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Specialty Home Furnishings Retailer Arhaus Underwhelms In Its Nasdaq Open

By News Creatives Authors , in Business , at November 5, 2021

On the surface, premium home furnishings retailer Arhaus (NASDAQ: ARHS) had everything going for it as it made its debut on Wall Street yesterday – strong profitable growth in the rapidly expanding furniture market. But investors weren’t necessarily buying it.

It originally aimed for a $2.38 billion valuation with shares priced between $14 and $17. But the share price was reduced to $13 the night before and then opened for trading at $12.50. In what he described as a downbeat opening, Marketwatch editor Tomi Kilgore reported at that price, it would reach a valuation of only $1.75 billion.

Growing faster than home furnishings retail

On the plus side, Arhaus competes in the home furnishings market, which has been on a tear since the pandemic. Furniture and home furnishings retail sales were up 22% through June 2021 compared to same period 2019, according to the Census Advanced Monthly Retail Trade report.

Arhaus grew more than twice as fast, with sales rising 51% for the first six months in 2021 compared with pre-pandemic 2019, reaching $355.4 million from $235.9 million in 2019.

Even while many of its 75 stores, called showrooms, were closed for months on end, Arhaus also enjoyed growth in 2020 as year-end sales reached $507 million, up 3% from $495 million in 2019. Much of the credit goes to its vibrant e-commerce platform that advanced 64% year-over-year and represented 18% of total sales in 2020.

After 35 years of operating successfully in the highly-fragmented $340 billion U.S. home furnishings business, CEO John Reed believes Arhaus has mastered the formula to keep on growing.

“We’ve been able to grow across the country with our footprint of showrooms which are being revamped into a retail-theater experience. Every detail is carefully designed to inspire people to come in. We want them to say, ‘Wow, I want my home to feel like this,’” he says.

Showrooms to visit and designers make house calls

The company sees a path to reach 165 locations as it plans to open between five and seven new stores per year for the foreseeable future. It also reports that it already has ten new showrooms in the pipeline.

Besides its showrooms in prime locations, the Arhaus website is its virtual showroom on the internet. The two work hand-in-glove. The company reports 80% of e-commerce revenue originates from customers within a 50 mile radius of a showroom. It also publishes a catalog twice a year to bolster both in-showroom and e-commerce sales.

While getting people into the showroom is a priority, it also takes the showroom direct to the client through complimentary in-home design services provided by 60 designer partners.

Through those in-home visits, the company has been able to increase average-order-value more than three times that of a standard order. And in-home clients repurchase at a higher rate. Notably, 40% of these clients make five or more purchases throughout their customer lifetime.  

Taking a contrarian view, Christopher P. Ramey of the Home Trust International (HTI), a network serving high-end home businesses, sees nothing disruptive in the Arhaus concept.

“They execute well, have good taste and they are nailing today’s zeitgeist,” he shares but adds, “Each of these is fleeting, particularly as the market evolves.”

Resiliency at the high-end

Arhaus is counting on continued expansion at the premium end of the home furnishings market. But there, it is going up against luxury powerhouse RH

RH
, which has been nothing but disruptive with its ecosystem vision of products, places, services and spaces.

It is reasonable to expect retailers that target the high-end of the furnishings trade to show more resiliency than mass-market competitors due to the greater spending power of their high-income customers. Some 80% of Arhaus’ customers have incomes over $100,000, a consumer demographic that is growing fast.

Arhaus estimates the premium home furnishings segment totaled some $60 billion in revenue in 2019. It cites estimates that the premium market will advance 10% CAGR through 2024 to reach $99 billion, which would be double the CAGR of overall home furnishings market.

While Arhaus is positioned to rise with that tide, it will also need to take market share from brands with greater consumer awareness, like RH and Williams Sonoma

WSM
and its West Elm and Pottery Barn brands.

“Luxury is a marketing-first business model,” cautions HTI’s Ramey. “It will be difficult for Arhaus to invest the necessary dollars in marketing with its existing 42% margin.”

Mission or metrics?

In the final analysis, what Arhaus considers its greatest competitive strength – responsibly sourced, artisan-crafted products from an international network of 400 vendors – might also be its greatest weakness.

“Arhaus’ greatest challenge to scaling may be its own mission statement – ‘Furniture should be responsibly sourced, lovingly made and built to last,’” Ramey observes.

He questions whether Arhaus’ artisan network has the capacity to lovingly craft enough supply to meet its market share growth objectives. Arhaus’ Reed is quite confident its supply partners can grow along with it.

“We’ve been doing it this way for so long,” Reed responds. “Many of our partners have been working with us for ten, even 20 years, so we work very closely with them. Our forecasts give them plenty of time to build out facilities and hire more craftsmen and train them. In many cases, our partners work exclusively with us. We’re very loyal to them and they are loyal to us.”

The company’s mission statement is right on trend for today’s consumer market – “Our green initiatives have always been a core part of our DNA,” Reed shares.

But Ramey warns the company’s admirable mission that served it well for 35 years may not stand up to competing pressures from investors to scale the company faster.

“The soul of a company is their mission statement, described by Arhaus as a ‘simple idea,’” Ramey concludes. “However managing a public company is rarely simple. Metrics, not mission, drive public companies.”

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