Expanding Showrooms And Marketing Investments Will Strengthen Brand Positioning

Key Takeaways

• Arhaus plans to double its showroom count, enhancing customer reach and brand awareness to drive revenue growth.
  
• Strategic investments in omnichannel capabilities and operational systems aim to boost revenue and long-term margin improvements.
  
• Arhaus faces potential pressure on net margins and revenue growth due to increased costs, declining demand, and strategic challenges in showroom expansion and market conditions.

Catalysts

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

• Arhaus plans to increase its showroom count to 165 traditional showrooms over the long term, effectively doubling its footprint. This expansion includes both new showrooms and relocations, which is anticipated to drive higher net revenue through wider customer reach and increased brand awareness.
  
• The company is focusing on enhancing its omnichannel capabilities, with particular attention to e-commerce, expected to be the fastest-growing revenue channel. By investing in technology and seamless integration between online and physical stores, Arhaus aims to boost revenue growth and improve customer engagement.
  
• Arhaus is implementing new operational systems, including a warehouse management system, an ERP system at its upholstery manufacturing facility, and an inventory planning system. These systems are expected to optimize efficiencies, enhance operational infrastructure, and support long-term margin improvements.
  
• The direct sourcing model employed by Arhaus remains a significant competitive advantage, allowing the company to scale production efficiently and mitigate cost increases. This model is expected to support stable net margins by reducing dependency on wholesalers and managing supply chain risks.
  
• The company is making strategic investments in marketing and brand differentiation, including the introduction of new catalogs and design innovations. By focusing on high-quality craftsmanship and engaging content, Arhaus aims to increase demand comparable growth and strengthen its premium brand positioning, thereby potentially boosting earnings.

Arhaus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arhaus's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $79.5 million (and earnings per share of $0.56) by about July 2028, up from $58.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $97 million in earnings, and the most bearish expecting $71 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 22.4x 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 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

Arhaus Future Earnings Per Share Growth

Risks

• Arhaus experienced a decline in net income by 45.3% to $69 million for the full year 2024, largely attributed to increased showroom and strategic investment costs, which could impact net margins.
  
• Comparable growth dropped by 8% primarily due to prior abnormal backlog fulfillment and a lack of demand in the second and third quarters, indicating potential ongoing revenue weaknesses.
  
• Gross margin decline was influenced by higher showroom occupancy and transportation costs, which might continue to pressure net margins if these costs are not managed efficiently.
  
• The guidance for potential tariffs and a highly promotional market could impact profit margins and sales, as these factors may necessitate price adjustments or affect consumer demand.
  
• Arhaus anticipates lower opening of traditional showrooms in 2025 compared to previous expansions, which could slow down revenue growth if new markets are not tapped as expected.

Valuation

• The analysts have a consensus price target of $9.875 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 $13.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $79.5 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 8.7%.
• Given the current share price of $9.28, the analyst price target of $9.88 is 6.0% 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.