Arhaus, Inc. (ARHS) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reflects mixed signals: weak Q4 financials with declining net income and EBITDA, offset by optimistic full-year guidance and strategic investments. The Q&A highlights risks like tariff impacts and inventory issues, yet management remains confident in growth potential and margin improvements. With a market cap of ~$2.39 billion, the stock is likely to remain stable, as positive long-term strategies counterbalance short-term financial challenges.
Key Financial Performance
Net Revenue Record net revenue of $1.38 billion, up 8.5% year-over-year. This growth reflects the strength of the company's model and the effectiveness of its showroom growth strategy and differentiated product offerings.
Gross Profit Gross profit was $536 million, up 7% versus last year. The increase was primarily driven by higher net revenue. However, gross margin decreased by 50 basis points to 38.9% of net revenue, primarily due to higher showroom occupancy costs associated with expansion.
Selling, General, and Administrative (SG&A) Expenses SG&A expenses increased 7.7% to $447 million, driven by higher corporate expenses and strategic investments in supply chain, technology, and warehouse-related areas, as well as higher selling expenses related to new showrooms. SG&A load decreased by 30 basis points to 32.4% of net revenue, reflecting modest improvement in operating leverage.
Net Income Net income was $67 million, a decrease of 1.9% versus last year. This decline was primarily due to showroom expansion and continued investment in the business.
Adjusted EBITDA Adjusted EBITDA was $145 million, an increase of 8.9% versus last year. Adjusted EBITDA margin remained flat at 10.5%, demonstrating disciplined expense management and healthy operating performance.
Cash and Cash Equivalents Cash and cash equivalents totaled $253 million, up 28.3% year-over-year, enhancing financial flexibility.
Net Merchandising Inventory Net merchandising inventory was $339 million, up 14.1% year-over-year. This increase was due to incremental tariff impacts, investments in best sellers and new product introductions, and inventory to support new showroom openings and relocations.
Free Cash Flow Free cash flow was $59 million for the year, reflecting strong operating cash flow of $137 million and net cash used in investing activities of $78 million.
Fourth Quarter Net Revenue Net revenue for the fourth quarter was $365 million, up 5.1% year-over-year. This performance was driven by the showroom growth strategy and differentiated product offerings.
Fourth Quarter Gross Profit Gross profit for the fourth quarter was $139 million, up 0.3% year-over-year. Gross margin decreased by 190 basis points to 38.1%, primarily due to an increase in inventory reserves related to obsolete inventory and higher showroom occupancy costs.
Fourth Quarter Net Income Net income for the fourth quarter decreased by 29.1% to $15 million. This decline was attributed to increased inventory reserves, higher showroom occupancy costs, and strategic investments in technology.
Fourth Quarter Adjusted EBITDA Adjusted EBITDA for the fourth quarter declined by 15.1% to $35 million, primarily due to increased inventory reserves, higher showroom occupancy costs, and strategic investments in technology.
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Operating Highlights
Customization: Customization continued to gain momentum, reaching impressive written sales growth. Expanded domestic upholstery capabilities in North Carolina manufacturing facility supported this growth.
Outdoor Collection: Largest launch in Arhaus history featuring premium teak and artisan-crafted all-weather materials, combining traditional design with modern performance.
Product Innovation: 2025 marked one of the strongest periods of product innovation, with a focus on richer colors, patterns, and textures. Clients are increasingly leaning into highly customizable models.
Showroom Expansion: Since 2019, showroom footprint grew by over 50%. In 2025, 13 showroom projects were completed, ending the year with 107 showrooms. Approximately 90% of sales came from clients within 50 miles of a showroom.
Trade Channel Opportunity: The U.S. interior design market is approximately $27 billion, presenting significant opportunities for Arhaus to expand its trade channel reach.
Domestic Manufacturing: Approximately 70% of upholstery sourcing in 2025 was domestic, with the largest portion produced in the North Carolina facility, ensuring better control over design, lead times, and quality.
Technology Investments: Initiated a multi-year digital transformation to replace legacy systems with a modern integrated platform, with a total investment of $30 million through 2030.
Distribution Optimization: Brought distribution management of the Dallas facility in-house, improving speed, reliability, and consistency across the network.
Resilience in High-End Market: Despite macroeconomic challenges, high-end clients continued to invest in quality and customization, reinforcing Arhaus' premium positioning.
Sourcing Flexibility: Diversified sourcing strategy across North America, Europe, and Asia, with 32% of total receipts sourced domestically in 2025, providing resilience against trade policy changes.
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Risk or Challenges
Macroeconomic Volatility: The company faces challenges from macroeconomic volatility, including softer housing turnover, tariffs, and broader economic uncertainty, which could impact consumer spending and demand for its products.
Inventory Management: Higher inventory reserves related to obsolete inventory were noted, which could lead to financial inefficiencies and increased costs.
Tariff Impacts: Incremental tariff impacts were significant in 2025, and the company anticipates $30 million to $40 million in tariff-related costs in 2026, which could pressure margins and profitability.
Showroom Expansion Costs: Higher showroom occupancy costs associated with expansion have impacted gross margins and net income, reflecting the financial burden of growth initiatives.
Technology Investments: The company is in the early stages of a multiyear digital transformation with significant costs ($30 million through 2030), which could strain financial resources in the short term.
Promotional Timing Shifts: Temporary softness in sales was observed due to promotional timing shifts, which could affect quarterly performance and revenue predictability.
Economic Sensitivity of High-End Clients: While high-end clients have shown resilience, their spending is still subject to economic conditions, which could defer or reduce sales during periods of uncertainty.
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Guidance & Outlook
Revenue Expectations: For the full year 2026, Arhaus expects net revenue between $1.43 billion and $1.47 billion, representing a year-over-year growth rate of 3.7% to 6.6%. For the first quarter of 2026, net revenue is projected between $300 million and $320 million, reflecting a year-over-year growth rate of -3.7% to +2.8%.
Comparable Delivered Sales: For 2026, comparable delivered sales are expected to range from flat to +3%. For the first quarter of 2026, comparable delivered sales are projected to range from -5% to +1%.
Net Income: For 2026, net income is expected to range between $66 million and $75 million. For the first quarter of 2026, net income is projected between $0 and $5 million.
Adjusted EBITDA: For 2026, adjusted EBITDA is expected to range between $150 million and $161 million. For the first quarter of 2026, adjusted EBITDA is projected between $13 million and $20 million.
Tariff Impacts: In 2026, tariff impacts are estimated to be in the range of $30 million to $40 million. The company plans to mitigate these impacts through vendor negotiations, sourcing shifts, and operational efficiencies.
Showroom Expansion: In 2026, Arhaus plans to complete approximately 10 to 14 total showroom projects, including 4 to 6 new openings and 6 to 8 relocations, renovations, or expansions.
Strategic Investments: Arhaus plans to invest approximately $12 million in 2026 and $10 million in 2027 as part of a multiyear digital transformation to modernize its technology infrastructure. Cash outflows will taper in 2028, transitioning to a steady-state run rate of $2 million annually through 2030.
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Shareholder Return Plan
Special Cash Dividend: The Board of Directors declared a special cash dividend of $0.35 per share of outstanding common stock. This marks the second time a special dividend has been issued since the company's IPO. The dividend reflects a disciplined capital allocation strategy, balancing investments in showroom growth, technology, and distribution infrastructure while returning excess capital to shareholders.
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Key Q&A
Q:What are the key drivers of leverage going into next year, and why is the first quarter guidance weaker than the rest of the year?
A:The key drivers of leverage include expanding margins through delivery efficiencies, operating effectiveness, and improving product mix. The first quarter guidance is weaker due to weather-related softness, store closures, delays in spring catalog mailing, and incremental promotions issued in February to reengage customers. Full-year guidance remains confident with expected business growth of 3.7% to 6.6% and EBITDA growth of 3.2% to 10.9%.
Q:How is the company addressing tariff headwinds and pricing strategies?
A:The company has been nimble with pricing and promotions to protect margins. They took selective pricing actions in October and used promotions as a lever. The new tariff range is lower than previously quoted, with the high end at $40 million. The company continues to invest in supplier relationships and streamline operations to mitigate tariff impacts.
Q:What is the rationale behind the obsolete inventory reference, and how is the company assessing inventory health?
A:The company decided to take a loss on obsolete inventory to focus clearance centers on other items. Investments in warehouse management systems have improved inventory insights. Overall inventory health is strong, with improvements in inventory turnover and valuation controls. The company is focused on optimizing inventory further.
Q:What are the expectations for gross margin improvement in the upcoming year?
A:Gross margin improvement is expected from delivery efficiencies (60-70 basis points), product margin enhancements (30-40 basis points), and premiumizing the portfolio. However, there will be a 30-40 basis point headwind from showroom occupancy costs. Overall, modest margin improvement is anticipated.
Q:What is the growth potential of the trade business, and how will the new trade program incentivize external designers?
A:The trade business is a significant growth area, targeting the $27 billion U.S. market. The company offers a one-stop shop for designers, providing comprehensive services and products. Adjustments in compensation and building a new team are expected to drive growth and attract more trade members.
Q:What is the company's real estate strategy, and what are the learnings from operating larger and smaller showrooms?
A:The company is flexible with showroom sizes, ranging from 14,000 to 40,000 square feet, depending on the market. Larger showrooms, like the 40,000 square foot Pasadena store, allow for more design centers and product testing, while smaller stores, like the 14,000 square foot Bozeman store, are also profitable. The company is learning from both formats.
Q:What factors contributed to the strong gross margin performance in the fourth quarter?
A:Strong gross margin performance was driven by improvements in Average Order Value (AOV), contributions from upholstery and decor (margin accretive), and strong special order performance. These factors align with the company's focus on trade channels and interior designer partnerships.
Q:Is the company seeing an inflection in business demand, and what is the outlook for written sales in 2026?
A:The company is optimistic about building momentum, driven by innovative product offerings and changing customer tastes. While January softness clouds the picture, the company remains confident in its full-year guidance and expects continued growth in written sales.
Q:What is the long-term outlook for EBITDA growth, and what are the key levers for achieving it?
A:The company aims for low double-digit EBITDA growth, with expectations of SG&A leverage and distribution network efficiencies. Digital transformation and economies of scale are key levers. The company targets EBITDA margins of 16%-18% over the next 4-5 years, up from current levels.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the quantum of pricing actions taken in October and the exact impact of promotions on margins. Additionally, while they expressed confidence in the trade business and showroom strategies, they did not quantify the expected growth or provide detailed metrics for success.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CEO
Clients
Customization
Full
Home
artisan world
channel
client designer
color pattern
commentary
confidence
custom
cycle
decade
demand differentiation
design service
designer showroom
durability model
end client
end market
experience environment
finish
focus
generation
home trade
hundred fabric
life
manufacturing
model craftsmanship
portion
product showroom
project
record
relationship
room home
sale client
silhouette
space
texture
work
year product
ARHS Transcript
Arhaus, Inc. (ARHS) Q4 2025 Earnings Call Transcript
Unknown2-26
The earnings call reflects mixed signals: weak Q4 financials with declining net income and EBITDA, offset by optimistic full-year guidance and strategic investments. The Q&A highlights risks like tariff impacts and inventory issues, yet management remains confident in growth potential and margin improvements. With a market cap of ~$2.39 billion, the stock is likely to remain stable, as positive long-term strategies counterbalance short-term financial challenges.
Arhaus, Inc. (ARHS) Presents at Morgan Stanley Global Consumer & Retail Conference 2025 Transcript
Neutral12-2
Arhaus, Inc. (ARHS) Q3 2025 Earnings Call Transcript
Positive11-6
The earnings call highlights strong strategic initiatives, such as new product launches and showroom expansions, which are positively received by customers. Despite some macroeconomic concerns, the company's optimistic guidance and proactive tariff management strategies are encouraging. The Q&A section reinforces positive sentiment with strong September demand and effective pricing strategies. While there are some uncertainties, the overall sentiment is positive, suggesting a potential stock price increase of 2% to 8% over the next two weeks.
Arhaus, Inc. (ARHS) Q2 2025 Earnings Call Transcript
Unknown8-8
The earnings call presents a mixed sentiment. The company shows strength in product development and market strategy, with positive aspects like market share gains, successful programs, and product launches. However, there's uncertainty in Q4 guidance and tariff headwinds, indicating potential risks. Financial performance and expenses appear steady, but the lack of detailed guidance raises concerns. Overall, the sentiment is balanced, leading to a neutral stock price prediction.
ARHS Report
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Where does this earnings call transcript come from?
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Why do some answers appear as “Unclear” or “Inaudible”?
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They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
