Arhaus Inc (ARHS) 2021 Q3 法說會逐字稿

Good morning and welcome to the Arhaus third-quarter 2021 earnings conference call. (Operator Instructions). Please note that this call is being recorded and the reproduction of any part of this call is not permitted without written authorization from the Company. I would now like to turn this call over to your host, Ms. Wendy Watson, Senior Vice President of Investor Relations. Thank you, ma'am. You may begin your presentation.

Good morning and thank you for joining Arhaus' inaugural earnings call. On with me today are John Reed, Co-Founder, Chairman and Chief Executive Officer; Jen Porter, Chief Marketing Officer; and Dawn Phillipson, Chief Financial Officer. John will begin with a company overview and operational details. Jen will discuss the status of marketing initiatives across our omni-channel footprint, and Dawn will cover our third-quarter performance and outlook.

After their formal remarks we will open the call to questions. For Q&A, please limit you one question and one follow-up. If you have additional questions, you may return to the queue.

We issued our earnings press release and our 10-Q for the quarter ended September 30, 2021, before market open today. These documents, along with supplementary slides, will be made available on our Investor Relations website at IR.arhaus.com. A replay of the call will also be available on our website within 24 hours.

As a reminder, remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties.

For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors contained in the Company's third-quarter 10-Q as such factors may be updated from time to time in its other filings with the SEC.

The forward-looking statements are made as of today's date and, except as may be required by law, the Company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures and this morning's press release includes the relevant non-GAAP reconciliations. I will now turn the call over to John.

Good morning, everyone, and thank you for taking the time to join our third-quarter 2021 earnings call, our first as a publicly traded company following our IPO in early November. This was an exciting milestone for our Company and I want to thank more than the 1,400 Arhaus team members for working together to get us to this point. You truly are the best in the business and I am proud to be part of such a dedicated team who cares for one another, our clients and what we do.

We had a record third-quarter performance with net revenue in both our retail and e-commerce channels up 69% and comparable growth up over 61% compared to the third quarter last year. Dawn Phillipson, our CFO, will cover our third-quarter performance and the outlook for the remainder of the year in more detail later in the call, but we are extremely pleased with our trends in our business.

Because this is our inaugural earnings call, I will take a few minutes to introduce Arhaus, describe what makes our brand so special and explain why I'm so excited about the growth going forward. I founded this Company 35 years ago with a simple vision, that furniture should be responsibly sourced, lovingly made and built to last.

In order to fulfill our mission, we built a unique model that differentiates us in the marketplace in four key areas and offers multiple strategies for growth. We believe we are in a position to nearly double the size of our business over the next two years and enjoy profitable long-term growth for years to come.

Our first key differentiator is our product. All of our products are designed in-house and sourced directly from leading artisan vendors around the world. By sourcing our own exclusive products we control the design, we control the credible quality, the supply chain and our cost. Through our vertical integration, designs and sourcing model we offer a globally curated assortment of handcrafted products that represent our livable luxury aesthetic.

The second key differentiator is our showrooms. From our very first showroom in Cleveland, Ohio we have always believed that retail is theater. Our showrooms should showcase our product in a way that is both inspirational and aspirational.

When clients walk into our showrooms we want them to envision that it could be an extension of their own home. We put as much detail and attention into our showrooms as we do in our products. And expanding our showroom base represents a tremendous whitespace growth opportunity and significantly builds our brand awareness.

In the third quarter we opened two new showrooms: a traditional showroom in Salem, New Hampshire and a design studio in Burlingame, California. We also relocated a showroom in McLean, Virginia to the Tysons Galleria and converted this showroom into the new format.

We ended the third quarter with 77 showrooms across 20 states. We expect to end the year with 79 showrooms. In the US alone we believe we can grow to as many as 165 total showrooms and our target is to add five to seven new showrooms per year for the foreseeable future.

Within our showrooms we are also growing our in-home designer program that offers clients the complementary service of having a designer personally come to their home. At the end of the third quarter we had 65 designers and 54 showrooms and the average order value when the client purchases through our in-home designers is more than three times greater than the standard order. We intend to at least have one in-home designer per showroom with locations accommodating more than one.

The third differentiator of our omni-channel experience -- Jen Porter will cover our omni-channel initiatives in our detail later in the call. But we will take the same inspirational approach to showcasing our products online and in our catalogs as we do in our showrooms. Our omni-channel approach serves to further increase our brand awareness and represents another level of our growth.

We've only recently begun investing in the visual capabilities and with e-commerce compromising (sic - comprising) approximately 18% of net revenue today we see a significant runway to grow our e-commerce sales as we enhance our omni-channel capabilities.

The fourth key differentiator is our client first mentality. This core value runs through our business. Everything we do, from the way we design our products, build our showrooms, hire, train and retain associates and invest in growth is with our clients in mind. I invite you to visit one of our showrooms and experience our client first mentality and with our incredible design consultants firsthand.

With our tremendous opportunity to continue growing and scaling our business we are closely focused on the current supply chain dynamics and making investments to expand our distribution capabilities. On the inbound side of the supply chain we are working closely with our vendor partners to fulfill orders and ramp up production. Our vendors have been incredibly resilient through the strong demand environment, increasing their capacity, growing with us and further deepening our relationships.

At the same time, we are also expanding our vendor base and bringing in more new products. In upholstery we expect the improvements in lead time with the opening of our new upholstery manufacturing and distribution facility in North Carolina. This facility will double our in-house upholstery manufacturing capabilities.

On the outbound side of the supply chain we are increasing our capacity and expanding our footprint. We have begun a 230,000 square-foot expansion in our Ohio distribution and corporate facilities and -- as well as expanding our offices in North Carolina which we will add another 310,000 square-foot of distribution capacity in addition to [187] square feet of upholstery manufacturing.

In the second half of 2022, we are planning to add a third distribution facility in the western United States where we have significant growth opportunities. Along with our ongoing efforts on the inbound side, the increases in our outbound capacity will further allow us to get products to our clients more quickly, more efficiently, reducing backlogs and shortening lead times.

In summary, we feel very good about the trends of our business and the investments we're making to drive long-term growth. At a time when consumers are spending more and more time in their home, investing in their home and looking for more functional spaces, we think we are very well positioned to continue to gain market share.

The premium home furnishings market in the United States represents a $60 billion opportunity. Today our market share is less than 1% of this large and rapidly growing market and we have multiple avenues and a long runway to pursue sustainable growth.

I could not be more excited about the future of Arhaus. We know our products are unique in the marketplace. We have built an incredible team, incredible infrastructure to grow and to scale our business. Now I'll pass the call over to Jen Porter to review the omnichannel and digital initiatives.

Thank you, John, and good morning, everyone. One of Arhaus' biggest opportunities to increase our market share is to grow our brand awareness. We are in the enviable position of introducing a meticulously crafted and proven heritage brand, grown mostly organically over the past 35 years, to a highly fragmented and arguably underserved market.

In 2019 we began significantly increasing our investment in digital initiatives and brand marketing overall. We developed a test and learn strategy, a balanced brand awareness approach with high return on advertising spend or ROAS driven targeted campaign.

Our focus is on profitable and meaningful long-term growth of the brand. We have a proven ability to drive brand awareness by opening more showrooms and we see continued opportunity by further enhancing and expanding our omni-channel marketing and technology capabilities.

For third quarter we are excited to report healthy client growth over Q3 last year in terms of both existing client numbers and value as well as new client acquisition numbers and value. Our approach to clients is omni-channel. Our direct mail channel continued to perform incredibly well for us with our fall catalog hitting homes at the end of August. We mailed this catalog to our largest circulation ever while achieving a higher ROAS than last year.

We are particularly excited to see direct mail continue to perform not only with our existing client base, but also as a significant driver of traffic to our website and new clients to the brand. Early results for our holiday catalog, which hit homes in the beginning of November, are looking very promising as well.

Q3 saw us increasing our media advertising and partnerships, participating in (inaudible) House Beautiful's Whole Home and Architectural Digest's Iconic Home campaigns, along with continuing to develop and expand the partner influencer program on social media. In September we reached 1 million followers on Instagram.

On the e-commerce front we saw strong e-commerce growth driven by owned, earned and paid marketing efforts. We continue to believe that e-commerce not only drives direct e-commerce revenue, but also serves as a gateway to the brand and a discovery tool for our products.

We are thrilled to be launching our new website this month which will immediately step up our online user experience, allowing us to better showcase our brand and share product knowledge with our online clients. The site will also bolster our product merchandising capabilities as well as position for further optimization throughout 2022 beyond.

Along with other digital initiatives launched this year, such as our 3D room planner, digital catalogs and virtual showroom tour, we believe we have tremendous opportunity to continue to deepen our client relationships and grow our e-commerce business. We look forward to sharing more information about our omni-channel development and growth in future quarters once our new site is up and running. For now I'll toss over to Dawn Phillipson.

Thank you, Jen, and good morning, everyone. As John mentioned, we are pleased with our third-quarter results and the underlying trends in our business. Demand and net revenue were very strong in the quarter. We are working hard to address the supply chain challenges to deliver product in a timely manner for our clients. And we're investing for growth as you've heard from John and Jen.

As a reminder, because our IPO was in early November, we were a private company in the third quarter with minimal tax obligations. For the third quarter net revenue increased 68.7% to $203 million. The growth was driven by increased demand for our products as well as elements of our supply chain beginning to catch up with client demand. We're pleased to announce to comparable growth was 61.3% in the quarter.

Demand remained strong in the quarter as well with demand comparable growth of 28.3% on a one year basis and 72% on a two year stacked basis. Given the substantial demand comp growth that we began to see in the third quarter of 2020, and the corresponding increase in our backlog, we've been focused on reducing delivery times from the peak levels experienced earlier this year. Accordingly, we expected comp growth to outpace demand comp growth in the quarter and our results were in line with those expectations.

Gross margin increased 87.6% to $85 million in the quarter driven by our higher net revenue, partially offset by the related increase in product and transportation costs, as well as higher credit card fees related to demand. Gross margin as a percent of net revenue increased 420 basis points to 41.7%, the improvement reflecting our ability to leverage our fixed costs over higher net revenue.

SG&A expenses increased 66.2% to $68 million primarily from investments to support the growth of our business and corporate and warehouse expenses, higher demand driven showroom compensation expense, increased marketing investment and one-time costs related to the IPO. As a percentage of net revenue, SG&A expenses declined 50 basis points to 33.5%. Interest expense in the quarter was approximately $1 million.

Net income of $14 million in the third quarter of 2021 was up significantly compared to approximately $1 million in the third quarter last year, and adjusted EBITDA increased over three times to $31 million from $10 million in the third quarter of 2020. Year to date through September 30, net income increased to $31 million and adjusted EBITDA increased over $[90] million compared to $14 million and $41 million respectively in the first nine months of 2020.

Turning to the balance sheet, as of September 30, cash and cash equivalents were $149 million and the Company had no long-term debt. Net merchandise inventory was $171 million as of September 30, a 58% increase from December 31, 2020, as we built inventories in response to our strong ongoing client demand.

As I mentioned earlier, while we are focused on reducing our backlog and our comp growth is now outpacing our demand comp growth, demand remains very strong and we are increasing our inventory levels accordingly.

For the nine-month period ended September 30, 2021, net cash provided by operating activities was $143 million. Post-IPO the Company remains in a net cash position. For the nine-month period ended September 30, capital expenditures were nearly $30 million and landlord contributions were $11 million. As a result, Company funded capital expenditures were approximately $18 million for the nine-month period.

Regarding CapEx and investment in new showrooms, this is a good time to point out our strong unit economic model and return on investment for new showrooms. We target an average investment in the new showrooms of approximately $1.4 million with the landlord contributing the balance of the total $3 million to $4 million cost. We expect new showrooms to be profitable within the first year of opening and by year three they have an average net revenue of $6 million with a 27% contribution margin.

As I mentioned, we completed our initial public offering after the third quarter. We used the proceeds from the IPO to pay a $64 million exit fee due under our former term loan that we terminated in December 2020. We allocated the remainder of the IPO proceeds for general corporate purposes, including the replenishment of working capital after the payment of a pre-IPO distribution to Arhaus LLC unitholders.

Regarding our full year 2021 and implied fourth-quarter outlook, please refer to this morning's press release. Underlying our outlook, particularly for net income, is continued expectation that higher freight costs will pressure gross margins in the fourth quarter as higher cost inventory is delivered.

As a reminder, in the fourth quarter we will also incur a $15 million derivative expense related to our former credit facility, $15 million in one-time IPO and reorganization costs, and we will begin to incur public company costs of approximately $3 million per quarter, all impacting SG&A expenses. These items are fully factored into our outlook for the full year and implied fourth-quarter guidance.

Note that going forward we plan to issue annual guidance which will be updated quarterly. That concludes our prepared remarks. Thank you for your attention and we would now like to open the call for questions.

(Operator Instructions). Curtis Nagle, Bank of America.

So, I guess the first one, so one of your competitors obviously reported last night. I think there were some questions around whether they had seen any change in behavior in terms of where people are shopping and what channels or perhaps more demand due to omnicron. I think they said not really, but just curious if you guys had any comments on that and then I'll have just a quick follow-up.

We continue to see demand strong in both channels. E-commerce continues to perform really well as it has throughout COVID, but showroom traffic has picked up as well. So, we aren't seeing meaningful trends differentiating in the third quarter or fourth quarter to date based on the new variant.

Okay, fair enough. It's still very early, so that makes sense. And then just -- forgive me if I missed this, but in terms of when we are thinking backlog peak, is it I guess fair to assume kind of mid next year or -- how is that looking right now? And how that may be changed in terms of your expectations say from three months ago?

Yes, our expectation for the backlog is consistent with how we were thinking about it a few months ago. We continue to see really strong demand, as we noted in the press release. And based on that strong demand and continuing freight constraints, we do expect that backlog to remain elevated and we will work through it throughout 2022.

We're not seeing significant increases in cancellation rates, so clients continue to be willing to wait for the merchandise and the product. So, we feel confident in our strategy. We do continue to be opportunistic and bring in product as quickly as possible in a financially prudent manner. So, we think our strategy is working and we'll continue to closely monitor cancellation rates, but to date we feel good about how we're handling it.

And Curtis, just to add to that, we do expect the backlog to continue. However, the amount of wait time the clients have continues to get a little bit tighter. So, in other words, they don't have to wait quite as long as they did six months ago. And that's really the key that we're looking at is we may not be 100% in stock, but you don't have to wait X amount of time, which, as Dawn just mentioned, we're seeing clients are used to that.

They've been trained around the world to wait now for two years for things, almost. So, they're willing to wait, they know it's product they are investing in their home, not throw-away product. So, it will be there long term for them.

And just to clarify, you guys are not seeing an increase in cancellations. Is that correct?

That's correct, Curtis. Those remain lower than pre-COVID rates.

Jonathan Matuszewski, Jefferies.

Congrats on the strong quarter. I had two questions. First one is on just promotionality. I think a key question in retail these days is how sustainable the pullback in promotional posture is once COVID fades. So, maybe just take a chance to share management's confidence in being able to see success with more full price selling in a future backdrop where there may not be a pandemic and there may not be long lead times. Just maybe talk to that dynamic. Thanks.

Hi, Jonathan. This is Jen Porter. We feel very confident in our current approach. We actually started pull back on promotional activity back in 2019, so pre-COVID, and we were seeing really strong responses to it at that time. It really allows us as a brand to focus more on the quality of a product, the stories of our artisans, the uniqueness of what we are offering to our clients and we see really strong responses to that.

Our clients are looking for that quality aesthetic and they're willing to pay for it. So, we have continued to pull back on promotions throughout the COVID time period. We do still run promotions time to time, particularly over three-day weekends, but we think that pullback can continue going into 2022.

Great. That's helpful, Jen. And then I guess, Dawn, just a follow-up question on freight costs. Curious how those are trending in October and November against maybe initial expectations you had for 4Q. And not looking for specific guidance for next year, but just directionally do you think freight costs as a percentage of inventory should still be higher versus the recent trend? Or do you think it's practical that maybe that ratio could be more flattish or even down next year? Thanks.

Sure. We continue to be opportunistic and really thoughtful in our approach to inbound product between bringing in product at the spot rates and the contracted rates. We don't have any material changes to the forecast for -- with regard to freight increases. I think we were appropriately conservative with how we thought about those for next year.

We are seeing a little bit of favorability in the fourth quarter relative to what we had provided a few months ago, but, that being said, the freight industry continues to be volatile. Until we have a very clear line of sight into any favorability that would be ongoing, we're going to hold steady with how we're thinking about 2022.

So, the gross margin rates for the fourth quarter I would expect somewhere in the 38% to 39%, so slightly better than where we were anticipating a few months ago.

And Jonathan, just to add to that, keep in mind -- you may or may not know, but over half of our product is purchased here in the United States. So, we have not seen significant increases in freight costs like the containers are. So, that's, we think, a competitive advantage of ours.

That's helpful. Thanks for the color and best of luck for the rest of the quarter.

Peter Keith, Piper Sandler.

Thanks, good morning, everyone, and congrats on the first quarter out of the gate here. I wanted to ask about the new North Carolina facility with the upholstery production and DC capabilities. Could you give us the timing on when you expect that's going to open? And then are you seeing any potential delays just as it would relate to hiring or buildout?

Sure, I can take that, Peter. The building is built. We're actually getting permits hopefully this week or next week. We fully intend to be in there before the year is out -- putting product in there and getting going. As far as the team goes, they are almost hired. It's been a great response. It's a great building to work out of. We give great benefits and so forth.

So, we are pretty well almost fully staffed, so we're excited to go. We moved a few people down from Cleveland to help manage it and so forth. They have been down there for a month or so and we're ready to go. We're just waiting on one inspector which we hope to hear from very soon.

Great, okay, that's exciting. And maybe a separate question I'll direct to Dawn on the model. So, a really nice increase in the outlook for Q4 versus what you were looking for earlier. We are looking at, I guess if our math is right, midpoint raising revenue by about $14 million, raising EBITDA by about $6 million. So, it's a really healthy mid 40s contribution margin if our math is right. Is there anything unique about Q4 that allows you to get that type of margin or is that something we could see in later quarters as well?

We're continuing to work through the backlog. Our strategy to bring product in at some of those higher spot rates, you're seeing some of that on the top line flow through. We're also -- have worked really diligently in the warehouse and with our third-party providers to expand the capacity flowing out of our existing headquarters building. So, we're really pleased with where we expect the fourth quarter to come in and hopeful that we'll be able to continue that cadence.

Okay, sounds great. Good luck with the holiday season.

Simeon Gutman, Morgan Stanley.

My first question is on sales. Can you talk about how you've characterized the underlying momentum of the business? Do you feel like it's accelerating, do you think it's holding? It looks like the top end of your sales guide implies a modest acceleration in the way we calculate this geometric stack. But curious if you think that's -- is that fair or do you think things are getting sequentially stronger?

Hi, Simeon. So, while we don't provide guidance on demand, we haven't seen any meaningful change in demand trends in the fourth quarter on a two-year stacked basis. We are facing larger year-over-year comparisons in the fourth quarter, so we are looking at it on a two-year stack basis.

I will note that similar to what we anticipated and saw in the third quarter, we would expect comp sales growth to outpace the demand comp growth as we continue to work through the supply chain constraints and deliver against the backlog of orders. But demand continues to be healthy and we're pleased with what we're seeing in our client base.

Okay, thanks. And then my follow-up on adjusted EBITDA, so in the fourth quarter, despite the revision higher, still looks like it will be down year-over-year. And we know why, investment and maybe some freight pressure. Can you talk about the drivers between those two when we sort of lap them both?

And then whether there's anything different in timing as far as the investments go, whether they're shorter in duration, longer duration and when we might see EBITDA flip? I know I'm not trying to get quarterly guidance for next year, but just conceptually when will you see EBITDA growth year-over-year?

As we think about the investments we're making in the business, in the fourth quarter we're going to see the expenses and the investment in North Carolina and some IT initiatives come into play on the P&L. And as we think about next year and onboarding a western distribution center that is larger in size than North Carolina, it will take time to start to see some leverage on those.

We don't expect to come out of the gate on both of those facilities with everything running smoothly at 100%, so we have thoughtfully forecasted a ramp up out of those facilities. So, I think you can kind of think about the timing of those as a scale, [a slope].

And then as we think about freight costs, I mentioned earlier we are forecasting those to remain elevated through next year. So, we have line of sight into those clearly coming down consistently. It's just prudent for us to expect those to remain elevated.

Okay thanks. Happy holidays. Good luck in the in the fourth quarter.

[Andrea Yi], Barclays.

Good morning and congrats again on your first quarter out of the box. Very successful. John, I was wondering, or Dawn, can you discuss the price increases that you took early fall? I believe it was in the high single-digit range. When did you take them, what was the customer reaction? Clearly doesn't seem like any noticeable impact on demand. And what's the opportunity for 2022 further increases?

And then, Dawn, if you can talk about -- what is the assumption for spot versus contract in your fourth-quarter guidance? What does it look like for Q1? And does Q1 have any more or similar pressure on freight and inventory deliveries? Thank you.

Sure, I can start with that. Yes, we did take price increases. We have not seen any -- much demand falling off if any. The clients seem to be fine. Sales teams adjusted to it and it seems like it's good to go.

As far as the future goes, your guess is as good as mine. Prices are going up all over the place. We think things stabilize quite a bit from beginning of this year where lumber prices were two or three or four times higher and then they came back down.

At least things aren't -- don't seem as volatile as they were. So, we're hopeful, as I'm sure everybody in the world is, that inflation will get under check here. But if we do get price increases we intend to pass them along, raise prices and really protect our margin.

With regards to the spot versus contract rate, it varies by origin and it really is contingent on what's going on at each individual port. What I'll say is that the fourth quarter is relatively consistent with how we approached it and the rates that we -- or the percentages between spot and contract that we deployed in the third quarter.

We are forecasting those to continue throughout 2022, but it's really just contingent upon container availability and what's happening at each individual port, which, as you know, is not just subject to Arhaus shipping. So, that's how we forecast it. We think we are appropriately conservative in 2022.

Okay, thank you very much. Best of luck for holiday.

Peter Benedict, Baird.

I guess my first question maybe for Jen, just on the new web platform that's going to be launching here later this month. Just curious, maybe you can expand on maybe two things. One, as a customer what are we going to see maybe that's most notable or most different? And then what is it really going to allow you to do, I guess, next year that you have not been able to do in the past, whether it be through data analytics or --? Just what would you call out as the biggest deliverables there? That's my first question.

Yes, we're really excited about the new site launching. We're in final testing mode right now, so coming very quickly. I think the biggest thing that we're really excited about for the immediate impact is just the huge step up in customer user experience. So, really focusing in on that immersive, creative content and imagery and storytelling, and really working to bring the Arhaus brand to life on that digital channel.

I think one of the most amazing things about the Arhaus story as you look, this brand has been getting -- being built for 35 years and our showrooms, we know what happens when clients are in there. And we've had a good site experience, but we're really excited for clients to be able to really deep dive into the brand, into the product, get that wow factor when they see imagery and then get into the details of the story.

And then also making for shopping and the purchase journey easier and more seamless and ultimately less stressful for clients. So, we're excited about things like navigation and merchandising capabilities to really help that client journey as they're starting to explore the product, get the information that they need, find other products that they might like. And really be able to do that in their homes and then be able to connect that to their -- and showroom experience or do the entire thing digitally online.

Looking forward to next year, I think with the re-platform, really excited about the increased analytics capabilities and backend functionality. So, over time really being able to lean more into [AI specific] product discovery, content personalization and the like. Analytics will really allow us to understand how clients are engaging with the platform so we can constantly test and improve conversion optimization and opportunity. And really just getting to know our clients better.

And then probably -- I know you only asked for next year, but I think the other really key thing for us is it really just improves our speed to market for new innovation as well. So, we really see this as a great step up and that's going to be an immediate impact on our e-commerce business. But it's really setting us up for success in the future to stay at the head of enhancements that we can make to that online part of our business.

All right, that's great content. Thank you. And I guess maybe somewhat related, circling over to brand awareness. And just curious some of the strategies around that. I know opening the showrooms on their own drives some brand awareness. But maybe talk about your plans from a marketing perspective, where you are allocating your spend over the next year or two.

And just how your brand awareness sets up right now nationally, and maybe if there's any pockets regionally that are particularly strong or underdeveloped. Just any context around that and your plans for driving brand awareness would be helpful. Thank you.

Definitely. Yes, I think you nailed a big one. Our showrooms are just such an incredible new client acquisition vehicle for us. They introduce the brand to new pockets and markets around the country. And so, we've been seeing incredible success with that. We've been opening up new showrooms. We have additional new showrooms planned for next year and we're excited to continue the support that.

We are very purposeful about the marketing support we put around those showrooms. So, it's great knowing that we have this key tool in those markets. We can really amplify our efforts of digital marketing, catalogs, social media in those markets as well to amplify those effects.

I think overall though as we're thinking about brand awareness, we really look at it as an omni-channel opportunity and holistically across the marketing mix. So, within our direct mail program, we are very focused on our prospecting audience and have really been working over the last few years to increase our prospecting circulation and getting these incredible introductions to the brand into the homes of clients. And we've been really excited by the results we've been seeing this year and looking to continue that next year.

Digital marketing and more broad based marketing is also a great opportunity to support what we're seeing. But I think there are also -- we touched a little bit on the call about some of our partnerships and media efforts. We really haven't done much [about this] brand before. Arhaus really grew relatively organically for 35 years. And so, we're just at the beginning of investing in those areas and really looking to continuously try new things and test and optimize upon what works.

And then social media and influencers -- I noted we hit 1 million followers on Instagram in Q3. And we just see so much runway potential in those areas, both in our own channels, but also partnering with influencers and partners just to spread that message to a wider audience. So, we have a lot of levers to pull and I think we're really excited just to continue playing and pushing into those and seeing what works the best.

That's great. Thanks so much and good luck.

Cristina Fernandez, Telsey Advisory Group.

Congratulations on your first report here. I wanted to ask also on supply chain, but specifically on Vietnam. What are you seeing there from your partners as far as production and perhaps any color you can share on your exposure and the ramp up in manufacturing out of the country?

Yes, Vietnam has been -- has probably been one of the sorest subjects over in Asia. They were basically shut down for quite a while. They are up and running now and we believe that our shipments will be pretty much on time going forward here.

One thing to note is Vietnam is a very small part of our business. I think we only have two or three vendors there. So, it hasn't impacted us much at all. We had pretty good inventory stock, so we're not seeing a decrease in sales in just Vietnamese products, whereas I'm sure, if we had a lot more eggs in the Vietnam basket, it would be a whole different story.

Thank you. And then my second question is on stores. Perhaps you can talk about your store pipeline for next year, I guess any locations that you're particularly excited about? And anything to note on the performance you're seeing out of your design centers, the smaller format stores? I know it's just a few, but any color there would be helpful.

Sure. Yes we are constantly working on new stores. I think the guidance has been we are going to open five to seven. We feel confident we'll be in that range. We're not giving out locations at this point. As far as design studios, we've only had one open the whole year, very happy to see the results of that one. We've had another one open for a few months and another one open a few weeks.

So, the newer ones also have started right out of the gate pretty strong on demand sales. Of course to turn those into actual sales usually takes a little bit just for the backlog and so forth. We do have two more design studios being open before the year is out, so we'll have five in total by January 1. After that we're very excited to really tweak them, merchandise them, re-merchandise them if we need to, learn a lot into 2022. And then from there we'll see if we can really grow that business as well as the regular stores.

Steve Forbes, Guggenheim Securities.

Maybe for Jen, curious if you could discuss any client demographic or client engagement differences that you're seeing within the new customer base relative to the existing base. I think you mentioned something in the prepared remarks here about the new customer growth. So, just curious if you're seeing anything notable to call out.

Yes, so we've been really excited by our new customer growth over the last 1.5 years and we continue to see that. So, that is really exciting. It's really too early to have a full picture as to how those clients are behaving relative to clients who joined the business earlier. But really the initial result is that they're spending more than new clients were before COVID, but we are seeing that trend in our existing client base as well.

And currently their behavior, their repeat behavior seems like it's very similar. So, we're going to be continuing to monitor it and pay very close attention to it. But overall it's looking like they're coming in and being really great clients to our brand.

And then maybe just a quick follow-up on the in-home designer initiative. Can you update us on the percentage of demand generated from that group, your hiring plans for the next couple years, and whether the average order value generated from those designers has changed at all relative to what was discussed during the IPO process?

So, the AOB we said earlier, a few months ago, is over three times that of a non-income designer assisted sale and we continue to be consistent with that. When we think about their penetration, we are seeing increases in that program relative to where we were at last year. So, we're really pleased with how that program is continuing to perform.

We will continue to expand that program. By the end of this year we'll have several more in place and then next year we'll continue to ensure that our existing store fleet has the appropriate staffing levels and all new showrooms will also have this program deployed as well. So, we're really confident, we're excited about this program and it seems to be working really well for us.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Ms. Wendy Watson for closing remarks.

Thank you, everybody, and we will look forward to talking to you again next quarter.

Happy holidays, everyone. And thank you for your time.

Thank you, everyone, for your participation on the call and interest in Arhaus. We look forward to speaking to you next quarter.