Arhaus Inc

Previous wording

We have prepared this Management's Discussion and Analysis (“MD&A”) as an aid to understanding our financial results. It should be read together with the accompanying consolidated financial statements and related notes. It includes management’s analysis of past financial results and certain potential factors that may affect future results, potential future risks and approaches that may be used to manage those risks. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Report entitled “Special Note Regarding Forward-Looking Statements.” In addition to the discussion of potential risks discussed in MD&A, certain other risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Annual Report entitled “Risk Factors.”

Current wording

We have prepared this Management's Discussion and Analysis (“MD&A”) as an aid to understanding our financial results. It should be read together with the accompanying consolidated financial statements and related notes. It includes management’s analysis of past financial results and certain potential factors that may affect future results, potential future risks and approaches that may be used to manage those risks. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Annual Report entitled “Special Note Regarding Forward-Looking Statements.” In addition to the discussion of potential risks discussed in MD&A, certain other risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Annual Report entitled “Risk Factors.”

Previous wording

This discussion and analysis addresses 2023 and 2022 items and year-over-year comparisons between 2023 and 2022. Discussions regarding our financial condition and results of operations for 2022 compared to 2021 not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Current wording

This discussion and analysis addresses 2024 and 2023 items and year-over-year comparisons between 2024 and 2023. Discussions regarding our financial condition and results of operations for 2023 compared to 2022 not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Previous wording

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.

Current wording

Arhaus is a growing lifestyle brand and premium retailer in the United States 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.

Previous wording

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 December 31, 2023, we operated 92 Showroomsin 29 states, consisting of 80 Traditional Showrooms, 8 Design Studios and 4 Outlets.

Current wording

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. Data about the Showrooms we operated as of each period presented is as follows:

Previous wording

Overall Economic Trends. The industry in which we operate is cyclical. Consequently, our net revenue is affected by general economic conditions including conditions that affect the housing market and economic factors including the health and volatility of the stock market. We target consumers of high-end home furnishings. As a result, we believe that our sales are sensitive to a number of macroeconomic factors that influence consumer spending generally, and that our sales are particularly affected by the health of the higher end consumer and demand levels from that consumer demographic. While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, new household formation and the affordability of homes for first time home buyers, the higher end of the housing market may be disproportionately influenced by other factors, including stock market prices, the number of second and third homes being purchased and sold, tax policies, interest rates, and perceived capital appreciation prospects in higher end real estate. Shifts in consumption patterns may continue to have an impact on consumer spending in the U.S. premium home furnishings market. In the past, we have experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods.

Current wording

Overall Economic Trends. The industry in which we operate is cyclical. Consequently, our net revenue is affected by general economic conditions including conditions that affect the housing market and economic factors including the health and volatility of the stock market. We target consumers of high-end home furnishings. As a result, we believe that our sales are sensitive to a number of macroeconomic factors that influence consumer spending generally, and that our sales are particularly affected by the health of the higher end consumer and demand levels from that consumer demographic. While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, new household formation and the affordability of homes for first time home buyers, the higher end of the housing market may be disproportionately influenced by other factors, including stock market prices, the number of second and third homes being purchased and sold, tax policies, interest rates, and perceived capital appreciation prospects in higher end real estate. Shifts in consumption patterns may continue to have an impact on consumer spending in the United States premium home furnishings market. In the past, we have experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods.

Previous wording

Our Strategic Initiatives. We are in the process of implementing a number of business initiatives that have had, and will continue to have, an impact on our results of operations. These initiatives include expanding our Showroom footprint, enhancing our digital marketing capabilities and eCommerce platform, optimizing our product assortment, expanding our supply chain infrastructure and continuing to invest in technology and related enhancements. As a result of the number of current business initiatives we are pursuing, we have experienced in the past, and may experience in the future, significant period-to-period variability in our financial performance and results of operations. While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the near term and may amplify fluctuations in our growth rates from quarter to quarter.

Current wording

Our Strategic Initiatives. We are in the process of implementing a number of business initiatives that have had, and will continue to have, an impact on our results of operations. These initiatives include expanding our Showroom footprint, enhancing our digital marketing capabilities and eCommerce sales channel, optimizing our product assortment, expanding our supply chain infrastructure and continuing to invest in technology and related systems enhancements. As a result of the number of current business initiatives we are pursuing, we have experienced in the past, and may experience in the future, significant period-to-period variability in our financial performance and results of operations. While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the near term and may amplify fluctuations in our growth rates from quarter to quarter.

Previous wording

In addition to U.S. GAAP results, this 10-K 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 are 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.

Current wording

In addition to U.S. GAAP results, this 10-K 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.

Previous wording

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 direct 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.

Current wording

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.

Previous wording

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 shrinkage, 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 consolidated statements of comprehensive income).

Current wording

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 consolidated statements of comprehensive income).

Previous wording

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.

Current wording

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 sales 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.

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

The following is a reconciliation of our net and comprehensive income to EBITDA and adjusted EBITDA for the periods presented:

Current wording

The following is a reconciliation of our net and comprehensive income to EBITDA and adjusted EBITDA for the periods presented (in thousands):

Previous wording

(1)Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, third-party consulting costs, one-time project start-up costs, severance, signing bonuses, recruiting and project-based strategic initiatives. For the year ended December 31, 2023, these other expenses consisted largely of $0.5 million of public offering costs. For the year ended December 31, 2022, these other expenses consisted largely of $5.0 million of costs related to the opening and set-up of our Dallas distribution center and $1.6 million of severance, signing bonuses and recruiting costs.

Current wording

(1)Other (income) expenses represent costs and investments not indicative of ongoing business performance, such as gain on disposal of assets, secondary offering costs, severance, signing bonuses and recruiting costs. For the year ended December 31, 2024, these other (income) expenses consisted largely of $1.2 million of gain on disposal of assets. For the year ended December 31, 2023, these other (income) expenses consisted largely of $0.5 million of secondary offering costs.

Previous wording

New Showrooms contribute incremental expense, new Showroom opening expense and net revenue to the Company. From January 1, 2022 to December 31, 2023, we successfully opened or relocated 18 new Showrooms. Our recent Showroom growth is summarized in the following table:

Current wording

New Showrooms contribute incremental expense, new Showroom opening expense and net revenue to the Company. Our recent Showroom growth from January 1, 2023 to December 31, 2024 is summarized in the following table:

Previous wording

Consolidated Statements of Comprehensive Income Data:

Current wording

Consolidated Statements of Comprehensive Income Data (in thousands):

Previous wording

As a percentage of net revenue, gross margin decreased 70 basis points to 42.0% of net revenue in 2023 compared to 42.7% of net revenue in 2022. The gross margin decrease as a percentage of net revenue was primarily the result ofhigher Showroom costs, transportation costs and credit card fees, which together increased 100 basis points as a percentage of net revenue. This was partially offset byfavorable product costs, contributing 40 basis points as a percentage of net revenue.

Current wording

As a percentage of net revenue, gross margin decreased 260 basis points to 39.4% of net revenue in 2024 compared to 42.0% of net revenue in 2023. The gross margin decrease as a percentage of net revenue was primarily the result ofhigher Showroom occupancy costs, which increased 110 basis points, a product margin decrease of 60 basis points, higher delivery and transportation costs, which increased 40 basis points and higher credit card fees, which increased 20 basis points.

Previous wording

SG&A expenses increased $35.7 million, or 10.5%, to $376.1 million in 2023 compared to $340.4 million in 2022. The increase was primarily driven by a $19.2 million increase in corporate expenses to support the growth of the business, a $15.8 million increase in selling expenses primarily related to new Showrooms and higher demand, the donation to The Nature Conservancy of $10.0 million and a $3.6 million increase in stock based compensation expense. This was partially offset by a $7.5 million decrease in warehouse expenses and the non-recurring costs of $5.0 million related to the opening and set-up of our Dallas distribution center.

Current wording

SG&A expenses increased $39.3 million, or 10.5%, to$415.4 million in 2024 compared to $376.1 million in 2023. The increase was primarily driven by a $30.1 million increase in general and administrative costs primarily related to legal costs, strategic investments to support and drive the growth of the business, including supply chain and technology improvements, marketing investments and increased warehouse expenses, in addition to a $19.2 million increase in selling expenses primarily related to new Showrooms. 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, selling, general and administrative expenses increased 150 basis points to 29.2% of net revenue in 2023 compared to 27.7% of net revenue in 2022.

Current wording

As a percentage of net revenue, selling, general and administrative expenses increased 350 basis points to 32.7% of net revenue in 2024 compared to 29.2% of net revenue in 2023.

Previous wording

Income tax expense was $43.5 million in 2023 compared to $45.9 million in 2022. Our effective tax rate was 25.8% in 2023 and 25.2% in 2022.

Current wording

Income tax expense was $22.4 million in 2024 compared to $43.5 million in 2023. The decrease was primarily due to lower income before taxes. Our effective tax rate was 24.6% in 2024 and 25.8% in 2023.

Previous wording

Net and comprehensive income decreased$11.4 million to $125.2 million in 2023 compared to $136.6 million in 2022. The decrease was driven by the factors described above.

Current wording

Net and comprehensive income decreased $56.7 million to$68.6 million in 2024 compared to $125.2 million in 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 December 31, 2023, we had cash and cash equivalents of $223.1 million.

Current wording

Our primary cash needs have historically been for merchandise inventories, payroll, marketing catalogs, Showroom rent, capital expenditures associated with opening new Showrooms and renovating 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 December 31, 2024, we had cash and cash equivalents of $197.5 million.

Previous wording

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 supply chain expansion and growth initiatives. 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.

Current wording

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 related to 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 December 31, 2024, we have no material off-balance sheet arrangements.

Previous wording

In 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 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 December 31, 2023 and 1.50% at December 31, 2022), 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 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 December 31, 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 December 31, 2023, we had no borrowings on the 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

The following table provides a summary of our cash provided by operating, investing and financing activities:

Current wording

The following table provides a summary of our cash provided by operating, investing and financing activities (in thousands):

Previous wording

For 2022, net cash provided by operating activities was $73.2 million and consisted of net income of $136.6 million, an increase in non-cash items of $80.4 million, which were partially offset by a change in working capital and other activities of $143.8 million. The use of cash from working capital was primarily driven by an increase in merchandise inventory of $78.1 million, a decrease in client deposits of $62.3 million due to improved delivery of our backlog orders and lower demand comparable growth in 2022, a decrease in operating lease liabilities of $33.7 million primarily due to payments made under the related lease agreements, an increase in prepaid and other assets of $6.9 million, which were partially offset by an increase in accrued expenses $27.7 million, an increase in accounts payable of $10.3 million.

Current wording

For 2024, net cash provided by operating activities was $147.1 million and consisted of net income of $68.6 million and an increase in non-cash items of $108.8 million, which were partially offset by a change in working capital and other activities of $30.2 million. The use of cash from working capital was primarily driven by an increase in merchandise inventory of $42.7 million, a decrease in operating lease liabilities of $37.9 million primarily due to payments made under the related lease agreements, an increase in prepaid and other assets of $2.5 million, a decrease in accrued expenses of $0.9 million, which were partially offset by an increase in client deposits of $47.1 million, an increase in accounts payable of $5.6 million and a decrease in accounts receivable of $1.1 million.

Previous wording

For 2023, net cash provided by operating activities was $172.3 million and consisted of net income of $125.2 million and an increase in non-cash items of $90.9 million, which were partially offset by a change in working capital and other activities of $43.8 million. The use of cash from working capital was primarily driven by a decrease in client deposits of $28.8 million, a decrease in operating lease liabilities of $25.8 million primarily due to payments made under the related lease agreements, an increase in prepaid and other assets of $20.7 million, a decrease in accrued expenses of $1.5 million, which were partially offset by a decrease in merchandise inventory of $32.1 million and an increase in accounts payable of $1.2 million.

Current wording

For 2023, net cash provided by operating activities was $168.7 million and consisted of net income of $125.2 million, an increase in non-cash items of $90.9 million, which were partially offset by a change in working capital and other activities of $47.4 million. The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $39.0 million primarily due to payments made under the related lease agreements, a decrease in client deposits of $28.8 million, an increase in prepaid and other assets of $11.1 million, a decrease in accrued expenses $1.5 million, which were partially offset by a decrease in merchandise inventory of $32.1 million and an increase in accounts payable of $1.2 million.

Previous wording

Investing activities consist primarily of capital expenditures related to investments in retail Showrooms, information technology and systems infrastructure upgrades as well as supply chain investments.

Current wording

Investing activities consist primarily of capital expenditures related to investments in Showrooms, information technology and systems infrastructure, as well as supply chain investments.

Previous wording

For 2022, net cash used in investing activities was $51.4 million primarily due to investments insupply chain expansion, Showrooms and information technology and systems infrastructure.

Current wording

For 2024, net cash used in investing activities was $99.5 million primarily due to investments in Showrooms, strategic investments in our supply chain, and information technology and systems infrastructure.

Previous wording

For 2023, net cash used in investing activities was $96.7 million primarily due to investments in Showrooms, supply chain expansion and information technology and systems infrastructure.

Current wording

For 2023, net cash used in investing activities was $93.1 million primarily due to investments in Showrooms, supply chain expansion, and information technology and systems infrastructure.

Previous wording

Historically, we have invested significant capital expenditures in opening new Showrooms and 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 landlord-owned leased assets, net of tenant allowances received. Certain lease arrangements require the landlord to fund a portion of the construction related costs through payments directly to us. New Showrooms may require different levels of capital investment on our part in the future.

Current wording

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.

Previous wording

Historical capital expenditures are summarized as follows:

Current wording

Historical capital expenditures are summarized as follows (in thousands):

Previous wording

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires that certain estimates and assumptions be made that affect the amounts reported in our consolidated financial statements and related notes, as well as the related disclosures. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements. Information on all of our significant accounting policies can be found in Note 2— Basis of Presentation and Summary of Significant Accounting Policiesin our consolidated financial statements.

Current wording

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires that certain estimates and assumptions be made that affect the amounts reported in our consolidated financial statements and related notes. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements. Information on all of our significant accounting policies can be found in Note 2— Basis of Presentation and Summary of Significant Accounting Policiesin our consolidated financial statements.

Previous wording

The following critical accounting policy reflects the significant estimates and/or judgments used in the preparation of our consolidated financial statements.

Current wording

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 the Company’s consolidated financial statements and accompanying notes. The following critical accounting policy reflects the significant estimates and/or judgments used in the preparation of our consolidated financial statements.