10-Q: Arhaus Q2 2025 Revenue Jumps 15.7%, Net Income Up

Arhaus, Inc. reported strong second-quarter 2025 results with net revenue increasing 15.7% and net income rising 57.7%, despite ongoing internal control weaknesses.

Summary

• Net revenue for the six months ended June 30, 2025, increased by 10.7% to $669.8 million, up from $605.0 million in the prior year.
• Net revenue for the three months ended June 30, 2025, increased by 15.7% to $358.4 million, up from $309.8 million in the prior year.
• Gross margin for the six months increased by 10.2% to $263.8 million, while for the three months, it increased by 19.1% to $148.2 million.
• Net and comprehensive income for the six months increased by $2.6 million to $39.9 million.
• Net and comprehensive income for the three months increased by $12.9 million to $35.1 million.
• The company operated 103 Showrooms as of June 30, 2025, having opened 7 new showrooms and closed 6 for relocations and 1 permanently during the six months ended June 30, 2025.
• Cash and cash equivalents stood at $234.8 million as of June 30, 2025, up from $197.5 million at December 31, 2024.
• Client deposits increased to $233.1 million as of June 30, 2025, from $220.9 million at December 31, 2024.
• Merchandise inventory increased to $311.1 million as of June 30, 2025, from $297.0 million at December 31, 2024.

Sentiment

Score: 7

Explanation: The company demonstrated strong revenue and net income growth, and positive comparable growth, indicating improved operational performance. However, the persistence of material weaknesses in internal controls and negative demand comparable growth for the quarter temper the overall positive outlook.

Positives

• Strong net revenue growth of 10.7% for the six months and 15.7% for the three months ended June 30, 2025.
• Increased net and comprehensive income to $39.9 million for the six months (up from $37.3 million) and $35.1 million for the three months (up from $22.2 million).
• Improved gross margin percentage for the three months ended June 30, 2025, increasing by 130 basis points to 41.4%.
• Healthy cash position with cash and cash equivalents at $234.8 million.
• Increase in client deposits to $233.1 million, indicating a robust order backlog.
• Maintained compliance with all debt covenants under the 2021 Credit Facility.
• Comparable growth turned positive at 4.7% for the six months and 10.5% for the three months ended June 30, 2025, reversing negative trends from the prior year periods.

Negatives

• Gross margin as a percentage of net revenue slightly decreased by 20 basis points to 39.4% for the six months ended June 30, 2025, primarily due to increased Showroom occupancy costs.
• Selling, General and Administrative (SG&A) expenses increased by $19.8 million for the six months and $6.5 million for the three months, driven by corporate expenses, warehouse expenses, and strategic investments.
• Demand comparable growth remained negative for the three months ended June 30, 2025, at -3.6%, and was only slightly positive at 0.4% for the six months.
• Identified four material weaknesses in internal control over financial reporting, including insufficient accounting personnel, inadequate accounting policies/procedures, ineffective controls over non-routine transactions, and ineffective IT general controls.

Risks

• Ability to manage and maintain the growth rate of the business.
• Ability to obtain quality merchandise in sufficient quantities.
• Disruption in receiving and distribution system, including potential delays in the integration of distribution centers.
• Effects of new or proposed tariffs and changes to international trade policies and agreements.
• The possibility of cyberattacks and the ability to maintain adequate cybersecurity systems and procedures.
• Loss, corruption, and misappropriation of data and information relating to clients and employees.
• Changes in and compliance with applicable data privacy rules and regulations.
• Risks as a result of constraints in the supply chain or disruptions due to geopolitical events such as acts of war and/or terrorism or other hostilities.
• A failure of vendors to meet quality standards.
• Declines in general economic conditions that affect consumer confidence and consumer spending.
• Ability to anticipate changes in consumer preferences.
• Risks related to maintaining and increasing Showroom traffic and sales.
• Ability to compete in the market.
• Ability to adequately protect intellectual property.
• Compliance with applicable governmental regulations.
• Effectively managing eCommerce sales channel and digital marketing efforts.
• Reliance on third-party transportation carriers and risks associated with freight and transportation costs.
• Compliance with SEC rules and regulations as a public reporting company.
• Material weaknesses in internal control over financial reporting could lead to material misstatements.

Future Outlook

The company anticipates total capital expenditures, net of landlord contributions, to be between $80 million and $100 million in fiscal year 2025, primarily related to the opening of new Showrooms. It is currently evaluating the effects of the recently enacted H.R. 1 (One Big Beautiful Bill Act) on its tax rate and cash tax position.

Management Comments

• Operating cash flows are believed to be sufficient to meet working capital requirements and fulfill other capital needs for at least the next 12 months, though borrowing arrangements may be pursued in the future.
• The company's goal continues to be to position itself to take advantage of identified business opportunities, potentially through additional strategies to generate capital, including new debt financing arrangements.
• A company-wide initiative is underway to modernize IT infrastructure to automate financial reporting processes, enhance the IT control environment, and mitigate underlying internal control gaps.
• Remediation efforts for material weaknesses in internal controls are in process, with the belief that they will be remediated as soon as practicable, though a specific timeline for full implementation is not yet projected.

Industry Context

The company operates in the U.S. home furnishings market, specializing in 'livable luxury' and is sensitive to general economic conditions affecting consumer confidence and spending. The reported strong revenue and net income growth, alongside positive comparable growth, suggest a robust performance within its market segment, potentially indicating resilience or strong market positioning despite broader economic uncertainties.

Corporate Governance

Legal Proceedings

• Currently not a party to any legal proceedings, the outcome of which, if determined adversely, would individually or in the aggregate have a material adverse effect on business, financial condition or results of operations.
• Accrued legal costs of $6.3 million as of June 30, 2025, included within accrued other expenses.

Related Party Transactions

• Lease agreement with Pagoda Partners, LLC (CEO indirectly owns 50%) for the Walton Hills, Ohio warehouse. Lease extended to April 2034. Rent expense was $0.9 million for the six months ended June 30, 2025, and $0.5 million for the three months ended June 30, 2025.
• Lease agreement with Brooklyn Arhaus (CEO owns 85%, Director Mr. Beargie owns 15%) for the Brooklyn, Ohio Outlet. Lease extended to September 2040, effective October 2025. Rent expense was $0.2 million for the six months ended June 30, 2025, and $0.1 million for the three months ended June 30, 2025.
• Lease agreement with Premier Conover, LLC (CEO indirectly owns 40%) for a distribution center and manufacturing building. Rent expense was $1.9 million for the six months ended June 30, 2025, and $0.9 million for the three months ended June 30, 2025.
• Remaining accounts payable due to related parties for state and federal income tax refunds were settled in June 2025.

Stakeholder Impact

• Shareholders: Positive impact from increased net income and positive comparable growth, but potential concern from ongoing material weaknesses in internal controls. A special cash dividend was paid in Q1 2024.
• Employees: Benefit from equity-based compensation plans (RSUs, PSUs) and the hiring of additional accounting and IT personnel.
• Customers: Strong customer demand indicated by increased client deposits and order backlog. Continued showroom expansion and strategic investments in supply chain and IT aim to improve customer experience.
• Suppliers/Vendors: Increased merchandise inventory suggests continued purchasing from vendors, though risks related to vendor quality standards and supply chain constraints are noted.
• Creditors: The company is in compliance with all debt covenants and has no borrowings on its credit facility, indicating strong creditworthiness.

Next Steps

• Continue to implement and redesign internal control over financial reporting (ICFR) to remediate identified material weaknesses.
• Modernize IT infrastructure to automate financial reporting processes and enhance the IT control environment.
• Evaluate the effects of the One Big Beautiful Bill Act (H.R. 1) on tax rate and cash tax position.
• Open new Showrooms, with anticipated capital expenditures between $80 million and $100 million in fiscal year 2025.

Key Dates

Recommendation

The company's strong revenue and net income growth, coupled with positive comparable growth, indicate solid operational performance and market demand. However, the persistent material weaknesses in internal controls over financial reporting introduce a significant element of risk and uncertainty regarding the reliability of financial data and future compliance. While the financial results are positive, the unresolved control issues warrant a cautious approach, suggesting a 'hold' until there is clear evidence of remediation and sustained effectiveness of internal controls.

Keywords

Home furnishings, Retail, E-commerce, Luxury, Furniture, Dcor, Showrooms, Financial results, SEC filing, Quarterly report, Arhaus