Arhaus Inc Class A Aktie

Good morning and welcome to the Arhaus Third Quarter 2026 Earnings Conference Call. Please note that this call is being recorded, and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Tara Atwood-Saja, Vice President of Investor Relations. Please go ahead.

Good morning and thank you for joining us for the Arhaus Third Quarter 2026 Earnings Call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman and Chief Executive Officer, and Michael Lee, our Chief Financial Officer.

During Q&A, we kindly ask that you limit yourself to 1 question only. This will allow us to get to as many callers as possible within our 1-hour window. You're welcome to re-queue for additional questions if time permits. We issued our earnings release and Form 10-Q for the quarter ended September 30, 2026, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours.

I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, targets, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent annual report on Form 10-K and subsequent 10-Qs. Such factors may be updated from time to time in our filings with the SEC.

The forward-looking statements are made as of today's date, and except as may be required by law, the company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliation. Now, I will turn the call over to John.

John, over to you.

Thanks, Tara. Good morning, everyone, and thank you for joining us. Before discussing our results, I want to welcome K.C. Moss, who joined Arhaus in September as our new Chief Digital Officer. K.C. brings extensive experience in digital commerce and customer experience, and we're excited about the opportunities ahead as we strengthen our digital capabilities and introduce Arhaus to more clients.

Turning to our results, we saw another record third quarter for Arhaus, with net revenue of $368 million, up 6.8% year over year, and above the midpoint of our guidance range. As we celebrate our 40th anniversary, these results reinforce the strength of the Arhaus brand and the progress we're making against our long-term growth strategy. We continue to see resilience among our high-end clients who are investing in their homes despite the challenging housing market and economic environment. We believe our premium positioning provides exposure to a more affluent consumer who continues to benefit from accumulated wealth, home equity, and financial assets.

A recent Bank of America research report highlighted that household assets exceed 10x household liabilities for the first time in six decades, supporting the strong backdrops for demand. What was encouraging this quarter was the strength of our underlying demand. Comparable written sales increased 13.9% year over year, building on strong growth in the prior year period for a two-year stack increase of 21.4%. More importantly, this demand was broad-based across product categories, geography, and selling channels. We believe this momentum reflects the investments we've made in compelling new products, expanded customization, our interior design and trade business, and marketing initiatives designed to reach new clients.

Certainly, the product. As we approach our 40th anniversary on November 8, I'm reminded of the values that have defined Arhaus since the beginning. We are a family-founded business built on a passion for exceptional people, beautiful products, and doing things differently. For me, it always starts with the product. Quality and craftsmanship are at the heart of everything we do, and we hold ourselves to incredibly high standards. We work directly with talented artisans around the world, many of whom operate small family-run businesses. These relationships allow us to collaborate closely on design, material, and quality, while eliminating unnecessary middlemen and costs. It's how we bring our clients distinctive, beautifully handcrafted products at compelling value while supporting attractive margins for our business.

And just as important as the products themselves is how we bring them to life. Our showrooms are designed to inspire. We pay attention to every detail, creating beautiful theatrical environments that allow clients to experience the Arhaus lifestyle. Our talented visual team brings an artistic eye to each location, tailoring the experience to the local market while carrying the same inspiration across our digital channels. That combination of exceptional product, authentic craftsmanship, and inspiring presentation has differentiated Arhaus for 40 years, and it remains central to how we think about our future.

New product introductions continue to be an important contributing factor. Our 40th anniversary fall catalog showcased fresh designs, distinctive materials, richer textures, and thoughtful interpretations of traditional design within our Collected Home assortment. The response has been encouraging, with newness representing more than a quarter of our written sales in the third quarter. And we're moving faster. We've continued to evolve our merchandising organization, including the addition of a Chief Merchandising Officer and the expansion of our product design and sourcing teams. I'm also pleased to share that we recently hired a Senior Vice President of Global Sourcing. She knows our brand well, and we've worked with her for some time. She brings 30 years of experience building relationships with talented artisans around the world.

We're also finding opportunities to bring exciting collections to market sooner. We're also using digital imaging and product visualization to introduce products online more quickly and selectively test new collections in our showrooms before expanding distribution. We're particularly excited about the return of more expressive interiors. We're seeing opportunities to introduce richer colors, sophisticated florals, layered patterns, and unexpected combinations of materials and textures. These designs give clients new ways to express their personal style and allow us to further differentiate the Arhaus assortment.

Our recent introductions reflect this direction, from hand-tufted upholstery crafted in North Carolina to distinctive furnishings incorporating natural stone, oak, linen, and rich performance fabrics. We have an exciting pipeline of collections still ahead. Customization is another area where we're making meaningful progress. We're expanding our selection of fabrics, leathers, as well as trims, hardware, and finishes, along with new opportunities to personalize our wood and stone furnishings. An exciting example is our expanded made-to-order natural stone assortment, which now offers clients a choice of 12 distinct stone varieties across the collection from around the world. Each stone has its own color, veining, and natural characteristics.

Our domestic upholstery manufacturing operation in North Carolina is a meaningful advantage in supporting this demand. What began with my early travels to North Carolina searching for artisans who shared our commitment to craftsmanship has evolved into an extensive upholstery assortment and our own manufacturing operation in the heart of American furniture country. Today, our North Carolina facility combines traditional craftsmanship that has defined Arhaus for decades with investments in production capabilities, material availabilities, and special order fulfillment.

We're also investing in introducing Arhaus to a broader audience. We more than doubled distribution of our 40th anniversary fall catalog, significantly expanding our reach to prospective clients, with new customers increasing more than 20% in September versus last year. We're encouraged by the response and have increased our investment in the upcoming spring catalog, which will begin reaching households in early January. As we look ahead, I believe we're just beginning to realize the potential of our product strategy. We have a strong pipeline, greater customization capabilities, and a talented team of merchants, designers, and artisans to bring our vision to life.

Turning to our clients, one of the most encouraging aspects of the quarter was the quality of demand across our core customer, interior design, and trade channels. We're seeing clients make meaningful investments in their home with strong demand for larger, higher-value projects. Our largest transactions grew strongly, with orders over $100,000 increasing significantly during the quarter. These trends reflect the resilience of our high-end clients and the breadth and appeal of our offering. Affluent clients continue to refresh and renovate their homes. While the broader housing market remains highly suppressed, we're seeing strength in the luxury market, particularly in second and third home transactions.

Interior design remains an important driver of our client engagement and a meaningful competitive advantage. During the quarter, we experienced significant growth in interior design assisted written sales, which continues to represent a significant portion of our overall business. Our complementary design services help clients bring larger, more personalized projects to life, creating opportunities to deepen relationships and build long-term loyalty. We are also pleased with the continued growth of our trade channel following enhancements to the program earlier this year. We're expanding our relationship with design professionals, including many who are new to Arhaus, and see meaningful opportunities to grow this recurring project-driven business. Together, these channels give us multiple ways to serve clients, deepen relationships, and capture a greater share of their home furnishings needs.

Turning to showrooms, our showrooms remain the front door to Arhaus, bringing our product to life through an immersive experience. During the third quarter, we saw strong comparable written sales growth with encouraging traffic and conversion trends. We're pleased with the performance of our mature showroom base and the opportunities we're seeing in the newer markets. We also continue to invest in elevating the showroom experience. Our recently relocated Charlotte showroom at The Village at SouthPark brings together our Artisan Craftsman collections, expanded customization offerings, and personalized interior design services in an exceptional setting. We see significant opportunity to expand our footprint across the country while remaining disciplined in how we evaluate new locations and invest in our existing showrooms.

As we celebrate our 40th anniversary, I'm proud of how we're honoring the craftsmanship and values that built Arhaus while continuing to evolve our product capabilities and client experience. The strength of demand this quarter gives us confidence that our strategy is resonating, and we believe there is meaningful opportunity still ahead. I want to thank our teams, manufacturing colleagues, and artisans around the world for their creativity, dedication, and commitment to our clients. They are what makes Arhaus special. With that, I'll turn the call over to Mike.

Thanks, John, and good morning, everyone. This quarter, we remained focused on what sets Arhaus apart: introducing exceptional new products, deepening client relationships, and executing with discipline. Our team's efforts contributed to record third quarter net revenue of $368 million, an increase of 6.8% year over year, representing our strongest third quarter net revenue performance in Arhaus' 40-year history. Our results were supported by continued showroom expansion and robust demand from our high-end clients. Gross profit was $144 million, an increase of 8.2% versus last year, while gross margin expanded 50 basis points to 39.2%.

To elaborate on the puts and takes, first, let me cover what is happening with fuel and transportation. During the quarter, we experienced approximately 60 basis points of cost increases due to fuel surcharges, with fuel surcharges climbing above 10% of delivery costs during several weeks of the quarter. Offsetting the increased fuel cost was 80 basis points of benefit related to our new TMS, which helped to optimize both load utilization and routing across our network. Additionally, we had 20 basis points of benefit from our delivery fee increase taken in June. Netting the various fuel and transportation puts and takes resulted in a 40-basis-point benefit during the quarter.

Second, showroom occupancy costs increased 110 basis points during the quarter, driven by our continued expansion of our footprint, and this will moderate as our new showrooms mature. Incidentally, if you exclude our showrooms opened less than 1 year and their respective pre-opening showroom costs, our gross margin would improve by 160 basis points for the quarter. I share this simply to illustrate the impact of new showrooms on our gross margin performance.

Third, we experienced 100 basis points of negative channel mix in the quarter as we increased clearance activity through our Loft locations. Importantly, the increased clearance activity was a strategic decision to improve inventory productivity, accelerate the movement of long-dated merchandise, and create capacity for compelling new product introductions. We view these impacts as temporary rather than structural.

Fourth, there was 230 basis points of benefit in the quarter tied to lower product costs and improved rate and product mix, resulting in an overall 50-basis-point improvement for the quarter. Looking ahead, we see several opportunities to support gross margin improvement. Under the current tariff framework, we estimate annual tariff costs of approximately $30 million to $40 million, compared with our estimates of $50 million to $60 million prior to the Supreme Court ruling, representing roughly $20 million of lower annualized impact. We also implemented price increases in October, which will help to offset cost pressures. And when combined with more normalized promotional activity and channel mix, coupled with our continued transportation efficiencies, we believe these initiatives position us to improve gross margin over time.

Selling, general, and administrative expenses were $134.3 million during the quarter, up 14.8% versus last year. This includes $10.5 million of higher general and administrative expense and $6.8 million of higher selling expense. As a result, SG&A load increased 250 basis points to 36.5%. Approximately 100 basis points of this increase reflects higher variable compensation associated with strong written sales growth. Commissions are recognized when orders are written, while the related revenue is recognized upon delivery. As a result, the gap between comparable written and delivered sales during the quarter created near-term expense deleverage. This reflects a timing difference rather than a structural increase in our cost base, and we expect the pressure to reverse in the fourth quarter.

Marketing and technology investments added 150 basis points to SG&A. These investments are intended to support long-term growth with benefits extending beyond the period in which these costs are incurred. We expect to cycle past elevated technology investments in the coming quarters and see opportunity for SG&A leverage over time. Legal expenses added approximately 80 basis points and are expected to remain elevated over the next 1 to 2 quarters. These costs are not structural and do not reflect a change in our day-to-day operations.

Net income was $7.8 million, down 36% versus last year. Adjusted EBITDA was $27 million, within our guidance range and down 12.3% versus last year. The adjusted EBITDA margin was 7.4%, a decrease of 170 basis points. The margin decline primarily reflected higher SG&A expenses, including marketing and technology investments, variable compensation timing, and elevated legal costs, as well as cost pressures in the cost of goods sold line, particularly higher transportation and fuel costs and expenses related to new showrooms and pre-opening activities.

We expect these pressures to ease over time as written orders convert to delivered revenue and as legal expenses moderate, new showrooms mature, and transportation and fuel costs normalize. Our marketing and technology investments are intended to support long-term growth with benefits extending beyond the period in which these costs are incurred. And we remain focused on disciplined expense management while investing in the business, and we see opportunity for improved profitability and operating leverage over time.

Comparable delivered sales increased 2.6% in the quarter, bringing year-to-date comparable delivered sales growth to 1.8%, within our guidance range. Comparable written sales increased an impressive 13.9% in the quarter, building on the 12.5% growth achieved in the second quarter and bringing year-to-date comparable written sales growth to 6.7%. We're encouraged by the breadth and quality of demand. Underlying client metrics continue to reinforce our confidence in the resilience of the affluent consumer. September was particularly strong, reflecting the effectiveness of our product, marketing, and promotional activities, and we doubled the catalog circulation while quadrupling the number of prospect clients reached.

Demand also benefited from compelling new product introductions, our 40th anniversary campaign, the September Semi-Annual Sale, and a 40-month 0% financing offer, which we brought back in November. New client acquisition increased more than 20% year over year in September, while engagement from existing clients also strengthened. And these results demonstrate our ability to attract new clients while deepening relationships with our existing client base. This strength extended beyond client acquisition. Order volumes and units per transaction increased, as well as average order value. Larger purchases were strong, and orders exceeding $25,000 increased 35% in the quarter, while orders exceeding $100,000 increased 30% for the quarter and 60% in September. These trends reinforce our confidence in the underlying health of our client base, the effectiveness of our investments in brand awareness and product innovation, and our ability to translate growing engagement into sustained demand.

Turning to our balance sheet, we ended the third quarter with $318 million in cash and cash equivalents, which is an increase of 25.5% from year-end 2025, with no long-term debt, reflecting our strong financial position and continued cash generation. Net merchandising inventory totaled $360 million, an increase of 6.4% from year-end, reflecting our continued investment in product availability and new collections balanced with disciplined inventory management. Client deposits reached approximately $325 million, an increase of 37.7% from year-end 2025, reflecting the strength of our outstanding client order base and providing visibility into future delivered revenue. For the first 9 months of 2026, net cash provided by operating activities totaled $173 million. Our strong financial position provides flexibility to fund our strategic growth initiatives while maintaining a disciplined approach to capital allocation.

Turning to strategic investments, we continue to advance our multi-year technology transformation with a focus on enhancing the client experience, improving operating efficiencies, and supporting future growth. As implementation progresses, we continue to refine the sequencing of our initiatives to support successful execution and maximize their long-term benefits. We completed implementation of our TMS this year and are beginning to realize the benefits. During the third quarter, our delivery network efficiencies helped to mitigate elevated fuel costs, demonstrating the early impact of these investments. We continue to expect $45 million in annualized savings at full scale, with benefits increasing in 2027.

We continue to advance our POS, ERP, and OMS initiatives. Our new POS platform is scheduled to begin piloting in the fourth quarter with a go live in the first quarter of 2027 to enhance the client experience and simplify showroom workflows. We expect OMS and ERP to be production ready in May 2027 with implementation costs starting to moderate thereafter, targeting a phased go live for either May or August to minimize operational disruption. We expect approximately 50 basis points of SG&A improvement by 2030 as transformation-related spending moderates to a more normalized level of ongoing licensing and maintenance costs. Together with expected transportation savings, improved inventory visibility, and greater operational efficiencies, we believe these initiatives will support meaningful adjusted EBITDA margin expansion over time.

Additionally, under K.C. Moss' leadership, we are accelerating our focus on digital and e-commerce growth, with priorities focused on enhancing the online client experience, improving conversion, and expanding our reach. Today, approximately 80% of our e-commerce clients live within 50 miles of a showroom, highlighting the significant untapped opportunity beyond our physical footprint. While we continue to expand our showrooms, we believe our digital strategy allows us to reach new clients and grow e-commerce independent of our real estate retail expansion. Our long-term ambition is to increase e-commerce penetration to 25% of revenue over the next 5 years, supported by a stronger digital experience, improved conversion, and greater awareness.

Turning now to our outlook, the third quarter marked our eighth consecutive quarter of delivering results at or above our guidance, reflecting our disciplined execution, our deep understanding of the business, and our measured approach to forecasting in a dynamic environment. We're particularly encouraged by the sustained strength in client demand over the past two quarters. And building on this momentum, we are raising our full-year net revenue and comparable delivered sales outlook, reflecting continued demand strength and our confidence in converting our growing written order pipeline into delivered revenue.

For the full year, we now expect net revenue between $1.465 billion and $1.485 billion, representing year-over-year growth of between 6.2% and 7.7%. This includes comparable delivered sales growth of 2.5% to 4.0%, and we are maintaining our full-year profitability guidance following this increase we made in the last quarter. With today's higher net revenue outlook, we have now raised both our top line and profit expectations over the past two quarters. The increase in our net revenue outlook is expected to generate approximately $4 million to $5 million in incremental profitability, which we are strategically reinvesting into initiatives to further growth. This includes approximately $3 million toward expanding our spring catalog circulation and approximately $2 million toward digital and e-commerce initiatives.

While fuel and transportation costs remain headwinds, we believe these targeted investments position Arhaus to drive future demand and support long-term operating leverage. We continue to expect net income of $71 million to $81 million and adjusted EBITDA of $160 million to $171 million. For the fourth quarter, we expect net revenue between $398 million and $418 million, representing a year-over-year growth rate of between 9.1% and 14.6%. And this includes comparable delivered sales of between 6% and 12%, and net income of between $21 million and $30 million, with adjusted EBITDA of $44 million to $55 million.

In closing, we are pleased with our third quarter performance, including record net revenue, strong comparable written sales growth, and our eighth consecutive quarter of meeting or exceeding guidance. We remain focused on converting written orders into delivered revenue, managing costs, and executing the investments that support sustainable, profitable growth. Thank you to our teams across Arhaus and our shareholders for their continued support. With that, I'll turn the call over to the operator. We are happy to take your questions.

[Operator Instructions]

Our first question comes from the line of Jonathan Matuszewski with Jefferies LLC. Please proceed with your question.

Good morning, John, Mike. It has two parts. The first part is on the 20% new customer growth in September. Anything that stands out there in terms of early ordering behavior or demographics for that cohort versus maybe your existing customers? I think you cited growth over $100,000 for certain orders. So is it safe to conclude your customer file may be shifting even more affluent these days? And then the second part, just Mike, if you could help us in terms of the path for converting written comps into delivered comps. If you could clarify maybe what's the written comp embedded in your 6% to 12% delivered comp for 4Q, and if you were to hit that, you know, what that would imply in terms of delivered comps as we kick off 2027? Thanks so much.

Hey, good morning, Jonathan. I can start with that. You asked about the new customers, the 20% increase. Yes, we haven't thoroughly -- to give it 60, 90 days to really dig into it. But what we're seeing is it was really across the board. It was across the existing stores, haven't dug into it because we normally see -- it was really across the board. It was geography. Stores have been around for many years, we saw a nice increase in new customers, as well as certainly the newer markets. We certainly found that as well that we do. Some of the newer markets where we were not known as well, getting the extra marketing and so forth really paid off.

So we're seeing it across the board. It definitely is a strong customer, like we have mentioned, a lot of second and third homes, remodeling being done in this country as people are not moving, and we're taking advantage of that. So it's an exciting thing to learn, and we're going to keep pushing it and get more and more customers.

Yes, just to build on that, Jonathan, we're really, really excited about the new customer acquisition in September. We think a lot of that comes back to the investment we made in the fall catalog and where we sent the catalogs and really did a good job of vetting the prospect targets, etc. So 20% growth is a pretty strong outcome for us. And that's what led really to our decision to lean in to the spring catalog. And just for everyone on the call, want to highlight we expense the catalogs when they're shipped, right? So that's one of the factors that impacted our Q3 profitability is we elected to expand the fall catalog circulation, and we expense that entire circulation during the planning quarter. Similarly, as we invest in the spring catalog, that's an investment that will incur the cost for in Q4. But again, there's early days, to John's point, on the return on investment, but the early indicators are that we're very pleased with the outcome.

In terms of your question around how accretive are these customers, we're still getting into the details of the customers that we generated through the catalog themselves. But when you look at average AOV on new customers versus existing customers in September, it's 30-plus percent higher. So it's very accretive, these new customers. So it's again another reason why we feel compelled to increase and lean into the spring catalog as well. So hopefully that provides a little bit of color. I think your question on the delivered and written sales for Q4, we don't really get into the guide on quarterly written and delivered, but I can tell you in Q3, I highlighted the variable comp impact in our P&L. And it's kind of an odd thing, but we do compensate our sales force on written sales, and written sales were about 20% higher than delivered sales in Q3.

So you can imagine that distortion where you're paying for essentially deferred revenue. And that's okay, the model works, we've had it this way for years. But when you have these periods where the quarter ends with a lot more written than delivered, you can have that distortion. So it's about 100 basis points of temporary impact on the P&L that will fully reverse out in Q4. So when you look at Q4 and you say, okay, how much, you know, if you wrote 20% more than you delivered in Q3, what does that look like for Q4? Right now we're modeling that Q4 delivered will be about 15% higher than written. But again, those numbers are still moving around a lot, but hopefully that provides a little bit of color on the dynamics between delivered and written.

And, Jonathan, just one thing I wanted to say. Oh, we'll go on to the next question.

Thanks so much, and best of luck.

Thank you.

Our next question is from Steve Forbes with Guggenheim Securities. Please proceed with your question.

Hey guys, good morning. This is Jake Nivasch on for Steve here. I just kind of wanted to piggyback on that one, but zeroing in on marketing here and the strategy altogether. So understanding the idea of expanding the catalog circulation, but can you elaborate on these targeted marketing initiatives and promo events that you've outlined today? I guess, you know, what specifically was done? You know, what did you learn? And really just from a brand awareness standpoint, do you see, you know, I guess an uplift in existing markets to the same degree as newer markets? You know, just trying to get a general sense of what the, you know, what the potential is here. Thank you.

Yes, Jake, I can start that. Yes, as far as markets go, it truly has been across the board. And we are targeting markets rather evenly, a little heavier in some of the newer markets where we were not known quite as well, but the response has been fantastic in both. And we're not doing anything different as far as promotions and that than normal. And we had the same promotion last year and the year before, you know, in the third quarter, so we're not changing our promotions at all. The product is working unbelievably well and we're seeing a big drive of that is one of the big reasons, not only the marketing part, but the product has really resonated with our consumer. And so, you know, some of that product really was getting to, you know, a few stores because it was new stuff, but after we were testing it, we're really encouraged to get the new really high-flying product out to all the stores. And so we see a great future coming up in 2027 as well.

Perfect. Thank you. And just one follow-up here. For e-commerce, understanding trying to lean into that some more. But just curious, I guess, how do you balance the growth between in-store showroom versus e-commerce? And I know you made the point that they are mutually exclusive to a large extent. But, you know, just curious if you can, you know, elaborate on that strategy, you know, maybe from a product and marketing standpoint, and how that may differ from, you know, from the in showroom. Thank you, guys.

Yes, as Mike said, we have a new head of digital and there's just a lot of low-hanging fruit that we can do on our website that will not only enhance and help sales on the website side, but also it'll drive a lot more consumers into the stores. You know, when people are purchasing a large amount of furniture, they really love to come in touch it, feel it, but they always start their transaction online, and so we think the enhancements we're already planning to do, and some of them we're literally starting already, on the e-comm digital side are going to help both, and I think help both evenly.

Perfect. Thank you guys.

Thanks, Jake.

Our next question is from Peter Keith with Piper Sandler. Please proceed with your question.

Oh, thanks. Good morning, guys. Congrats on the second consecutive quarter of the double-digit written demand. I did want to focus on that catalog that you mailed out in Q3. You talked about a doubling of the catalog shipments, a 4x increase in prospecting. So with the increased marketing expense for the spring catalog, is that something that what you did with fall you're going to repeat now with the spring catalog, and is that $3 million of expense the total amount or will it be some that carries over into Q1?

Yes, Peter, it's Mike here. Good question on the accounting. You know, we've run this a few different ways, but the clear reality is that accounting rules require that all of the catalogs get shipped at the time of delivery to the shipping provider. So as much as that creates a matching issue between expenses and revenue, that's how the accounting works. So there's a bit of a, think of it as a prepayment impact in December that we're going to incur with this shipment. But again, we continue to manage the business for long-term value creation, and it's absolutely, you know, the right investment for us to make. And, you know, it's a few million dollars, so, you know, it's something over the grand scheme of things isn't a huge investment, but it's worthwhile.

You know, going back to the question from Jake earlier around what are we learning, what are we experimenting with, you know, one of the things that we are experimenting with is how we prospect and making sure that we're taking a balanced approach between some of the bigger, more mature markets and some of the markets where we're, you know, newer and developing, right. We've been in California for only a few years and that's an area where, you know, we continue to look for ways to build brand awareness. And with this last catalog, we ended up deploying a little more of our circulation into California, particularly into some of those prospect markets where there's high net worth in some of these areas. And when you take a big step back, we think we're really well positioned in some of these newer markets in terms of site selection, in terms of where our showrooms are. But when you look at where our sales are coming from and you plot that against where all the wealth is, there's still tons of white space opportunity even in some of these markets. So John's really been pushing us on how do we build awareness faster in some of these markets, and we think the catalogs are going to be an important vehicle for us going forward.

The other thing we're experimenting with, and I know this is getting into a little bit of the weeds, but we send out more than just our big book. We send out mailers, we send out some category-level catalogs on occasion. And there's like an 8-to-1 tradeoff between we can send out eight small mailers for every big catalog, and we've been challenging ourselves on what's the role of each. And the little mailers that are like 5 to 7, 10 pages, those are great for creating kind of a pulse reminder to clients, but we don't believe that those stay on the coffee table for months and months, whereas the large catalogs stick around and they tend to be on the coffee table. And, you know, it might take someone 30 to 60 days of flipping through the catalog to get the order in, but, you know, we think it has that staying power. And with the work that we're doing on these catalogs, we're so proud of what's in them. We believe that, you know, that staying power is really important. So we're continuing to learn from that in terms of optimization.

And candidly, we're looking at how do we balance across printed versus e-comm. And we've been leaning into paid search on e-comm over the last several months, and we've been seeing good ROI on that as well. So that's that on catalogs. But getting back to digital, I just want to remind everybody that we see e-comm as a $500 million opportunity for Arhaus by 2030, right? So when we kind of take a big step back and look at our 5-year plan, we think we can get our e-comm business up from, you know, we're at 16% to 17% e-comm penetration in terms of mix of our business today. We think we can get that up to 25%. And that's an incremental, depending on your watermark here, but that's an incremental $250 million to $275 million versus where we are today. And what's really cool about that is when you look at the revenue growth from that, there's really strong gross margins from that because we don't have occupancy costs with leases and all the OpEx that goes along with running showrooms. We don't have all the staffing expenses across the showrooms. And candidly, as we grow e-comm, we can support it really efficiently from a G&A perspective. So we think it's absolutely transformational to our P&L, and hence, we're going to lean in really hard over the next 12 to 18 months.

We've already got a CDO, a Chief Digital Officer in place, and she's coming up to speed quickly. And as part of that, we'll be making some selective investments to really build out capabilities on the team in terms of engineering capabilities and UX design type capabilities, and folks that can help us with analytics and CRM and all of that. And we've got a very clear roadmap over the next 12 to 18 months of where we're going to make some investments in building out our web capabilities. We think we're in a very strong foundation today in terms of the technology platform, but there are some gaps that we see in our website today that we're going to close pretty rapidly here over the next 12 to 18 months. So we can't get into the details of the what and the when, but these aren't massive investments. These are very tactical that are mostly people-led. So our confidence level about delivering on these various initiatives over the next 12 to 18 months is high, and now that we've got dedicated resources to it, we're going to move as quickly as we can.

So in terms of like the P&L impacts over the short term, we're still working through what that revenue expense profile looks like, but we expect a lot of this to be self-liquidating, where the revenue growth that we get even into next year is going to pay for some of these investments. At a minimum, it should be like break-even type investments, and then it will grow into accretive investments over time. We'll have more to talk about digital on our Q4 call. Once K.C. gets up to speed, we'll start to share a little more about where we're going and what the profile of the growth looks like. But I'll leave it with that for now, Peter.

Okay, thank you very much for all the detail, Mike.

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Good morning. This is Adam asking a question on behalf of Simeon. So I'm just curious, are customers primarily buying individual pieces, or are you seeing more demand for complete rooms or multiple room projects? So could you talk a little bit about how the mix has changed recently? Thank you.

I think we said that in our earnings call that we're seeing folks spend more money. We're seeing some larger sales, very nice growth as Mike just had said on the call. So, in the third quarter we saw both. We saw more traffic in the stores. We've seen more individual sales, but more importantly, we've been seeing some more of the larger sales have really been adding up. Like I said, people aren't moving. They're fixing up their homes, and they're putting money into it. Our customers are certainly elevated where they are earning enough money to put money back into their homes, and we're getting the benefit of that.

Okay. To build on that, Adam, one of the things that we're really excited about in the business is how we alluded to in our remarks how broad-based the growth was. Just to kind of build on what John was talking about, when you look at traffic, we saw showroom traffic grow low single digits during the quarter. E-comm traffic was up double digits during the quarter, which was great. And then you get into like the sales equation. Order count was up in the teens in the quarter, and if you look at it on a comp basis, our order count was up high single digit. Our AOV was up high single digit, and that was really driven by growth in both units per transaction. So it gets at your question, Adam, about are people buying one big piece or multiple pieces? Well, we saw growth in units per transaction. So that should answer your question.

And then average unit retail is obviously up year over year with the pricing actions that we have taken. And then just going back to some of the transaction sizes, really happy with the continued premiumization of the business, with orders above $25,000 growing 35% in the quarter, which we thought was really impressive. When you look at it from a product perspective, one thing we didn't comment on, but we're really excited about, is special order. Special order is growing share of our business. So special orders actually grew about 50% faster than the overall business, to just give you a sense of how excited some of these new categories are where we have special order options that we didn't have in the past.

And then newness continues to be a huge priority for us. Our merch team is moving faster than ever before, and the feedback that we're hearing from customers, the orders that they're placing on newness has been really, really impressive. And, you know, we don't always highlight this, but when you look at the quarter, customer satisfaction continues to perform well. When you look at some of the metrics around cancellations and returns and exchanges, all improved versus prior years, which means that we're executing well, customers are happy with what they're getting, and we're seeing fewer cancellations and returns. So really, I couldn't emphasize more how broad-based the performance has been for the last quarter and in many ways with Q2 as well.

Thank you so much.

Our next question is from Cristina Fernández with Telsey Advisory Group. Please proceed with your question.

Hi, good morning. I wanted to see if you could frame the 2026 guidance. What are the key factors to get to the low end versus the high end? And as you look at the strong demand trends you're seeing to the extent that that continues in the fourth quarter, is the philosophy to reinvest that in the business as you did in the third quarter or to let some of it flow to the bottom line? Thanks.

Yes, good question, Cristina. Look, that's always the balance, right? We are really excited about what we're seeing from a written order perspective, and there's so many things that are working well now. We have had, I'd say, a bias toward investment, but it's a balance of price. And we continue to apply the same financial rigor that we've talked about quarter in, quarter out, over and over, and we are in a bit of an investment mode. The catalog investments that we're making, we think are working really well. We're leaning into data, and there's going to be some investments there, but it's going to be a balanced approach, Cristina. We can't do everything at once. So it's really with a focus toward let's continue to grow the business, but let's make sure that we're balancing against execution. Because it's not just taking the orders. We've got to get them out, right? And we've got to manage the supply chain along the way and make sure we keep customer satisfaction up.

In terms of what frames Q4, look, we talked about the investments, so those are kind of set at this point. But what will really drive Q4 is on the delivery of the current open orders. And we are pushing hard on the supply chain. We're asking a lot of them. We are setting records every week and every month now in terms of total delivered throughput. So they're really killing it from an execution perspective. And if we can exceed even our current expectations, we can come in on the top side because there's plenty of demand out there that's open orders, it's just how much can we actually get out the door. We continue to be well positioned from an inventory perspective, from an in-stock now status, but we have seen a little bit of a dip in in-stock now just with the outsized growth that we experienced in Q3, but nowhere near some of the challenges that we had last year at this time. So we're continuing to navigate through that. So in a nutshell, Cristina, it's how much can we actually get delivered? And we're pretty comfortable on the low end. The high end would require a few more record-setting weeks from a delivery perspective.

Our next question is from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning. This is Alexandra Jimenez on for Bobby Griffin. Thank you for taking our question. I wanted to follow up on gross margins and the transportation efficiencies. You guided to $1 million to $2 million of the TMS savings in '26 and then $4 million to $5 million at full implementation. When should we expect to realize the full run rate benefit? And then more broadly, how should we think about the underlying gross margin trajectory into '27, particularly as we lap one-time tariff refund benefits? And then could you also remind us what the tariff refund impact was in 3Q and then what you're expecting for 4Q?

Yes, there's a lot there. So let me think, where do we start here? In terms of the margin profile going into next year, you know, we're well into our budget cycle for fiscal '27. And, you know, when you look at some of the foundational assumptions going in, we are forecasting into our plan elevated fuel costs will continue into next year, right? And right now we're kind of modeling through half of next year that we'll continue to see these elevated fuel surcharges. It's been very volatile, as you guys know, but the fuel surcharges have hovered anywhere as high as 11%, 12% during the quarter, as low as 8%, so it's really moved around a lot. I think we're doing a good job of managing it, but it's just a very dynamic environment.

So the delivery fee increases that we took are helping to mitigate some of that. But in hindsight, we look like geniuses pushing for our TMS technology to be the first out of the gate on our transformation initiative. We launched our TMS, which is our transportation management system for folks on the call if you don't know these acronyms, but this is the technology that we deployed this past summer to help us improve effectiveness on how we route product, and it's helping us on improving how much we put on a truck, and it's actually helping us to optimize the lanes that we select. And in the quarter, you know, on a base rate perspective, we saw around 80 basis points of benefit from a delivery perspective. We can't assign all of the benefit to TMS, but we know TMS is really driving a majority of that. So at this point, I'm comfortable saying that from a TMS perspective, we're going to exceed the $1 million to $2 million target that we set this year. And going into next year, we expect to be at that $4 million to $5 million run rate and potentially even higher. We're really happy with what we're seeing on this technology.

In terms of the delivery fee that we took, we took that as a reminder in June, and that was on all written orders starting in June, and it takes a couple of months for it to flow through. So we're starting to see that flow-through benefit, and that will come to full maturity in Q1 of next year. And I think that was around a $5 million annualized impact. And between that and the TMS benefits, we're hoping that that will offset a lot of the fuel surcharges that we're seeing. The other thing that we don't talk about, but it's also an economic impact I want you guys to be aware of, is there's been a lot of mention in the press around just ocean containers. And I just want to squeeze this into your question because we buy 6,000 to 7,000 containers a year, and the costs on those containers have gone up, and availability has been challenged. In fact, our supply chain team has really been doing a great job of managing through what's been a very challenging shipping situation, particularly places like India and Vietnam where container availability has been a bottleneck. So even if you're willing to pay spot prices, availability has been a challenge. The good news is we're starting to see it loosen on availability, and spot prices are starting to moderate a little bit. But our latest forecast is when you sort of run through what we've seen year-to-date September and what we've got forecast for Q4, we're expecting a $5 million to $6 million rate impact from this past year.

Now all that flows into inventory as part of our landed costs, and that will flow out into next year. But this is the kind of stuff that we're taking into account when we forecast out next year. So when you put all this together, we took some price increases in large reaction to some of these headwinds that we're talking about between ocean freight and fuel surcharges and all of that. But when you look at next year's margin profile, despite the fact that we're not going to have a big refund in our numbers, we're hoping to target a gross margin with a 4 handle on it, not a 3 handle. So more to come on our Q4 call, but we're really pushing hard. And John has really pushed the teams on protecting margins. And I've seen him in action on all these decisions as well. So we're aligned as a management team, and it's really just about executing.

Thank you.

Our last question will be from Andrew Carter with Stifel. Please proceed with your question.

Hey, thank you. Good morning. I just want to clarify something real quick. You did say earlier in the call that you expected written to be 15 points below demand. You were guiding to 6% to 12% comparable sales growth in the fourth quarter. That, by my math, minus 9, that would be -9% to -3% written sales in the fourth quarter, which is down from 13% in September. You also have ongoing pricing going into place. So is that just conservatism in your guidance, or is there a significant breakdown starting in October or something in comparison, something to worry about, something with demand conversion, higher cancellation rates, anything? Thank you.

Yes, Andrew, the numbers I was quoting around the ratio between written and delivered was not off of our comp basis. It was off of total because that's the total business. We don't get into monthly disclosures, but we're pretty happy with October results. It's been in many ways a continuum of the strength that we've been seeing. So we'll leave it with that for now, but we're really confident with the guidance that we're putting out for Q4. And getting back to the earlier question in terms of what's going to drive low end of the range versus the high end, it's really going to be our ability to get the deliveries out over the next 6 to 7 weeks.

It would still be negative demand in the fourth quarter, even off the top though then, which is what's in the guidance, right?

Yes, we're not forecasting a negative comp for Q4.

Delivered is what I'm saying. Delivered written would still be negative off that 15-point commentary.

Yes, we're not forecasting a negative comp for written or delivered in Q4.

This live transcript is auto-generated without human intervention or review.

Thank you. Good morning and welcome to the Arhaus Second Quarter 2026 Earnings Call. Please note that this call is being recorded and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, [ Tara Atwood-Saja ], Vice President and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Arhaus Second Quarter 2026 Earnings Call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman, and Chief Executive Officer, and [ Michael Lee ], our Chief Financial Officer. During Q&A, we kindly ask that you limit yourself to 1 question only. This will allow us to get to as many callers as possible within our 1-hour window. You are welcome to re-queue for additional questions if time permits. We issued our earnings press release and Form 10-Q for the quarter ended June 30, 2026, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com.

A replay of the call will be available on our website within 24 hours. I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, targets, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent annual report on Form 10-K and subsequent 10-Qs as factors may be updated from time to time in our filings with the SEC.

The forward-looking statements are made as of today's date and except as may be required by law. The company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliations.

Now, I will turn the call over to John. John, over to you. Thanks, [ Tara ]. Good morning, everyone, and thank you for joining us. This morning, we reported second quarter results that reflect the continued strength of the Arhaus brand and the resilience of our business. We generated record net revenue and strong comparable written sales, reflecting continued client engagement and momentum across our 3 customer demand channels, which is a testament to the strength of our differentiated model. While the broader environment remains dynamic, the high-end consumer continues to demonstrate resilience supported by a relatively healthy U.S. economy, solid consumer spending, and the positive wealth effects of higher stock prices. We delivered record net revenue of $385 million, above the high end of our guidance range.

Comparable written sales increased 12.5% in the quarter, bringing year-to-date comparable written sales to 2.8%. Our clients remain highly engaged and continue to prioritize investments in their home, driving strong demand for our differentiated product assortment and the elevated experience Arhaus provides. Turning to products. For 40 years, Arhaus has been built on the belief that furniture and decor should be responsibly sourced, lovingly made, and built to last for generations. That philosophy continues to differentiate our brand and remains one of our strongest drivers of client demand. During the quarter, we saw strength across our assortment and collections. Clients responded to our distinctive mix of heirloom quality furnishings, globally curated designs, and handcrafted pieces made with natural materials and time-honored techniques.

Strong written sales reflected continued interest in new product introductions alongside our extensive customization capabilities, giving clients the opportunity to create spaces that feel uniquely their own. This balance of timeless design and thoughtful innovation continues to resonate with both our new and existing clients. Demand was broad-based across categories, including upholstery, outdoor, and the collected home, our vintage-inspired collection celebrating craftsmanship, heritage, and enduring designs. Classic upholstery manufacturing capabilities in North Carolina remain an important competitive advantage, allowing us to deliver exceptional quality, customization, and service while providing greater flexibility and control over production.

We remain committed to keeping our assortment fresh while staying true to the aesthetics that define Arhaus. We believe the strength of our product strategy lies in offering distinctive furnishings that are difficult to replicate, supported by disciplined merchandising, continuous product innovation, and meaningful investments in our product pipeline. Looking ahead, we have several important events in the coming weeks to engage with our clients. We will launch our special 40th Anniversary Fall Catalog, reaching more than double the number of households compared to our Spring Catalog, including a focus on high-potential prospective clients, followed by our September semi-annual store-wide sale.

Combined with compelling new product introductions and a strong in-stock position, we believe this positions us well for the important fall selling season. Better inventory availability allows us to offer clients more of what they want, when they want it, supporting higher conversion, stronger delivered sales, and an even better client experience. I want to thank our product team and artisan partners around the world. Their passion for great design, commitment to craftsmanship, and ability to anticipate emerging trends continue to differentiate the Arhaus brand and bring our vision to life for our clients.

Turning to our clients, the second quarter reinforced the breadth and quality of demand across all 3 demand channels: our core customers, Arhaus interior design, and trade. Throughout the quarter, we continued to see clients investing in home through larger, higher-value projects, reflecting healthy engagement with our premium assortment and no meaningful evidence of trade down. We believe this speaks to the resilience of our client base, the differentiated value of the Arhaus brand, and the enduring appeal of our product offering.

Interior design continued to be an important driver for client engagement, as more clients use our complementary design services to bring larger, whole-home projects to life. These relationships not only create a highly personalized experience but also create a deeper client loyalty and long-term engagement with Arhaus. We have also been encouraged by the early response to the enhanced trade program, which relaunched earlier this year. Supported by the dedicated team focused on expanding relationships with design professionals, we believe the program represents a meaningful, long-term opportunity to broaden our reach, cultivate a growing base of recurring project-driven business.

Overall, the continued strength across our core customer, interior design, and trade channels highlights the multiple ways clients choose to engage with Arhaus. We believe this diversified demand model, combined with the differentiated product and elevated client experience, positions us to continue building lasting customer relations supporting sustainable long-term growth. Turning to showrooms. Our showrooms are the front door of the Arhaus brand and one of the most important drivers of awareness, engagement, and conversion. They bring product to life, support our interior design and trade channels, and provide an immersive client experience that differentiates Arhaus.

Demand across the showroom portfolio was broad-based during the quarter. We generated strong written sale growth across every region and all of our showroom formats, including our traditional and design studio showrooms. This breadth gives us confidence that demand is not dependent on a single geography or market and that our product and brand resonates with clients from coast to coast. We continue to see significant white space for expansion while maintaining a disciplined approach. During the second quarter, we opened a nearly 20,000-square-foot traditional showroom in Ashburn, Virginia. We relocated our Westlake, Ohio showroom and expanded our Park Meadows showroom in Lone Tree, Colorado.

And just last week, we opened our newly relocated Charlotte, North Carolina showroom at the Village at SouthPark. At approximately 35,000 square feet, it is our second largest traditional showroom after our Pasadena, California showroom and provides an elevated immersive destination for our clients in an important market for us. The opening also reflects our long-standing connection to North Carolina, where skilled artisans craft many of our signature upholstery pieces. For 2026, we continue to expect approximately 10 to 14 total showroom projects, including 4 to 6 new openings, 6 to 8 relocations, renovations, and expansions. We maintain a disciplined approach to evaluating projects against our targeted return criteria.

Our recent openings have continued to perform in line with our expectations. A key reason for our showrooms to perform well is our people. Ashburn demonstrates the importance of combining the right location with the experienced team. We established leaders from nearby showrooms at the location and hired and trained the broader team well ahead of the opening. As a result, Ashburn opened with a team that understood our product, client, design services, and service model. The showroom has performed ahead of our expectations since opening. We continue to believe our physical presence remains an important competitive advantage and a meaningful driver of awareness, client engagement, and conversion.

As we look ahead, we remain focused on executing the strategy that has served us well for 4 decades: creating exceptional products, delivering an elevated client experience, and investing thoughtfully in the long-term growth of the Arhaus brand. We believe we are well positioned for the important fall selling season and remain confident in the signature opportunities ahead. I want to thank our team members and artisans around the world for their passion, craftsmanship, and commitment to excellence. Their dedication is what makes Arhaus special and continues to strengthen the relationship we have with our clients. With that, I'll turn the call over to [ Mike ].

Thanks, John, and good morning, everyone. Our second quarter performance reflected disciplined execution against our most difficult year-over-year comparison of 2026. We delivered results above the high end of our guidance range across all our key financial metrics and generated strong comparable written sales, reinforcing our confidence in the full-year outlook. This marked our seventh consecutive quarter delivering results at or above our guidance. Before I turn to our results, I want to address an unplanned benefit related to [ IEPA ] tariffs that was recognized in the quarter and not included in our previous financial guidance. Arhaus requested refunds of $37.8 million for [ IEPA ] tariffs previously paid. As of June 30, 2026, we recognized a receivable of $32.7 million, which is included in prepaid and other current assets within the balance sheet, and we received $5.1 million in cash refunds.

During the quarter, we recognized a benefit in cost of goods sold of $23.8 million for the recovery of [ IEPA ] tariffs paid, of which $15.5 million is related to inventory sold prior to April 2026, and $8.3 million is related to inventory sold in the quarter. Additionally, we reported $14 million primarily related to a reduction in inventory costs in merchandise inventory net within the balance sheet. As of today, we have received a full tariff refund in cash. Moving on to our results for the quarter. Net revenue was approximately $385 million in the second quarter, up 7.4% year-over-year, marking the highest net revenue in our 40-year history. This performance is particularly notable as we lapped a prior-year period that benefited greatly from the accelerated ramp following the insourcing of our Dallas Distribution Center. We grew over that comparison, and year-over-year comparisons ease through the balance of 2026.

Gross profit was $172 million, up 16.1% versus last year. This increase included a recognized $23.8 million benefit from the recovery of previously paid [ IEPA ] tariffs, of which $15.5 million related to inventory sold prior to April 2026. Excluding this benefit and to better reflect a more normalized gross profit for the quarter, gross profit would have been $157 million, up 5.6% versus last year, primarily due to higher net revenue. Gross margin was 44.7%, an increase of 330 basis points versus last year. This increase included 400 basis points of benefits related to the [ IEPA ] tariff recoveries associated with the inventory sold prior to April 2026. Excluding this benefit, gross margin would have been 40.7%, down 70 basis points versus last year, driven largely by higher fuel and shipping costs.

Notably, we increased our delivery fee in June to help offset these inflationary pressures, and this will start to flow through in the third quarter. Selling, general, and administrative expenses were $118 million, up 16.1% versus last year. The increase was primarily driven by an $8.4 million increase in general and administrative costs, including approximately $3 million of strategic investments related to technology licensing and other costs incurred to support our business transformation. We also saw a $7.9 million increase in selling expenses, primarily related to new showrooms and increased demand for our products. As a result, SG&A load increased 230 basis points to 30.6%. While our strategic investments create some near-term expense pressure, we believe they are important to strengthening the client experience, improving scalability, and supporting long-term profitable growth.

Net income was $40 million, up 13.1% versus last year, and adjusted EBITDA was $70 million, up 16.8% versus last year, both above the high end of our guidance range. Excluding the $15.5 million tariff refund benefit associated with inventory sold prior to April 2026, adjusted EBITDA would have been $55 million, down 8.9% versus last year, primarily reflecting higher fuel and shipping costs, increased selling expenses associated with new showrooms, and strategic investments to support long-term growth of the business. Adjusted EBITDA margin was 18.3%, an increase of 150 basis points versus last year. Excluding the 400-basis-point tariff refund benefit associated with inventory sold prior to April 2026, adjusted EBITDA margin would have been 14.3%, down 250 basis points versus last year, driven largely by higher fuel and shipping costs, increased selling expenses associated with new showrooms, and strategic investments to support the long-term growth of the business.

Turning to our comparable metrics. Comparable delivered sales increased 4% in the second quarter, exceeding the high end of our guidance range against our most difficult delivered sales comparison for the year. Year-to-date, comparable delivered sales were 1.4%, consistent with our full-year outlook of flat to positive 3%. Comparable written sales increased 12.5%, bringing year-to-date comparable written sales to positive 2.8%. We believe the second quarter acceleration reflected a combination of factors. As John mentioned, we saw broad-based strength across our product assortment, including newness, upholstery, customization, outdoor, and the collected home assortment. In addition, our interior design team continued to generate strong momentum by inspiring clients, deepening engagement with the brand, and helping convert larger, more complex projects.

We also benefited from increased marketing activity designed to drive engagement, conversion, and brand awareness. These efforts included incremental investment in paid search and digital optimization, as well as our planned catalog expansion to additional households. As we have seen historically, periods of temporary softness can be followed by stronger demand as clients re-engage. And overall, we believe this second quarter performance reflects a combination of some recovered demand from the first quarter and healthy underlying momentum across the Arhaus brand. Before turning to our balance sheet and outlook, I would like to provide additional context around our long-term financial framework and how we are positioning Arhaus for sustainable growth. While quarterly results can vary based on the timing of written to delivered conversion, our promotional cadence, investment timing, and the broader macroeconomic environment, our long-term strategy remains consistent.

We are focused on building a larger, more profitable business by balancing market-leading revenue growth with expansion in profitability over time. This is summarized by our 3 strategic imperatives as follows. First, achieving market-leading sales growth. We continue to see meaningful opportunities to grow the Arhaus brand by simplifying the selling experience across our channels, creating a more seamless, omni-luxury journey for our clients, expanding our showroom footprint, growing our interior design, trade, and contract businesses, broadening brand awareness, and strengthening our digital and e-commerce capabilities. Together, we believe these initiatives deepen client engagement, expand our market share, and support sustainable long-term growth.

Second, strengthening our product leadership. Our product remains our greatest point of differentiation and the foundation of the Arhaus brand. We continue to invest in innovation and newness while preserving the timeless design aesthetic that defines us. Our focus remains on extending our leadership in luxury upholstery, building on the strength of our best-selling collections, and attracting luxury customers through fresh, relevant assortments. Third, advancing operational excellence and perfecting the client experience. As we grow, we remain focused on building a more efficient and scalable operating model by accelerating product flow from concept to showroom, enhancing execution across the business, and digitally enabling the enterprise.

Technology is a key enabler of this strategy. And during the second quarter, we successfully launched TMS, and our ERP and OMS implementations remain on track for a February 2027 go-live. In addition, we are opportunistically pulling forward the implementation of our new modern POS platform into the fourth quarter of this year, ahead of our original timeline. This pull-forward simplifies our overall technology roadmap, accelerates our transition from legacy systems, and equips our showroom teams with a more modern and intuitive selling platform. Over time, we believe these investments will create a more seamless, connected experience across our customer demand channels, improve operational efficiency, and further elevate the client experience.

Turning to our balance sheet and liquidity, we ended the quarter with $226 million in cash and cash equivalents, maintaining our strong liquidity position. Net merchandise inventory totaled $354 million, up 4.3% from December 31st of 2025. The composition of our inventory remains healthy, with aged inventory down both sequentially and year-over-year. Importantly, best-seller inventory improved during the quarter, and we exited June with strong in-stock levels across our network. Overall, we believe we are well positioned in inventory to support current demand, continued product newness, and the conversion of written orders into net revenue. Client deposits ended the quarter at approximately $264 million, up 11.8% year-over-year, reflecting the strength of second quarter written demand.

Turning to tariffs and sourcing. Following the recent implementation of the new Section 301 tariff framework, we estimate our 2026 tariff impact to be approximately $30 million to $40 million. We continue to address this headwind through our diversified global sourcing strategy, vendor negotiations, pricing actions, and ongoing operational efficiencies. These initiatives provide us with many levers to help mitigate tariff-related costs while maintaining our focus on product quality, value, and long-term profitability. While the tariff environment remains dynamic, our diversified sourcing model and disciplined operating approach positions us well to adapt as policies evolve. We will continue to monitor developments and adjust our sourcing and pricing strategies as appropriate.

Turning now to our outlook. As I mentioned earlier, the second quarter marked our seventh consecutive quarter of delivering results at or above our guidance. This consistency reflects our understanding of the business, our disciplined execution, and our measured approach to forecasting in an environment that remains dynamic. We were very pleased with our second quarter results and the meaningful acceleration in comparable written sales. The quarter strengthened our confidence in the full-year outlook. At the same time, we believe it remains appropriate to maintain a prudent net revenue range that reflects multiple potential scenarios for the consumer environment. For the full year, we continue to expect net revenue between $1.43 billion and $1.47 billion, representing year-over-year revenue growth of between 3.7% and 6.6%. We continue to expect comparable delivered sales of flat to positive 3%.

We are updating our full-year profitability guidance to reflect the benefit recognized from the recovery of previously paid [ IEPA ] tariffs, and we now expect net income of $71 million to $80 million and adjusted EBITDA of between $160 million and $171 million. As we've discussed, we view the [ IEPA ] tariff recovery as a discrete one-time benefit that is being allocated as follows. First, and consistent with our long-term capital allocation philosophy, we are reinvesting a portion of these recoveries back into the business to support strategic growth imperatives. These investments include more than doubling the distribution of our fall catalog and increasing our spring 2027 catalog circulation in a similar manner, as well as expanding our marketing and digital investments, and pulling forward the implementation of our new POS system.

These incremental investments, which are reflected in our updated guide, are expected to total between $7 million and $10 million during fiscal 2026. Second, the recovery helps offset meaningful cost pressures we continue to face across the business, including approximately $10 million of elevated fuel expense and $10 million of higher shipping costs for the year, driven by disruption in the Middle East, as well as ongoing labor and inflationary pressures, while preserving the economic flexibility as the tariff environment continues to evolve. And finally, after funding these strategic investments and offsetting the incremental costs, the remaining benefit of approximately $10 million flows through to adjusted EBITDA and is reflected in our updated full-year profitability guidance range.

Importantly, our outlook does not assume a meaningful improvement in housing turnover, consumer confidence, or the broader macroeconomic environment. Turning to the third quarter, we expect continued business momentum, balanced against ongoing macroeconomic uncertainty and variability in the timing of written sales conversion to delivered sales. Our outlook is supported by healthy product availability, continued strength across our interior design trade channels, compelling new product introductions, our 40th anniversary fall catalog, and our September semi-annual store-wide sale.

From a profitability perspective, we expect the third quarter to reflect the continued impact of tariffs, elevated fuel and shipping costs, and planned investments in technology and marketing. These pressures are expected to be partially offset by the growing benefit of our June delivery fee increase. Pricing actions we've taken are going to be very important, taken in transportation productivity initiatives, including the initial TMS benefits, as well as continued disciplined expense management. For the third quarter of 2026, we expect net revenue between $355 million and $375 million, representing year-over-year growth of between 3% and 8.8%. We expect comparable delivered sales of minus 1% to positive 5%, net income of between $8 million and $13 million, and adjusted EBITDA of between $26 million and $34 million.

We are pleased with our second quarter results and the progress we have made across Arhaus. We delivered results above the high end of our guidance. We saw a meaningful acceleration in written sales, and we continue to execute against the operational and strategic priorities supporting long-term growth. While the environment remains dynamic, we are focused on the factors within our control, which include driving demand, improving conversion, managing our costs with discipline, and building a stronger, more scalable, and more profitable business. I want to thank our teams across Arhaus for their continued focus and execution and our shareholders for their ongoing support. With that, I turn the call over to the operator. We are happy to take your questions.

Thank you. [Operator Instructions] Our first question will come from Jonathan Matuszewski with Jefferies.

Your results confirm a narrative that's kind of building around a widening divergence in affluent consumer spend on this category relative to maybe a mass consumer. So, can you add some more context around your 2Q demand trend? As we think about the acceleration, how much of that has been driven by an uptick in new customers entering your file? How much did discrete pricing adjustments contribute? And it sounds like mix is playing a role as well with consumers maybe leaning towards higher value complex projects. So how did your 2Q demand break down across some of those drivers? Thank you.

Sure, Jonathan, I can try to answer the first part of that. So, first of all, across the board, we didn't see any meaningful change in new customers versus existing customers. It stayed pretty much as it has been. The product assortment has gotten so much better that we're seeing basically larger sales per customer. A lot of people are renovating, some new home builds, but a lot of people are putting money back into their homes as they decided maybe not to move. And so we're seeing a really nice increase in people coming in, being very serious about renovating a room or entire house. And that certainly has helped our business. Anything to add, [ Mike ]?

Sure, I can build on that. Jonathan, I'd say just looking at overall traffic in the quarter, we were very happy with traffic. It was a big rebound versus Q1. And when you break down the fundamentals of existing versus new customers, I agree with John, it was very consistent, but in total up versus where we were in Q1. Looking at things like order, average order value, units per transaction, you know, those all continue to perform quite strong. And then even looking at order sizes and order counts for large sales, we were very happy with Q2 looking at orders above $10,000, orders above $25,000, orders above $100,000. It was quite strong. So we are very happy with what we're seeing from our customer base and would concur that the high-end consumer continues to perform well.

Thank you. Best of luck.

And our next question will come from Steven Forbes with Guggenheim Securities.

This is [ Jake Neubosch ] on for Steve. So John, just a question on the trade program. So given the strength in written demand trends, curious if you can expand upon the trade program, how it's performing, and maybe give us some high-level commentary on the size of that business today if you're able to quantify, you know, what key initiatives you're leaning into to scale it here. Thank you very much.

Sure, Jake. I'd be glad to. So the trade program is one that we've focused as we've been talking about. A few things we've done. We've adjusted or given an option on how the trade folks can earn money on buying our products. We had been paying a commission-based thing. Now we're doing a discount as well. So we're letting the trade members decide which way they want to go, which has been extremely successful. We've been adding thousands of new trade numbers each month, actually, since we started that. And that just launched a few months ago.

With that, we've also added a significant amount to the team, folks that are living all over the country that are, we're in the trade business or are in the trade business that are helping us attract new trade design firms to come and work with us because, you know, we offer everything. They can come in and do everything from the lighting to the rugs to the upholstery. Arhaus is a full-service shop, whereas most trade members have to go through catalogs and order things from all these different companies. And we make it simple. You know, we warehouse it for them. We stand behind it. We repair it if something happens to it. And the trade members are loving that. So we think it's a huge opportunity. We're just really getting started with it. And the future should be amazing.

And moving next to [ Madeline Check ] with Bank of America.

Could you provide a little more color on how comps progressed through the quarter, including the exit rate in June and what trends you saw in July that keep you confident in your full-year outlook?

Hi, [ Maddie ], it's [ Mike ] here. Yes, we don't get into monthly disclosures anymore, but I will tell you that we were happy with the quarter overall. We alluded to the fact on our last call, I think we referred it to kind of a V-shaped recovery as we were getting into like the second half of the April timeframe. And I'd say overall for the quarter, we were quite happy with the performance. Normal, you know, normal seasonality ebbs and flows with the flow of our promotions, but quite happy.

You know, the other thing, just to build on that, [ Maddie ], you know, in terms of promotions, one of the things that we started doing in the quarter that we really appreciated, plan to continue over the next 6 months is the promotion strategy that we implemented around some of these up to 50% off discounts. We're really focused on some of our long-dated inventory. We found that it proved to be a really good traffic driver, created a lot of excitement in the showrooms, and also allowed us to move through some of that long-dated inventory.

And when you look at the margin impacts of that, it was quite modest because those up to discount offers were really limited to mid-single-digit mix of sales overall. So it didn't have a lot of impact in terms of the financials, didn't have a lot of impact in terms of mix of sales, but allowed us to move through that inventory. So we're coming out of Q2 pretty jazzed about our results. And Q3 is, again, shaping up to look pretty well. So consumer continues to be happy. As John mentioned, we're in a great position from a product perspective, better position from an in-stock status than we've been in for many months, really since I got here 14 months ago. So we're very encouraged about where the business is and where it's headed.

And I'll just add to that quickly too, and John jump in, you know, when we think about coming into the fall, [ Maddie ], you know, we talked about that 40-year anniversary catalog. We're incredibly excited about that. It's doubling in terms of the household that we're getting that to, a newness we alluded to as well, just the incredible designs and also that semi-annual sale. So that will certainly provide strength and demand and people coming in and just engagement. And John, I don't know if you want to add anything about the product and newness we're seeing for the fall.

Yes, that's the most exciting part in our business is the new product has just truly been killing it. And we're just getting started with it. You know, we rolled out a lot of newness products come the first quarter. We tested it in a fair amount of stores. And now that we've seen what is working, we are rushing to get it to all stores in many cases. And when we launch the September catalog, we think it's by far the best ever. I mean, the best-looking catalog, but absolutely the best lineup of new products we truly have ever had.

And we think it's going to carry us through certainly the third, fourth quarter into next year for sure. And we'll keep going with that. And yes, it's going to be an exciting second half of the year.

Some of the leading indicators, [ Maddie ], on newness for the fall, we're starting to get some early indicators from customers that we're going to blow away newness relative to last year as well. So really excited about the newness that's coming out.

And our next question will come from Peter Keith with Piper Sandler.

This is [ Alexia Morgan ] on for Peter Keith. We were wondering if you could elaborate more on assumptions around the sustainability of the Q2 momentum for full-year guidance, just since it seems like the full-year demand comp guidance assumes some deceleration in the second half. Thank you.

Yes, again, I think our business is going to be strong. We certainly are cautious with external things going on in the world, certainly trade costs and wars and all kinds of things like that that we can't forget about. So we're rather conservative in our thinking, but we think it's going to be strong. Knock on wood, if everything stays the way it is now, it should be pretty strong, and we're very happy with it.

[ Alexia ], if I could just offer, you know, internally when we're, you know, forecasting our business, we've always got sensitivities around the forecast between high-side, low-side forecast when we get into our merch plans. And I can tell you that, you know, there is, you know, a lot of optimism today within our merch teams on the second half possibilities. And we are protecting against some of the high-side forecasts that we're seeing just to make sure that if the performance continues at Q2 levels that we're well positioned to support that business. So that does nothing in terms of the guidance we're providing, but it gives you a little bit of a peek on internal sentiment on the business.

And we'll hear next from Peter Benedict with Baird.

So question on kind of product margins down 190 basis points in the quarter. If you could dig in a little bit further on what the drivers were there, maybe bucket those, and then how you think about that over the back half of this year, thinking about 4Q in particular as you lap the inventory and business, and then how you think about the market as a whole impairment. And related to all that, the delivery fee increase from June 1, how's that kind of impacting the guidance over the back half of the year? Thank you.

Yes, thanks, Peter. Good question. I can cover some of the key drivers of margin, though we don't get into quarterly guidance on gross margin per se. But I'd say the number 1 driver on margin is tariff assumptions, and we continue to expect $30 million to $40 million of tariff impact for the year. I think last quarter, we had mentioned that we were coming in at the lower end of that range. I think with the latest on tariff announcements, we're coming in closer to that midpoint, slightly above the midpoint on that range. But that $30 million to $40 million range continues to be valid.

On fuel, you know, look, you know, this is a tough one to forecast, but we do expect fuel surcharges to remain elevated into Q3 and Q4 at similar levels of what we expected in Q2. But, you know, depending on the news of the day, right? This could change wildly. But our current forecast, you know, is assuming about a $10 million impact for the year. $4 million of that's behind us. And you guys know that that $4 million is really Q2 in nature because in Q1, you know, fuel prices didn't have a big impact. So, you know, expecting about a $5 million to $6 million impact balance of year. But again, that's really subject to change based on oil markets and the Iranian war and all of that.

From a shipping supply chain perspective, you know, I think [ Tara ] did a nice job in the investor relations investor deck laying some of this out in more detail. But we've got about $10 million of impacts factored in our guide on, I'll call it just shipping slash supply chain slash manufacturing headwinds. And the reality is that from a shipping perspective, even though we are largely hedged on shipping because our containers are under contract, when we go to the spot market for additional containers, we're exposed to the spot market prices, and spot market prices have really spiked over the last 60 to 90 days. And we're navigating through it. Our logistics team is doing an amazing job trying to avoid those spot prices where we can, but the reality is we are out there on spot buys. So that's something we're keeping an eye on, something to be mindful of when you're modeling out the second half.

From a manufacturing perspective, this isn't something that's probably obvious to people outside the company, but when you talk about fuel prices, there are fuel inputs that go into things like foam, and our foam costs have gone up in manufacturing. So that's factored into this as well. But a lot of this comes down to the Middle East conflict and how sticky some of these input prices will be post the war winding down. So we've been admittedly a little bit cautious on some of these, you know, cost headwinds. We don't see these as long-term durable cost headwinds. These are really driven by some of the shocks that we've experienced over the last 3 to 4 months.

From a delivery fee perspective, really happy with the move that we made. You know, we implemented new delivery fees in June. This is the first time we've taken a fee increase, really, in 3 to 4 years, and there's been almost zero impact. We're not hearing much from customers, if anything. We're not hearing much from our internal selling team. So really happy with the move that we made. That's worth about $5 million to $6 million annually in terms of run rate, and we would expect that run rate to start to flow through as a benefit in Q3. Not a full Q3 benefit, but most of a run rate benefit, just because of the lag effect.

The other thing that we're building into our margin forecast for balance of year are the benefits of the TMS, the Transportation Management System. We've talked about the benefits of this extensively. You guys know what we're spending on this and what the benefits are. We're projecting $4 million to $5 million of annualized run rate savings when this thing gets going. And we are forecasting to see some of that flow through in Q3 and Q4. So really happy with what we're seeing there. The other thing to be mindful of is just occupancy costs. We continue to open new showrooms, and that does serve as a drag on gross margin as those showrooms scale. So in Q3, I think the Q3 versus Q2 occupancy costs are similar in nature, and then it starts to moderate in Q4. So to the extent that you're modeling occupancy, that's something to be mindful of.

And then finally, the tariff refunds that I talked about a few minutes ago in my prepared remarks, you know, there will be additional flow-through of the tariff refunds in Q3 and Q4. And we're expecting $5 million to $7 million in a flow-through benefit in Q3 and a similar amount in Q4. It could be a little spiky. It's hard to forecast what's going to flow through and what items have different tariffs attached to it. So there's a little bit of variability there, but I think that would be a good range to take into account.

So those are kind of the key drivers that I would be thinking about. But back to your point, Peter, we did take an impairment on some inventory in Q4 last year. So our margin, I think in Q4 was just above 38%. And I think in Q3, we're around 38.7%. As we look out in the second half, we do expect to come in north of that in our forecasting, despite all the headwinds and tailwinds I went through. We think we're going to see benefits year-over-year from a margin perspective. So hopefully that's a good build for you, and we can always talk later if you have more questions.

And our next question will come from Simeon Gutman with Morgan Stanley.

A couple of questions and 1 quick clarification. That the higher delivery cost, does that get it, that $5 million to $6 million, does that flow through the comp? And then my real questions are twofold. First, John, when you talk about the excitement around new product, we look at the showroom expansion, you have a pretty good run right here. I guess when does this business get to, I don't know, maybe mid-single-digit comp on a sustainable basis? It feels like it's getting close, but curious if you underwrite that for '27. And then the other follow-up, this is more for you, [ Michael ]. If we look at the second quarter composition, the SG&A dollars rose a lot. I missed some of the prepared if there was some stuff related to tariff there, but if you take out the gross margin benefit from refunds, it looks like core SG&A would have been well above average, such that the flow-through wasn't so great. So I wanted to just get clarification on second quarter, how noisy it was and things that I'm missing in there. Thank you.

Sure. I can speak about the sales and the products. Yes, I mean looking forward to the third, fourth quarter and into next year. As I said before, our product is really, really resonating with our clients, and it's really in all categories. We're seeing some really nice increases everywhere. We're about to launch some of our newest product that, largest collections that we've ever done coming up in September and so forth.

So, I think the product is definitely on track. We've got an incredible team, incredible supply chain out there that's really working with us, shipping on time and so forth, great quality, and we're learning every day on what's going to be hot and we're moving really fast to get that stuff out to the stores and promote it and so forth. Really new trends out there that we just absolutely love that done on who we are. We've never been an ultra-modern company, much more eclectic, warmer, and incredible, you know, woods and stones and so forth.

So we're taking some categories, really, really growing them. Upholstery, of course, is our biggest category, and we're launching some new product that's just amazing and new collections that fit a new customer as well. We're really going after more of a broad depth of a client that certainly hits our demographics, but in taste-wise, we're hitting a much broader client than we've ever hit and offering a better selection, you know, taking relics and beautiful antiques and replicating them into, you know, today's world to doing some more modern product as well. So we're going both directions. Pricing, same, you know, higher pricing, some sharper price point product to hit a younger customer. So we think we're hitting on all cylinders right now, and I'm sure that's going to continue into the fall and into next year.

[ Simeon ], I'll jump in. Just 1 build to John's comment, getting to that mid-single-digit sustainable comp growth rate, a big part of that's e-com too. We've talked a little bit about our aspirations on e-com. If you look at our e-com performance year-to-date, we're 1%, 1.5%. And we think that should be a growth business for us. And, you know, we made an announcement, you know, last month about our desire to really, you know, improve the focus on this channel over time. But e-com, you know, plays a critical role there.

Getting back to your other questions, the delivery fee is not in the comp, so just be mindful of that. And then second quarter SG&A, yes, it was a little elevated and just be, you know, be mindful of 2 things. Number 1, with the strategic investments that we're making, our IT costs are elevated as we're going through this investment cycle for the year, so that's 1 note. The other note is our selling costs were a little bit elevated, and be mindful that some of our selling costs is driven by written sales.

So if you have a big written sales month relative to delivered sales, you get a little bit of a deleveraging because of that timing. So that will reverse out a little bit as written sales and delivered conversions over time. SG&A overall for the year will be elevated. We've been really clear on that. We factored that into our guide. As we sit here today, we think SG&A is going to land around 100 basis points higher on a percent of revenue basis than prior year, is just a good anchoring point.

And you can triangulate that back and say, okay, where are those investments going? You know, it's really the catalog that John highlighted. You know, we're making a big bet on doubling the fall circ. We're going to increase the spring circ, which we pay for this year as well. Those are 2 very prudent investments that help us get to that mid-single-digit comp growth that you're talking about. We're also investing in the POS pull-forward project as well as the digital transformation, so that's in the SG&A outlook. So there's definitely an investment cycle going on here, but we look forward to the returns on investment that are going to come from that and allow us to sustainably grow this business and expand margins over time. So it's a very necessary investment that we're making right now.

And we'll go next to Seth Sigman from Barclays.

I want to ask about pricing. You've raised prices periodically over the last year. Could you just update us on the strategy from here? And specifically as it relates to the tariff refunds, it doesn't seem like you're investing in price, seems more focused on some of the longer-term drivers that you talked about. But can you just speak to that and what you're seeing across the industry as it relates to pricing and how folks are using those tariff refunds? And then just a follow-up on that last point around the investment cycle. Is it fair to say that you're including the costs here related to that, you know, that $7 million to $10 million, but not necessarily including the sales benefit since you kept the full-year sales unchanged? Thanks so much.

Sure, Seth. Yes, pricing, we're not doing anything significantly different than we have been for this spring and summer. Obviously, there are some headwinds with more delivery costs or container costs and so forth. But we've worked with our vendors, who are incredible partners with us. We're going to hold pricing right now. We don't see that we have to raise prices, they don't see we have to lower prices as well. So it's kind of a steady point right now this year and have no plans to change it.

I can jump in and I think I followed the question. Okay. But let me just quickly remind everybody the reinvestments that we're making along with the tariff refunds. So just overall tariff refunds were the $38 million, recognizing $24 million in Q2 and forecasting $5 million to $7 million of additional benefit in Q3 and Q4 respectively. We're going to reinvest about $5 million back into marketing, really to accelerate growth further. We're really big believers in the catalogs and believe we've got better catalogs than we've ever had. So we're going to double the circulation for the fall and we're going to increase the circulation in the spring. Those 2 investments around $5 million, both of which will hit our P&L this year.

On the technology side, you know, $4 million to $6 million of incremental spend relative to what we talked about at the beginning of the year in terms of the digital transformation. And it's really driven by the decision to pull forward our new POS system, which was always in our long-term technology roadmap, but was previously planned to follow the ERP, OMS, TMS wave of investments. But in light of the tariff refunds and also in light of the fact that we've learned that by pulling this forward, we can actually wean ourselves off of legacy systems faster and also de-risk the deployment of these technologies, we felt it was a very prudent decision. And that is now underway.

So that POS pull-forward is going to be $2 million to $3 million of P&L this year. And from a cash perspective, that POS is now overlaid into the investor deck that you guys can see for our digital transformation. It's about $20 million over 5 years, with $2 million to $3 million being this year. And again, this is a major, major capability win for Arhaus. It will absolutely change the game for the 1,100 sales folks that we have across the organization. We're also deploying $2 million to $3 million into IT for additional resources to attack our backlog of initiatives, moving really fast right now to really modernize all of our capabilities. And in some ways they're ahead of schedule on certain things and are looking for more funding to go after the backlog of projects. So we think that's a prudent use of tariff reimbursements.

And then we talked about some of these cost headwinds between fuel surcharges and shipping sourcing costs that we won't belabor here, and then the rest drops to the adjusted EBITDA. So hopefully that makes sense. In terms of your other question around, you know, does the SG&A reflect these investments? It absolutely does. There is a burn rate on these investments that do not go into CapEx that are OpEx in nature. They cannot be capitalized. So that is in our P&L today, and there is no revenue attached to it because these are all in-flight services projects that have not gone live yet. We are definitely in an investment cycle, and we're being very prudent about the projects that we take on. We're being very prudent about making sure we stay on track, on scope, on budget. And as we sit here today, we're on schedule for a Q1 go-live of this technology. So it's a really exciting time for Arhaus, and we'll continue to provide updates on a quarterly basis.

This now concludes our question and answer session. I would like to turn the floor back over to [ Tara Atwood-Saja ] for closing comments.

Thank you, everyone, for joining us.

Thanks, you guys. Appreciate it. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

Good morning, and welcome to the Arhaus First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded and that the reproduction of any part of this call is not permitted without written authorization from the company.

I will now turn the call over to your host, Tara Atwood-Saja, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Arhaus first quarter 2026 earnings call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman and Chief Executive Officer; and Michael Lee, our Chief Financial Officer. Jennifer Porter, our Chief Marketing and eCommerce Officer, will join us for the Q&A portion of the call. [Operator Instructions]

We issued our earnings press release and Form 10-Q for the quarter ended March 31, 2026, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours.

I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, targets, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent annual report on Form 10-K and subsequent 10-Qs, as such factors may be updated from time-to-time in our filings with the SEC. The forward-looking statements are made as of today's date and except as may be required by law, the company undertakes no obligation to update or revise these statements.

We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliations.

Now I will turn the call over to John.

Thanks, Tara. Good morning, everyone, and thank you for joining us. I want to start by discussing our first quarter performance, how we view the current environment and why we remain confident in the long-term opportunity ahead of us. We have been in business for over 40 years. And when you have operated through as many cycles as we have, you learn that quarter-to-quarter fluctuations matter, but they do not define a business. We are building Arhaus for the long term.

The first quarter marked the highest first quarter net revenue in our history. This reflects the strength of our operating model, the resilience of our client base and the disciplined execution across all our teams. We delivered this performance despite several temporary headwinds.

First, more than half of our showrooms experienced weather-related disruptions at some point in the quarter, including temporarily closures in several key markets. We also saw a delay in our Spring catalog release, which shifted some demand timing. In addition, just 48 hours after our previous earnings call, the conflict in Iran began, creating a broader macro uncertainty and contributing to a more cautious consumer sentiment.

That caution was most visible in our comparable written sales, which decreased a little over 5% during the quarter. We believe that our pressure was primarily driven by those temporary factors: weather disruption, delayed catalog timing and, of course, the broader macro uncertainty. Importantly, we review this as short-term pressures, not structural changes.

When we look at the second half of March and trends continuing through April and into May, we saw meaningful improvement and stronger momentum. That gives us confidence as we move through the second quarter. As we have for 4 decades, we navigate cycles by staying focused on what we can control.

Our long-term strategy remains unchanged, and we continue to execute with discipline across the key drivers of our business. Short-term volatility can create noise, but it does not change who we are, the strength of our brand or the opportunity ahead of us. Our future is incredibly bright.

We believe we are exceptionally well positioned with our product, our design leadership and our ability to stay ahead of where the customer is going. We continue to deliver differentiated collections that set us apart and strengthen our competitive position.

Let me walk you through 5 key growth drivers. First, we remain focused on product innovation, which is the foundation of our brand and one of our strongest competitive advantages. We continue to invest through cycles in livable luxury, heirloom quality and artisan crafted pieces that are built to last for generations. Our assortment and quality is exclusive to Arhaus and cannot be purchased or replicated elsewhere, reinforcing the uniqueness of our brand and the emotional connection our clients have with our brands.

Our aesthetic breadth spans traditional, transitional and modern designs with a level of customization that is meaningfully differentiator for us. A key competitive advantage is our custom upholstery with the majority of our upholstery sourced domestically. This gives us greater control over quality, cost, lead times and the client experience. We believe we are in one of the strongest periods of product innovation in our history, with 2026 featuring some of our most expressive designs to-date.

We are seeing a shift from neutral-only palettes towards richer colors, patterns, architectural silhouettes and layered textures. We have been ahead of this trend, a traditional evolution, refining classic silhouettes for modern living with pieces that feel collected over time, rooted in craftsmanship and layered in character.

You see it in our trim -- tailoring trim, fringe, distinctive textiles, materials that create a warmth and individuality in your home. At the same time, we continue to expand our customization capabilities with hundreds of silhouettes and more than 700 fabrics and leathers, allowing clients and our designers to create something truly personal and uniquely special.

Our vertically integrated sourcing model further strengthens our quality standards. We work directly with artisans across North America, Europe and South Asia, many of which we have partnered with for decades using time-honored craftsmanship and responsible sourcing practices. Since our founding more than 40 years ago, we believe furniture should be responsibly sourced, lovingly made and built to last.

And because of our unique model, we are extremely competitive in our pricing, in most cases, lower retails and better quality than many of our competition. We remain committed to investing in product innovation during periods of uncertainty because we have consistently seen that strong product cycles positions us to capture sales when consumer confidence improves.

Second, we remain committed to our showroom growth strategy. These are longer term investments with attractive returns, and we continue to see meaningful white space opportunities. Since 2019 through 2025, we have grown our showroom footprint for more than 50% and showrooms opened during this period represented 37% of our net revenue growth, reinforcing the long-term value creation of our disciplined approach.

As of today, we operate 108 showrooms, including our new traditional showroom in Ashburn, Virginia, which opened just last month. We were particularly excited about this location in Ashburn, one of the most affluent areas in the country. It is a premium lifestyle destination that aligns exceptionally well with our client base and our showroom growth strategy.

And just this week, we completed the expansion of our Park Meadows showroom in Lone Tree, Colorado, an important market for us. Park Meadows is a premium luxury retail destination supported by a fluid demographics and premium co-tenancy. Expanding the showroom reflects strong local engagement, showroom productivity and an opportunity to deepen client relationships through greater product presentations, design services and more expansive showroom experience.

For 2026, we continue to expect to complete approximately 10 to 14 showroom projects, including 4 to 6 new openings, 6 to 8 relocation, renovations or expansions. We remain confident in our long-term showroom strategy because proximity matters. Our showrooms are often the front door to the brand, driving client engagement, conversion and long-term relationships.

Third, we remain committed to the investments in our infrastructure needed to grow our business. We are making meaningful progress across initiatives focused on modernizing our distribution network and technology infrastructure, which are foundational to our long-term growth, improved operational efficiencies and an enhanced client experience.

At our core, we believe that investing with discipline even during periods of uncertainty will help us emerge with stronger, more durable competitive advantages. I'll let Mike dive deeper into the progress of our strategic investments shortly.

Fourth, we remain focused on our clients. This includes delivering an exceptional client experience across 3 primary channels: our core customers, our clients that are engaged with Arhaus interior designers and our trade partners. These relationships are central to how we build loyalty, deepen engagement and capture market share, particularly during periods of macroeconomic uncertainty.

Our interior designers continue to be one of the most powerful drivers of demand across the brand. Designer-supported projects generate meaningful higher order values, drive stronger repeat engagement and provide greater visibility into our future projects. In the first quarter, Arhaus' interior designers represented a significant percent of our total written sales, and we expect this to continue to grow.

We are seeing similar momentum with the trade, which represents another attractive long-term demand channel for us. We recently launched our newly redesigned Arhaus trade program, which was built in collaboration with the feedback from our trade community and designed to strengthen the relationship with design professionals, builders and developers.

Additionally, the program provides personalized order support, access to our exclusive products and a customized trade dashboard that empowers professionals to build -- to better serve their clients, including design tools for 3D and 2D planning -- room planning. U.S. interior design market is approximately $27 billion. We see significant long-term opportunity to grow our reach within this channel.

Lastly, we remain focused on building out our integrated omnichannel model. Our omnichannel model allows us to meet our clients wherever they choose to engage, whether online or in one of our showrooms. Our showrooms, we curate immersive traditionally inspired spaces that feel layered, warm and aspirational. Clients don't simply see a piece of furniture. They feel transported into a home that reflects their own.

Digitally, we extend the same emotional experience through enhanced storytelling, ensuring a seamless connection across e-commerce platforms and showroom experience. 40 years in, we have navigated recessions, market disruption, supply chain shocks and a pandemic. The long-term strategy for Arhaus remains intact, and we are focused on the disciplined execution across 5 key drivers of our business that I had just shared.

At the same time, we are making strategic adjustments to thoughtfully navigate the near-term environment. These include being more deliberate with the pace of our investments, taking a more measured approach to headcount growth and in near-term, implementing new promotions to help accelerate the client journey from aspirational to conversion and increasing our marketing efforts to further increase engagement and conversion while keeping an eye on cost to protect margins.

In closing, our product is exceptional. Our client continues to invest in their home, and our showrooms are very productive. Our balance sheet remains a competitive advantage. We are debt-free and operating from a position of strength. This gives us flexibility to invest through the cycle while maintaining a disciplined approach to allocate capital, investing in the business, returning value to shareholders and maintaining financial flexibility.

Now I'll turn it over to Mike.

All right. Thanks, John, and good morning, everyone. As I reflect on my first year in this role, I'm proud of what we have accomplished across the business and the discipline with which our teams have continued to execute. Even in a more challenging environment, we remain focused on strengthening our operations, investing in the business and positioning Arhaus for long-term profitable growth. And that perspective gives me continued confidence in the strength of our model, the resilience of our client base and our ability to navigate near-term volatility while staying committed to our long-term strategy.

Net revenue was $314 million in the first quarter, up 0.9% year-over-year and above the midpoint of our guidance range, making the largest first quarter net revenue in our history. This performance is particularly notable as we lapped a prior year period that did not face the same tariff uncertainty, macro volatility or geopolitical disruption. And despite these ongoing headwinds, including the recent escalation in global conflict, we continue to deliver net revenue growth through a volatile environment.

Gross profit was $114 million, down 1% versus last year, with gross margin decreasing 70 basis points to 36.4%, driven by higher fuel prices of 40 basis points and showroom occupancy costs of 40 basis points.

Selling, general and administrative expenses increased 1.9% to $112 million, driven by a $1.9 million increase primarily related to strategic investments to support and drive the growth of the business, including supply chain and technology improvements and other corporate expenses. As a result, SG&A load increased 40 basis points to 35.7%.

Net income was $2.2 million and within our guidance, and adjusted EBITDA was $18 million and within our guidance range. Adjusted EBITDA margin decreased 30 basis points year-over-year. As a reminder, there is a seasonal impact to margins in the first quarter, which carries lower net revenue as a result of less operating leverage.

Turning to our comparable metrics. Comparable Delivered Sales decreased 1.7%, above the midpoint of our guidance range. Performance during the quarter was impacted by severe weather, our delayed catalog as well as broader consumer softness tied to macroeconomic uncertainty, which weighed on overall delivery volumes.

Comparable Written Sales decreased 5.7%, driven by a combination of factors. Weather-related disruption in key markets reduced traffic during important promotional periods, including our semiannual store-wide sale in January. In total, more than half of our showrooms experienced temporary closures at some point during the quarter due to adverse weather conditions.

Additionally, the delayed timing of our Spring catalog release as well as macroeconomic and geopolitical uncertainty, including the war in Iran, impacted comparable written sales. While comparable written sales were pressured during the quarter, trends improved meaningfully in the back half of March, where elevated promotional activity drove stronger engagement and improved conversion. That trend continued in April and into May.

Turning to our balance sheet and liquidity. We ended the quarter with $177 million in cash and cash equivalents, a decrease of 30% from December 31, 2025. This primarily reflects the $49 million special cash dividend paid in March.

Net merchandise inventory totaled $369 million, up 9% from December 31, 2025, and the increase reflects higher product costs, including the impact of tariffs as well as inventory investments, including increased depth in best sellers as well as new product introductions in addition to outdoor assortments ahead of the seasonal ramp. Excluding tariff impact, net merchandise inventory would be up approximately 6% from December 31, 2025.

Turning to strategic investments. We continue to make meaningful progress on numerous initiatives to modernize our distribution network and our technology infrastructure. This initiative is aligned with our long-term strategy, designed to improve operational efficiency, enhance the client experience and strengthen our internal controls and support profitability. Simply put, these investments are foundational to supporting our next phase of growth.

A recent milestone was the go-live of Phase 1 of our transportation management system in April. This is an important foundational step in modernizing our distribution network and strengthening our transportation capabilities across the business. We are now live with the new TMS system and are nearing the end of our hypercare phase, at which point we will be fully operational. And as with any large-scale implementation, there is continued work underway, and our teams remain focused on execution and long-term success.

Our TMS is expected to deliver several meaningful benefits over time. First, improved cost efficiencies through better load optimization, route planning and carrier selection, helping us to reduce transportation expense and improve network productivity. Second, greater operational visibility through real-time tracking and system-driven planning, replacing manual processes and giving us stronger control across the delivery journey. And third, stronger integration and scalability across our broader distribution network, creating efficiencies through connectivity with our warehouse management systems and other platforms. We are encouraged by the progress and excited about the long-term value this platform can create as we continue to expand capabilities across the network.

Additionally, we continue to make meaningful progress on our order management system and enterprise resource planning initiatives. Our OMS investment is critical to enhancing the client experience and improving the purchase journey across our omnichannel model, while our ERP investment is designed to modernize our core financial and operational systems. Execution across our distribution network and technology infrastructure investment remains our top priority and success is delivering these initiatives on time, on budget and within scope.

Equally important is the cultural shift underway. As we implement these systems, we are increasing accountability and standardization across Arhaus, building a more scalable and disciplined operating model. Overall, we view these strategic investments as essential to strengthening our foundation and positioning Arhaus for long-term profitable growth.

Turning to tariffs and sourcing. Trade policy remains fluid, particularly following the recent Supreme Court ruling on certain IEEPA-related tariffs and the rollout of the CBP refund process. We are actively evaluating the potential implications, including the administrative process required to pursue refunds. Separately, the 10% global tariff implemented under Section 122 is currently scheduled to expire in July, though the path forward remains uncertain. Given this evolving backdrop, we continue to take a disciplined and measured approach.

Importantly, our diversified sourcing strategy and meaningful domestic manufacturing footprint position us well across a range of potential policy scenarios. Based on current policy, we continue to estimate 2026 tariff impacts to be in the range of $30 million to $40 million. This reflects some benefits from vendor negotiations, sourcing shifts and operational efficiencies. We will continue to assess pricing over the coming months and quarters and plan to respond quickly and thoughtfully as conditions evolve.

Turning to our outlook. While we continue to operate in a challenging environment, we remain confident in our full year 2026 outlook. In the first quarter, we achieved results within our expected range, and we continue to believe our long-term strategy and operating model position us well to navigate near-term volatility. We recognize that the consumer has been pressured by broader economic uncertainty, geopolitical tensions and shifting consumer sentiment.

And that being said, we also see several meaningful factors supporting the balance of the year. First, we entered the second quarter with healthy client deposits, which we expect to convert to delivered revenue as inventory availability and in-stock positions improve across key categories. Second, we have increased promotional activity and marketing efforts to drive volume and client engagement, strengthen brand awareness and stimulate demand. And third, we have seen continued strength in our interior design and trade channels. As a result, these factors continue to support our confidence in the back half of the year.

Importantly, because of prior pricing actions, we have flexibility to increase our promotional activity while continuing to protect our margins. This allows us to support volume and demand generation without creating meaningful pressure on profitability. As we have said before, for our client base, we believe demand is often deferred rather than lost. Our clients may consider purchases, and we believe deferred demand, improved product availability and demand generation efforts support our confidence in maintaining our full year guidance.

It's also important to note that our current outlook does not include any benefits from potential IEEPA tariff refunds. As we gain full clarity and confirmation around those refunds, we will evaluate any impact and update our guidance if necessary.

For the full year, we continue to expect net revenue between $1.43 billion and $1.47 billion for year-over-year growth of between 3.7% and 6.6%. Comparable Delivered Sales of flat to plus 3%, net income of $66 million to $75 million and adjusted EBITDA of $150 million to $161 million. For the second quarter of 2026, we expect continued near-term pressure on demand as consumers remain cautious amid ongoing macroeconomic and geopolitical uncertainty.

Our second quarter outlook reflects a range of outcomes with the low end assuming continued pressure on demand trends and the high end incorporating benefits from improved inventory availability, strong in-stock positions, client deposit conversion and the positive impact of our increased marketing and promotional activity.

As a reminder, we are also lapping a particularly strong second quarter in the prior year, which benefited from elevated delivered sales following insourcing of operations of our Dallas distribution center. And therefore, second quarter performance should be viewed in the context of this year-over-year comparison.

For the second quarter of 2026, we expect net revenue between $350 million to $370 million for a year-over-year growth rate of down 2.4% to up 3.2%, with comparable delivered sales of minus 5% to flat and net income of $19 million to $24 million and adjusted EBITDA of $40 million to $49 million.

In closing, we are controlling what we can control and investing where it matters most and in positioning Arhaus to emerge stronger. We have the brand, the product, the balance sheet and the strategy to navigate this period and capture opportunity as demand improves. Thank you to our teams across Arhaus for their focus and execution. And to our shareholders, thank you for your continued support.

And with that, I'll turn it over to the operator. We are happy to answer your questions.

[Operator Instructions] The first question comes from the line of Andrew Carter with Stifel.

I wanted to ask in terms of your reiteration of guidance, your -- the guidance implies, I think, 3% to kind of 6.5% comparable growth in the second half of the year. In terms of where your written trends are today comparable, are they supportive of that kind of outlook? Or do they need to accelerate from here to get to the low end, high end, et cetera?

Yes. Thanks, Andrew. Look, let me first take a step back and remind everyone of the approach we took to setting our full year guidance back in February. Really starting with the top line, our guidance assumed a continuation of a weak housing market. It assumed continued investments in home remodeling and renovations. And then we also assumed growth from our new trade model as a platform for growth into FY '26. And with this, we arrived at a range of around 0% to 3% comp delivered growth, and that was further supported by 350 basis points of growth tied to new showrooms in the development pipeline. So that was really what underpinned our top line guide.

Our EBITDA margin guide was based on flattish gross margins for the year, reflecting modest inflationary headwinds, a full year of tariff impacts as well as pricing actions and improved mix as well as various productivity initiatives to help offset some of those headwinds.

From an operating expense perspective, we assumed continued funding of our digital transformation, which started last November and will continue through this year as well as increases for sales and marketing investments to help drive the top line. So that's what led to our EBITDA guidance of $151 million to $160 million for the year.

And look, as we mentioned in our prepared remarks, Q1 was challenging. We faced very difficult weather conditions. And just to give you a little more color, we had 60 showrooms closed for 5 days in January, which included a weekend. We had 20 showrooms closed later in January for 2 days. And then another 20 showroom closures in February for 3 days. So if you just run the math on selling days against the quarter, it's about a 4% reduction in selling days as a result of those weather-related closures.

We also had delays on the catalog, which coincided with our January store-wide sale. And the catalog, the majority of the catalogs did not show up in people's homes until the end of January. And when you take that and then add the impact of the war and the commensurate impacts of the capital markets and what it meant to consumer sentiment, along with the associated inflation concerns that are emerging, we kind of had a perfect storm in Q1.

So putting all that into context, we did see a meaningful improvement in showroom traffic and client engagement as we exited Q1 and proceeded into Q2. And that engagement really has continued through April and into May. And that's -- it's consistent with what we've highlighted in the past, which is our clients tend to be very resilient. They often are the fastest to return following a period of uncertainty. And though we're all cautious about the macro backdrop, we believe we're out of the woods when it comes to some of those unique challenges we faced in Q1.

So we've elected to hold our guide based on somewhat of an elevated risk profile. And if you just look at our distance to go, taking our full year guide and bouncing that against what that means for Q2 to Q4, we've got to deliver 1% to 4% delivered comp growth versus the full year guide of 0% to 3%. So it's about another point from a distance to-go perspective. So again, very elevated but achievable given we know how Q2 is shaping up, and we know everything that's in store for H2. So that's a little bit of a backdrop.

And then I also want to highlight that we're entering a period where our inventory availability and our in-stock now status is reaching recent highs. We haven't talked a lot about it, but as we've navigated through tariffs over the last 6 to 8 months, we've had portions of inventory where we were oversold and we had elongated lead times. And we're in a much stronger position now than we were even 2, 3 months ago. So really optimistic that we're well positioned from that perspective.

As far as our Q2 guide goes, Andrew, recall that we are overlapping a pretty big Q2 of last year. Our delivered comp was up 10.5% last year in Q2, and that was driven by the early ramp of Dallas. And as we sit here today, 5 weeks into the quarter, we're trending toward the high end of our Q2 guide. But we kept our range wide because of the ongoing uncertainty that we're facing, and we think that's prudent.

So once again, because of that Q2 overlap, I would encourage everyone to look at our Q2 guide relative to 2 years ago. And in doing that, you'll see that our Q2 revenue guide is plus 13% to plus 19% versus 2024. And if you look at adjusted EBITDA, it's essentially flat to up 20 -- I'm sorry, it's flat to plus 22% versus 2024. So just looking at it, taking the overlap out of play and looking at it versus 2 years ago. So that's how significant that Q2 overlap was for us.

And again, just one final comment. When we get back to our full year guide, looking at EBITDA, we do have an elevated risk profile, really driven by a variety of inflationary headwinds. I mentioned fuel costs, they are having both a direct and indirect impact on our business, and we are taking actions to mitigate these costs, and while we have a number of productivity initiatives underway, we expect that to start to flow through in the second half as well, and we'll share more details on these as they materialize.

And just one final reminder, our current guidance does not include anything on tariff refunds. We just don't know enough at this stage to guide on it, but I can assure you by the end of Q2, we'll have more information to share. So hopefully, that gives you a little color on the building blocks behind our full year guide as we sit here 5 weeks into Q2.

And I just want to add one little piece just to our full year 2026 adjusted EBITDA guide is $150 million to $161 million for the full year.

And our next question, we'll hear from Madeline Cech with Bank of America.

I was wondering if you could remind us the time line of your order management system and ERP rollout? Are you still targeting 1Q 2027 for deployment? And can you remind us the P&L impact from that investment in '26? I think maybe you expected to see some gross margin efficiencies from the transportation management part of that in the second half. But just wondering what kind of SG&A cost you will see in 2026?

Yes. Thanks for the question. Look, we're really excited about the progress we're making on our digital transformation. The TMS system is going to provide meaningful benefits to our supply chain. In fact, even though we're still in the hypercare phase, which we do expect to end in the next few days, by the way, we are already looking at the underlying KPIs that measure load rates and all the associated efficiencies that we expected to get from this transportation management system. So early indicators are that, yes, we are already seeing some of those benefits.

When you go fully operational on the TMS, which would include the Phase 2 portion of that project, which kicks off here in the next few weeks, and it helps us with inbound transportation, we expect to see $4 million to $5 million a year in annualized benefits on just that transportation line item. For FY '26, we're forecasting $1 million to $2 million of benefits. Maybe we'll do a little bit better than that, but that's what we're modeling.

When you look at the other components of the digital transformation, which include the ERP and the OMS, as we sit here today, we're on schedule. With these projects, you always have week-to-week volatility on are we on track on certain tasks, some we're ahead on, some are behind on. But on its entirety, we are still tracking for a Q1 launch on both of those systems. And so far, we're on budget and generally no massive, like scope changes at this point. We feel pretty good about the scope. There's a few things here and there that we're looking at. But generally, in terms of the overall deliverables, we're tracking quite well.

Going back to our business case on this, there's a tremendous number of benefits that emerge over the next few years. Some of it is tied to software savings as we consolidate our ecosystem and have fewer systems that we're paying licensing fees on. Some of it is in the form of IT efficiencies where we can streamline our support costs. And then some of it just comes down to SG&A efficiency across the organization. And just from an SG&A perspective, we're modeling 50 basis points of SG&A load that will materialize over the next 2 years. So that's still what we're targeting.

And that's -- again, it will come across different pockets of the organization. A lot of that being back-office costs, whether it's things like payroll, accounts payable and other transactional areas of the business.

But getting back to your point on the order management system, we see this as a significant unlock to how we fill orders, how we deploy inventory. And we think that's going to be a big unlock just from a productivity perspective, but also from a customer experience perspective. So lots more to come. We'll keep you updated quarterly on this, but tracking extremely well at this juncture.

And next, we'll hear from Cristina Fernandez with Telsey Advisory Group.

I had a question for John. Can you talk about how consumers are responding to the newness, whether it was the Spring collection or the expanded outdoor and the bath introductions you did in the fall? And also a clarification on the current trend. When you talk about significant improvement has demand turned positive? Or is it still negative but vastly improved from earlier in the quarter?

Christina, yes, thanks for the question. Yes, product-wise, I think as I said in the recorded talk that this is the biggest launch of new product, most exciting time, I think in our history. As I'm sure you may or may not know, but trends have changed very quickly in the last year or so. And they changed really into our favor, product that is just right down our sweet spot. It had been very stark, white or even before that, just gray, neutral fabrics, very flat. And we've always been much more eclectic, much warmer and so forth. So it's been -- it's a great time right now. We accelerated the launch of some of our products. And I'm thrilled to report that in the big picture, the results have been phenomenal.

Now we're playing catch-up to get them to all stores. A lot of these groups that we would say would have tested in 20 stores, put on the web and so forth. We monitor it closely. And if it's outperforming product that's currently on floors, then we switch floor samples and send it out to all the stores. So we're in that process right now, but everything is looking fantastic. I'm loving the wood pieces, the designs, the shapes, I just got back from the Milan furniture show last week, the week before. And I've got to say we should have had a booth there because I think our product looks better than anybody else that I saw in Milan. I've never said that before, but I think it's the truth. We are dead on right with the trends, and we're way ahead of the competition in it. And yes, it's going to be a fun year for that.

And Christina, just to add a little bit of color there, too. Mike and John both referred to our catalog being delayed earlier. And specifically, as I think you all know, we have various catalogs and direct mailings that we send out, big book at 228 pages, a 12-pager or postcards. The catalog that was affected with those delays was that 228-page book, and that is really the supporting system for us introducing all of that incredible new product and getting it out to our customers and into their homes.

So just looking at that, customers are really responding well to that product and now getting that marketing into homes, launching digital campaigns throughout the quarter. And then we actually have gotten our early summer catalog out into homes at the end of March here. We're just really excited to continue to see that initial engagement and excitement for that product and it continuing to grow going into Q2 now, but more people know that it's out there and are being driven into stores to go and see it.

And it's obviously the beginning of the outdoor season. So far, it's been phenomenal. We're very happy with the results and learning a lot for next year to even get better.

I would just add on the newness front in Q1, I think our newness was at around 12% of sales, up from 8% of sales last year. So continuing to lean more into that, and that trend continued into April. And look, I know we talked about not getting into month-to-month disclosures. But I think the question was, has demand turned positive in April? It absolutely has turned positive. And I can tell you, April and May are performing even ahead of some of our internal forecasts. So we are very, very encouraged by the momentum in the business. And we've talked about U-shaped recoveries and V-shaped recoveries. I would say April was more like a V-shaped recovery in that regard.

And next, we'll move on to Steven Forbes with Guggenheim Securities.

John or Mike, maybe a 2-part question. First, can you expand on the promotional change that you're investing behind versus the traditional buy more, save more, just so we sort of understand sort of what you guys are leaning into? And then secondarily, the new trade model that you've launched here, I would love to just hear you talk about sort of what are the key attributes of it and what's really resonating with the trade professionals?

Sure, Steven. I can start and Jen can help with the promotion side. But the trade model is pretty simple. It's -- we have these outside folks that have their own businesses, and they have their own clients. They bring various people and hopefully more and more to us. So all we did was we offered a second way to -- for them to make an income. It was we were giving them basically a commission, so to speak, type of format. And now we've offered them a discount. Instead, one or the other, they get to choose, which is more the traditional way that most of them -- many of them work. So we just offered a second way of them to make income using our product. And so far, the response has been phenomenal. Very, very early to say. I think it's only 30 days we launched it or something. But so far, so good. And then Jen, maybe you can fill him in on the promotional thing because...

Yes, of course.

...hasn't been that different, I don't think.

Yes, Steven, good question on the promotions. So looking at our Q1 approach to promotions, really strategy was very similar and in line with what we've talked about previously in 2025, with a lot of the buy more, save mores and those types of promotions that we've talked about on prior calls. Going into April, we purposely elevated our promotional activity, and that was in reaction both to what's going on in the macro and then also the challenging Q1 environment that was spoken to prior on this call.

And as Mike just said, we're really pleased with what's happening in April. We started to see that pick up in the second half of May, really pleased with April, really pleased with what we're seeing going into May as well. I think when you look at our approach, what we're looking at is the underlying health and quality of our business. So even with the challenging environment in Q1, our customers are remaining highly engaged. We have an affluent customer. They're still looking for the furniture. They're still doing those big projects. And we're seeing that underlying quality of our demand remaining really strong. If you look at orders over 10,000, over 100,000, those bigger projects, they're really good. We're really pleased with that engagement with clients coming in and working with our interior designers, as John just mentioned, with trade designers as well. So that structure is looking good.

What we are seeing is that customers are being more deliberate. They're more considered. We started talking about that last year. We saw that in Q1. And so our approach to promotions, our approach to marketing, our approach to really just outreach to the customers is really focused on that, focusing on what we are doing really well, which as John has referenced, clients are responding really well to the products. They're responding really well to our quality, our unique assortment, the craft that we can only -- that only we can offer. And so that is really what we're positioning out in the market. We're looking to engage them with marketing, really trying to be creative with the content and the ways that we're getting that messaging out to customers.

And then similarly, with promotions, really looking at what are those drivers where we can help, first off, keep Arhaus top of mind, continue to introduce Arhaus to new potential clients who maybe don't know about us yet, but then also really looking at those levers to drive the consideration to conversion window. And pleased with what we've seen in April, pleased with our plans for the next coming months here, and we'll continue to monitor our business, the macro and adapt and evolve throughout the year as needing.

And next, we'll hear from Peter Benedict with Baird.

This is Zach Beeck on for Peter. Mike, you mentioned the flattish gross margin view for the year. I think you had previously discussed 60 to 70 basis points of expansion. Can you help us understand the change there in your assumptions for oil and fuel costs over the balance of 2026? And then maybe on the Q2 EBITDA range as well. I realize you have some tough compares in the quarter, but if you could unpack the drivers of compression there and help us understand how that moderates in the second half, that would be helpful.

Yes, Zach. Look, fuel costs are highly, highly uncertain at this point, but that's really the driving force behind gross margin. And there's about a 40-basis point impact in Q1, and that impact really is about half a quarter's worth of impact. So when you take into account that we've got a full quarter impact coming up. And we also have a lag effect between any mitigations taking place and when they actually flow through the P&L. So a little bit more cautious as it relates to fuel. And look, everything we're hearing is that even if the war ends, the lag effect on fuel prices coming down is going to really be in months and quarters, not weeks. So if anything, we're just being a little bit cautious there.

But again, I want to emphasize that we've got mitigation steps that are underway, and we think we can fully offset that in terms of ongoing structural costs. It just -- it takes a little bit of time to get it going in the P&L and for it to flow through to delivery. So that's something just to be mindful of. It's just that lag effect.

In terms of the overall EBITDA for the balance of the year, look, inflation is persistent and it's real. Sort of setting aside the fuel costs, there are indirect impacts from fuel costs and even little things like fuel costs impacting the foam in our manufacturing business, right? And these aren't huge. Maybe there are a lot of, I'll call it, ankle biters in terms of these impacts that are happening across the business, but we're increasingly leaning on productivity initiatives to help offset that, but the inflation impacts are real. So that's something that we're continuing to manage day in, day out.

Some of it's more business as usual with our suppliers around the world, different suppliers are facing different cost pressures. Some aren't facing any and some are facing more than others. But we continue to work through that. I don't see as much from a product cost perspective as I do from a supply chain logistics perspective, even container costs, right, getting containers now are more expensive than they were even 3 months ago.

So really managing through that, but nothing that I would say is a structural change to our business. It's really just leaning on productivity initiatives to help offset those. So more to come as we get through Q2 on some of those mitigation steps, but we're really excited about some of the opportunities that we're discussing internally to help absorb some of those headwinds.

And our next question, we'll hear from Jonathan Matuszewski with Jefferies.

This is [ Andres ]. I'm on for Jonathan. With S&P at all-time highs and the wealth effect historically being a key driver of your consumer, what's the broader macro and housing environment you're embedding in the back half?

Yes. It's a great question. The stock market volatility and its impact on our business, it is real. Even going back to last April when a lot of the tariffs were announced for the first time and the stock market reaction, there's a pretty good correlation between what we see and the capital market outlook. Our guide is really based on a continuation of a lot of the fundamentals that we're seeing today. I wouldn't say that we build our plans based on the S&P being at an all-time high, but we're certainly not building into our full year guide a recession.

So look, we know that job growth is a bit anemic right now. We know that inflation is real. We know that the housing market is weak. We know that the 10-year continues to move up. So consumer credit is being impacted. But again, a lot of our business comes from the high-end consumer. And when we look at high-end housing, high-end housing continues to perform well. As recent as the last 30, 60 days measures on luxury home sales continuing to perform well. High-end consumers are still investing in projects, home remodels. So that continues to do well. So that's really what's underscoring our full year outlook from a, call it, an infrastructure perspective.

But most of our outlook is weighted on the promotion plans, the product that's coming, the marketing, new showroom expansion, things like that, which fit into the category of controllable. And I can tell you that one of the reasons why we've held our guide is that we feel really good about the balance of this year from a product perspective, from an inventory perspective. I know there's some questions about why inventory is up, but we are coming out of a cycle where we had out of stocks on a number of items. So we're in a pretty good spot overall.

And yes, we recognize the volatility of the backdrop is still there. And I would say that's what's driving maybe a wider range than we would normally have on our guide is just protecting against that uncertainty. So hopefully, that helps give some context.

And our next question, we'll hear from Peter Keith with Piper Sandler.

This is Alexia Morgan on for Peter Keith. We've been monitoring supply chain disruptions stemming from the Texas chemical plant incident in March. Could you frame up your exposure there to the resulting foam and polyol shortages? Are you anticipating any material delays in upholstery or other categories? And how do we model the potential impact there?

Yes, it's a good question. Yes, we're fully aware of that incident, and we are very comfortable, confident with our foam supply. So not expecting any disruption in terms of the supply chain. We are experiencing some cost pressures on foam, but that's a relatively small percentage of the overall product cost. So it's not a meaningful factor. It's just another example of those ankle biter headwinds that we're fighting through candidly.

But since you mentioned it, I do want to just acknowledge the great work that our manufacturing team is doing. We continue to set new records on upholstery sales each and every month. And we're sort of battling through a surge in special order upholstery. We're producing at higher levels than we've been in a long time. We've even added a second shift in manufacturing to keep up with that demand. So that continues to be an area of our business that is a strategic advantage for us and feel really well positioned to deliver on those 700 fabrics and leathers that we offer through our special order program.

And we'll hear from Simeon Gutman with Morgan Stanley.

It's Simeon Gutman. I wanted to ask, I guess, 2 parts. First, the decel in written orders quarter-to-date, can you talk about how that shapes the visibility for the rest of the year? And I know you mentioned a lot of other factors and variables at play. And then can you talk about new gallery productivity, what -- how they're performing? And then what that implies, I guess, for, I guess, older or existing galleries? I assume they're doing less good, but can you talk about the dispersion between them?

Sure. Simeon, I could start with the galleries. Yes, I mean we track, obviously, new ones, old ones and so forth every single month. And yes, over the big picture on new galleries have been opened a year or so, we've been very, very happy with their performance. They've been hitting our plans and exceeding them in quite a few cases. And that's not only new galleries, but galleries we came back and renovated or moved. An example, we've been -- had a great gallery in Pittsburgh for, gosh, 20 years. We moved it down the street and a little larger, better looking -- far better looking and sales have been through the roof. So things like that that have been working in both new -- brand new ones and moving or renovating existing ones.

So yes, I think they're outperforming as a whole. The fleet as a total, but both are doing well. Pockets in the country are doing better than others just because of the weather and so forth. Yes. And then the second question...

And then just to follow up on your question, Simeon, about just how the written orders are performing and the momentum there. Again, I would just underscore our earlier remarks that we really started to see improvement in the second half of March and even what I would call an acceleration into April and May, and it certainly has felt like a V-shaped recovery from that moment onward. And we are shooting for the high end of our Q2 guide as a result.

And just a reminder that that guide is really just informed by the uncertainty that's out there. But as we sit here today, we're really confident in how the Q2 orders are shaping up. So with that, we'll leave it at that.

Ladies and gentlemen. We have reached the end of the question-and-answer session. I would now like to turn the floor over to Tara Atwood-Saja for closing remarks and comments.

Thanks, everyone, for joining us today.

Thanks, everybody.

Thank you.

Appreciate your questions. Bye.

Bye.

Bye.

Thank you, everyone. You may disconnect.

Good morning, and welcome to the Arhaus Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note that this call is being recorded, and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Tara Atwood-Saja, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Arhaus Fourth Quarter and Full Year 2025 Earnings Call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman and Chief Executive Officer; and Michael Lee, our Chief Financial Officer. Jennifer Porter, our Chief Marketing and E-commerce Officer, will join us for the Q&A portion of the call. We issued our earnings press release and Form 10-K for the year ended December 31, 2025, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours.

I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, targets, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent annual report on Form 10-K and subsequent 10-Qs as such factors may be updated from time to time in our filings with the SEC. The forward-looking statements are made as of today's date and except as may be required by law, the company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliations.

Now I will turn the call over to John. John, over to you.

Thanks, Tara. Good morning, everyone, and thank you for joining us. As we close out 2025, I'm proud of what we delivered. But more importantly, I'm energized by what I'm seeing firsthand across our showrooms, our design teams, our artisans around the world. I founded Arhaus 40 years ago on a simple idea that furniture and decor should be responsibly sourced, lovingly made and built to last for generations. That philosophy hasn't changed. It continues to guide many of the decisions we make today. We're building Arhaus for the long-term, and that begins with talent. I'm excited to welcome Michael Rengel as our new Chief Merchandising Officer. Michael is a proven merchant leader and operator with deep expertise in product strategy, assortment, architecture and building assortments that resonate with our customers. As we continue to build on our differentiated model rooted in artisan craftsmanship, timeless design and a highly personalized service experience, Michael will be instrumental in strengthening cross-functional collaboration, elevating our products and shaping the next chapter of our growth.

Across Arhaus, our team remains our secret sauce. The Arhaus family is a key competitive advantage, one that consistently sets us apart. The fourth quarter marked a strong finish to 2025 and a strong year of execution across the business, reflecting the power of our brand, the strength of our product offerings and our disciplined strategy. I want to spend a moment putting 2025 in context because when I look at this year, I don't just see results, I see a business that has proven its resilience across cycles. Having led Arhaus through multiple cycles over the last four decades, perspective matters.

If we go back to 2019, a more normalized pre-pandemic baseline, Arhaus was a very different company, smaller in scale and earlier in our growth journey. Over the past six years, we've grown dramatically. We've navigated extraordinary onetime events from pandemic-driven demand surges to normalization as customers shifted spending between products and experiences. And more recently, in a period of macro volatility, driven by softer housing turnover, tariffs and broader uncertainty. Throughout all of this, we've remained true to the values and craftsmanship that we have defined Arhaus right from the start.

What matters to me as a founder and CEO isn't short-term volatility. It's whether the long-term thesis is working. And what we see today is very clear. Our model is working. In 2025, the Arhaus team delivered record net revenue of $1.38 billion, up 8.5% year-over-year. Since 2019, our net revenue has nearly tripled, underscoring the strength and durability of our model rooted in artisan craftsmanship and airloom quality design.

I want to spend a few minutes sharing what we see firsthand with our high-end clients. Throughout the year, headlines suggested that the consumer was under pressure and discretionary spending was challenged. What we experienced in our business tells a more nuanced and encouraging story, particularly at the high end of the market. Our clients' purchases are highly considered. They are intentional investments in the home, and our high-end clients continue to invest. They are choosing high-quality pieces. They are investing in custom order specialized pieces that we make just for them. They are refreshing rooms and renovating entire homes. They are designing spaces that feel meaningful and personal. They are prioritizing quality, craftsmanship and longevity. And this plays direct to Arhaus strengths.

My perspective comes from the daily interaction across our showrooms, our interior design services and our trade network. This real-time engagement gives us a clearer view than generalized macro commentary. When uncertainty arises, written sales are typically deferred, not lost, and we see that dynamic in 2025. Engagement remained healthy and as confidence improved, projects moved forward. We marked strong performance in 2025 across several important areas of our business. Record total written sales supported by the growth of our showroom footprint and continued demand of our products.

Upholstery had the highest total written sales in our history, a testament of our meticulous craftsmanship and assortment of hundreds of fabrics and leathers. Customization continued to gain momentum, reaching very impressive written sales growth. Over the past several years, we have meaningful -- meaningfully expanded our custom capabilities, and we also achieved record written sales from clients working with our interior designers. These are not signs of a pullback. Instead, they are signs of intentional investment in Arhaus products. When demand becomes more considered, differentiation matters most. And when clients invest in intention, they invest in quality. That is where we always win.

It is also important to understand what drives our written sales. When clients come to our showrooms, it's typically for one of the following reasons: First, a light refresh, replacing individual pieces and updating existing spaces. Second, home renovations, multi-rooms or entire home projects, often supported by interior designers and trade relationships. Home turnover, which provides incremental upside as the housing activity normalizes, particularly as conditions improve across higher end markets. This mix reinforces the durability of our model.

We serve clients across three primary demand channels. First, our core customer, affluent homeowner making considered long-term investments. Second, customers that work with Arhaus interior designers, a high-impact growth lever, interior designers assisted projects generating average order values more than 4x that of the standard orders and approximately 40% of our customers become repeat purchases.

Third, our trade channel, meaningfully long-term opportunity. The United States interior design market is approximately $27 billion, and we see significant opportunity to expand our reach within this channel. While macro commentary can shift quickly, our confidence is grounded, the resilience and purchasing power of our high-end clients, record engagement in products, customization, upholstery and interior design services, a written sales mix anchored in refreshes and renovations, not solely home turnover and a premium brand positioned for intentional spending environments.

2025 reinforced what -- that when demand becomes more considered, our differentiations become more powerful. We believe Arhaus is exceptionally well positioned for the years ahead. Turning to product, at Arhaus, product is the foundation of everything we do. It inspires engagement, drives differentiation and ultimately allows us to capture market share. Home is where life unfolds, and our pieces are designed to support these moments. From the beginning, I believe the home should feel personal and truly lived in. That belief continues to guide our design process.

2025 drove one of the strongest periods of product innovation in our history, [resonating] with clients through thoughtful design, natural materials and warm timeless silhouettes. Newness, customization and interior design-led projects contributed meaningful --meaningfully to engagement and written sales throughout the year. What excites me most is how our clients are evolving statistically. While neutral remains important, we are seeing a clear shift towards richer colors, pattern and texture. We're leaning further into the more traditional aesthetic with pieces that feel collected over time, rooted in craftsmanship and layered with character. You see it in deeper finishes, richer colors and distinctive textiles.

Silhouettes are traditional in origin yet thoughtfully refined for today. There is a warm and a sense of patina, almost a subtle gilded quality that evokes nostalgia and makes each piece feel storied rather than simply new. Clients are embracing these more expressive pieces colored through upholstery pattern ottoman, statement rugs and sculpture chairs. They are designing with intention, creating homes that feel personal and distinctive.

Our client does not want the same furniture that the neighbors have. And they are increasingly leaning into our highly customization model, selecting from hundreds of fabrics, leathers, finishes and silhouettes to create something unique for their own, supported by expanded domestic upholstery capabilities in our North Carolina manufacturing facility.

Customization remains a core differentiator. Our exclusivity comes from designing at the materials, construction and silhouette level. Time and time again, when I hear from our clients, after 5, 10 years, they still love their product, the incredible quality that only gets better over time. Our clients want furnishings they can live in, collect and ultimately pass down generation to generation.

Looking ahead, 2026 represents some of the most innovative and expressive designs to date. confident use of color, pattern and architectural silhouettes, refining detailing, including tailored trim and fringe and a continued focus on responsibly sourced materials and elevated finishes. Our outdoor collection is a great example. We believe it is the largest launch in our history, featuring premium teak and artisans crafted all-weather materials developed exclusively for Arhaus while delivering exceptional durability. These pieces are traditional and inviting in design yet built for modern performance.

Equally important is how we present our products is our showrooms. We are curating traditional inspired rooms that feel layered and aspirational. Clients don't just see a new sofa. They feel transported into a home that feels their own. Digitally, we are enhancing the same storytelling through richer imagery and content that highlights craftsmanship, texture and finish, ensuring the emotional experience carries seamlessly across channels.

This philosophy was recently brought to life through our Defy the Ordinary campaign, a reflection of how our product showrooms and digital platform work together to create something intimate, personal and inspiring. Ordinary has never been our goal, and it never will be. This is how we design, how we source and how we build enduring relationships with the artisans around the world. We are reaching new clients, deepening engagement with existing clients and empowering our interior designers and showroom teams to bring these collections to life in meaningful ways.

Turning to our artisans. We source from artisans across North America, Europe and Asia with many relationships spanning decades, allowing us to innovate, maintain quality and adapt as materials, costs and clients' preferences evolve. No single country defines our sourcing strategy, providing flexibility and resilience in a volatile trade environment. A meaningful portion of our sourcing remains domestic.

In 2025, the United States represents approximately 32% of all our total receipts, including our internal manufacturing operations. We continue to invest in our U.S. manufacturing, particularly in our domestic upholstery business. Approximately 70% of our upholstery sourcing in 2025 was domestic with the largest portion produced in our own North Carolina facility, giving us greater control over design, lead times, quality and speed while reinforcing our long-standing commitment to American craftsmanship.

Our artisans are central to everything we do at Arhaus. I spend meaningful time with them, both in the United States and abroad because quality, innovation and long-term value are built in workshops. In December, I spent time in Vietnam and India. It was one of the most productive trips I've had in many years. We reviewed work and development, explored new techniques and materials, shaped early concepts and for future assortments. What stood out was the level of craftsmanship and pride with artisans refining finishes and designing in real time with a shared focus on responsibly sourced lovingly made pieces built to last.

Our differentiated assortment comes to life through our showrooms, experience in our interior designers and design consultants. Together, they convert inspiration into engagement and deepened client relationships. That is how we capture share of the $100 billion premium home furnishings business. We operate in a highly fragmented category where proximity matters. In 2025, approximately 90% of our total sales came from clients that live within 50 miles of one of Arhaus showrooms. Our showrooms are the front door to our omnichannel experience, immersive environments where clients fully engage with our brand, our product and our interior designers.

Since 2019, we've grown our showroom footprint by more than 50%, and we see an opportunity to expand further. In 2025, we completed 13 total showroom projects and ended the year with 107 showrooms. I personally spent time in many of these new locations, from Winter Park to Bozeman to San Diego to Pasadena. These spaces are carefully chosen, thoughtfully designed, and intentionally built to bring the full Arhaus experience.

As we head into 2026, the macro environment may continue to shift. But what we see firsthand gives us confidence. Being with clients every day across our showrooms in their homes and alongside interior and trade designers means we rely on real insights, not secondhand signals. We see clients investing thoughtfully in their homes, trade designers choosing Arhaus as a trusted partner, and artisans and vendors delivering products that are increasingly well-made and exclusive to Arhaus.

I want to thank our teams across Arhaus for the year they delivered in 2025. This was a year that required focus, creativity, and disciplined execution. It's your work that brings the Arhaus brand to life. 40 years in, and in many ways, we are just getting started. With that, I'll turn it over to Mike to walk through the financials.

Thanks, John, and good morning, everyone. 2025 was a year of strong execution and continued progress against our long-term strategic priorities. Let me begin with the full year. In 2025, we delivered record net revenue of $1.38 billion, up 8.5% year-over-year and at the high end of our guidance range. This record net revenue reflects the strength of our model and the continued effectiveness of our showroom growth strategy and differentiated product offerings.

Gross profit was $536 million, up 7% versus last year, primarily driven by higher net revenue. Gross margin decreased 50 basis points to 38.9% of net revenue in 2025, primarily driven by higher showroom occupancy costs associated with our continued expansion. Selling, general, and administrative expenses increased 7.7% to $447 million. The increase was primarily driven by higher corporate expenses and strategic investments to support and drive the growth of the business, including supply chain, technology, and warehouse-related investments, as well as higher selling expenses related to new showrooms. SG&A load decreased 30 basis points to 32.4% of net revenue, reflecting a modest improvement in operating leverage.

Net income was $67 million, a decrease of 1.9% versus last year. This decrease primarily reflects our showroom expansion and our continued investment in the business. Importantly, adjusted EBITDA was $145 million, an increase of 8.9% versus last year, and adjusted EBITDA margin was flat versus last year at 10.5%, demonstrating disciplined expense management and healthy operating performance as we invest for the long term.

During the fourth quarter, we delivered net revenue of $365 million, up 5.1% year-over-year and at the high end of our guidance range. This performance reflects continued execution of our showroom growth strategy and the strength of our differentiated product offerings. Gross profit was $139 million, up 0.3% versus last year, and gross margin was 38.1%, down 190 basis points year-over-year.

The decrease in gross margin was primarily driven by an increase in inventory reserves of 160 basis points related to obsolete inventory, higher showroom occupancy costs of 110 basis points associated with our continued expansion, and partially offset by improved delivery efficiencies of 100 basis points tied to our ongoing focus on productivity improvements.

Selling, general, and administrative expenses increased 6.8% to $119 million. As a result, SG&A load increased approximately 50 basis points year-over-year, primarily attributed to strategic investments in technology. Additionally, in the quarter, we had higher selling expenses tied to new showrooms and higher corporate expenses to support scale. While net income in Q4 decreased 29.1% to $15 million and adjusted EBITDA declined 15.1% to $35 million versus last year, it's important to note that this performance primarily reflects an increase in our inventory reserves related to obsolete inventory identified during the quarter, higher showroom occupancy costs associated with our continued expansion and strategic investments in technology to support the growth of our business.

As a reminder, we are in a reinvestment phase that we believe supports sustainable growth and long-term value creation. And as these investments mature, we expect them to improve operating leverage over time. Importantly, our outlook for 2026 contemplates continued revenue and profit growth while also funding these strategic investments. Turning to our comparable metrics. As part of our ongoing efforts to improve clarity, we are renaming our comparable metrics to more intuitively reflect how sales are generated and recognized. Additional details provided in our earnings release and Investor Relations presentation. Comparable written sales, previously referred to as demand comparable growth, increased 1.3% for the full year, reflecting the underlying health and resilience of our business.

In the fourth quarter, comparable written sales declined 2.8%, primarily driven by temporary softness in October. October comps were down 14.8%, largely due to promotional timing shifts. In 2025, our semiannual sale concluded at the end of September, whereas in the prior year, it extended into early October. And this timing difference pulled written sales forward into September, creating a headwind in October. Importantly, written sales rebounded in November and December with comparable written sales up 2.3% and 2.6%, respectively.

On the delivered side, comparable delivered sales, previously referred to as comparable growth was up 3.6% for the full year and 1.4% in the fourth quarter, reflecting healthy demand conversion and the benefits of investments we've made across our distribution network. Lastly, beginning in 2026, we will report comparable written sales on a quarterly and year-to-date basis and no longer report this metric on a monthly basis.

Turning to our balance sheet and liquidity. As of December 31, 2025, cash and cash equivalents totaled $253 million, up 28.3% year-over-year, further enhancing our financial flexibility. We had net merchandising inventory of $339 million, up 14.1% year-over-year. And this increase primarily reflects incremental tariff impacts of $14 million, investments in best sellers and new product introductions, and inventory to support new showroom openings and relocations.

Excluding the incremental tariff impact of $14 million, net merchandising inventory was up approximately 9.3% year-over-year, largely in line with our sales growth. Net operating cash flow was $137 million and net cash used in investing activities was $78 million for the full year ended December 31, 2025. Free cash flow, defined as operating cash flow less net cash used in investing activities was $59 million for the year.

And given the strength of our free cash flow, our Board of Directors declared a special cash dividend of $0.35 per share of outstanding common stock. This marks the second time we have issued a special dividend since our IPO and reflects our disciplined capital allocation strategy, balancing investments in showroom growth, technology and distribution infrastructure while returning excess capital to our shareholders.

Importantly, following this distribution, we remain debt-free with substantial liquidity, which we believe will support our long-term growth strategy. As we enter 2026, we remain focused on driving profitable growth, maintaining financial strength and delivering sustainable long-term value for our shareholders. Turning to showroom growth and real estate. We are enhancing our disclosures to provide clearer and more consistent insight into how showroom expansion drives long-term growth and returns.

As part of this effort, we are introducing net unit growth as a standardized measure of showroom expansion while continuing to disclose total showroom projects inclusive of new showrooms, relocations, renovations and expansions. In 2025, we completed 13 total showroom projects, including 5 new openings, 7 relocations and 1 renovation, consistent with our full year guide.

These actions resulted in net unit growth of 3.9% year-over-year, bringing our showroom count to 107 showroom locations at year-end. Looking ahead to 2026, we expect to complete approximately 10 to 14 total showroom projects in 2026, consisting of 4 to 6 new openings and 6 to 8 relocations, renovations or expansions. In addition, moving forward, we will consistently provide targets for the following. Our showroom maturity ramp, our targeted aggregate 4-wall economics at maturity as well as providing enhanced disclosures on our showroom maturity mix and expanding detail on revenue contribution of new showrooms.

Importantly, these disclosures reflect enhanced presentation and clarity and do not represent any change to the underlying economics, strategy or disciplined approach to showroom investments. Details are provided in our earnings release and our Investor Relations presentation.

Turning to strategic investments. In 2025, we made meaningful progress across initiatives focused on modernizing our distribution network and our technology infrastructure. These investments are tightly aligned with our long-term strategy and are designed to improve operational efficiency, enhance our clients' experience, strengthen our internal controls and support profitability over time.

Starting with distribution. A key milestone in 2025 was our decision to bring distribution management of our Dallas facility in-house. This transition was executed successfully and ramped ahead of schedule. We also continue to evaluate opportunities to optimize our distribution footprint and processes with a focus on improving speed, reliability and consistency across the network.

Turning to technology. As shared last quarter, we are in the early stages of a multiyear digital transformation to replace our legacy finance and operations systems with a modern, fully integrated technology platform. As a reminder, the total program investment is approximately $30 million, including implementation, staffing and licensing fees through 2030. We expect approximately $12 million of cash investment in 2026 and approximately $10 million of cash investment in 2027.

Cash outflows will begin tapering in 2028 as we transition to a steady-state run rate of roughly $2 million annually through 2030 for ongoing licensing and maintenance. We view our strategic investments as foundational to our next phase of growth, and we will continue to provide updates as we make progress.

Moving to sourcing and tariffs. Trade policy remains fluid, particularly following the recent Supreme Court ruling related to certain global and country-specific tariffs. We are actively evaluating the implications. Given the evolving environment, we believe that it is prudent to maintain a disciplined planning posture until there is greater clarity. But importantly, our diversified sourcing model and our domestic manufacturing positions us well across multiple policy scenarios. For 2025, incremental tariff impacts were partially offset through sourcing shifts, vendor negotiations and pricing actions implemented in the fall, reflecting the flexibility of our sourcing model.

In 2026, based on tariff policy following the Supreme Court ruling, we estimate tariff impacts to be in the range of $30 million to $40 million. This tariff impact reflects some benefits from vendor negotiations and sourcing shifts and operational efficiencies. We will continue to assess pricing over the coming months and quarters and plan to respond quickly and thoughtfully as conditions evolve with the intention of protecting margins and providing value.

Turning now to our outlook. We are providing full year 2026 and first quarter 2026 guidance. Our outlook reflects confidence in the resilience of our model and the embedded growth opportunity within our showrooms while maintaining a measured stance given the ongoing macro uncertainty. We believe this balanced approach appropriately reflects both the near-term environment and our long-term growth trajectory. For the full year, we expect net revenue between $1.43 billion and $1.47 billion for a year-over-year growth rate of plus 3.7% to plus 6.6%. Comparable delivered sales of flat to plus 3%, net income of $66 million to $75 million and adjusted EBITDA of $150 million to $161 million.

For the first quarter of 2026, we expect net revenue between $300 million and $320 million for a year-over-year growth rate of down 3.7% to plus 2.8% comparable delivered sales of down 5% to plus 1% and net income of $0 to $5 million and adjusted EBITDA of $13 million to $20 million.

In closing, 2025 was a strong year of execution across our business. And as we look ahead, we continue to remain focused on executing our strategy to deliver profitable growth and long-term value creation, driving industry-leading top line growth, navigating tariffs, protecting margins, improving profitability while continuing to transform our business through strategic investments that support scalable growth and long-term performance.

We entered 2026 from a position of strength, with a debt-free balance sheet, strong liquidity and a proven ability to execute through varying market conditions. Thank you to our teams across the company for your creativity, your passion and your execution and to our shareholders for your continued confidence in Arhaus. With that, I'll turn it over to the operator for questions.

[Operator Instructions] Our first question is from Simeon Gutman with Morgan Stanley.

This is [Pedro Gil] on for Simeon. Nice quarter. My first question is on guidance. You've guided for full year EBITDA margin leverage of about 20 basis points, which is remarkable given some of the still tariff headwinds and some of the strategic investments that you're undertaking. I'd be curious to know what are the key drivers of leverage going into next year? Is it coming more from gross margin? Is it ramping of the new showrooms? And also for the first quarter guidance is a bit weaker than the rest of the year, both in comps and margin. Is there anything specific in the first quarter, perhaps some noise from the storms that you're seeing? And then I have a follow-up.

All right. Great. Thanks, Pedro. Look, I would start with just a quick overview of our Q1 guide, just to give you some perspective, really 3 things that I would highlight. Number one, our Q1 guide is really anchored on how we finished the year. We came in very strong on deliveries in December. And that obviously has a spillover impact into January, February as it relates to deliveries. But additionally, and more importantly, January did affect us in terms of weather. We saw some softness that we believe was really driven by the weather. We had a number of store closures during that January, early February time period. And that really led to low traffic during these peak winter events.

I would say that we also had some delays on the issuance of our spring catalog mailing. It was isolated and it only affected certain markets. but we did have some production delays that I think further exacerbated the softness. So in response to that, we did issue some incremental promotions in the month of February is somewhat of a remedy to get people back into stores and to reengage. But we see the softness is demand deferred. John says it all the time. Clients are still engaged. We're still confident in our full year guide.

Our full year guide really is anchored on growing the business between 3.7% and 6.6% and that's with EBITDA growth of between 3.2% and 10.9%, and that's while supporting all of the strategic investments that we've highlighted previously. So Pedro, to get to the bottom of your question on the full year guide in terms of what the drags and drivers are generally, we are looking to expand margins, and we continue to push on delivery efficiencies and operating effectiveness, continuing to improve product mix.

Every time we introduce newness, that's an opportunity to really further premiumize the portfolio and focus on margins. In terms of SG&A load during the year, we're not counting on a lot of efficiencies there, largely because we are funding some of the strategic investments. If you peel that away and looked at it apples and apples, you would see some SG&A leverage, but we are funding these investments somewhat through the P&L, somewhat through the CapEx.

When you look at fiscal '26, our guide on strategic investments for the digital enablements, $12 million in cash, around 30% to 40% of that will be P&L expense during the year. So that's something to keep in mind. Our marketing spend is growing in line with revenue. That's an area that we continue to remain very fluid on as we see opportunities in the market, we will spend more. And then in other areas where there's softness, we'll pull back. But I would say that the marketing line on the P&L is very much in line with historical averages in terms of percentage of revenue.

So those would be the big drivers and drags. And I would highlight that when you look at our business from an EBITDA margin perspective, our guide implies a range of 10.5% to 11% with that low end being in line with where we ended fiscal '25. with the investments included in that. So we are showing, I think, improved operating margin resilience over time. We've just got to get through this investment phase over the next 12 to 24 months.

Okay. Fantastic. And then my second question is on tariffs and pricing. It's nice to see you're making further progress in mitigating some of the tariff headwinds. You mentioned last quarter, you're taking a bit of pricing targeted selectively in October. You mentioned again on the call earlier today. So I'd be curious to know a little bit how much pricing was in effect throughout the fourth quarter and how you are thinking about price inflation into 2022?

Yes, Pedro, thanks for the question. I know it's top of mind. I just want to start off by taking a moment just to recognize the tremendous support from the entire extended Arhaus team over the past year as we've navigated through the tariff policies. And this goes all the way back to the beginning of our supply chain with our vendors and sourcing agents overseas to our logistics and sales teams across the U.S. and to even our headquarter teams that have helped us to navigate through this very challenging year of continuous policy changes. But as it relates to tariffs itself, we've been clear on our objectives from day 1, which is really to protect our margins, to maintain deep relationships with our suppliers and to be nimble.

And if you take a step back and think about that, like from a margin perspective, we're exiting this year with solid margin performance. Our largest headwind on gross margins for the year really was elevated occupancy costs related to our showroom expansion. And when you peel that away, I think we did a tremendous job of managing margins through this dynamic situation. So I would call that a win for our organization. And then looking at the suppliers, we continue to invest in these relationships either through speeding up new product development or figuring out how to streamline our ways of working. We're certainly collaborating with all of our suppliers, but particularly the top -- the top tier.

And given some of our commercial highlights that John highlighted in his remarks, this wouldn't be possible without the vendor partners across the world continue to support us through this dynamic situation. So I'd say that's also a win. But -- in the end, one of the things I'm most proud of in the organization for the past year is we have demonstrated incredible nimbleness. And it comes back to your question, Pedro. We've been very nimble through our price and promotions. We did take pricing in October. We haven't disclosed details around the quantum of that, but we did take some pricing in keeping with our goal of protecting margins. And we've also used promotions as another lever to protect margins and make sure that we're striking the right balance between top line growth and margin management.

But as you think about the latest on tariffs, in my remarks, I talked about the latest development. That new range is down from what we quoted at our last call. The current high end of the range at $40 million is close to the low end of the old range. And just for absolute clarity, the high end of our current range is based on the ability of the administration to increase the global tariffs from the 10% to the 15%, which they haven't announced yet, but they could at any time. They have announced the 10%, which I'm sure all of you are keeping a close eye on, and that's what's really driving the bottom end of our range. But we don't see anything in the new tariff policy that would suggest a massive change to our current strategy. We think our strategy is working. We'll continue to be nimble and things will ebb and flow, but we really do think it's working.

Our next question is from Jonathan Matuszewski with Jefferies.

One question and one follow-up. The first question, Michael, can you just add some more color on the reference to obsolete inventory? Just any more context there, the rationale and how you would assess the health of the inventory based after those actions? That's my first question.

Yes, sure. Jonathan Look, as you guys know, I'm fairly new in this business and continuing to get up to speed every single day.

We made a lot of investments in our warehouse management systems over the last couple of years, and that has provided us with increasingly beneficial insights into every [SKU] across our network. And we knew coming into Q4 that we had some areas in inventory that were really on the border of being sellable through our clearance centers versus really just being obsolete. And given our strategy with the clearance centers, we made the business decision to really take the loss and move on and focus our clearance centers on other items. So that's what drove the Q4 impairment [indiscernible].

And when you look at overall inventory, in businesses like this, you always have challenges, right? You never have enough of what you want. You always have a little bit too much of what you don't want. But when we look at the overall health of our inventory, we're in quite a good spot. When you look at it almost on every measure, whether it's inventory turnover or inventory as a percentage of sales, we continue to work on further improving the health of inventory.

But overall, we're in pretty good shape. Ultimately, our job is to make sure that we're marking that inventory at its lower cost to market, that we're keeping our inventory valuation in line with net realizable value, making sure that we have a good handle on shrink. And I can tell you that as part of all our focus on SOX controls and operating controls across the company, we've never had a better handle on inventory than we do today.

And it's really through the work of dozens and dozens of people across the organization, whether it's how we do physical inventories at the end of the year or how we're doing cycle counts and how we're monitoring SKU velocity and things like that, we're better than we've ever been. So as CFO here with my first 10-K just going out the door, I'm very comfortable with where we are. That being said, we can always do better, and our goal is to continue to optimize.

In terms of the rest of the noise in the Q4 margin, hopefully, it's clear, but occupancy played a role there, just year-over-year increased occupancy costs, and that's really just a function of our showroom pipeline as they start to ramp. And we've highlighted in our remarks, our expectations for the upcoming year in terms of pipeline.

In terms of thinking through some of the big headwinds and tailwinds for next year as you think about gross margin and modeling, I would offer -- just a few things to think about because I know you guys are all looking at your models and what expectations are for next year. I do expect us to continue to improve efficiencies from a delivery perspective next year. Some of this is driven just through economies of scale that we get and some of this is through some of the technology investments that we're making.

I would point you back to one of the deliverables in our digital transformation is the transportation management system that we're rolling out here in a few months, and that's going to give us lots of opportunity to drive savings across our network from a freight and transportation perspective. So I think there's 60 to 70 basis points of margin improvement year-over-year as a result of those transportation costs and efficiencies.

I do see continued improvement in our product margin, looking just at product cost. And that's a function of continuing to premiumize the portfolio. John's talked about how much newness that we have in the market. And every time we introduce new SKUs, we're looking at ways to further enhance margins. So that's a big opportunity for us. We think there's 30 to 40 basis points of opportunity in our margin from that.

And then I would say that even though we don't guide on margin itself, I would factor in 30 to 40 basis points of headwind for the continued build-out of showrooms and just the occupancy costs that come along with that. But if you sort of put that all together and net it out, we are counting on some modest margin improvement for the upcoming year.

That's really helpful. And then a quick follow-up just on trade. It seems like a major growth platform for '26. You're stepping on the gas here. So what's embedded in the total sales guide for your efforts there? And how will the new trade program incentivize external designers to devote more of their clients' budgets to Arhaus going forward? Thank you.

Sure. Yes, the trade business is one that we -- as you all know, we're focusing on to grow. It's a massive business. I don't know how many billions of dollars it is, $27 billion out there in the United States. And our customer is a luxury customer. When they are redoing a room or a home, are moving, they want help. And we have our own interior designers, which have done an incredible job and have been growing like crazy.

But there's also the exterior trade folks who have their own businesses who need a place to shop for furniture. And what's so great about us is it's kind of a one-stop shop for them. Instead of them having to go somewhere to buy the lamps, somewhere else to buy the rug, somewhere else to buy the sofa, someone else to buy the coffee table, somewhere else to buy the prints. We can do it all for them, and we do all the service for them as well. So we know we're in the right area here. And as we're changing, adjusting how we're compensating them and so forth, we're really going after building a new team. We think this is a big growth area. We shall see how much it grows, but we know it's going to be -- it's going to grow, and we're going to be very successful at it. We've already proven that, and we have a lot of trade members who just love working with us and adding more literally every day.

Best of luck.

Thank you.

Our next question is from Steve Forbes with Guggenheim.

Good morning everyone.

Hi Steve.

John, I wanted to talk about the real estate strategy here. So sort of a 2-part, first question here. One, given the recent opening of the 40,000 square foot store in Pasadena, California, I'm curious if the development of that gallery has changed your perspective around the most ideal showroom size? And if you could sort of maybe talk through what, if any, learnings you sort of are looking to gather, right, from operating a bigger box like that?

Yes. Yes, Steve, that box was what it was. It was an old Saks Fifth Avenue, and it was that size. It wasn't our ideal size from a standard box location, but we were able to do some -- a lot of fun things in there that we've never been able to do before. So we're testing a heck out of it. It's rather new. Response has been phenomenal so far. But we've been able to put in more design centers, more -- little offices for our designers to work out of. We're able to display a lot of our decor and accessories in a much, much bigger way than we did.

We were able to put in a lot more really edgy furniture, test sectionals with large patterns on them, things like that, that we had never done before. And then that same sectional, which certainly is the best seller for us, we'll duplicate in a more neutral fabric somewhere else on the floor. So we're learning a lot. No -- we have no strategy to go to only 40,000 square foot stores in the future, but more to come on that. It's been fun to learn. The whole team has been out there going through what's working, what isn't. And so yes, working well. And then we've opened up smaller stores as well that have been doing well. We did one -- a little store in Bozeman, Montana, which is 100,000 people, just killing it there. And that store, I think, is 14,000 square feet. So again, we're so flexible. And depending on the markets, we can go from 14,000 to 40,000 square feet, and they all work, and they're all profitable. So we love our model. It's not just here's your standard box. It has to be this big sort of thing. And so we're learning a lot from both ends, the smaller size and the large ones.

That's great to hear. And then just a quick follow-up for Mike. If we back out the inventory reserve, 160 basis points in the fourth quarter, fourth quarter gross margin, I think, exceeded expectations and improved pretty nicely sequentially -- you gave us a nice sort of building blocks for next year. It seems like you're expecting further gross margin expansion. But maybe we could just focus on the fourth quarter. Like what happened in the fourth quarter that allowed you to outperform on gross at the...

I think the -- no, that's clear. Look, I would come back to some of the fundamentals in the business. AOV continues to improve. When you break down AOP -- AOV, excuse me, both price mix improved as well as units per transaction. I see a lot of that ties into the trade channel focus and the interior designer focus and really partnering with clients that are doing home refreshes and remodels, and that continues to drive bigger and bigger transactions. When you look at Q4, we also saw strong contributions from upholstery and decor, which tend to be margin accretive to the P&L and SPO, special order, was also quite strong during the quarter. So just a lot of things firing on all cylinders in that regard. And I think it's really what's the underpinning behind our 2026 guide as well as the investments that we're making to really build out this trade channel because it's just a massive opportunity for us.

Our next question is from Seth Sigman with Barclays.

Nice progress. I wanted to ask about written sales, which were up over 1% over the last 12 months. I think December or November and December exited better than that. So the question is, do you think you're starting to see an inflection in the business? And how are you thinking about demand and written sales for '26 embedded in the outlook?

Yes, I can kind of start in big picture. As always, our clients buy from us because we have unique product, incredibly quality, incredible design at a very, very reasonable price for what it is. And we have innovated more in the last 6, 8 months than we've ever done. So I am just thrilled with the new product rolling out. It's such a fun time in the business right now because customers tastes are changing. It came out of COVID. Everything was kind of monotoned. First of all, everything was gray, kind of plain, simple and things have gotten much warmer, warmer woods, more character in the woods, prints, fringes, -- and it's just an amazing time right now. So the folks that are on top of the trends are going to win. And I know we are on top of the trends more than anybody. I haven't seen anybody roll out anything anywhere close to what we're doing. So we're going to win. So we're very bullish on business because our product is unbelievable, and it's going to be getting better and better as the year goes on. Mike, if you want to add anything to that question.

No, I think that was comprehensive. The only thing I would say is the softness in January clouds the picture a little bit just from some of that softness, but we are pretty confident in our full year guide. I completely echo John's remarks around the momentum that we're building in the business. Is this a hard reflection point or not? Hard to say, but it certainly feels like we're building momentum.

Right. Okay. That's very helpful. And then my follow-up is around the long-term outlook for low double-digit EBITDA growth. So 2025, EBITDA was up 9%. This year, you're guiding 3% to 11%. So the high end does capture that. But to get to that run rate consistently, is it really just a matter of sales growth accelerating? Or how are you thinking about those other margin levers that could kick in? How do we think about the timing of some of those unlocks?

Yes. It's good question. And the way we're thinking about it is over the next 5 years, we do see leverage coming from a couple of areas in the P&L, namely SG&A costs where we've struggled to get significant economies of scale as we've grown because of the digital platform that we're operating with today, and this is one of the biggest pillars in the digital transformation when we think about the ROI is we should be able to grow this company in mid-single-digit top line growth and get economies of scale and leverage out of our SG&A.

And that's a big part of our business case is improving SG&A load over time. I think we said in our last quarter that in the wake of this digital transformation with the leverage that we put out there, that should be worth $10 million a year to the P&L. We also think there's tremendous opportunity in our distribution network over time as we continue to achieve economies of scale and really thinking about and even reinventing in some regards how we get to our customers that -- things that you can do at a larger scale that you can't do necessarily when you're still early growth company.

So we've built in some expectations. We have a road map around these initiatives, but I think that some of it's the transportation management system and getting economies of scale there. It's continuing to evolve our footprint to get closer to the customer and further optimize transportation costs and it's continuing to improve inventory turns to make sure that we're operating with the right square footage across the system. But we see margins over time creeping into the [indiscernible] mid-40s, but 42-43% range, coupled with some SG&A leverage this business should be operating at 16%, 17%, 18% EBITDA margin versus where we are today. So that's the thing that I'm on the hook to deliver is how do we get -- how do we deliver the growth we're talking about over the next 4 to 5 years, but also have flow-through to the point where we can deliver the -- what we would view to be competitive margins in this space from an EBITDA margin perspective. So that 16%, 17%, 18% target is really out there for us to go and get.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Tara Atwood [indiscernible] for closing comments.

Thanks, everyone, for your participation on our call and interest in Arhaus. Have a great day.

Thanks, everybody. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.

All right. We're in business. Hi, everyone. Good morning. It's Simeon Gutman of Morgan Stanley's hardline, broadline and food retail analyst. Welcome to day 1 of our Global Consumer and Retail Conference. I'm pleased to introduce Arhaus represented by Michael Lee, CFO. It's an interesting crossroads with a housing home improvement, home furnishings world that is stagnant, but starting to show some signs of life. This is an eclectic growth story with a neat mix of showrooms and product. And it feels like it's getting the short end of the stick from the market in terms of valuation.

So -- to start off, I'll ask a question. Oh, we will be taking audience questions at the end if there's time. I also want to just read an important disclosure for important research disclosures, please see www.morganstanley.com/researchdisclosures.

And with that, I'm going to ask the first question, sit down and have a chat. Michael, to start off for anyone in the audience who may be newer to the Arhaus story, can you give a high-level overview of the business? How would you describe what differentiates the brand in the home furnishing landscape?

All right. Well, thank you for that. And I just want to say upfront, I agree with you, we're undervalued. Thank you, Simeon.

But yes, I'm happy to give a quick overview of Arhaus. We are a high-end, high-growth furnishings brand with a resilient business model and a very affluent client base. We designed nearly all of our products in-house, and we have an ecosystem of artisans and craftsman around the world, relationships that our CEO, John Reed, has built up over many, many years, and in some cases, many decades. And -- through these relationships, we have incredible control over design and craftsmanship, allowing us to bring luxury products to our clients at a great value.

And one little known fact is when you come to an Arhaus showroom, nearly 90% of the products, in fact, I think a little over 90% of our products, you can't find anywhere else, right? These are exclusive products to Arhaus, which makes the shopping experience one of discovery.

With respect to our clients, our clients are really interesting. I would call it a differentiator for Arhaus. They're very engaged in the Arhaus brand, and they tend to be affluent, they tend to be very design forward and they prioritize quality and long-term investment above all else. And we continue to see very healthy demand. We get asked all the time, what's going on with the high-end consumer, what's going on with cancellations, what's going on with engagement levels? And it continues to be very positive.

In fact, one of the things we've noticed in our business when we team up our affluent clients with one of our interior designers, which we provide to them for free, free of charge, the order values on those transactions tend to be 4x greater than orders when there is no interior designer involved. So it's a real driver of our business.

So we see a lot of growth ahead. We reach our clients through our omnichannel platform. We have over 100 showrooms across the United States. We operate multiple showroom formats, but I'll save that for later. We also have an e-commerce business. We have an in-home design program, and we have a growing trade business. And when I say trade, just for the next 40 minutes that we're together, trade is a term to describe business that comes to us through a third-party interior designer, right?

So this is a client that's hired their own designer and working on a project, and those people oftentimes choose Arhaus because of the depth and breadth of our assortment. So that's our trade channel, which we're really excited about because that's a big area of growth for us.

And just in light of the growth, Simeon, we are investing for the future. We see a lot of growth ahead, and we are in the midst of a digital transformation at Arhaus to really put in place a scalable digital platform for growth that will allow us to grow efficiently over time, really targeting to improve EBITDA margins over time and improve our SG&A load over time through really modernization of our tech stack. So we're really excited about that.

But -- at the end of the day, we are a very differentiated, design-led brand with a very affluent consumer base. And we've got a proven model that we're really excited about. So we're focused on really scaling with discipline.

Thanks for the overview. We're going to touch on almost every one of those topics.

Okay.

One random one you mentioned -- I mentioned eclectic, you said artisan brands, some of this that John have cultivated over the years. One of the impressions when we were getting to know the brand is then how do these suppliers scale with you. You're growing rapidly, they're unique, they're smaller, they're more crafty. So how -- was that a perception that you had when you came to the business?

Well, it's been interesting. I had the opportunity to go to Southeast Asia a couple of months ago to meet with some of our suppliers. And I was just really struck by the engagement and the partnership. I spent 20 years of my career in the wine business. And one of the things I learned from the wine business is that your business begins and ends with your growers.

And there's a lot of parallels at Arhaus in that regard in that our craftsman and artisans around the world are in many ways, our lifeblood to the business. And we've taken a very I'd say, partnership-oriented approach over the years, we don't squeeze our suppliers. We really view it as a partnership. We do collaborate on product design. We do regularly engage with them on product quality, making sure that it hits Arhaus standards. But Simeon, with the recent tariff movements, we've had suppliers completely pick up and relocate across borders for us to support our business. So absolutely, we've seen many examples where they've been willing to invest behind Arhaus to continue the partnership.

'25 has been a better year than '24 for the industry. There are more than signs of life that potentially signs of vibrancy. So looking back at how '25 has played out versus what you expected, what's been the biggest surprise, and if you would be willing to share how that sets us up for 2026?

Sure. Yes. Well, I wasn't in the industry in 2024, but I will say that 2024 was a more challenging year for the industry, just managing through an election year with heightened levels of uncertainty with respect to macro backdrop. But in the last 2 quarters, it's been a real interesting period, a little bit choppy when you think about the volatility of the business, and I'll come back to that in a minute. But when you look at our growth over Q3, it's been pretty impressive. July, we had one of our strongest growth months ever.

One of the things we measure in our business is what we call demand, but it's akin to what orders we've received from the customer. And because of our business model, there's sometimes a 4- to 6-week delay between order and receipt. We track orders as a concurrent indicator of demand, right? And then when we fulfill and deliver to the customer, that's when we recognize revenue. So demand is, in some ways, a leading indicator of what's coming to the P&L.

And in July, we were up 15.7%, just a real strong growth rate for us in the summer and the summer continued to be very strong. In fact, when you flash forward to September, we do our store-wide sale 2 times a year, once in January, once in September, and September was just an absolute upside surprise for us than that the fall collection was very well received. We released our catalog, our fall catalog, right around that time, and we also introduced our fall collection.

We had our biggest month ever in September, and we achieved a number of records during that store-wide sale, which I think are, in some ways, evidence that our strategy is working. We had record levels of newness, and that's been a concerted effort by our product development teams and merchant teams to really lean into newness. So we had record levels of newness, so the clients are voting that we're doing the right thing.

We had record levels of upholstery sales. We had record levels of customization. And when we talk about customization, this is an area we're quite proud of, but when you come into Arhaus, into a design studio or into a traditional showroom, and you see a piece of furniture such as a sofa, you may decide, I love the sofa, I don't like the fabric. We can walk you to our fabric wall, and we have the largest assortment in the high-end luxury business for furniture over 600 fabrics to choose from and over 90 leathers to choose from. And we can walk you through the differences between all of these fabrics, and we can have a custom-made sofa to you in about 6 weeks.

So that's a great example of our strategy really coming to life. We achieved record levels of customization in September as well. So consumers are really voting for the fabrics that we're offering. We also had record levels of trade business in September as well. So that's a great validation, if you will, that we're doing things right when you have third-party interior designers choosing Arhaus, and coming to us because we have the best selection, the best variety, the best quality.

So we're real happy with how our Q3 performed as we flash forward into 2026. We're in the midst of our planning cycle now, Simeon, but we're really excited about what's coming. We are coming into what will arguably be our largest pipeline of new products in the history of Arhaus.

Our CEO, John has been really pushing on the teams to innovate and to move more quickly when it comes to new product introductions. And his efforts have paid off. He can be quite motivating in that way. And we've ended up pulling forward a lot of our innovation into the spring because there's so much momentum in the business. So we're really excited about next year.

I want to clarify maybe the cadence of the third quarter. And if you're willing to take a gander on how the third quarter success could translate into holiday season. But you mentioned September was great. We talked on the call that there was some decel in October. You also said your regular sale or event September. Was there anything pulled forward? Did the calendar change and did anything in the competitive environment? Because it still sounds lumpy the way the year, but trending in the right direction.

Yes. If you look at our demand, our comparable demand through Q3, which is essentially same-store comparable sales on an order basis, orders received, we were up 2.8% through Q3. And if you play that out month by month, you will see a bit of a seesaw effect in our business throughout those 9 months. And some of that is the natural seasonality of our business. We grew in January. We had a fantastic January, September store-wide sale. And then business was a little bit softer in February and then March was great. And then in April, we had the big Rose Garden tariff announcements.

And hence, we were down a little bit in April. And then we're back up in May and every month since then, it's been a bit of a seesaw. But I think the one that caught maybe more attention during our Q3 call was following a very strong Q3, a very strong September, we had a softer October. In fact, we were down, I think, around 14.8% in October. And a few notables on that. Number one, October tends to be one of our smaller months. And you tend to see that when you follow a big store-wide sale, the following month tends to drop off and those are all for obvious reasons.

But we also made a decision as a management team to modify our promo calendar a bit. In the prior year, there was a business decision to extend the September store-wide sales into October. That was kind of a one-off decision, and we talked about 2024 being a tougher year. So I think a lot of it stems from that.

This year, we elected to not extend the September store-wide sale through October and to really get even more focused on our programming time lines. But we also did this because with all the tariff impacts, we were looking to October to take some price increases.

So it was really us trying to have a clean break between September, a store-wide sale and implementing price increases and not having confusion with consumers on the side of pricing. So look, the business has been choppy, some of which is just driven by the macro backdrop, I mentioned how our consumers are very affluent.

They're not necessarily driven by the same things that the average Americans driven by. A lot of their purchase behavior comes back to things like the wealth effect or how much home equity they have. That drives their behavior more than what's going on with GDP.

And when the stock market has its ups and downs and you can think about all the ups and downs we had this year with the tariff announcements, we saw a pretty close correlation in our business. So that really contributed to the volatility. We don't expect this volatility to continue forever. But without turning this into a political discussion, it's kind of hard to say.

We're, in many ways, bracing ourselves for continued volatility. I think we've proven, Simeon, to be quite agile through a very challenging macro backdrop. But all that being said, I think we still remain very confident about the future ahead.

You mentioned wealth effect home equity. I want to ask about housing turnover, the connection to the industry's demand and able to detect whether we're in the midst of a replacement cycle or industry has been soft, and we're just beginning to see it crawl back out. So anything related to macro and how much of this could be tied to housing?

Well, it's a great question. We get asked this all the time because you would expect that our business would have a very tight correlation with housing turnover. But the reality is that we'd love for housing to turn around and when it does, that will be a further tailwind to our business. But we have many, many demand drivers that go well beyond just the existing home sales or new home sales.

As I mentioned, our demand is really anchored in this affluent client, and they just tend to behave differently. And they're much less tied to housing turnover in that regard. They're less tied to things like affordability measures that we look at all the time. Their purchase [Technical Difficulty] in home equity. And they tend to have a long-term point of view when it comes to investments in their home.

We're also seeing a very healthy replacement and renovation cycle. That has continued. Even though people are moving less, they are still investing in their homes. So whether it's a light refresh or a full remodel, or a designer-led project for their whole home, we continue to see very strong levels of engagement from our consumers.

And then think about and third homes. This is where we have introduced design studios into those key markets where there's lots of second home ownership. We want to be where those clients are to provide them with Arhaus design services. So those are all factors that contribute to the demand that's coming in. I am excited about the housing turnaround. I do think it's imminent. I don't think it's on our doorstep, but we are looking forward to continued improvements into 2026.

But I will say, when you think about what brings people in the showrooms, there are many factors on demand that we directly control. And I would point to the fall 2025 collection, clearly a demand driver. We got lots of feedback from our clients on that fall collection. And the innovation, the design, the quality, the warm tones, the burl woods, all the things that further differentiate us from what you might see from our competitors, the customization that we offer continues to be a demand driver.

We have our own manufacturing facility in North Carolina, and it's an upholstery manufacturing facility, and that's where a lot of the customization comes from, and we continue to improve cycle times with clients. So that when they do come in and offer and express interest in a customized sofa, they don't have to wait 6 months. They don't have to wait 4 months. We can get them a sofa in 6 weeks. So that continues to be a differentiation. So there's number of things that we're doing to bring people in that are helping to drive demand that isn't necessarily tied to housing turnover, but we would welcome it, that being said.

One more on demand related to what you said bringing people in the buy more, save more at the $5,000 price point and that's been a big success this year. Can you talk about big ticket? Is it outperforming because of marketing programs like that? And how does that impact the overall mix and product margin?

That's a great question. And this is one of our biggest wins this year is the continued strength in our higher-ticket transactions. The combination of large project clients, designer-led projects, trade-led projects as well as the buy more, save more program contributed meaningfully to our average order value. And just so everyone is aware, the buy more, save more program is where we promote to our customers spend X dollars, they'll get Y percentage off their transaction.

So it's not priced based on individual pieces, but if they put a project together and reach a $10,000 threshold, they can get 20% off their transaction or 30% off their transaction. That's been very effective in marketing because it doesn't, in any way, impair the value proposition or hurt our brand. It's simply recognizing that when a client comes in and puts down a big order that there's value for that, and we recognize that through discounts.

So it's been very well received, and it's really been, I'd say, our anchor promotion for the last 18 months or so. So we've had quite a lot of success with that. But when you go back to the ticket sizes of $5,000 and $10,000, they continue to be very healthy at these transaction levels. And it's all the same factors I've mentioned a few times, right?

It's the interior designers, the trade, the promotions. And it's had a big impact on our product mix and doing that. We're naturally weighted toward higher AOVs because of the category that we compete in. We offer large furniture categories, large pieces. But with our upholstery program, the customization, these are higher dollar items, and that continues to drive the AOV upwards as well.

And the big ticket items help us on margin. There's no doubt about that. The more product we source from the U.S., the better our margins typically. The more we source from our own manufacturing facility in North Carolina, the better our margins typically. So it's that ability to customize and trade customers up that is really helping us to protect our margins. So generally speaking, it's been a big win for us.

What the market knows about Arhaus and AI is largely a function of what you communicate on quarterly calls, maybe on your website. So to dangle the carrot, all things AI set the record as what Arhaus is doing to implement it. And as a side question, do you think it has a bigger top line or bottom line benefit, more immediate term, in the next 3 years?

Yes. That's a great question. I know it's a big topic. I'm personally a believer in the benefits of AI. I use it, both personally and professionally. So I consider myself to be very well educated on this. But I would say at Arhaus, we're not treating AI as a stand-alone initiative, right? We're treating AI as an enabler to what we're already doing. In the areas of the top line, we're using it to help create more personalized and seamless client experiences in the form of better product recommendations, helping us to target clients and to help support product discovery online.

So even when you go into like the design step of your project, we're using AI to help model out different visuals as well. So that's been very helpful for top line, but also customer experience. On the bottom line, look, we're just getting started here. We recently announced a digital transformation.

And just as a bit of a back story. I've done a number of these in my career, very large-scale digital transformations, ERP projects and whatnot. And -- as I've jumped into Arhaus and help them to stand up this program, it's been absolutely shocking to me how much more efficient these programs are with AI as the enabler.

So we announced a $30 million investment in digital transformation that we'll maybe talk about in a few minutes. But the fact that we're able to accomplish this and the time lines that we've laid out, a lot of it comes back to AI and the fact that the accelerators that they've developed to either write code or to develop change management collateral or to even summarize meetings and action items, it's just been a real enabler.

And I see thematically that AI is really just a big enabler that companies are going to deploy over the next couple of years. And we see lots and lots of opportunity, but we're taking a very methodical approach, just like we've taken a methodical approach on building our showroom fleet over the years, we're going to take a very methodical approach with AI and make sure we deploy it to the highest use cases across the business, but ultimately, make sure that we capture some of those benefits.

So this digital transformation, and you were right, that was the next topic. How does it break down between ERP, supply chain, inventory management? The $30 million looks mostly capitalized? Is there a P&L impact? And one more for you, since you've done a few of these degree of risk associated with this one inside of Arhaus.

Sure, yes. Look, this is one of the most important initiatives that we are undertaking as a company right now. Arhaus has grown quite a lot over the last 4 years since our IPO, and we have outgrown our technology stack. And at the same time, we got a lot of growth ahead. So this is a critical initiative to really set us up for continued growth. There are 3 major components to this program.

The first one is replacing our core, if you will, our core finance and operating systems. And that's the longest pole in the tent, if you will, with respect to this program. In addition to that, we are implementing new capabilities in the form of transportation management systems and an order management system. And you might ask, well, why are you doing that at the same time you're doing these other projects.

Well, there's a lot of integration between the transportation order management systems with the existing core systems. So it makes a lot of sense to do it at the same time. But these projects also drive a really strong ROI. We spend tens of millions of dollars a year on transportation and the uplift in capability that we're going to get from a new transportation management system has real meaningful P&L impact and we want to pull that in as fast as possible.

The order management system that we're talking about, there's a lot of complexity to it, but we think it's worth the effort because it's really going to elevate the client experience through their entire purchase journey and allow us to really reengineer in many ways how we service our customers. So we're really excited about that.

So some core investments that we're making, but -- for anybody that's read our 10-K or our 10-Q, you also see that we have several material weaknesses in our financial reporting. And one of our big priorities as a company is to fully remediate those material weaknesses and improve our internal control environment across the company. We can't do that today with our existing systems. We can do a lot of things to improve our internal controls and we're doing that.

But we can't get all the way to bright with our existing tech stack. So this new tech stack is going to help us fully remediate these material weaknesses in due course. We don't have an exact time line on that. But once these new systems are in place, you should expect to see some progress on that in the future. But it's a priority for us as a company.

When you think about the economics of this program, it's about a $30 million initiative over the next 18 months. And Simeon, you're right, the way this gets accounted for is it's mostly capitalized into a cloud computing asset on the balance sheet. And then once the system goes live, you start to depreciate or amortize the asset. So we communicated the $30 million split is mostly next year and the year after. I think we said $2 million this year of cash spend, $12 million next year and $10 million the following year, and then $2 million, $2 million, $2 million after that through this 5-year horizon.

So that's how the cash flows will flow. We're projecting to go live with this technology in Q1 of fiscal '27. And at that point, we'll start expensing amortizing the program, and it will get amortized from '27 through 2030, which is the duration of the 5-year license agreement with the software providers.

But the good news is, is that by 2028, we expect the benefits to start to realize as well. And we've communicated really 2 major sources of financial benefits. I'll say 3. Number one is, we see SG&A benefits in the business to the tune of around 50 basis points a year of permanent savings by the year 2030. And if you do that math, that's worth about $10 million a year. We think we can start getting that in 2028, so say around $8 million a year in 2028. We also expect to have savings on the transportation side of the house of $4 million to $5 million a year starting in 2027.

And then we're going to save on software because we're consolidating our tech stack and [Technical Difficulty] a couple of million dollars of savings in the program for that as well. So we're really excited. This is one where we're going to get it done. We're going to strengthen our controls as a company. We're going to set ourselves up for growth, and we're going to drive some good returns out of it.

How do you minimize execution risk? It sounds like '27 is when it flips on order management, I mean, ERP, these are scary things for retailers. So when will you know that nothing is disrupted?

Yes. Well, one of the things that's really important is you set these programs up the right way. And we have an executive team, 4 executive team members that are sponsoring this program. So me, along with our Chief Information Officer, our Head of Client Care and our Head of Logistics, and we've all got our different experiences with these systems.

But over the last 6 months, we've been focused on the foundational work necessary to set these programs up the right way. When you think about where risks are on these projects, it's really around the areas of do you have dedicated teams or not? If you do not have dedicated teams, that's a major risk factor. We have assigned a dedicated team. Do you have a clear scope or not? We have a very clear scope and we debated scope over the last 6 months to make sure that it was very tight, very clear. Do you have executive support on these projects? That's another precursor predictor of success.

We have 4 executive team members that are overseeing the project, but we also have a very engaged Board of Directors playing a role of governance on this project as well. And then at the end of the day, another predictor of success is change management, making sure that you're bringing along the organization on the journey to ensure that you have the employee acceptance and the engagement when these things go live. And we have invested in change management as part of this project.

And I'll give you an anecdote. I'm not going to quote who said it. Simeon, you just got to take it on faith. But when you do these programs, you have system implementers, right? These are people that third-party consultants that work with the software provider and the client, in this case, it's Arhaus to deploy this technology. And we just had our launch of this in the last month.

And the system implementer, the leader came to us and told us after this big 3-week long, 2-week long kickoff event, the best kickoff that he's ever seen. So Arhaus is doing this the right way. That's how we're going to manage risk. And at the end of the day, we don't go live until we have gotten sign-off from the entire company. So we're going to manage this the right way.

Two more topics in our 5.5 minutes for tariffs and B2B. I'll keep them a little separate. So tariffs first, still on our mind, it feels like there's another wave of pricing. This is not furniture-related, but broadly that needs to come. You've talked about $50 million to $60 million of impact in '26 that doesn't seem terrible relative to your top line. Can you talk about puts and takes, mitigation, vendor concessions, pricing, anything and above tariffs?

Yes, it's been a busy year with respect to tariffs. And I'm really proud of the work that the organization has done because we're on track to have a pretty good year overall despite what's been a very volatile situation.

Our approach has been very straightforward. We said from day 1, we are going to protect our margins, and we have done that. We've -- we're now starting to see flow-through of tariffs onto our P&L. We took pricing starting in October. We've communicated that we'll continue to look at pricing over the next 1 to 2 quarters to make sure that we protect our margins every step of the way.

We've pulled many other levers, Simeon, we had sourcing changes, as I mentioned, I got to meet one of the proprietors of a business that literally picked up shop and moved from one country to another and was in the process of starting up production for us as one of the sourcing location changes that we had to do in order to minimize tariff impacts.

So we've got many examples of sourcing diversification, sourcing changes that we've made, been very, very difficult. One of the things that we're really proud of is that Arhaus continues to grow. As we've added new showrooms, as we've continued to grow our comp growth, we've grown our top line and that means we're buying more product from our suppliers. And as we're buying more product from suppliers, they're getting economies of scale. As part of this negotiation process, our partners have shared with us [Technical Difficulty] growth, which makes [Technical Difficulty]. So we've had some concessions in that regard to help offset the tariffs.

And then for what's remaining, we're passing it through, and we're doing it in a very methodical, surgical way, this is not a one-size-fits-all approach. We are largely taking pricing where items are impacted by tariffs, which means that for our U.S. sourced goods, we've taken very little price. But in this exercise, we've also taken price down where we think there were too high. And one of the things that's cool about our business being so integrated is we're one phone call away from our sales team to get real feedback on what our clients are saying.

And what we continue to hear from our clients is that price is not coming up as an issue, and where it does come up as an issue, we take a look at it, and we make adjustments. But generally speaking, we've been able to make price adjustments where needed to absorb these tariffs. But it's continue wait and see. I don't know if things will change with the upcoming Supreme Court decision, so we take a wait-and-see approach. But in the meantime, we're just running our play and we're going to continue to protect our margins every step of the way.

Last but not least, B2B. It's almost a buzzword across home improvement, home furnishing, it seems like a new channel that makes sense while the traditional channel is soft, but also as a growth strategy over the next 5 years. So talk about -- and have you sized it yet and how you're going building that business?

Yes, we think it's a massive opportunity for us. And I would not say that we're underdeveloped, but I would say we have lots of upside opportunity. And we think about the B2B business really in 2 different ways, right? There's the trade channel that I talked about earlier. This is where an individual hires an interior designer, that interior designer comes to Arhaus. But there's also the contract business, which is a business that comes from businesses that are looking to furnish building. So the Hyatt comes to us and says, we want to furnish a hotel.

On the trade side, we are leaning in very hard. We hired a new executive over that team. We are investing in new technology capabilities to support that team with things like clienteling, which is how we engage with the trade. We are working on a new trade member program that we think will be more competitive and will better reward trade people for being loyal to Arhaus and really simplify the way we do business.

But it's a big opportunity. More and more of our business continues to shift in that direction. We're just now stepping on the gas and we're going to go and get more business through this new strategy that we're building out. So in 2026, the trade channel is one of our major platforms for growth next year, and we'll have more to share on that at our next earnings call.

Appreciate all the time. Thank you for sharing part of the strategy, digital transformation, AI. Good luck over the holiday season into '26. Thank you.

All right. Thanks. Appreciate it.

Good morning and welcome to the Arhaus Third Quarter 2025 Earnings Call. [Operator Instructions]

I will now turn the call over to your host, Tara Atwood-Saja, Vice President of Investor Relations. Please go ahead.

Good morning. And thank you for joining us for the Arhaus third quarter 2025 earnings call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman and Chief Executive Officer; and Michael Lee, our Chief Financial Officer.

After our prepared remarks, we will open the line up for a Q&A Session. Jennifer Porter, our Chief Marketing and eCommerce Officer, will join us for the Q&A portion of the call. [Operator Instructions]

We issued our earnings press release and 10-Q for the quarter ended September 30, 2025, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours.

I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors, and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent Annual Report on Form 10-K and subsequent 10-Qs, as factors may be updated from time to time in our filings with the SEC. The forward-looking statements are made as of today's date and, except as may be required by law, the company undertakes no obligation to update or revise these statements.

We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliations.

Now, I will turn the call over to John.

Thanks, Tara. Good morning, everyone, and thank you for joining us. We appreciate your continued interest in and support of Arhaus. I am very pleased to report another strong quarter, reflecting the strength of our brand, the appeal of our product offering and the disciplined execution of our long-term strategy.

Net revenue for the quarter was $345 million, up 8% year-over-year and near the high-end of our guidance range, marking the highest third quarter net revenue in our company's history. This performance was driven by growth in our showroom footprint and increased demand for our products. Comparable growth of 4.1% reflects healthy, underlying client demand and strong, operational execution across our distribution network. I'm also very pleased to share that the demand comparable growth was 7.4% for the quarter, highlighting the strength of our brand and the continued momentum of our high-end clients.

I'll share a few highlights on demand, including the success of our Fall Collection in a moment, and then Mike will walk you through the details driving quarterly and year-to-date demand performance.

Turning to products. Our Fall 2025 Collection represents our strongest launch in company history, resonating deeply with clients across our catalog, website and showrooms and reinforcing our design leadership and highly differentiated, artisan crafted products. The collection embodies the essence of Arhaus, warm, inviting and timeless, blending modern and traditional silhouettes with natural materials and artisan craftsmanship. From warm wood, to stone, to tailored upholstery and refined finishes, each piece is designed to feel layered and personal, reflecting our belief that home is a feeling. Our fall product collection translated directly into record performance supported by newness, upholstery, customization and our in-home design program, core differentiators that create a powerful growth engine driving demand. September marked the highest total demand month in Arhaus history.

Let me highlight a few additional key performance wins for the quarter. New product introductions achieved the highest level of total demand for September in our history, underscoring the strength of our design leadership and product innovation. Upholstery also delivered exceptional performance in September. Upholstery has always been the heart of Arhaus. It's where our story began and remains one of the most powerful differentiators. With nearly 70% of our upholstery sourced domestically as of the third quarter and the largest portion produced in our North Carolina facility, our vertically integrated model continues to be a competitive advantage. It allows us to control design, quality and lead times, while reducing exposure to tariffs and global supply chain volatility. We're proud of our North Carolina artisans, whose craftsmanship, detail and use of the finest materials has set our upholstery apart.

Customization also remains a key driver of our success, with clients able to personalize pieces across more than 600 fabrics and over 90 leathers, one of the broadest offerings in the industry. Custom orders performed particularly well, achieving the highest September total demand in company history, supported by a strong reception to newly introduced upholstery collections that represented a meaningful portion of this growth. The fall upholstery assortment struck the perfect balance of newness and timeless design, resonating deeply with our clients and reinforcing the strength of our upholstery business.

Lastly, our in-home designer program continues to be one of the most powerful differentiators and drivers of demand. September marked record performance for our in-home design team, achieving the highest total demand in company history. Each designer creates a personalized experience tailored to every client's project, priorities and styles.

Clients who work with our interior designers generate order values roughly 4x higher than those without, a testament to the program's impact on engagement, conversion and loyalty. Together, these initiatives create a powerful flywheel. Our storytelling through our catalogs and product imagery, drives discovery. Our newness and customization deepen engagement; and our design, services and showroom experiences convert inspiration into long-term client relationships. Each element strengthens the next, creating a self-reinforcing engine of growth and demand.

Looking ahead to 2026, I'm incredibly excited about what's next. Our upcoming collections feature some of the most innovative designs in our history, pieces that will further distinguish Arhaus in creativity, craftsmanship and design leadership. The enthusiasm across our teams is incredible, and I'm confident our clients will share that excitement when these products debut. I want to recognize the extraordinary work of our teams across Arhaus, whose creativity and dedication continue to elevate the Arhaus brand and strengthen our connection with clients.

Moving to showrooms with roughly 90% of our clients across retail and e-commerce living within 50 miles of an Arhaus showroom, it is important to have physical presence to drive brand awareness and engage in client relationships. I am thrilled to share that in October, we opened our largest, traditional showroom to date in Pasadena, California, spanning nearly 40,000 feet within the historic Penn Oil Building. This is a century-old building that we thoughtfully restored in order to honor its architectural heritage. The result is a stunning showroom that's been warmly received by the local community. The showroom features our full product assortment, extensive custom upholstery offerings and our best-in-class design team. And this month, we'll be opening our first Montana Showroom in Bozeman, located in a lifestyle-rich setting surrounded by mountain views. Bozeman embodies a remarkable sense of place where design and the outdoors are wholly intertwined.

Turning to sustainability. Our commitment in this area has been at the heart of Arhaus since I founded the company nearly 40 years ago. Our philosophy is simple. Furniture should be responsibly sourced, lovingly made and built to last for generations. Sustainability extends beyond the product we create to the people, the artisans, the vendors who bring them to life. We collaborate with skilled artisans around the world who share our values using sustainability harvest and reclaim materials and time-honored techniques that preserve natural resources and celebrate craftsmanship.

Before I close, I want to briefly address the broader macro backdrop. While conditions remain uncertain, we remain confident in our outlook, and we are focused on what we can control. Looking ahead, several themes continue to reinforce our confidence and clearly differentiate Arhaus within the industry. First, our people and culture. Our success is built on the dedication and passion of our teams. Every team member at Arhaus plays a critical role in delivering our exceptional product and experiences. Our people are our greatest asset and the driving force behind our growth and success.

Second, our artisans and vendors. Our unique sourcing model and long-withstanding relationships with our artisans and vendors around the world is a strategic advantage and sets us apart. These trusted relationships built on collaboration, shared values and exceptional craftsmanship, allow us to adapt to global dynamics while maintaining the high-quality standards that define our brand. And our strategy is not to compromise on quality at this time, as prices have gone up.

Third, our growth strategy. We remain focused on disciplined profitability growth even in dynamic environments. We continue to lean into innovation, expanding our footprint, launching inspiring new products and investing in scalable systems and leadership to fuel the next phase of our growth.

Fourth, our operational strength and agility. We continue to operate from a position of strength, supported by our disciplined execution. And our end-to-end control from product development through distribution enables us to adapt quickly to shifting market dynamics and client demand. And through continued, strategic investments, we are enhancing efficiencies, improving service levels and strengthening our foundation for the future growth.

And fifth, our resilient, high-end client base. While the macro environment remains uneven, our high-end client continues to demonstrate engagement and loyalty. We're seeing strength in our in-home design services and trade channels, reflecting the enduring appeal of our brand and strength of our clients.

In short, despite the noise, we're navigating the current environment from a position of strength, debt-free with ample of liquidity. We're confident in our path forward with a powerful brand, a proven model and a talented team, Arhaus is well positioned to continue delivering growth and long-term value to our clients, employees and shareholders.

With that, I'll turn the call over to Mike Lee, our Chief Financial Officer, to walk you through our financial results. Mike, over to you.

Thanks, John, and good morning, everyone. Today, I will cover both our third quarter financial performance, as well as our latest outlook for the remainder of the year, before turning it over to Q&A. This quarter, we focus on what sets Arhaus apart, bringing exceptional products to market, deepening client relationships and executing with discipline.

Our team's efforts drove record third quarter net revenue of $345 million, up 8% year-over-year and near the high-end of our guidance range, supported by showroom expansion and strong demand from our high-end clients. Comparable growth was 4.1%, reflecting healthy, underlying client demand and strong operational execution across our distribution network. Our Dallas D.C., which we successfully brought in-house last quarter, continues to ramp effectively and drive meaningful improvements in delivery performance. Our continued investments in our distribution network and our technology infrastructure, are translating into stronger efficiency and are strengthening the overall client experience.

Demand comparable growth, which measures written orders, was up 7.4% in the quarter, reflecting the strength of our high-end client base and the ongoing appeal of our product offering. I'm incredibly proud of our teams for their creativity and execution, which fueled the strength of demand this quarter. I'm also pleased to share that year-to-date through the third quarter, demand comparable growth stands at plus 2.8%.

While demand remained strong in the quarter and year-to-date, as we've discussed previously, near-term demand can fluctuate with macro and geopolitical conditions, as well as our own promotional calendar. Monthly demand volatility is not uncommon for our business. When we do experience short-term softness, demand is typically deferred rather than lost, and this quarter was a clear example of that dynamic. Following temporary softness in the second quarter, we saw a strong rebound in the third quarter, followed by moderation in October.

July demand comps increased 15.7%, reflecting strong, early quarter momentum. August was up 3.3% and September was up 5.2%, supported by the successful launch of our Fall Collection with newness driving impressive engagement. September marked the highest total demand month ever, with particularly strong performance at the end of the month, including the second highest demand day we've ever recorded, and we believe this strength resulted in some pull forward of demand into September. As expected, we saw a moderation in October with demand comparable growth down 14.8%. This was largely driven by timing effects, including the shift in our promotional calendar. Last year, our semiannual sale ended in early October, while this year, it concluded at September month end.

Monthly fluctuations tied to promotional cadence are typical for our business. And importantly, we continue to see healthy engagement from our high-end client base. In the third quarter, gross profit was $133.4 million, up 8.4% versus last year, primarily driven by record net revenue. Gross margin was 38.7%, up 10 basis points from the prior year, reflecting product margin gains and improved operational efficiencies, partially offset by higher showroom occupancy costs tied to our showroom expansion.

Selling, general and administrative expenses grew 4.1% to $117 million. This was primarily driven by an increase in selling expenses related to new showrooms and was partially offset by a decrease in G&A costs due to lower corporate expenses. As a result, SG&A load decreased 120 basis points to 34% of net revenue, reflecting strong cost leverage.

Net income was $12.2 million, which grew 23.1% versus last year, representing approximately 2.9x earnings leverage on 8% net revenue growth. This performance reflects strong top line results, modest gross margin expansion and disciplined expense management. Adjusted EBITDA was $31.2 million, up 35.2% versus last year, representing approximately 4.4x leverage on 8% net revenue growth. Adjusted EBITDA margin expanded 180 basis points versus last year to 9.1%, driven by continued operational efficiency and strong flow-through on higher sales.

Turning to our balance sheet. We ended the quarter with $262 million in cash and cash equivalents, and we remain debt-free. This level of leverage, delivered without any financial debt, underscores the scalability of our operating model and the earnings power we have as we grow. Additionally, we had net merchandising inventory of $329 million, a 10.7% increase from December 31, 2024, to September 30, 2025, reflecting investment in best sellers and new product introductions.

Now let's turn to our operational performance, beginning with sourcing and tariffs. This has been an unprecedented year for tariff policy, and our diversified sourcing strategy with meaningful domestic exposure, continues to serve us well. Our global sourcing footprint spans North America, Europe and Southeast Asia and is anchored by long-standing relationships with artisans and vendors, some spanning 3 to 4 decades. These strong relationships provide the flexibility and resilience needed as trade policies evolve. Many of these relationships started here in the U.S., where approximately 30% of our total receipts and nearly 70% of our upholstery was sourced in the third quarter.

I recently traveled to Southeast Asia with our product development team to meet with several of our artisans and vendors in person as we continue to deepen relationships and remain close to our sourcing network on the ground. During the third quarter, we saw renewed headlines surrounding the Section 232 investigation into imported furniture. While the direction remains fluid, we successfully navigated tariff uncertainty before, and our 3-point playbook remains clear and effective.

First, we protect our margins through vendor negotiations, sourcing diversification and operational efficiencies, passing through costs where appropriate. Second, we continue to maintain deep, long-standing relationships with our global network of vendors and artisans, relationships built on mutual trust and shared values that form the foundation of our resilient, flexible sourcing model. And third, we remain nimble, adjusting quickly as policies evolve and conditions change.

Moving to pricing. Since early 2024, we've been testing price and promotional levers to deepen our understanding of price elasticity with our high-end client base. And what we have found is that when targeted pricing is paired with high-quality product and strong value storytelling, demand remains resilient. Even when demand softens, it's typically deferred rather than lost.

This fall, we carefully implemented measured price increases as part of our tariff mitigation strategy applied surgically across select SKUs rather than broadly. And these targeted adjustments are designed to offset the incremental tariff costs and support margin performance.

We remain confident that our high-end clients will continue to recognize the compelling price-to-value proposition of our product assortment and the enduring value of the Arhaus brand. We will continue to assess pricing over the coming months and quarters, and we will respond quickly and thoughtfully as conditions evolve, always with the goal of protecting margins and providing value.

Turning to tariff impact. Our updated 2025 outlook reflects the estimated impact of incremental tariffs resulting from policy changes announced in the third quarter, which we currently expect to be approximately $12 million net of mitigation. Looking ahead to 2026, we expect the tariff impact to be in the range of $50 million to $60 million. These estimates reflect third quarter tariff policy updates, along with benefits from vendor negotiations, sourcing shifts and operational efficiencies.

In short, Arhaus is well positioned to manage through a dynamic trade environment, supported by our diversified sourcing footprint, strong vendor relationships and disciplined execution. We remain focused on utilizing all available tools to protect our margins, while continuing to deliver exceptional service and products to our clients.

Let's now turn to our showroom expansion plans. Arhaus continues to scale with intention and showroom growth remains a foundational pillar to our long-term strategy. As John mentioned, in October, we were proud to open our largest traditional showroom to date in Pasadena, California. This new location expands our Southern California presence and marks Arhaus' 15th showroom in the state and the fifth in the Greater Los Angeles area. We're also opening our first Montana Showroom in Bozeman this month.

We remain on track to complete approximately 12 to 15 total showroom projects in 2025, consisting of 4 to 6 new openings and 8 to 9 relocations, renovations or expansions. In addition to expanding our showroom footprint, we are making strategic investments to ensure that we scale efficiently, maximizing flow-through. These investments are focused on 2 key areas: our distribution network and technology infrastructure.

First, on distribution. In recent years, we've opened and expanded major facilities in North Carolina, Ohio and Texas, including last quarter bringing Dallas operations in-house. We continue to evaluate opportunities to further optimize our network.

Second, on technology. Over the past 2 years, we've implemented a new warehouse management system across all 3 distribution centers, along with additional technology enhancements across both our retail and e-commerce channels. And these investments are improving the client experience, strengthening our internal controls and driving productivity gains.

Our next phase of investment will be focused on replacing our core operating systems for finance and operations. We believe these investments will result in an integrated, fit-for-purpose platform for growth, that optimizes our workflows, improves our nimbleness and accelerates our speed to market, enabling us to further elevate our customers' experience through their Arhaus journey. This is the beginning of a digital transformation that will modernize how we work.

I'm happy to share that we have made tremendous progress since our last update in August. And as of this week, our digital transformation is underway. We have assembled a team of high performers, from across the company, who will be led by members of our executive team. Our software selections are made, our consulting partners are engaged, and we have officially begun what we believe to be an 18-month long project.

The total incremental program investment is approximately $30 million, including implementation and staffing costs, as well as licensing fees through 2030. This is well below our internal, initial estimates and reflects a tighter scope and faster timeline. We expect approximately $2 million of spend in 2025 weighted to the fourth quarter and already reflected within the $10 million of strategic investments previously communicated for 2025. We anticipate an additional $12 million of spend in 2026 and $10 million of spend in 2027, with cash outflows tapering in early 2028 as we transition to a steady state run rate of roughly $2 million of spend annually through 2030 for ongoing licensing and maintenance costs.

To be clear, this represents a cash investment, not a P&L expense. A large portion of this investment will be capitalized and expensed to the P&L once the systems are ready for go live, and these payments are being funded through existing operating cash flows. Because these programs have inherent risks, we are designing this program in accordance with proven best practices as follows: we have established a dedicated project team comprised of high performers from across the organization.

We have a two-in-the-box approach where business and IT resources are partnered across every major work stream as global process owners and global technology owners. We have a dedicated change management team starting on day 0 to help ensure full organizational buy-in. We have a clear scope with a commitment to adopting best practice design and configuration to the extent possible to avoid pitfalls of customization. And we have clear, compelling benefits case with a focus on speed to value, and we have executive support all the way to the boardroom.

We believe the potential ROI is compelling as we expect to see 50 basis points of SG&A improvement by 2030, along with additional benefits in transportation and logistics, driven by the capabilities associated with the order management and transportation management systems included in this program. We will keep you updated on these initiatives as the work continues.

Turning to our outlook. We are updating our full year 2025 outlook, having raised the low end of our prior ranges, while maintaining the high end. This reflects the momentum we saw during the third quarter, while maintaining a measured stance on the upper end given continued macro uncertainty. This approach demonstrates both confidence in our execution and discipline in our outlook as we navigate a dynamic environment.

For the full year, we now expect net revenue between $1.35 billion and $1.38 billion for a year-over-year growth rate of plus 6.2% to plus 8.6%; comparable growth of flat to plus 2.5%; net income of $58 million to $68 million; and adjusted EBITDA of $135 million to $145 million. For the fourth quarter of 2025, we expect net revenue between $336 million and $366 million for a year-over-year growth rate of down 3.3% to plus 5.4%; comparable growth of down 7% to plus 1%; net income of $6 million to $16 million and adjusted EBITDA of $25 million to $35 million.

In closing, we delivered another strong quarter, reflecting the strength of our brand, the resilience of our high-end clients and the disciplined execution of our long-term strategy. While the macro environment remains dynamic, we entered the final quarter of the year from a position of strength with a debt-free balance sheet, strong liquidity and a proven ability to execute through varying market conditions. Thank you to our teams across the company for their creativity, passion and execution, and to our shareholders for their continued confidence in Arhaus.

With that, I'll turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Steven Forbes with Guggenheim Securities.

This is Julio on for Steve. Just given the recent launch of the Bath collection, curious you could comment on the initial feedback and engagement from your customers and update us on how the Bath collection experience has informed the product expansions into 2026. And then I have a quick follow-up.

Yes, I'd be glad to answer that. Yes, we launched the Bath, what 3 months ago? And yes, we're very excited about it. It's doing what we think it's going to do, and we're learning a ton of new ideas that we think are really going to be able to grow it, already working on the next wave of new products, and so forth. And we think it's going to be a good, stable part of our business, and it's going to continue to grow and be more and more important.

Then as a follow-up, just given the recent expansion in states like California and just the size of this Pasadena opening, can you comment on if and how the average store model is evolving as we think through the 2026 class of stores, what will be the average cost and then like the productivity ramp, maybe any cannibalization or productivity that you might see from densifying?

Yes, I think Mike can answer some of that if possible. But as far as the evolution of our stores, we continue to evolve our stores, we reinvent our stores, our design team is incredibly creative at coming out with new ways to enhance our stores to enlighten our consumers. And Pasadena is a perfect example. You walk in there, it is truly magical. It is a place that you walk in and say, geez, this is how I want my home to look.

And we've done a lot of new things, creative things to re-merchandise things and so forth, new furnishings new flooring, new ceilings, different objects, that we're putting in the stores to really enhance the shopping experience. And then we'll continue that. But Pasadena just blew us away and it's blowing the customers away. I don't know Mike, if you have --

Yes. Just as a reminder, we've talked about the benefits that come with new showrooms. 90% of our clients tend to come from locations that are within 50 miles of the showroom. We get not just in-store benefits, but also e-com benefits from that as well. And then, Steve, just as a reminder, like when we think about the ramp-up of the stores, every store has got a little bit of a different ramp life cycle, but we don't bring them into the comp for 13 months for good reason, really just driven by the fact that these things take time to build. We are building our presence in Los Angeles, we're building our presence in California. The West Coast will continue to be a priority. And as we continue to learn more and more about our business, one of the things that we think is a critical success factor, not just in existing locations, but also in new locations is really ramping that trade business as quickly as possible as we enter new locations because that's really a source of fuel to really build awareness and overall customer loyalty.

So we'll leave it with that for now.

Our next question comes from the line of Andrew Carter with Stifel.

So I want to dig in on that October number, the down 14.8%. I know you had a promotional shift. Correct me if I'm wrong, you did put some tactical prices in there. So I guess I wanted to ask is as you've teased it out, do you have a good feel of what the underlying comparable demand number is, the simple average between September and October is minus 4.8%. Do you think it's better, worse than that? Just something to think about as an exit rate we have out of October going into the final 2 months of the year.

Maybe I'll jump in on just the macro side of that question, and then I'll invite Jenny to come in on more of the customer side. But look, just taking a step back, we are very proud of the performance through Q3. Our total demand comp is up 2.8% and we are hitting records along the way. Our Q2 net revenue was the biggest quarter we've ever had at 15.9% growth, our Q3 net revenue was the highest Q3 we've ever had with growth of 8%. Our Q3 demand comp was up 7.4%. Our total demand, including new showrooms was at 10.9%.

When you drill into September, September was also record demand with a demand comp of plus 5.2%, really driven by many elements of our strategy. We had record levels of newness in September. We had our second largest upholstery month ever, up 15%. We had strong interest in our newness elements of our upholstery as well, and we hit a customization record during the month. And then our designer business, which I mentioned a few minutes ago, continues to grow share of overall sales. So we're very, very encouraged by the momentum that we've seen. And in Q4, looking forward, to your point, we did expect October to be a little bit soft. We made intentional changes to the promotional calendar in October, which we talked about during my remarks. We did have some pull forward into September just in recognition of the success that we had during the storewide sale.

And again, as you think about this, all of these purchasers or at least most of these purchases are well thought-out purchases, much of our business has not come from a customer walking into the store for their first visit and making big purchases, they're working with designers. These are thoughtful, laid-out purchases, and they knew store-wide sale was coming, and they're making these thoughtful, well-timed decisions to take advantage of the value.

When I think about the Q4 guide, it does reflect our confidence in the momentum that we talked about during my prepared remarks, but it also reflects some of the cautiousness related to the macro backdrop. There still remains uncertainty in the marketplace when you think about what's going on with consumer sentiment and things like that. But when you get to the fundamentals of our business as we look ahead into Q4, we're very encouraged by the current levels of client engagement as we head into the holidays, and that's supported by a very strong core product offering, it's supported by newness that is setting records, as I spoke about. Our design services continue to be of high interest to our clients. And all of these elements of our strategy are working together in unison. So we're very, very confident about the go forward.

I will say when we look at last year performance quarter-by-quarter, we're cognizant of the fact that Q4 is our biggest overlap. I think our demand comp was up 5.7% in Q4. So that's a little bit of a hill for us to climb, but that's reflected in our current guide as well.

So with that, Jenny, anything you want to add?

Yes. Andrew, I think Mike really, pretty much covered it there. The one thing that I would add is specifically to your question about price we took in October. As we look at our business, we're not seeing correlation between the sales impact and the select SKUs where we took price going into October. So we don't see that being the primary driving factor. As Mike mentioned, we were expecting the softer October, we really see it predominantly being the pull forward into September and that shift in promotional calendar.

I think as we look at our consumer as well, we are not seeing any shift in demo of our consumers as we go throughout the year. We didn't see any shift as we went from Q3 into October. But what we have talked about, which Mike touched on, is that our client this year is being very considered. As they always have been with Arhaus, they're drawn to the product, they're drawn to the quality, they're drawn to the product and the aesthetics that they like. We're seeing higher engagement in those interior designer orders, which are those larger projects that take a little bit more time. We're seeing strong engagement with that custom upholstery, which is a more considered purchase as well.

And we continue to be really pleased with how people are engaging with the product, with the marketing, with our teams, as they are really enthused going into the next few months here.

I'd also call out we're in November. So we have Black Friday coming up. You're already starting to see those promos coming. So as we're just looking at that choppiness, and engagement and the pull forward versus what's happening there, we'll be looking forward to November and December.

Second question I wanted to ask, you gave a $50 million to $60 million annualized tariff number. I want to make sure, number one, that's an annualized number. Therefore, the $12 million you're eating this year is in that base, the net of mitigation. And just to be clear, that number is a currently net of mitigation number, i.e., you have additional arrows in your quiver to mitigate that through pricing or whatever? Or is this something you would consider as a potential profit hit, probably not all of it, but any comments on that would be helpful.

Yes, I can jump in. And then, John, you could obviously jump in as well if you have anything to add here. But I would just go back to some of the remarks we made a few minutes ago around the 3-point plan. We are laser-focused on protecting our margins. And as we work with all of our suppliers, we're looking at things like sourcing, productivity savings, every quiver, as you said, in the bag because this is a challenging dynamic that we're working through. I think one thing that has served as a tremendous advantage is John's relationship and engagement throughout this process. John is directly engaged with all of our top suppliers. In fact, we just had one that you've known for 30 years here in the building this week, where we were talking about more productivity opportunities in the business.

But we have made it clear. John has made it clear that as we navigate through this, we are not sacrificing quality and/or design at all. It's a nonstarter. So we're really focused on finding ways to navigate through productivity, sourcing changes and quite honestly, asking more of our suppliers in some cases as they are benefiting from, I'll call it, the economies of scale of Arhaus growth. As we grow, their fixed costs get spread over more and more product, and we're asking to participate in some of that.

So as you think through this, we've talked about this being continuous negotiations. I would call it continuous collaboration as we're working with all of our suppliers. These relationships remain strong even through this very challenging dynamic. And I would say we're very happy about the insulation that we get from our U.S. sourcing, particularly as upholstery continues to set new records, our U.S. sourcing provides a little bit of a buffer against the impacts of these tariffs.

A couple of things I would highlight, Andrew, just to make it clear. Last quarter, we did provide a range of tariff impacts for FY'26 of $40 million to $45 million. Our new estimate is $50 million to $60 million, and that is an annualized number and that is net of any purchase cost savings or operations savings, but that is not net of pricing actions. So we will be taking pricing actions, as I mentioned, to protect our margins.

But the big bridge between the old number and the new number is, I think, shortly after our Q2 earnings call, Mr. Trump announced tariff changes in a few countries, including India, which was about a $5 million impact to that range. Indonesia was about $4 million. And then on the back of the 232 investigation, Mexico was about a $3 million impact.

So I know the range is a little bit wider, because we do have a very active sourcing team that's continuing to work with our suppliers on finding ways to mitigate. And we're not done. This is going to be one of our top priorities, if not the top priority, from an operations perspective over the next year to figure out how to continue to bring this down over time.

The other thing I want to highlight, because we've talked about it in the past is, I think at some point, we shared a goal of getting to 5% of our sourcing coming from China. And as you guys know, China continues to evolve as Mr. Trump was there a couple of weeks ago. And we are currently reevaluating our sourcing based on this new information. And the reality is, is that even though their tariffs still remain high, the gap between China and some of the other locations has narrowed.

And as I think John has mentioned in the past, the Chinese are pretty productive, right, when it comes to manufacturing. So even though their tariffs might be a little bit higher than some other countries, we look at it on a total, delivered cost basis, and with this recent change, it tips the scale on a couple of our items.

So this is a very fluid situation, and we would not recommend anchoring on this 5% goal for the end of the year at this time. I would anchor on this $50 million to $60 million range of impact, and that's really what we're managing against and quite honestly, trying to reduce as we go forward.

Anything you would add?

Yes. I just want to add that the new product that we launched this fall and an incredible amount of new product we're going to be launching into next year, is really priced with tariffs in it and everything else. So it's not this game of let's take this and raise pricing or not raise pricing and so forth.

And it's been amazing. Our partners around the world have worked so well with us at hitting sharper price points without compromising any kind of quality. And I'm excited about that, because as we get this new product in, it's going to be at a fantastic price. We think we blow the competition away with our model, with our pricing. And that's just going to kind of just keep going. And we're hitting on some really, really hot products that we know are just at the tip of the iceberg because a lot of them are just testing and say a select number of stores or so forth. So when we roll it out and roll a collection out a new collection, it's going to be a huge hit. And they're going to be at a price that has already got the tariffs and everything else factored into it.

The other thing I've really been pushing our team to do is continue to grow our domestic upholstery business, which has no tariffs. I think it's 70% of the business now in our upholstery business. I'm pushing to grow that for next year coming up, because we can. And again, with the tariffs and so forth, we can have some of this product made in the states. We're doing some incredibly creative, innovative things that we don't think anybody else is doing to offer new frames that typically couldn't be made in the United States that are now going to be made here, and that's going to be exciting.

So going forward, the future is incredibly exciting. And that's what I'm focusing on, is to bring out all this new product and these new trends that are just happening like crazy right now that -- well, the tariffs are what they are, and we'll live with them and move forward.

I would offer just one final comment. With the growth that we're seeing in upholstery, our manufacturing teams are continuing to hit new levels of productivity as well. So just a shout out to that team, because we're doing a really good job of driving productivity across our entire manufacturing.

And then the other element here, Andrew, that's important to highlight is that when we zoom out of the year and kind of look at how we've managed through just a massive amount of transition, we've executed really well. Our buying teams, our merge teams, our sourcing teams, our planning teams, it has been continuous rework throughout the year.

And I know that John is not happy with how we performed in a couple of categories in terms of just inventory levels, even with that, the disruption has been minimal from a commercial perspective.

So I think it just goes to the strength of the Arhaus team and how we've been able to remain nimble during a very challenging backdrop.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital.

Congrats on a strong quarter. You reduced your CapEx guide by quite a bit, I think, $90 million to $70 million at the midpoint. And just wanted to get an understanding of that. Obviously, various projects that are going on with systems, and so forth. But you didn't have really any meaningful change here in the showroom plans. So just wanted to understand the dynamic that's going on with your CapEx expectations, both for this year and then as we kind of look forward, kind of a range of where we should be thinking?

Look, I'd start with the fact that in our original guide, we had our technology initiatives kicking off sooner in the year. And with some of the management changes that occurred earlier in the year, some of that was put on hold until we had some of the new members of the management team put in place. So that was a big part of the change in the capital guide or the CapEx guide.

The other thing is on new showroom. Showroom projects, as you know, are ultimately a function of the timing of the buildouts. And earlier in the year, we had a little bit of a different plan in terms of the timing. And as certain projects have moved more toward the end of the year, that's impacted some of the spend as well. But what I would highlight is our showroom pipeline, our guidance of [ 5 to new ] showrooms annually still remains our target. And we're on pace to finish a record number of showroom projects this year at between 12 and 15. And I know we sit here in the middle of November and say, okay, you still got a big range there, but it just goes to show you how tight some of this is in terms of the calendar.

But our long-term plan is really anchored in the 5 to 7 new showrooms a year. Some years are going to be higher than that, some years are going to be lower, we're coming off of a really busy year. And next year, we'll be, I think, right in that long-term range that we provided. We've got a couple of things, again, moving around where some things might spill over from a December of 1 fiscal to the January of the other. But our overall capital allocation strategy hasn't changed. Building out the showroom pipeline continues to be our number one focus in terms of capital investment.

Great. And then just a separate question here coming back to pricing and how you are thinking about it really within the industry. So we've seen that some peers are getting a bit more promotional, maybe have not had as good a demand. Overall, industry is still relatively sluggish, but wanted to see if you could provide some commentary on what you're seeing from some peers who are also -- some of them have responded a bit more with setting initial pricing a bit higher related to the tariffs, we think. But wanted to get your assessment of what you're seeing in the industry.

It's a great question. And I think it continues to be what we're honestly asked every call and what we're very focused on and trying to understand as well. We pay very close attention to what other people are doing in the industry. And like you mentioned, you're seeing a lot, you continue to see elevated promotions. I think you could argue that we're seeing those get even more elevated recently, starting to see Black Friday promotions launching in October by some brands and getting early and earlier in November, just as one example.

I think what we've always said is that, while we pay very close attention to what everybody else is doing, we are really focused on what we are doing, and how our clients are responding and what's working for our business. And so our approach to promotional strategy really hasn't changed.

Earlier on the call, Mike mentioned that we have for the last 18 months, really been testing and learning about our pricing and promotional strategy. That has been continued. We continue to really like our buy more, save more volume discounts. I have spoken to those engaging clients and being really pleased with our higher average order value purchases.

We have spoken about how we are continuously evaluating how we message our promotions and the specifics of timings of those details, and we plan to continue to do that. But I think it's really, just a continuation of we need to pay very close attention. We're constantly getting feedback not only within our data but also speaking to our store teams and having direct conversation with our clients as well to see how people are actually responding.

We were just on a call last week with some of our top interior designers hearing about how clients are engaging with them in the stores through Q3 and into October. And we learn a lot from that, and we really based our strategy and approach on those elements.

I think the other thing that I would just really echo is with all of the noise of everything going on, promotional and pricing strategy is obviously a very big topic and a focus for everyone, but it's really only 2 of the levers that we have of our business. And I want to echo John's comments from earlier as to how excited we are with the perception of our new product from fall, with our marketing from fall. We spoke about how excited we are about our new showrooms. I think even if you visited our existing showrooms recently, the product and the visual expression on the floors is just absolutely amazing. I think you can see just with all of the product and the mix on the floor as we speak to things like the increase of special order purchases, for example, clients are excited. There are new trends, and we are showing them and representing them.

So we're focused on trying to build out what is our continued approach to promotions and pricing for the next few months and into next year, but we are even more focused and excited on the new product that is coming in just a couple of months here in spring, the continued response and reaction to marketing campaigns as they go out into the market and the constant feedback from our design teams and design consultants in stores as to how clients are responding and what they're telling us that they want more of.

Our next question comes from the line of Robbie Ohmes with Bank of America.

This is Mattie Chick on for Robbie Ohmes. Just first, I wanted to circle back to the expected $10 million related to systems investments and the $12 million in net tariff costs this year. Given revenue came in towards the higher end of your expectation in 3Q, how did tariff costs flow through in the third quarter? And what's your expectation for 4Q?

Yes, Mattie, around 20% to 30% of the tariff impact for the fiscal year is behind us in Q3 with the balance being in Q4. And then sorry, what was the second part of your question? You were faint at the beginning of your question.

I apologize. Maybe just how the systems investments are broken down between the third quarter and the fourth quarter?

Yes. So there is a couple of buckets here, so maybe we talk about both of them. We talked about a technology initiative at the beginning of the year of $10 million, about $5 million of that will be in Q4, the other balance is behind us. And then just taking a bigger step back on the technology side, because this is something I want to make sure that the analysts take away from this call. We talked about the spend that we've built into the program. But one of the things that I also want to highlight is that we've done a lot of work on this program to identify where the benefits are going to come from. And we don't take this term digital transformation lightly. Like this is really an opportunity for Arhaus to change the way it works. And it's not just across the finance team or the operations team, but across the organization.

So we'll talk about this more in the future. But we do see a lot of savings from a transportation efficiency perspective, from a productivity perspective across our G&A lines. As we rationalize our technology ecosystem, there's going to be benefits in IT from a staffing and licensing cost perspective. So this is one of the more compelling business cases I've come across in business when you think about a technology program like this.

But it's also important to highlight some of the capabilities we're getting in terms of just how we operate. When we think about pricing, which we just talked about, having a single source of truth to make quick, nimble decisions is really important. When we think about dealing with the hundreds of suppliers we have around the country, how we onboard vendors and manage vendors through our supply chain, this new technology is going to really modernize us in that regard.

We haven't talked about this, but in our SEC filings, we have material weaknesses that we've disclosed. We have 4 of them today. And this technology is going to be a big enabler from an internal controls perspective and financial reporting perspective so that coming out of this initiative, we hope to be able to remediate all of these material weaknesses.

From a procurement perspective, when we think about how to drive savings across the organization, having modern technology to put spending controls in place to be able to manage suppliers more effectively, to have greater visibility to procure to pay.

And then from a selling perspective, having reliable information on order fulfillment and faster deliveries to really elevate the customer experience. We really think this is going to be a game changer for Arhaus.

We get a lot of questions around how AI plays into this. And I can tell you that AI will have both a top-line and bottom-line benefit to us over time. In the near-term as we do this technology, one of the reasons why we're able to deploy this technology so quickly is a lot of the implementation plans are AI-enabled, right? So anyway, we're really happy about where we are on the technology cycle. Lots of activity ahead over the next 18 months, and we'll be sure to keep you guys posted as our plans evolve.

Our next question comes from Seth Sigman with Barclays.

So I wanted to follow-up on demand. Demand was obviously very strong this quarter, but it's been quite volatile month-to-month. Year-to-date demand running up 3%. I mean it's pretty encouraging. I'm just curious, is that the right run rate to be thinking about the business going forward or the 7% in Q3, do you think that's more representative because it's normalizing -- or I guess, we normalize for the event shifts, or is it somewhere in between? How are you thinking about that?

Yes, Seth, I can start and Jen can jump in. We don't guide on demand is the first answer but we have had a lot of choppiness, and that's the one flag that we continue to raise when we talk about why is our guide what it is. There is still uncertainty. And the macro backdrop is a big part of it. When we take a big step back and you think about what's going on with housing, housing is starting to show some signs of life, but it's really from, I'd say, coming from a weak perspective. Mortgages are starting to come down, but they're still high. Refinancings are up, which is encouraging, but only 22% of all mortgages are above the current borrowing rate.

So you just go down all of -- the S&P 500 is at a 23x forward earnings. And when we think about what drives volatility in our business, it's the wealth effect in some regards as well. So really hard to predict at times, Seth, and it is choppy. We can't get into the guide of what's normalized demand for us. But we are mindful of the choppiness. We do want the choppiness to settle down over time, but a big part of this is that macro backdrop.

Jen, is there anything you would add?

Yeah. The only thing that I would add is just as a reminder, we do have high-end clients. And I think Mike mentioned this earlier in the prepared remarks, even when we see softening in demand, we see that as being deferred demand, not lost demand. And I would just go back to how excited we are about our September results, which reflects the product that we're launching and the execution that our teams are doing, how excited we are about spring, which is just a couple of months away here going into January and all that new incredible product that John was mentioning. There is so much enthusiasm and excitement about what we can control around the organization. And So we are continuing to focus on that. And I would second Mike's call out, we would love for some of this choppiness to go away, but we feel really good about controlling what we can control in the meantime.

Okay. And then I guess somewhat related, the select price changes that you made this quarter, I think, this is the first time you've done that since tariffs have gone into effect. I think your competitors have been a little bit more aggressive in raising prices this year. Can you just elaborate on the scope and the magnitude of the changes you've made to date?

And then I'm just trying to think about of that $50 million to $60 million of net tariff next year doesn't include price offsets. How much could be offset by pricing? Just given, to your point, strength of your product and the newness, feels like it would only require a 4% increase in prices across the assortment to offset that and many of your competitors are already doing that. So I guess, how are you thinking about that?

Yes, Seth, I'll start. First of all, it's being very disciplined and pragmatic and making sure that we really engage with our showroom personnel on where the opportunities are. So it's a very collaborative process. When you get to that $50 million to $60 million range, our expectation is to cover 100% of that, whether it's through operational savings that hits the margin line or vendor concessions or pricing actions. But our goal is to protect margins.

In terms of the scope and magnitude, it is an item-by-item approach. We have 9,500 SKUs that we keep in stock, and we're looking at every one of those SKUs on a continuous basis with our merch teams to really identify areas of opportunity. And sometimes we take prices down to be competitive. But we've got merch teams that are all over this that are really guiding where we think we have the ability to inch upwards and making sure that we keep our customers in mind along the way.

So to your point, when you scale this back and think about the scope of our business, the tariff impact appears to be something that's digestible. We believe it is. But we just have to be mindful that we got to keep customers in mind as we do this. The other thing to be mindful of is that it's not just a pricing decision, but it's also a promo decision. So all of these things work together in unison to make sure that we're providing the right value.

Yes. The only thing I'd add to that, Seth, and we've spoken about this not so much this year, but a lot in prior years is our focus is always on providing a great value to our clients. And our clients, as we mentioned, are that high-end clientele, they can afford to pay for what they want, they want what they want. And we believe in delivering the most comfortable, the highest quality, the most beautiful, the most innovative product that we can.

And so all of these decisions are very much we have margin in mind and profitability in mind, but we also have our clients in mind, and we want to make sure that they are always getting a great value and that we are building that long-term relationship with those clients.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor over to Tara Atwood for closing comments.

Thank you, everyone, for your participation in the call and interest in Arhaus. Have a great day.

Thank you. Everyone, you may disconnect your lines now. Thank you.