arhs-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-41009

Arhaus, Inc.

(Exact name of registrant as specified in its charter)


Delaware						87-1729256
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

51 E. Hines Hill Road, Boston Heights, Ohio

(Address of Principal Executive Offices)

44236

(Zip Code)

(440) 439-7700

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value per share	ARHS	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 3, 2023 the registrant had 53,166,638 shares of Class A common stock and 87,115,600 shares of Class B common stock outstanding.

Table of Contents


		Page
Part I - Financial Information		2
Item 1.	Financial Statements of Arhaus, Inc. and Subsidiaries	2
	Condensed Consolidated Balance Sheets (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
Part II. Other Information		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

Part I - Financial Information

Item 1. Financial Statements of Arhaus, Inc. and Subsidiaries


Arhaus, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited, amounts in thousands, except share and per share data)


	June 30, 2023		December 31, 2022
Assets
Current assets
Cash and cash equivalents	$	176,759	$	145,181
Restricted cash equivalents	4,604		7,346
Accounts receivable, net	1,746		1,734
Merchandise inventory, net	294,854		286,419
Prepaid and other current assets	43,084		37,371
Total current assets	521,047		478,051
Operating right-of-use assets	309,211		252,055
Financing right-of-use assets	39,979		38,522
Property, furniture and equipment, net	149,515		135,066
Deferred tax asset	11,508		16,841
Goodwill	10,961		10,961
Other noncurrent assets	3,058		296
Total assets	$	1,045,279	$	931,792

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	55,082	$	62,636
Accrued taxes	8,637		12,256
Accrued wages	11,233		20,860
Accrued other expenses	33,857		35,169
Client deposits	193,401		202,587
Current portion of operating lease liabilities	41,483		39,744
Current portion of financing lease liabilities	934		531
Total current liabilities	344,627		373,783
Operating lease liabilities, long-term	352,898		289,871
Financing lease liabilities, long-term	53,863		51,835
Deferred rent and lease incentives	2,112		2,272
Other long-term liabilities	4,215		4,336
Total liabilities	$	757,715	$	722,097
Commitments and contingencies (Note 9)
Stockholders' equity
Class A shares, par value $0.001 per share (600,000,000 shares authorized, 52,370,200 issued and 52,345,693 outstanding and 51,437,348 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively)	52		51
Class B shares, par value $0.001 per share (100,000,000 shares authorized, 87,115,600 shares issued and outstanding as of June 30, 2023 and December 31, 2022)	87		87
Retained Earnings	94,335		20,053
Additional Paid-in Capital	193,090		189,504
Total Arhaus, Inc. stockholders' equity	287,564		209,695
Total liabilities and stockholders' equity	$	1,045,279	$	931,792

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Arhaus, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands, except share and per share data)


	Six months ended June 30,				Three months ended June 30,
	2023		2022		2023		2022
Net revenue	$	617,467	$	552,565	$	312,899	$	306,265
Cost of goods sold	349,109		321,822		172,779		173,239
Gross margin	268,358		230,743		140,120		133,026
Selling, general and administrative expenses	168,913		157,622		86,131		82,774

Income from operations	99,445		73,121		53,989		50,252

Interest expense (income), net	(651)		2,616		(478)		1,316
Other income	(660)		(475)		(88)		(117)
Income before taxes	100,756		70,980		54,555		49,053
Income tax expense	26,474		18,283		14,372		12,414
Net and comprehensive income	$	74,282	$	52,697	$	40,183	$	36,639


Net and comprehensive income per share, basic
Weighted-average number of common shares outstanding, basic	139,232,238		137,662,601		139,389,967		137,840,691
Net and comprehensive income per share, basic	$	0.53	$	0.38	$	0.29	$	0.27
Net and comprehensive income per share, diluted
Weighted-average number of common shares outstanding, diluted	139,959,943		139,394,055		139,979,928		139,454,109
Net and comprehensive income per share, diluted	$	0.53	$	0.38	$	0.29	$	0.26

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


Arhaus, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited, amounts in thousands)


	Six Months Ended
	Common Stock						Treasury Stock			Total Stockholders' Equity
	Class A			Class B			Class A
	Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings		Additional Paid-in Capital		Total Stockholders' Equity
Balances as of December 31, 2022	51,437	$	51	87,116	$	87	—	$	—	$	20,053	$	189,504	$	209,695
Net income	—	—		—	—		—	—		74,282		—		74,282

Shareholder capital contribution	—	—		—	—		—	—		—		30		30
Equity based compensation	933	1		—	—		—	—		—		3,903		3,904
Shares withheld to cover employees' withholding taxes for equity based compensation	(25)	—		—	—		25	—		—		(347)		(347)
Balances as of June 30, 2023	52,345	$	52	87,116	$	87	25	$	—	$	94,335	$	193,090	$	287,564

	Six Months Ended
	Common Stock						Treasury Stock			Total Stockholders' Equity
	Class A			Class B			Class A
	Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings (Accumulated Deficit)		Additional Paid-in Capital		Total Stockholders' Equity
Balances as of December 31, 2021	50,428	$	50	86,519	$	87	—	$	—	$	(116,581)	$	186,209	$	69,765
Net income	—	—		—	—		—	—		52,697		—		52,697
Shareholder capital contribution	—	—		—	—		—	—		—		43		43
Equity based compensation	932	1		597	—		—	—		—		1,388		1,389
Balances as of June 30, 2022	51,360	$	51	87,116	$	87	—	$	—	$	(63,884)	$	187,640	$	123,894

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


Arhaus, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited, amounts in thousands)


	Three Months Ended
	Common Stock						Treasury Stock			Total Stockholders' Equity
	Class A			Class B			Class A
	Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings		Additional Paid-in Capital		Total Stockholders' Equity
Balances as of March 31, 2023	52,216	$	52	87,116	$	87	25	$	—	54,152		$	190,803	$	245,094
Net income	—	—		—	—		—	—		40,183		—		40,183
Shareholder capital contribution	—	—		—	—		—	—		—		13		13
Equity based compensation	129	—		—	—		—	—		—		2,274		2,274

Balances as of June 30, 2023	52,345	$	52	87,116	$	87	25	$	—	$	94,335	$	193,090	$	287,564

	Three Months Ended
	Common Stock						Treasury Stock			Total Stockholders' Equity
	Class A			Class B			Class A
	Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings (Accumulated Deficit)		Additional Paid-in Capital		Total Stockholders' Equity
Balances as of March 31, 2022	51,232	$	51	86,519	$	87	—	—		$	(100,523)	$	186,929	$	86,544
Net income	—	—		—	—		—	—		36,639		—		36,639
Shareholder capital contribution	—	—		—	—		—	—		—		19		19
Equity based compensation	128	—		597	—		—	—		—		692		692
Balances as of June 30, 2022	51,360	$	51	87,116	$	87	—	$	—	$	(63,884)	$	187,640	$	123,894

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Arhaus, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)


	Six months ended June 30,
	2023		2022

Cash flows from operating activities
Net income	$	74,282	$	52,697
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	14,140		11,995
Amortization of operating lease right-of-use asset	16,080		14,508
Amortization of deferred financing fees, interest on finance lease in excess of principal paid and interest on operating leases	9,945		5,489
Equity based compensation	3,904		1,389
Deferred tax assets	5,333		4,851
Amortization of cloud computing arrangements	142		—

Amortization and write-off of lease incentives	(160)		(144)
Insurance proceeds	60		—
Changes in operating assets and liabilities
Accounts receivable	(12)		(1,272)
Merchandise inventory	(8,495)		(64,135)
Prepaid and other assets	(6,808)		(5,095)

Other noncurrent liabilities	169		264
Accounts payable	(4,849)		15,197
Accrued expenses	(14,847)		8,728
Operating lease liabilities	(17,903)		(15,401)
Client deposits	(9,186)		12,039
Net cash provided by operating activities	61,795		41,110

Cash flows from investing activities
Purchases of property, furniture and equipment	(32,815)		(20,355)
Insurance proceeds	333		—
Net cash used in investing activities	(32,482)		(20,355)

Cash flows from financing activities
Principal payments under finance leases	(130)		(50)
Repurchase of shares for payment of withholding taxes for equity based compensation	(347)		—
Net cash used in financing activities	(477)		(50)
Net increase (decrease) in cash, cash equivalents and restricted cash equivalents	28,836		20,705

Cash, cash equivalents and restricted cash equivalents
Beginning of period	152,527		130,908
End of period	$	181,363	$	151,613

Supplemental disclosure of cash flow information
Interest paid in cash	$	2,610	$	2,155
Interest received in cash	3,172		—
Income taxes paid in cash	21,902		15,342

Noncash operating activities:
Lease incentives	4,945		4,494

Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable	456		1,673

Noncash financing activities:
Derecognition of build-to-suit assets as a result of ASC 842 adoption	—		(31,017)
Capital contributions	30		43

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents


Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

Arhaus, Inc. (the “Company,” “we” or “Arhaus”) is a Delaware corporation and is a premium retailer in the home furnishings market, specializing in livable luxury supported by heirloom quality merchandise. We offer merchandise in a number of categories, including furniture, outdoor, lighting, textiles and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. We position our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. The Company operated 85 Showrooms at June 30, 2023.

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process.

The accompanying condensed consolidated balance sheets at June 30, 2023 and December 31, 2022, the condensed consolidated statements of comprehensive income and changes in stockholders’equity for the six and three months ended June 30, 2023 and 2022, the condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 and the related interim condensed consolidated disclosures are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position at June 30, 2023, the results of operations and changes in stockholders’equity for the six and three months ended June 30, 2023 and 2022 and the condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022. The condensed consolidated balance sheet as of December 31, 2022 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The results for the six and three months ended June 30, 2023 and 2022 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accounting estimates and other matters included within our condensed consolidated financial statements and notes to the condensed consolidated financial statements we have assessed include, but were not limited to, revenue recognition, including a reserve for merchandise returns, inventory reserves, goodwill and fair value of financial instruments which include, but are not limited to, accounts receivable, payables and lease obligations.

Client Deposits

Client deposits represent payments made by clients on orders. At the time of purchase, the Company collects deposits for all orders equivalent to at least 50 percent of the clients’ purchase price. Orders are recognized as revenue when the merchandise is delivered to the client and at the time of delivery the client deposit is no longer recorded as a liability. The

Table of Contents


Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

Company expects substantially all client deposits as of June 30, 2023 will be recognized as net revenue within the next 12 months as the performance obligations are satisfied.

Gift Cards

The Company sells gift cards to clients in our Showrooms and through our website. Such gift cards do not have expiration dates. We defer revenue when payments are received in advance of performance for unsatisfied obligations related to our gift cards. The liability related to unredeemed gift cards at June 30, 2023 and December 31, 2022 of $0.4 million and $1.0 million, respectively, is recorded in the accrued other expenses line item of the condensed consolidated balance sheets. The Company recognizes income associated with breakage proportional to actual gift card redemptions. For the six and three months ended June 30, 2023, breakage income was $0.7 million. For the six and three months ended June 30, 2022 breakage was minimal.

Fair Values of Financial Instruments

The Company’s primary financial instruments are cash and cash equivalent investments, accounts receivable, payables, lease obligations and equity based compensation instruments. Due to the short-term maturities of cash and cash equivalent investments, accounts receivable and payables, the Company believes the fair values of these instruments approximate their respective carrying values at June 30, 2023 and December 31, 2022. See Note 5 — Leases for discussion of our lease obligations and Note 6 — Equity Based Compensation for discussion of our equity based compensation instruments.

The Company has established a hierarchy to measure our financial instruments at fair value, which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

From time to time, the Company invests in money market funds and other Level 1 cash and cash equivalent investments. For the six and three months ended June 30, 2023, the Company earned $3.3 million and $1.8 million, respectively, in interest income. The Company did not have cash and cash equivalent investments for the six and three months ended June 30, 2022. Interest income is included within interest expense (income), net on our condensed consolidated statements of comprehensive income.

2. Recently Issued Accounting Standards

New Accounting Standards Adopted in Fiscal 2023

We did not adopt any Accounting Standards Updates (“ASU”) in the six months ended June 30, 2023 that had a material impact on our accounting policies or our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

The following table summarizes accounting pronouncements which we have not yet adopted but will be adopted in the upcoming fiscal year. ASU 2023-01 is effective for annual periods beginning after December 15, 2023. We believe the adoption will not have a material impact on our accounting policies or our consolidated financial statements and related disclosures.

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU

Description

Adoption Date

ASU 2023-01

Leases (Topic 842): Common Control Arrangements

January 1, 2024

3. Merchandise Warranties

The Company warrants certain merchandise to be free of defects in both construction materials and workmanship from the date the performance obligation was fulfilled to the client for three to ten years depending on the merchandise category. The Company accounts for merchandise warranties by accruing an estimated liability when we recognize revenue on the sale of warrantied merchandise. We estimate future warranty claims based on claim experience which includes materials and labor costs to perform the repairs or replace products. We use judgment in making our estimates. We record differences between our estimated and actual costs when the differences are known.

A reconciliation of the changes in our limited merchandise warranty liability is as follows (amounts in thousands):


	Six months ended June 30,				Three months ended June 30,
	2023		2022		2023		2022
Balance as of beginning of period	$	6,375	$	4,724	$	6,465	$	4,963
Accruals during the period	6,749		5,104		3,368		2,908
Settlements during the period	(6,546)		(4,416)		(3,255)		(2,459)
Balance as of end of the period(1)	$	6,578	$	5,412	$	6,578	$	5,412

(1) $3.8 million and $3.7 million were recorded in accrued other expenses at June 30, 2023 and December 31, 2022, respectively. The remainder is recorded in other long-term liabilities on our condensed consolidated balance sheets.

We recorded accruals during the periods presented in the table above, primarily to reflect charges that relate to limited merchandise warranties issued during the respective periods.

4. Long-Term Debt

On November 8, 2021, the Company entered into a revolving credit facility (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment in an amount equal to the lesser of (a) $10.0 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan in an amount equal to the lesser of (a) $5.0 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility was initially $50.0 million. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a minimum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at June 30, 2023 and 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.

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, 2023 and December 31, 2022, we had no borrowings on the 2021 Credit Facility. Deferred financing costs related to the 2021 Credit Facility of $0.4 million are recorded in other noncurrent assets on the consolidated balance sheets and will be amortized over the term of the 2021 Credit Facility on a straight-line basis. Accumulated amortization related to deferred financing costs for the 2021 Credit Facility was $0.1 million as of June 30, 2023 and December 31, 2022.

The Company was in compliance with all applicable debt covenants at June 30, 2023 and December 31, 2022, and expects to remain in compliance over the next 12 months.

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

5. Leases

The Company leases real estate and equipment under operating and finance leases, some of which are from related parties as discussed in Note 10 — Related Party Transactions. The most significant obligations under these lease agreements require the payments of periodic rentals, real estate taxes, insurance and maintenance costs. Depending on particular Showroom leases, the Company can also owe a percentage rent payment if particular Showrooms meet certain sales figures.

The following table summarizes the amounts recognized in our condensed consolidated balance sheets related to leases as of June 30, 2023 and December 31, 2022, respectively (amounts in thousands):


	Condensed Consolidated Balance Sheet Classification	June 30, 2023		December 31, 2022
Assets
Operating lease assets	Operating right-of-use assets	$	309,211	$	252,055
Finance lease assets	Financing right-of-use assets	39,979		38,522
Total leased assets		$	349,190	$	290,577

Liabilities
Current operating leases	Current portion of operating lease liabilities	$	41,483	$	39,744
Non-current operating leases	Operating lease liabilities, long-term	352,898		289,871
Total operating lease liabilities		394,381		329,615

Current finance leases	Current portion of financing lease liabilities	934		531
Non-current finance leases	Financing lease liabilities, long-term	53,863		51,835
Total finance lease liabilities		54,797		52,366
Total lease liabilities		$	449,178	$

SEC Form 10-Q filed by Arhaus Inc.