Arhaus, Inc.

channel capabilities and technology, and investing to upgrade our infrastructure, improve our business tools, and support our growth. Our ongoing commitment to build on our progress across these initiatives is paying clear dividends to sustain results quarter after quarter. At the same time, our debt-free balance sheet and the flexibility it affords us remains a competitive advantage as we maintain our focus on expense control and prudent capital deployments. In the current environment, I get a lot of questions about how we are continuing to do so well with luxury home sales well below pre-pandemic levels and mortgage interest rates expected to stay higher for longer. The answer as we see it is many of our clients are staying in their home and they want to enjoy them. So they're remodeling, refreshing, or simply replacing their furniture. Our in-home and trade designers have never been busier with projects ranging from small to large. Our clients' appetite to make their home a better place to live continues to be strong. And given our clients' demographics, our clients are going on their European holidays this summer or enjoying a cruise, but they are also improving their homes at the same time. Many of our design projects include assisting our clients with their second or third homes as well. So we are very pleased with the state of our consumer and with the latest data showing both luxury home sales and listings increasing in this quarter, we're optimistic for the balance of this year and into 2025. As you know, I'm very enthusiastic about expanding our showroom footprint and how that continues to drive brand awareness and our long-term growth. Since our last call, we opened a new design studio in a wonderful location in Greenwich, Connecticut. It's already performing exceptionally well. Later this year, we are adding design studios in Peachtree, Georgia and Huntersville, North Carolina near Lake Norman. We are proving out our design studio concept and it's working very well. We've developed the concept before the pandemic, a smaller footprint showroom, perfect for second home markets and affluent pockets, such as Princeton, New Jersey, within or outside large markets. Locations where a lower square footage is preferred, staffed with in-home designers and the latest high-tech design tools to assist clients in imagining their home. In October of 2020, we opened our first design studio in Carmel, California. We expect to have 11 by the end of this year, with a long runway ahead of us. We also recently opened a our house loft outlet in Pittsburgh, We are adding two more locations this quarter, one in Denver and one in Florence, Kentucky, just outside of Cincinnati. And in just a few weeks, we'll be opening an amazing new showroom at The Grove in Los Angeles. We expect it to be one of our flagship locations and cannot wait for clients to see it and experience it. As we have discussed, we have significant growth opportunities on the West Coast, In addition to the Grove, we are opening three more showrooms in California this year, Carlsbad, Palo Alto, and Corte Madera. We are also opening our first Oklahoma showroom this year. What is so gratifying and exciting for me and the R House team is how well our showrooms perform in such a varied locations across the United States. And we are not quite halfway through our goal of 165 plus traditional showroom locations. Turning to products. Product is one of our key competitive advantage and a big differentiator. Our design, merchandising, and sourcing teams continue to delight our clients with incredible new product. Our product reflects our livable luxury aesthetics. It is simultaneously eclectic, family-friendly, and full of warmth and comfort. Our pieces have a unique handcrafted feel and are designed using the best materials and an unparalleled focus on quality. This confidence in our product comes from both client reaction and consistent performance. Clients are loving our spring new product introductions. With newness this year, outperforming the incredible reception we had last year's new spring product. We are also very proud of the depth of our styles and selections. I mentioned that our showrooms perform well across regions, and one of the keys to this is the breadth of our product across traditional, transitional, and modern aesthetics. Alongside our new product, our iconic bestsellers continue to be well bestsellers. We are able to consistently refresh these designs with beautiful new fabrics, shapes, finishes, and sizes, and present them in new inspiring ways across all channels. We believe our product is an incredible value, and based on our demand trends, our clients seem to agree. And we cannot wait for you to see and experience the new product we are coming up with this fall. in our showrooms catalog and ourhouse.com. On our strategic growth initiative front, there are two areas I want to call out. One, we just launched the new warehouse management system in our Ohio, D.C., representing a tremendous amount of work across several of our functional areas. This is a key piece of the system upgrades that will enable us to improve our operational efficiencies and mostly set the foundation for long-term growth. Congratulations to our team. Second, I also want to call out our final mile team. Over the past year, we have made several improvements to our final mile and in-home delivery processes that are evident in better execution and delivery performance with some of the highest client survey scores we have ever received. We are extremely busy delivering our consistent results and client-first service while growing and investing in the business requires unrelenting commitment. And I am extremely grateful for the hard work our team puts in each day and every day. In the first quarter, we delivered net revenue of $295 million, net income of $15 million and adjusted EBITDA of $29 million. As we reported this morning, we are pleased to have exceeded our top and bottom line outlook for the quarter as teams executed well and first quarter benefited from the shift in our new warehouse management system implementation to April from March. We are on track to deliver on our first half and full year outlook. Moving to demand. It's truly remarkable what our teams are achieving in the current macro environment. As we continue to meaningfully outpace the industry, our first quarter results are highlighted by February's mid-single digits and March's high single-digit demand comp growth, more than offsetting January's weather-related high single-digit demand comp decline. Our demand comp in April was up mid single digits. Before I turn the call over to Don to discuss these results and our full year outlook in more detail, I want to reiterate our confidence in the outlook for our company for the balance of 2024 which we reaffirm this morning. Our future is bright. We believe our strategic competitive advantage positions us to continue to capitalize on the aspiration of our clients to live in beautiful, curated spaces with our unique artisans' crafted furniture. I'd like to extend a warm welcome to John Moran, who joined us as Chief Operating Officer on Monday. Prior to joining us, John was Chief Operating Officer of Canada Goose, and brings a wealth of experience in operational execution and supporting transformation growth across the functions. He is an important addition to our leadership team as we scale the business and realize the significant potential for growth. As I said last quarter, I generally feel there are no collections like our collections. There are no people like our people. There is no potential like our potential. Our house stands out. Our house stands alone. When I founded Our House almost 40 years ago, I could not envision the Our House we have today with the incredible potential we still have. Now I'll turn it over to Dawn.

Thank you, John, and good morning, everyone. Net revenue in the first quarter was $295 million, with a 9.5% comp decline against a comp growth comparison of 21% in the first quarter last year. Our prior year included significant abnormal backlog deliveries that did not repeat this year as we caught up on deliveries in 2023 and have returned to a normal backlog. We were pleased with our demand comp growth of 1.3% in the quarter as we continue to see strength in average order value and in orders over $5,000 and $10,000. We're also pleased the demand penetration of our in-home designer program continues to increase. Our first quarter growth margin decreased to $115 million, driven primarily by lower net revenue and higher showroom costs as we continue to expand our footprint. Growth margin as a percent of net revenue decreased to 39%, driven primarily by the higher showroom costs, due leverage related to the lower revenue, and increased transportation costs First quarter SG&A expense increased $14 million to $97 million, primarily driven by increased selling expenses related to new showrooms and demand strength, increased corporate expenses as we invest in our strategic initiatives to support and drive the growth of the business, and increased warehouse expense as our Dallas location continues to increase productivity. First quarter 2024 net income was $15 million. Adjusted EBITDA in the quarter was $29 million versus $55 million in the first quarter of 2023. First quarter net revenue of $295 million and adjusted EBITDA of $29 million resulted in a 9.9% adjusted EBITDA margin in the quarter. Next, as we reported this morning, we are pleased to reaffirm our outlook for full year 2024. Our expectations for how the year will progress have not changed since we initially provided our outlook in March, apart from the warehouse management system going live in April rather than in March. As a reminder, we expect full year adjusted EBITDA margins to be lower than 2023. We expect about 85% of the deleverage to come from SG&A with a lesser amount of deleverage in gross margin. Deleverage is driven by comping prior year backlog delivery and strategic investments we are making this year. Strategic investments include corporate strategic investments of $10 to $15 million to enhance our operational capabilities and drive our success long-term, as well as investments in other growth initiatives such as e-commerce and our in-home designer and trade program. The $10 to $15 million in corporate strategic investments includes our new warehouse management system, planning and allocation software, a new manufacturing ERP at our upholstery facility, and our in-home delivery experience. To add further color, we also wanted to note we expect to have higher expense at our distribution centers this year as productivity improves in Dallas. In the second quarter of 2024, we anticipate net revenue in the range of $310 to $320 million. We expect approximately 900 basis points of adjusted EBITDA deleverage in the second quarter. Approximately one-third is from gross margin pressure, primarily due to higher showroom costs related to growing our showroom footprint, investments in in-home delivery program, and to a lesser extent, the impact of price action product in our P&L. The balance of the deleverage is in SG&A, primarily due to new showrooms, strategic growth investments, and supply chain costs from the continued ramp of our Dallas Distribution Center. Given the new warehouse management system implementation shift from March to April, we expect the earnings upside relative to original expectations in Q1 to be offset in Q2, with our anticipated first half financial performance in line with four-year expectations we shared in March. As I noted last quarter, we continue to expect net revenue growth in the balance of this year. We expect the deleverage in both gross margin and SG&A in the first half of the year to inflect in the second half as the P&L impact from the June 2023 price action product is complete. Revenue and earnings from new showrooms positively impact our P&L, and we continue to expand our brand awareness and drive market share expansion. We will update you on our third quarter expectations when we report second quarter financial performance in August. For all other details related to our 2024 outlook, please refer to our press release. In closing, I want to thank our team for their focus and execution of our strategic growth priorities and investments. I am so proud of what we are accomplishing while delivering solid financial performance and retaining our balance sheet strength. We believe our four-part strategic growth strategy and our strong debt-free balance sheet are compelling competitive advantages, enabling us to make the necessary investments to build on our share gains in the highly fragmented $100 billion premium home furniture market. We are navigating the current environment from a position of strength, and we believe we are well-positioned to delight our clients while maintaining our unwavering commitment to driving value for all stakeholders. This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we are happy to take your questions.

We will now begin the question and answer session.