10-K: Arhaus Reports 8.5% Revenue Growth, Addresses Internal Control Weaknesses

Arhaus, Inc. reported an 8.5% increase in net revenue to $1.38 billion for fiscal year 2025, alongside a slight decrease in net income and ongoing efforts to remediate material weaknesses in internal control over financial reporting.

Summary

• Net revenue increased 8.5% to $1,379.2 million in 2025 compared to $1,271.1 million in 2024.
• Gross margin increased 7.0% to $536.4 million in 2025, but decreased as a percentage of net revenue by 50 basis points to 38.9%.
• Selling, General and Administrative (SG&A) expenses increased 7.7% to $447.4 million in 2025, but decreased as a percentage of net revenue by 30 basis points to 32.4%.
• Net and comprehensive income decreased by $1.3 million to $67.3 million in 2025 from $68.6 million in 2024.
• Adjusted EBITDA increased to $145.1 million in 2025 from $133.3 million in 2024, maintaining 10.5% of net revenue.
• The company opened 12 new showrooms and closed 7 for relocations, and 1 permanently, ending 2025 with 107 showrooms.
• Material weaknesses in internal control over financial reporting (ICFR) remain outstanding as of December 31, 2025, though one previously disclosed material weakness was remediated.
• A multi-year technology upgrade, including a new ERP system, is underway with an expected incremental investment of approximately $30 million through 2030.

Sentiment

Score: 5

Explanation: StockSavvy.ai views this as a mixed report. While revenue growth and Adjusted EBITDA are positive, the decline in net income and persistent material weaknesses in internal controls are significant concerns that temper optimism.

Positives

• Net revenue grew by 8.5% to $1,379.2 million in 2025, indicating strong sales performance.
• Adjusted EBITDA increased to $145.1 million in 2025, maintaining a healthy 10.5% of net revenue, reflecting operational efficiency.
• Comparable delivered sales increased by 3.6% in 2025, reversing a decline from the previous year.
• Comparable written sales increased by 1.3% in 2025, also reversing a prior year decline, suggesting renewed customer demand.
• The company expanded its showroom footprint by opening 12 new showrooms in 2025, bringing the total to 107 locations.
• Strong liquidity is maintained with $253.4 million in cash and cash equivalents as of December 31, 2025, and a debt-free balance sheet.
• One previously disclosed material weakness related to accounting for non-routine or complex transactions was remediated.
• The revolving credit facility's maturity date was extended from November 8, 2026, to October 17, 2030, and the letter of credit commitment increased to $15 million, enhancing financial flexibility.
• Key executive appointments, including Michael Rengel as Chief Merchandising Officer and Allison Sutley as Chief Information Officer, strengthen the leadership team.

Negatives

• Net and comprehensive income decreased by $1.3 million to $67.3 million in 2025, despite revenue growth.
• Gross margin as a percentage of net revenue decreased by 50 basis points to 38.9% in 2025, primarily due to higher showroom occupancy costs.
• Material weaknesses in internal control over financial reporting (ICFR) remain outstanding as of December 31, 2025, and the independent auditor issued an adverse opinion on ICFR effectiveness.
• Higher product costs ($40.6 million increase), increased showroom occupancy costs ($18.1 million increase), higher delivery and transportation costs ($6.1 million increase), and higher credit card fees ($3.4 million increase) negatively impacted gross margin.
• Increased general and administrative costs ($16.4 million) and selling expenses ($15.6 million) contributed to higher operating expenses.
• The special cash dividend declared in February 2026 is $0.35 per share, which is lower than the $0.50 per share declared in February 2024.

Risks

• The company may incur operating losses in the future or fail to achieve or maintain profitability.
• Fluctuations in the growth rate of the business in terms of revenue, earnings, and margins may continue.
• Ability to purchase quality merchandise in sufficient quantities at competitive prices, especially from specialty and artisan vendors, may be disrupted.
• Disruption in the receiving and distribution system or increased costs may arise from the continued integration of recently opened distribution and manufacturing centers.
• Cybersecurity risks, including credit card fraud, identity theft, and business interruption, could result in unexpected expenses and loss of revenue.
• Loss, corruption, and misappropriation of data and information relating to clients and employees pose significant risks.
• Changes in and compliance with applicable data privacy rules and regulations could expose the company to litigation or damage its reputation.
• Supply chain constraints or disruptions due to geopolitical events such as acts of war and/or terrorism or other hostilities could adversely affect operations.
• A failure of vendors to meet quality standards could damage the company's reputation and brand image.
• Declines in general economic conditions that affect consumer confidence and consumer spending, particularly in the high-end housing market, could adversely impact revenue.
• The company's ability to anticipate changes in consumer preferences is crucial for sustained demand.
• Risks related to maintaining and increasing Showroom traffic and sales exist.
• The company operates in a highly competitive market and its ability to compete effectively is a risk.
• Inability to adequately protect intellectual property could diminish brand value and competitive position.
• Compliance with applicable governmental regulations (labor, customs, trade, consumer protection, privacy, safety, real estate, environmental, zoning) is complex and non-compliance could lead to penalties.
• Effectively managing the eCommerce sales channel and digital marketing efforts is critical for growth.
• Reliance on third-party transportation carriers exposes the company to risks associated with freight and transportation costs and delivery disruptions.
• Compliance with SEC rules and regulations as a public reporting company adds complexity and potential costs.
• Adverse events in the primary regions of operations (Ohio, North Carolina, Texas) such as extreme weather or disasters could materially affect the business.
• Failure to recruit, hire, and retain qualified personnel, especially skilled labor, could adversely affect the business.
• Capital expenditures for remodeling existing Showrooms may not result in incremental traffic or sales.
• Defective merchandise from vendors could damage reputation and brand image, and remedies against vendors may be inadequate.
• Use of social media and influencers may materially and adversely affect reputation or subject the company to fines or other penalties.
• Reliance on third parties to drive traffic to the website, and changes in their algorithms or pricing, could negatively impact marketing effectiveness.
• Client or other various legal proceedings could adversely affect the business, financial condition, results of operations, and cash flows.
• Failure to successfully manage the costs and performance of print media (catalogs) might negatively impact the business.
• Failure to successfully anticipate merchandise returns might have a negative impact on the business.
• Product warranty claims could have a material adverse effect on the business if reserves are inadequate.
• Inability to successfully adapt to client shopping preferences or develop and maintain a relevant and reliable omni-channel model could adversely affect financial performance and brand image.
• Future growth depends on the ability to successfully implement the organic growth strategy, including opening new Showrooms, which entails significant risks.
• The estimated addressable market is subject to inherent challenges and uncertainties, and overestimation could limit future growth opportunities.
• Substantial lease obligations expose the company to increased risks.
• Growing the business may require additional capital, and if capital is not available, business, operating results, and financial condition may suffer.
• Disruption in the financial markets could have a material adverse effect on client demand and the ability to refund client deposits.
• Business operations depend on good relations with employees, and unionization efforts could negatively affect the business.
• Public health emergencies or outbreaks of epidemics, pandemics, or contagious diseases could significantly disrupt operations.
• Failure to address risks associated with payment methods, credit card fraud, and other consumer fraud could damage reputation and harm the business.
• Failure to comply with payment card network operating rules (PCI DSS) could lead to fines, penalties, or loss of card acceptance privileges.
• Challenges with the planning or implementation of technology upgrades, including a new enterprise resource planning system, may impact business, operations, financial results, and internal control over financial reporting.
• Delaware law may protect decisions of the Board of Directors that have a different effect on holders of Class A and Class B common stock.
• Anti-takeover provisions could prevent or delay a change in control of the company.
• Future sales of shares of Class A common stock, or the perception that such sales may occur, could adversely affect the market price.
• If securities or industry analysts do not publish research or reports about the business, or if they change their recommendations adversely, stock price and trading volume could decline.
• The dual class structure of common stock has the effect of concentrating voting power with the Founder and Founder Family Trusts, whose interests may conflict with other stockholders.
• The dual class structure of common stock may adversely affect the trading market for Class A common stock.
• The market price, trading volume, and marketability of Class A common stock may be significantly affected by numerous factors beyond the company's control.
• The company is a controlled company within the meaning of Nasdaq rules and qualifies for and may rely on exemptions from certain corporate governance requirements.
• Operations present risks which may not be fully covered by insurance.
• Expectations of the company relating to corporate responsibility factors may impose additional costs and expose it to new risks.

Future Outlook

The company anticipates total capital expenditures, net of landlord contributions, to be approximately $70.0 million to $90.0 million in fiscal year 2026, primarily for new showrooms and information technology and systems infrastructure. A multi-year technology transformation, including a new ERP system, is underway with an expected incremental investment of approximately $30 million through 2030. Cash outflows are anticipated to be approximately $12 million in 2026 and $10 million in 2027, tapering in early 2028 to annual licensing and maintenance costs of approximately $2 million per year through 2030. The company believes its operating cash flows will be sufficient to meet working capital requirements and other capital needs for at least the next 12 months.

Management Comments

• "We believe that you will make an immediate contribution to the Executive Leadership Team."
• "The team and I look forward to working with you at Arhaus and expect that you will be a valuable asset to the company."
• "Our primary cash needs have historically been for merchandise inventories, payroll, marketing, Showroom rent, capital expenditures associated with opening new Showrooms and renovating existing Showrooms, as well as the development of our infrastructure and information technology."
• "We believe our operating cash flows will be sufficient to meet working capital requirements and fulfill other capital needs for at least the next 12 months, although we may enter into borrowing arrangements in the future."
• "While we do not require debt to fund our operations, our goal continues to be to position the Company to take advantage of the many opportunities that we may identify in connection with our business and operations."

Industry Context

StockSavvy.ai notes that Arhaus operates in a highly fragmented U.S. premium home furnishings market, estimated at $100 billion, suggesting significant opportunity for market share expansion through its differentiated brand positioning and scale. The company's vertically integrated model and focus on artisan-crafted, exclusive products align with a growing consumer demand for quality and unique home goods, potentially allowing it to outperform general market trends, especially in the luxury segment. However, the broader economic environment, including inflation and interest rate changes, remains a key factor influencing consumer spending in this discretionary market.

Comparison to Industry Standards

• The company competes with national and regional home furnishing retailers and department showrooms, including RH, Room & Board, Serena and Lily, Williams Sonoma, and Crate & Barrel.
• Arhaus's gross margin of 38.9% in 2025 is comparable to or slightly below some premium retailers, but its vertically integrated model and direct sourcing aim to deliver high-quality products at a compelling value, differentiating it from competitors.
• The company's showroom expansion strategy, targeting approximately 165 total Traditional Showrooms and approximately 50 total Design Studios in the United States, indicates an aggressive growth plan within the fragmented market, potentially outpacing the organic growth of smaller, independent retailers.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in various litigation and claims incidental to its business, including employment practices, intellectual property infringement, personal injuries, and product liability.
• Management believes the ultimate resolution of these matters will not have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows.
• Accrued legal costs of $6.5 million as of December 31, 2025.
• The company has received inquiries from state and local taxing agencies and is subject to tax audits, with accrued liabilities of $0.3 million for non-income tax matters as of December 31, 2025.

Related Party Transactions

• Lease agreement with Pagoda Partners, LLC (50% indirectly owned by CEO John Reed) for a warehouse in Walton Hills, Ohio, extended to April 2034. Rent expense was $1.7 million in 2025.
• Lease agreement with Brooklyn Arhaus (85% owned by CEO John Reed, 15% by Director Bill Beargie) for a Loft in Brooklyn, Ohio, extended to September 2040. Rent expense was $0.4 million in 2025.
• Lease agreement with Premier Conover, LLC (40% indirectly owned by CEO John Reed) for a distribution center and manufacturing building. Rent expense was $3.9 million in 2025.
• Remaining accounts payable due to related parties for state and federal income tax refunds were settled in June 2025.

Stakeholder Impact

• Shareholders: Impacted by the decrease in net income, the lower special dividend compared to the previous year, and the ongoing material weaknesses in internal controls. The dual-class stock structure concentrates voting power, potentially limiting influence for Class A shareholders. Future sales by the Founder and Founder Family Trusts could affect stock price.
• Employees: New executive appointments (CMO, CIO) indicate strategic leadership strengthening. Ongoing investments in IT infrastructure aim to improve operational efficiency, which could benefit employees. The company states positive relations with employees and a commitment to diversity and inclusion.
• Customers: Continued showroom expansion and investments in the omni-channel model aim to enhance customer experience and product availability. Risks related to product quality, supply chain disruptions, and data security could negatively impact customer trust and satisfaction.
• Suppliers/Vendors: Reliance on a global network of nearly 400 vendors, with the top 10 representing 50% of net revenue, indicates significant relationships. Risks include vendor capacity constraints, quality failures, and geopolitical disruptions affecting supply.
• Creditors: The company has a debt-free balance sheet and strong liquidity, which is favorable for creditors. The extended maturity of the revolving credit facility also provides stability.

Next Steps

• Continue to assess, implement, and redesign internal control over financial reporting (ICFR).
• Execute remediation plan for material weaknesses in ICFR, with a multi-year company-wide initiative to modernize IT infrastructure.
• Anticipate total capital expenditures, net of landlord contributions, to be approximately $70.0 million to $90.0 million in fiscal year 2026, primarily for new showrooms and IT infrastructure.
• Pay a special cash dividend of $0.35 per share on March 31, 2026, to shareholders of record on March 18, 2026.
• Hold the Annual Meeting of Stockholders on May 14, 2026.
• Michael A. Rengel to begin as Chief Merchandising Officer on February 16, 2026.
• John Reed and certain Reed family trusts to begin selling Class A common stock under 10b5-1 trading arrangements starting March 16, 2026.

Key Dates

Recommendation

While Arhaus demonstrated solid revenue growth and maintained Adjusted EBITDA margins, the decline in net income and the persistent, auditor-attested material weaknesses in internal control over financial reporting introduce significant uncertainty and risk. The lower special dividend compared to the prior year might also be viewed negatively by income-focused investors. The company's strategic investments and showroom expansion are positive long-term drivers, but the governance and financial reporting issues warrant a cautious "Hold" stance until these fundamental weaknesses are effectively remediated and sustained profitability is demonstrated.

Keywords

Home furnishings, Retail, Omni-channel, Luxury furniture, SEC filing, 10-K, Financial results, Corporate governance, Risk factors, Internal controls, Supply chain, Showroom expansion, EBITDA, Net revenue, Arhaus