Arhaus Inc

Previous 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.

Current wording

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

Previous wording

Revision of Previously Issued Condensed Consolidated Financial Statements

Current wording

Restatement and Revision of Previously Issued Condensed Consolidated Financial Statements

Previous wording

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been revised to give effect to the 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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 thethree months ended September 30, 2024, we generated $319.1 million of net revenue, $123.1 millionof gross margin and $9.9 million of net and comprehensive income.

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 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.

Current wording

(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.

Previous 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.

Current wording

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 thenine months ended September 30, 2023. The decrease was driven primarily by the non-recurrence of prior year abnormal backlog deliveries.

Previous 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.

Current wording

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 thenine 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.

Previous 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.

Current wording

As a percentage of net revenue, gross margin decreased 310 basis points to 39.2% of net revenue in the nine months ended September 30, 2024 compared to 42.3% of net revenue in thenine 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.

Previous wording

SG&A expenses increased $22.8 million, or 13.5%, to $191.7 million in the six months ended June 30, 2024 compared to $168.9 million in the six months ended June 30, 2023. The increase in SG&A expenses was primarily driven by an $11.0 million increase in selling expenses primarily related to new Showrooms, a $9.0 million increase in corporate expenses due to strategic investments including supply chain and technology improvements, and increased warehouse expenses of $3.1 million.

Current wording

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.

Previous wording

As a percentage of net revenue, SG&A expenses increased 430 basis points to 31.7% of net revenue in the six months ended June 30, 2024 compared to 27.4% of net revenue in thesix months ended June 30, 2023.

Current wording

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 thenine months ended September 30, 2023.

Previous 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.

Current wording

Interest income, net increased to $2.6 million in the nine months ended September 30, 2024 compared to $1.7 million in the nine months ended September 30, 2023. The increase was primarily due to interest income earned.

Previous 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.

Current wording

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.

Previous wording

Net and comprehensive income decreased $37.0 million to $37.3 million in the six months ended June 30, 2024 compared to $74.3 million in the six months ended June 30, 2023. The decrease was driven by the factors described above.

Current wording

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.

Previous wording

Net revenue decreased $3.1 million, or 1.0%, to $309.8 million in the three months ended June 30, 2024 compared to $312.9 million in the three 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.

Current wording

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.

Previous wording

Gross margin decreased $15.7 million, or 11.2%, to $124.4 million in the three months ended June 30, 2024 compared to $140.1 million in the three months ended June 30, 2023. The decrease was due to higher Showroom costs of $4.7 million, lower product margin of $4.5 million related to promotional activity and lower net revenue, and $2.6 million of increased delivery and transportation costs.

Current wording

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.

Previous wording

As a percentage of net revenue, gross margin decreased 470 basis points to 40.1% of net revenue in the three months ended June 30, 2024 compared to 44.8% of net revenue in the three months ended June 30, 2023. The gross margin decrease as a percentage of net revenue was primarily the result of a product margin rate decrease of 180 basis points, higher Showroom costs, which increased 160 basis points, and higher delivery and transportation costs, which increased 90 basis points as a percentage of net revenue.

Current wording

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.

Previous 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.

Current wording

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.

Previous wording

Interest income, net increased to $0.6 million in the three months ended June 30, 2024 compared to $0.5 million in the three months ended June 30, 2023. The increase was primarily due to interest income earned on interest-bearing checking accounts.

Current wording

Interest income, net decreased to $0.5 million in the three months ended September 30, 2024 compared to $1.1 million in the three months ended September 30, 2023. The decrease was primarily due to lower interest income earned.

Previous wording

Income taxes were $7.8 million in the three months ended June 30, 2024 compared to $14.4 million in the three months ended June 30, 2023. Our effective tax rate was 26.0% and 26.3% for the three months ended June 30, 2024 and June 30, 2023, respectively.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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 equivalentsof $177.7 million.

Previous 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.

Current wording

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.

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. 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.

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 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.

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

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 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.

Previous wording

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. The 2021 Credit Facility expires on November 8, 2026. At June 30, 2024, we hadno 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.

Current wording

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.

Previous 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.

Current wording

For the nine months ended September 30, 2024, net cash provided by operating activi ties 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.

Previous 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.

Current wording

For thenine 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 thenine months ended September 30, 2023.

Previous 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.

Current wording

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.

Previous 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.

Current wording

For thenine 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.

Previous 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.

Current wording

Total capital expenditures, net of landlord contributions increased by$14.8 million in the nine months ended September 30, 2024 compared to thenine months ended September 30, 2023.

Previous wording

We anticipate our total company funded capital expenditures to be between $80 million and $100 million in fiscal year 2024, primarily related to the opening of new Showrooms.

Current wording

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.

Previous wording

For thesix months ended June 30, 2024, net cash used in financing activities was $71.1 million primarily due to the payment of the special dividend on our Class A and Class B common stock.

Current wording

For thenine 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.

Previous 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.

Current wording

For thenine 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.