Declining Homeownership And Digital Rivals Will Undermine Showrooms

Key Takeaways

• Softer demand for premium furniture and showroom expansion is threatened by declining homeownership, shrinking living spaces, and shifting consumer preferences.
  
• Increased competition from online and secondhand platforms will pressure margins, reduce market share, and drive earnings volatility.
  
• Expansion into new product lines, showroom growth, digital investments, and a strong brand position Arhaus for scalable, high-margin growth across both retail and B2B channels.

Catalysts

Operates as a lifestyle brand and premium retailer in the home furnishings market in the United States.

• As US homeownership rates face further decline, exacerbated by persistent housing affordability challenges, Arhaus's core addressable market for high-end home furnishings is likely to shrink over the next several years, stalling top-line revenue growth even if the company continues expanding its showroom footprint.
  
• The ongoing trend toward smaller urban living spaces directly undermines demand for large, premium furniture and expansive assortments like those Arhaus specializes in, raising the risk that new product categories such as the Bath Collection could underperform and miss revenue targets.
  
• With consumers increasingly shifting preferences toward online-only, direct-to-consumer furniture brands, traffic to Arhaus's physical showrooms is likely to stagnate or decline, limiting the effectiveness of ongoing showroom investments and putting pressure on both store productivity and net margins.
  
• Heavy reliance on a disciplined yet capital-intensive brick-and-mortar expansion strategy locks Arhaus into high fixed costs and exposes the business to significant leverage and margin compression should luxury spending or housing activity weaken further.
  
• Intensifying competition from digital-first and secondhand furniture platforms will erode Arhaus's market share and pricing power, weighing on gross margins and resulting in greater earnings volatility as consumers increasingly choose lower-cost, more flexible furnishing options.

Arhaus Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Arhaus compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Arhaus's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.3% today to 4.6% in 3 years time.
• The bearish analysts expect earnings to reach $73.6 million (and earnings per share of $0.51) by about August 2028, up from $71.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, down from 22.2x today. This future PE is greater than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.98%, as per the Simply Wall St company report.

Arhaus Future Earnings Per Share Growth

Risks

• Arhaus's expansion into new product categories like the Bath Collection and continued growth of its outdoor and upholstery lines indicate significant potential for revenue growth by tapping into new areas of consumer demand and increasing average order values.
  
• The company's disciplined showroom expansion strategy-targeting both new traditional showrooms and design studios with high average contribution margins and short payback periods-suggests the ability to steadily increase both net sales and earnings in the long term.
  
• Investments in digital platforms, inventory forecasting, and operational systems are expected to drive greater scalability and efficiency, enabling the company to support a larger sales base without proportional increases in SG&A expenses, which would support margin expansion and higher EBITDA.
  
• Arhaus's strong brand differentiation through unique, artisan-crafted, customizable, and sustainable products aligns with secular consumer preferences for premium and personalized furnishings, likely resulting in enhanced customer loyalty and more resilient pricing power, supporting both revenues and profit margins.
  
• The growing trade and contract (B2B) business, especially with the leadership focus and the onboarding of new executives to lead this segment, presents a high-margin revenue opportunity that could further accelerate earnings and diversify revenue streams beyond traditional retail customers.

Valuation

• The assumed bearish price target for Arhaus is $8.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Arhaus's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $73.6 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $11.22, the bearish analyst price target of $8.5 is 32.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.