Investors Should Decorate Their Portfolios with Arhaus
Upscale furniture chain Arhaus, Inc. begins trading Thursday (NASDAQ: ARHS)
Arhaus offers directly-sourced furnishings with focus on sustainability
Half of Arahus’s customers have household incomes above $200,000
Priced slightly below indicative range at $13, reflecting $1.8 billion market cap
Revenue grew an annualized 19% since 2019; Ebitda grew at 56% clip
High-end furnishing market forecast to grow 10% annually to 2024, double industry pace
Arhaus has less than 1% of premium segment, giving plenty of room to expand
Company expects to grow from 75 showrooms to over 165 over time
Arhaus benefits as consumers relocate to new states, suburbs
Co-Founder, CEO and Chairman John Reed has been with company for entire 35-year history
Valuation of about 2x 2022 sales, well below Restoration Hardware at 4x
Could potentially be a takeover target with private equity buyers active in the sector
After enduring extended lockdowns, affluent Americans care more than ever about well-appointed homes. Investors now have a smart way to bet on the trend.
Meet premium furniture chain Arhaus, Inc., which begins trading on Nasdaq Thursday (ticker: ARHS) having priced the night before at $13 a share, indicating a market capitalization of $1.8 billion. That was slightly below the expected range, which may present a chance to snag the shares at a great price.
Arhaus is positioned in a segment that’s poised to outperform the broader industry for years to come. As wealthy people spend more time working at home and also leave cities for larger, suburban homes, they want to decorate. Altogether, the premium category is expected to grow 10% annually through 2024 – double the pace of the broader industry.
Arhaus itself stands apart from the pack in several ways that investors should note. First, the company has as a strong focus on direct sourcing and cuts out middlemen. By going directly to artisans who produce the furniture, the company can ensure top quality while also minimizing any concerns about a steady supply. That also means better margins since there’s not a wholesale transaction.
The company is one of a handful of large operators in its segment. The vast majority of rivals are mom and pop outfits that simply can’t compete on brand power.
And yet, there is ample room for the Arhaus brand grow stronger. Arhaus accounts for less than 1% sales volume in the premium segment. What’s more, the company says its own brand awareness is about 30%, considerably below that of four other big players in the category.
One very important way to raise awareness is the digital channel, which is growing fast but has much more room to run. The company makes under 20% of its revenue from online sales compared with 43% at other operators in the segment.
But Arhaus already tops some of those rivals when it comes to order size. The average online purchase tracks higher for Arhaus than for Restoration Hardware or Williams-Sonoma, according to the company’s investor presentation.
The company is wisely using the most popular social media platforms to drive awareness. For instance, it recently reached 1 million followers on its Instagram account. That figure, while strong, also has room to grow when compared to other established players
Younger customers – Millennial and Gen Z – should also be attracted to the company’s focus on sustainability and responsible sourcing. The idea is to produce items that won’t wind up in landfills but be passed down through generations as heirlooms.
The company has also invested in technology to allow customers to visualize pieces of furniture in their own homes. That’s a key advantage especially as many people spend more time doing everything at home – including shopping – in the wake of the pandemic.
Of course, the in-person shopping experience is also critical for many shoppers who want to test out new items before purchase. The company is known for its theater-like showrooms, which have an upscale atmosphere that’s pleasant to visit.
There’s a great opportunity to expand across the country. There are currently 75 showrooms and the company expects at least 165 to open in the long run.
But the company won’t roll out new locations recklessly. It carefully targets locales that have the right demographics and client characteristics after a deep analysis, only adding five to seven per year.
Arhaus also has introduced a smaller showroom format that’s about 4,000 square feet. That allows it to target niche markets without running up major real estate expenses.
Another secret weapon is the company’s team of in-home designers who offer free decorating advice tailored to your home. The service is available both in person and virtually for those who prefer shopping online. The strategy clearly works: Average order values are three times as high when the in-home designers consult clients.
The company will continue to be run by a proven leader with Co-Founder, CEO and Chairman John Reed who opened the first store in Ohio 35 years ago. He has overseen many creative initiatives such as partnering with Italian artisans to offer a very successful luxury product.
All this adds up to an impressive financial performance. Since 2019, revenue has grown at a 19% annualized rate while Ebitda rose at a 56% pace.
Another factor to consider is the possibility of a sale – which should keep the shares supported. Indeed, Hellman & Friedman earlier this year purchased At Home Group Inc. at a healthy premium and other private equity firms are likely on the hunt for strong operators.
It’s also important to remember that Arhaus’s customers are much more resilient to an economic downturn than others. Half of them earn over $200,000 per year and have ample budgets to maintain their homes with top-notch furnishings.
Making reasonable growth assumptions for next year, the company trades at an enterprise value of just over 2 times 2022 sales. Restoration Hardware, meanwhile, trades at 4 times consensus sales, according to Sentieo, an AI-enabled research platform.
Investors can be forgiven for feeling they missed out on Restoration Hardware, whose shares have run up 80% in the last year. But with Arhaus trading at such a deep discount, there’s good reason to get comfy with the shares.
Contact:
John Jannarone, Editor-in-Chief
editor@IPO-Edge.com
Twitter: @IPOEdge
