0 million related to promotional activity and lower net revenue.

Previous wording

As a percentage of net revenue, gross margin decreased 310 basis points to 39.0% of net revenue in the three months ended March 31, 2024 compared to 42.1% of net revenue in thethree months ended March 31, 2023. The gross margin decrease as a percentage of net revenue was primarily the result of higher Showroom costs, which increased 160 basis points, deleverage on fixed expenses of 50 basis points and higher transportation costs, which increased 40 basis points.

Current wording

As a percentage of net revenue, gross margin decreased 390 basis points to 39.6% of net revenue in the six months ended June 30, 2024 compared to 43.5% of net revenue in thesix months ended June 30, 2023. The gross margin decrease as a percentage of net revenue was primarily the result of higher Showroom costs, which increased 160 basis points, a product margin rate decrease of 100 basis points and higher transportation costs, which increased 70 basis points.

Previous wording

Interest expense (income), net increased$1.3 million for thethree months ended March 31, 2024 compared to thethree months ended March 31, 2023, primarily due to an increase in interest income earned on interest-bearing checking accounts.

Current wording

Interest income, net increased to $2.0 million in the six months ended June 30, 2024 compared to $0.7 million in the six months ended June 30, 2023. The increase was primarily due to interest income earned on interest-bearing checking accounts.

Previous wording

Income tax expense was $4.8 million in the three months ended March 31, 2024 compared to $12.1 million in the three months ended March 31, 2023. The decrease was primarily due to lower income before taxes. Our effective tax rate was 24.2% and 26.2% for the three months ended March 31, 2024 and 2023, respectively.

Current wording

Income tax expense was $12.6 million in the six months ended June 30, 2024 compared to $26.5 million in the six months ended June 30, 2023. The decrease was primarily due to lower income before taxes. Our effective tax rate was 25.3% and 26.3% for the six months ended June 30, 2024 and June 30, 2023, respectively.

Previous wording

SG&A expenses increased $13.9 million, or 16.8%, to $96.7 million in the three months ended March 31, 2024 compared to $82.8 million in the three months ended March 31, 2023. The increase in SG&A expenses was primarily driven by a $6.6 million increase in selling expenses related to new Showrooms and demand strength, a $5.6 million increase in corporate expenses due to strategic investments, including supply chain and technology improvements, and increased warehouse expense of $1.4 million as our Dallas location continues to increase productivity.

Current wording

SG&A expenses increased $8.9 million, or 10.3%, to $95.0 million in the three months ended June 30, 2024 compared to $86.1 million in the three months ended June 30, 2023. The increase in SG&A expenses was primarily driven by increased selling expenses of $4.4 million primarily related to new Showrooms, a $3.4 million increase in corporate expenses due to strategic investments, including supply chain and technology improvements, and increased warehouse expenses of $1.7 million.

Previous wording

As a percentage of net revenue, SG&A expenses increased 560 basis points to 32.8% of net revenue in the three months ended March 31, 2024 compared to 27.2% of net revenue in thethree months ended March 31, 2023.

Current wording

As a percentage of net revenue, SG&A expenses increased 320 basis points to 30.7% of net revenue in the three months ended June 30, 2024 compared to 27.5% of net revenue in the three months ended June 30, 2023.

Previous wording

Net and comprehensive income decreased $19.0 million to $15.1 million in the three months ended March 31, 2024 compared to $34.1 million in the three months ended March 31, 2023. The decrease was driven by the factors described above.

Current wording

Net and comprehensive income decreased $18.0 million to $22.2 million in the three months ended June 30, 2024 compared to $40.2 million in the three months ended June 30, 2023. The decrease was driven by the factors described above.

Previous wording

Our primary cash needs have historically been for merchandise inventories, payroll, marketing catalogs, Showroom rent, 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 March 31, 2024, we had cash and cash equivalents of $233.2 million.

Current wording

Our primary cash needs have historically been for merchandise inventories, payroll, Showroom rent, marketing catalogs, 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 June 30, 2024, we had cash and cash equivalents of $174.2 million.

Previous wording

For the three months ended March 31, 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.

Current wording

For the six months ended June 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.

Previous wording

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.

Current wording

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 six months ended June 30, 2024, the Company paid out $70.1 million of the aforementioned special cash dividend on its Class A and Class B common stock.

Previous wording

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 minimum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at March 31, 2024 and 1.50% at March 31, 2023), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.

Current wording

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 minimum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing

Previous wording

For the three months ended March 31, 2024, net cash provided by operating activities was $36.8 million and consisted of net income of $15.1 million and an increase of non-cash items of $26.0 million, which were partially offset by a change in working capital and other activities of $4.3 million. The use of cash from working capital was primarily driven by an increase in merchandise inventory of $14.1 million, an increase in prepaid and other assets of $5.8 million, a decrease in accrued expenses of $5.1 million, a decrease in accounts payable of $4.8 million, and a decrease in operating lease liabilities of $4.2 million primarily due to payments made under the related lease agreements which was partially offset by an increase in client deposits of $29.1 million in the three months ended March 31, 2024.

Current wording

For the six months ended June 30, 2024, net cash provided by operating activities was $84.3 million and consisted of net income of $37.3 million and an increase of non-cash items of $57.6 million, which were partially offset by a change in working capital and other activities of $10.6 million. The use of cash from working capital was primarily driven by an increase in merchandise inventory of $19.3 million, an increase in prepaid and other assets of $11.5 million, a decrease in accrued expenses of $11.3 million, a decrease in operating lease liabilities of $10.7 million primarily due to payments made under the related lease agreements, which was partially offset by an increase in client deposits of $36.5 million and an increase in accounts payable of $4.6 million in the six months ended June 30, 2024.

Previous wording

For thethree months ended March 31, 2023, net cash provided by operating activities was $10.9 million and consisted of net income of $34.1 million and increases of non-cash items of $25.1 million, which was partially offset by a change in working capital and other activities of $48.4 million. The use of cash from working capital was primarily driven by a decrease in accrued expenses of $13.3 million, a decrease in accounts payable of $12.6 million, a decrease in operating lease liabilities of $10.6 million primarily due to payments made under the related lease agreements, an increase in merchandise inventory of $5.8 million, a decrease in client deposits of $4.7 million primarily due to improved delivery of our backlog orders and lower demand comparable growth and an increase in prepaid and other assets of $1.3 million in thethree months ended March 31, 2023.

Current wording

For thesix months ended June 30, 2023, net cash provided by operating activities was $64.2 million and consisted of net income of $74.3 million and increases of non-cash items of $49.4 million, which was partially offset by a change in working capital and other activities of $59.5 million. The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $17.3 million primarily due to payments made under the related lease agreements, a decrease in accrued expenses of $14.8 million, a decrease in accounts payable of $10.5 million, a decrease in client deposits of $9.2 million primarily due to improved delivery of our backlog orders and lower demand comparable growth and an increase in merchandise inventory of $8.5 million in thesix months ended June 30, 2023.

Previous wording

For the three months ended March 31, 2024, net cash used in investing activities was $25.9 million primarily due to investments in Showrooms, information technology and systems infrastructure and strategic investments in our supply chain.

Current wording

For the six months ended June 30, 2024, net cash used in investing activities was $62.2 million primarily due to investments in Showrooms, strategic investments in our supply chain, and information technology and systems infrastructure.

Previous wording

For thethree months ended March 31, 2023, net cash used in investing activities was $11.4 million primarily due to investments in Showrooms, supply chain expansion and information technology and systems infrastructure.

Current wording

For thesix months ended June 30, 2023, net cash used in investing activities was $34.9 million primarily due to investments in Showrooms, supply chain expansion and information technology and systems infrastructure.

Previous wording

Total capital expenditures, net of landlord contributions increased by $4.6 million in the three months ended March 31, 2024 compared to thethree months ended March 31, 2023.

Current wording

Total capital expenditures, net of landlord contributions increased by $16.0 million in the six months ended June 30, 2024 compared to thesix months ended June 30, 2023.

Previous wording

For thethree months ended March 31, 2024, net cash used in financing activities was $0.8 million primarily due to the repurchase of shares for payment of withholding taxes for equity based compensation.

Current wording

For thesix months ended June 30, 2023, net cash used in financing activities was $0.5 million primarily due to the repurchase of shares for payment of withholding taxes for equity based compensation.