Expanding Showrooms And Calculated Investments Set The Stage For Future Growth In The Premium Furniture Market

Key Takeaways

• Strategic expansion and marketing are set to drive revenue growth by increasing showroom presence and customer engagement.
  
• Investment in infrastructure and technology upgrades aims to enhance margins and production capabilities, supporting future financial strength in a competitive market.
  
• Arhaus faces near-term revenue and margin pressures due to decreased demand, higher costs, and strategic investments impacting cash flow and profitability.

Catalysts

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

• Arhaus is expanding its showroom base significantly, with ten new showrooms opened in 2024 and additional plans to reach 165 traditional showrooms from the current 85. This expansion is expected to impact future revenue growth by increasing market presence and customer reach.
  
• The company is investing strategically in infrastructure and technology upgrades, including a new warehouse management system, planning system, and ERP at the upholstery manufacturing facility. These improvements are expected to optimize inventory, enhance margin visibility, and improve production capabilities, potentially impacting net margins positively in the future.
  
• Arhaus is enhancing its product assortment, with compelling new product collections like the Astor Collection being launched. This focus on new product offerings is likely to drive future revenue growth and improve product margins by meeting and exceeding client expectations for premium and artisan-crafted furnishings.
  
• The company is increasing its brand awareness through strategic marketing campaigns and promotions around key product launches, which is expected to deepen customer relationships and drive engagement, thereby supporting future revenue growth.
  
• Arhaus is maintaining a debt-free balance sheet, which positions it to continue making responsible investments in a $100 billion premium home furniture market. This financial strength allows the company to navigate macroeconomic challenges and potentially improve earnings through strategic growth initiatives.

Arhaus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arhaus's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.2% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $87.0 million (and earnings per share of $0.6) by about December 2027, up from $78.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $102 million in earnings, and the most bearish expecting $57.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2027 earnings, up from 19.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 17.3x.
• Analysts expect the number of shares outstanding to grow by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Arhaus Future Earnings Per Share Growth

Risks

• Arhaus experienced a 9.2% comp decline in net revenue for the third quarter, which was impacted by lower demand and the non-recurrence of abnormal backlog deliveries, suggesting potential future revenue challenges.
  
• The company has lowered its full-year sales and earnings outlook due to a tempered consumer environment, indicating a potential negative impact on net margins and earnings.
  
• Increased SG&A expenses driven by legal costs, marketing investments, and strategic supply chain and technology improvements could put pressure on net margins.
  
• Arhaus is facing higher delivery, transportation, and showroom costs, which contributed to a decrease in gross margin as a percentage of net revenue, suggesting continued margin pressure.
  
• There is significant investment in strategic software systems and infrastructure, which, while beneficial long-term, may constrain near-term cash flow and profitability due to increased expenses.

Valuation

• The analysts have a consensus price target of $11.5 for Arhaus based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $87.0 million, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of $10.75, the analyst's price target of $11.5 is 6.5% higher. The relatively low difference between the current share price and the analyst consensus 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.