Tariff Pressures And Costs Will Curb Performance Yet Value Emerges

Key Takeaways

• Sustained demand from affluent consumers and investments in omni-channel growth face pressures from rising costs, supply chain complexity, and volatile discretionary spending.
  
• Margin expansion and premium positioning are challenged by showroom cost risk, income inequality, increasing competition, and near-term dilution from operational investments.
  
• Heavy reliance on showrooms and elevated fixed costs expose Arhaus to risk if consumer spending weakens or shifts further toward digital purchasing channels.

Catalysts

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

• While Arhaus benefits from long-term U.S. household formation, affluence in its key demographics, and steady demand from affluent consumers who prioritize home investment and premium furnishings, the company faces ongoing headwinds from rising tariffs and persistently high costs of capital, which may constrain discretionary spending and mute revenue growth through 2025.
  
• While the company’s low exposure to China sourcing and investment in domestic manufacturing somewhat shield gross margins from the most severe tariff impacts, long-term dependence on a North American supply base and the increasing complexity of global supply chains could limit scalability and introduce cost pressures, impeding margin expansion.
  
• While ongoing showroom expansion and omni-channel enhancements have successfully supported market share gains so far, the company is increasingly exposed to risk from higher fixed costs tied to brick-and-mortar locations, putting downward pressure on net margins and profitability should comparable sales growth remain volatile or decline.
  
• Despite consumer preference for sustainability and artisan-made goods aligning with Arhaus’ differentiated product offering and justifying premium pricing, worsening income inequality and stagnating real wage growth may narrow the addressable market for high-end discretionary home furnishings, creating a structural challenge to long-term top-line growth.
  
• While investments in technology, e-commerce, and supply chain upgrading could drive efficiency and future earnings growth, the near-term dilution from ongoing SG&A spending, as well as mounting competition from lower-cost online furniture retailers and direct-to-consumer brands, threatens to erode Arhaus’ premium positioning and compress both revenue growth and EBITDA margins if demand softness persists.

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 6.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.5% today to 4.8% in 3 years time.
• The bearish analysts expect earnings to reach $74.6 million (and earnings per share of $0.52) by about July 2028, up from $58.3 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 19.6x on those 2028 earnings, up from 19.5x today. This future PE is greater than the current PE for the US Specialty Retail industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.8%, as per the Simply Wall St company report.

Arhaus Future Earnings Per Share Growth

Risks

• Higher-for-longer interest rates and persistent macro uncertainty are contributing to softening consumer sentiment and more cautious spending on big-ticket home furnishings, which could depress Arhaus’s net revenue and growth trajectory over the long term.
  
• The company's aggressive showroom expansion and continued investment in physical retail carry the risk of high fixed occupancy and operational costs, which could pressure net margins and profitability in an environment where comparable sales growth may remain volatile or negative.
  
• Despite meaningful investments in e-commerce, Arhaus’s business remains heavily reliant on showroom-driven demand, leaving it potentially exposed to ongoing shifts in consumer preference toward online, direct-to-consumer, and digital marketplace models that could erode market share and revenue.
  
• Tariff volatility on imported goods, including significant cost increases from 10% tariffs on most countries and a 170% tariff on China imports, could materially raise Arhaus’s cost of goods sold; while management highlights mitigation efforts, sustained cost pressures may further squeeze gross margins if not fully offset.
  
• A prolonged period of stagnating real wage growth or demographic headwinds—such as delayed or declining household formation among younger consumers—could shrink the addressable market for discretionary, premium furniture purchases, posing a risk to Arhaus’s long-term revenue base and earnings growth.

Valuation

• The assumed bearish price target for Arhaus is $8.0, 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 $13.0, and the most bearish reporting a price target of just $8.0.
• 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 $74.6 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 8.8%.
• Given the current share price of $8.07, the bearish analyst price target of $8.0 is 0.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• 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.