10-Q: Arhaus Reports Strong Q3 2025 Growth Amid Internal Control Remediation

Arhaus, Inc. delivered robust financial performance for the third quarter and first nine months of 2025, with significant revenue and profit increases, while actively addressing identified material weaknesses in its internal control over financial reporting.

Summary

• Net revenue for the nine months ended September 30, 2025, increased by 9.8% to $1,014.4 million, up from $924.1 million in the prior year period.
• Gross margin for the nine months ended September 30, 2025, rose by 9.6% to $397.2 million, maintaining a gross margin percentage of 39.2% of net revenue.
• Net income for the nine months ended September 30, 2025, grew by 10.4% to $52.2 million, compared to $47.3 million in the same period last year.
• Adjusted EBITDA for the nine months ended September 30, 2025, increased by 19.5% to $110.1 million, with Adjusted EBITDA as a percentage of net revenue improving to 10.9% from 10.0%.
• Comparable growth for the nine months ended September 30, 2025, was 4.5%, a significant improvement from a (8.6)% decline in the prior year.
• Demand comparable growth for the nine months ended September 30, 2025, was 2.8%, reversing a (4.6)% decline in the prior year.
• For the three months ended September 30, 2025, net revenue increased by 8.0% to $344.6 million, and net income grew by 23.2% to $12.2 million.
• The company operated 103 Showrooms as of September 30, 2025, consistent with December 31, 2024, after opening 7 new Showrooms, relocating 6, and permanently closing 1 during the nine-month period.
• Four material weaknesses in internal control over financial reporting (ICFR) were identified, and remediation efforts are ongoing.

Sentiment

Score: 7

Explanation: The company demonstrated strong financial performance with significant increases in revenue, net income, and Adjusted EBITDA, alongside a positive turnaround in comparable sales growth. However, the persistent material weaknesses in internal control over financial reporting introduce a notable element of risk and uncertainty, tempering an otherwise very positive financial report.

Positives

• Net revenue increased by 9.8% for the nine months and 8.0% for the three months ended September 30, 2025, indicating strong sales growth.
• Gross margin increased by 9.6% for the nine months and 8.4% for the three months, with gross margin percentage remaining stable or slightly improving.
• Net income saw a significant increase of 10.4% for the nine months and 23.2% for the three months, demonstrating improved profitability.
• Adjusted EBITDA grew by 19.5% for the nine months and 35.1% for the three months, with an improved Adjusted EBITDA margin, reflecting enhanced operational efficiency.
• Comparable growth turned positive at 4.5% for the nine months and 4.1% for the three months, a substantial recovery from negative growth in the prior year.
• Demand comparable growth also turned positive at 2.8% for the nine months and 7.4% for the three months, indicating increased client orders.
• Selling, General and Administrative (SG&A) expenses as a percentage of net revenue decreased by 50 basis points for the nine months and 120 basis points for the three months, showing better cost management relative to revenue.
• Cash and cash equivalents increased to $262.2 million as of September 30, 2025, from $197.5 million at December 31, 2024, strengthening liquidity.
• Net cash provided by operating activities increased to $127.5 million for the nine months ended September 30, 2025, from $115.4 million in the prior year, indicating healthy operational cash generation.
• The revolving credit facility maturity date was extended from November 8, 2026, to October 17, 2030, providing long-term financial flexibility.

Negatives

• Product costs increased by $29.2 million for the nine months and $6.1 million for the three months ended September 30, 2025, partially offsetting gross margin gains.
• Showroom occupancy costs increased by $12.7 million for the nine months and $4.6 million for the three months, impacting profitability.
• Delivery and transportation costs increased by $7.7 million for the nine months and $1.9 million for the three months, adding to operational expenses.
• Interest income, net decreased for the nine months ended September 30, 2025, to $2.1 million from $2.6 million in the prior year.
• Income tax expense increased significantly to $18.9 million for the nine months and $5.2 million for the three months, with effective tax rates rising to 26.6% and 29.7% respectively.

Risks

• Material weaknesses in internal control over financial reporting (ICFR) persist, specifically regarding the lack of sufficient accounting professionals, inadequate segregation of duties, ineffective accounting policies and procedures, and deficiencies in IT general controls.
• Challenges with the planning or implementation of technology upgrades, including a new enterprise resource planning (ERP) system, could impact business operations, financial results, and ICFR.
• Disruptions, delays, or deficiencies in the design or implementation of the new ERP and related systems could lead to significantly greater capital expenditures and management time, and adversely affect the ability to operate the business and deliver products timely.
• The need to operate and support legacy systems concurrently with new systems during the IT transformation may increase costs and affect business operations.
• The inability to remediate material weaknesses could adversely affect the ability to record, process, and report financial information accurately and prepare financial statements within SEC time periods.
• Declines in general economic conditions that affect consumer confidence and spending could adversely affect revenue.
• Risks related to maintaining and increasing Showroom traffic and sales.
• Constraints in the supply chain or disruptions due to geopolitical events could impact the business.
• A decline in the U.S. dollar relative to other foreign currencies could increase purchasing costs from vendors, as the majority of international purchases are denominated in U.S. dollars.

Future Outlook

The company anticipates total capital expenditures, net of landlord contributions, to be between $65 million and $75 million in fiscal year 2025, primarily for new Showrooms. A multi-year transformation involving technology upgrades, including a new ERP system, is expected to incur approximately $30 million in incremental investment through 2030, with cash outflows of $2 million remaining in 2025, $12 million in 2026, and $10 million in 2027, before transitioning to annual licensing and maintenance costs of about $2 million per year through 2030. Operating cash flows are expected to be sufficient to meet working capital and other capital needs for at least the next 12 months, with potential future strategies to generate additional capital.

Management Comments

• Management believes the ultimate resolution of current legal proceedings will not have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows.
• Management compensates for the limitations of non-GAAP financial measures by relying on U.S. GAAP results in addition to using these non-GAAP measures.
• Management's goal is to position the Company to take advantage of the many opportunities that may be identified in connection with its business and operations.
• The CEO and CFO have concluded that disclosure controls and procedures were not effective at the reasonable assurance level due to material weaknesses in internal control over financial reporting, despite the financial statements being prepared in accordance with U.S. GAAP.

Industry Context

Arhaus operates in the U.S. home furnishings market, specializing in 'livable luxury' and heirloom-quality merchandise. The company's strong comparable growth and demand comparable growth figures, reversing prior year declines, suggest a robust performance within the sector, potentially outperforming broader industry trends or capturing market share. The continued investment in new showrooms and technology upgrades indicates a strategic focus on expanding its omni-channel presence and improving operational efficiency to maintain competitiveness in a dynamic retail environment.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct industry benchmarking. However, the positive comparable growth of 4.5% for the nine months and 4.1% for the three months ended September 30, 2025, represents a significant turnaround from the negative growth experienced in the prior year (down 8.6% and 9.2% respectively). This suggests a strong recovery or outperformance relative to its own historical trends, which could be indicative of market share gains or a more resilient business model compared to some competitors who may still be facing post-pandemic normalization or economic headwinds.
• The improvement in Adjusted EBITDA as a percentage of net revenue (up 90 bps for nine months, 190 bps for three months) indicates enhanced operational leverage and profitability, which would generally be considered a positive trend when compared to industry peers, especially if competitors are experiencing margin compression due to rising costs or promotional activities.
• The ongoing material weaknesses in internal control over financial reporting, while being actively remediated, could be a point of concern when compared to industry best practices for corporate governance and financial reporting integrity. Companies with robust internal controls are generally viewed more favorably by investors and regulators.

Corporate Governance

Legal Proceedings

• The company is involved in litigation and claims incidental to its business, including employment practices, intellectual property infringement, and personal injury/product liability claims.
• 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 $6.4 million as of September 30, 2025, are included within accrued other expenses.

Related Party Transactions

• Lease agreement with Pagoda Partners, LLC (CEO indirectly owns 50%) for the Walton Hills, Ohio warehouse. Rent expense was $1.3 million for the nine months ended September 30, 2025.
• Lease agreement with Brooklyn Arhaus (CEO and a Director own 85% and 15% respectively) for the Brooklyn, Ohio Outlet. Rent expense was $0.3 million for the nine months ended September 30, 2025. This lease was amended in April 2025, effective October 2025, to extend the term to September 2040.
• Lease agreement with Premier Conover, LLC (CEO indirectly owns 40%) for a distribution center and manufacturing building. Rent expense was $2.9 million for the nine months ended September 30, 2025.
• Accounts payable due to related parties for state and federal income tax refunds were settled by the company in June 2025.

Stakeholder Impact

• Shareholders: Positive financial performance and dividend payments (in 2024) are beneficial, but ongoing material weaknesses in internal controls and the associated remediation costs could be a concern.
• Employees: Continued equity-based compensation, and the hiring of additional accounting and IT personnel, indicate investment in human capital.
• Customers: Showroom expansion and investments in technology aim to enhance the customer experience and product delivery, but potential disruptions from ERP implementation could temporarily affect service.
• Creditors: Strong cash position and compliance with debt covenants, along with the extension of the credit facility maturity, provide comfort regarding the company's ability to meet its obligations.
• Suppliers: Increased product costs and delivery/transportation costs suggest ongoing relationships with suppliers, with potential for cost pressures to be passed through.

Next Steps

• Continue the multi-year transformation to upgrade technology, including implementing a new enterprise resource planning (ERP) system, order management system, and transportation management system.
• Allocate anticipated capital expenditures of $65 million to $75 million in fiscal year 2025 primarily towards opening new Showrooms.
• Continue to implement and test remediation plans for the identified material weaknesses in internal control over financial reporting.
• Assess personnel needs and continue hiring additional competent accounting, financial reporting, and IT personnel.
• Further enhance the design and operation of user access control activities and program change management policies for IT systems.
• Monitor and refine the financial statement close process and related policies and procedures.

Key Dates

Recommendation

The company's financial performance for the nine months and three months ended September 30, 2025, is strong, marked by significant revenue growth, improved profitability, and a positive turnaround in comparable sales. This indicates robust operational execution and market demand for its products. However, the persistent disclosure of four material weaknesses in internal control over financial reporting, despite ongoing remediation efforts, introduces a substantial element of risk. These control deficiencies have led to past restatements and could impact the reliability of future financial reporting and operational efficiency. While the financial results are impressive, the governance and control issues warrant caution. Therefore, a 'hold' recommendation is appropriate, acknowledging the strong business fundamentals while recognizing the significant internal control risks that need to be fully addressed and proven effective over time.

Keywords

Home Furnishings, Retail, E-commerce, SEC Filing, 10-Q, Financial Results, Gross Margin, Net Income, Adjusted EBITDA, Comparable Growth, Internal Controls, ERP System, Supply Chain, Showrooms, ARHS