ARHS - NASDAQ

Good morning, ladies and gentlemen, and welcome to the Arhaus First Quarter of 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal remarks. 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 will now hand the call over to your host, Wendy Watson, Senior Vice President of Investor Relations.

Good morning and thank you for joining the Arhaus first quarter 2023 earnings call. On with me today are John Reed, Co-Founder, Chairman and Chief Executive Officer; and Dawn Phillipson, Chief Financial Officer. John will start with a summary of the main points we made in this morning’s press release along with operational details. Dawn will cover our financial performance and outlook for the remainder of 2023, and then they will be joined by Jen Porter, our Chief Marketing and E-commerce Officer for the Q&A session. During Q&A, please limit to one question and one follow-up. If you have additional questions, please return to the queue. We issued our earnings press release and our 10-Q for the year ended March 31, 2023 before market open today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will 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 described in our annual report on Form 10-K and subsequent 10-Qs as such factors may be updated from time-to-time in our filings with the SEC. The forward-looking statements are made as of today’s date and except as may be required by the 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 reconciliation. I will now turn the call over to John.

Good morning, everyone, and thank you for joining us today. I will keep my comments today brief providing a few highlights on our first quarter performance. We are very pleased with our first quarter 2023 results, delivering net revenue of $305 million a 24% increase over Q1 last year. Comp growth of 21%, an increase in net and comprehensive income of 112% and an adjusted EBITDA increase of 76%. Demand comp growth in the first quarter was 5.6% with March sequentially decelerating to a flat demand comp. Following high-single-digit demand comps in January and February. In April, our demand comp remains flat. As we discussed with you, when we reported last quarter, our focus in 2023 is investing in the long-term growth in showrooms and systems that will fuel that growth, while at the same time continuing to prioritize products, building brand awareness and putting our clients first. In the first quarter, the key performance drivers include our product assortment and our marketing campaigns. From a marketing perspective, we are very pleased with our current campaigns. We are very excited for our plans throughout 2023, including some great new partnerships and the support and emphasis we place on marketing our new showroom openings. Speaking on our growing showroom footprint, I am pleased to update you on the progress towards opening 12 new showrooms this year. We opened one new one in a design studio in Ashville, North Carolina on March 10 and in Naperville, Illinois on April 14, as well. In June, we expect to open a new showroom in Topanga, California and a new loft location in Dallas -- in the Dallas area with the remainder of our eight additional expected new showrooms openings in the second-half of the year. Our renovation, relocation and expansion projects are all proceeding as expected. And we're very excited about our new relocation showroom we just opened last week in Towson, Maryland. Moving to supply chain. As we are well positioned on both the inbound and outbound elements of our supply chain and in most cases our product lead times are back to pre-pandemic levels. Our expanded distribution footprint along with the systems capabilities we are implementing will support our growth for the next seven to 10 years. One example of these capability enhancements is our warehouse management system we began implementing last month, which will enable us to move product through the supply chain more efficiently. To share further operational details, I'm very excited about the past two days I just spent at our upholstery production facility in North Carolina. The facility combines state-of-the-art production machinery and tools with skilled upholsters, crafting the best upholstery pieces available anywhere in the world. I was at the facility with our product development and regional sales team leaders. And I'm impressed and inspired by the enthusiasm of these incredibly talented teams coming together to brainstorm and to work on future collections that we believe our clients will love. Turning to our outlook, as we announced this morning, given our solid first quarter 2023 performance, we are reaffirming our full-year outlook and Dawn will share these details with you. In summary, I want to reiterate how pleased we are with the start of 2023. The client reception we have seen to our new products and the progress we continue to make in our showroom growth. As we look to the future, we remain confident in our strategy with a balance sheet that is well positioned to navigate any macro choppiness. And focused on delivering long-term growth and shareholder value. Finally, I want to thank our team for focusing -- for continuing to focus on our clients first. It is truly astonishing to me how you have pulled together over the past few years of tremendous growth between 2019 and 2022, our net revenue grew 149%. Our net income grew 762% and our adjusted EBITDA grew 346%. In just the first quarter of 2023, our net income and adjusted EBITDA surpassed all of 2019s net income and adjusted EBITDA. This is a testament to your commitment and I'm incredibly proud of all of you. Now I'll turn it over to Dawn.

Thank you and good morning. As John described, our business continues to be resilient and we are pleased with our operational and financial performance in the first quarter. Key items from our first quarter 2023 income statement include: net revenue of $305 million, comp growth of 21% and demand comp growth of 5.6% on a one-year basis, 13.9% on a two-year stack basis, 104.2% on a three-year stack basis, and 101.7% on a four-year stacked basis. We thought a four-year stack could be helpful to compare to demand pre-pandemic. During the quarter, we saw strong revenue growth in both our showroom and e-commerce sales channel with our showroom channel up 23% and our e-commerce channel up 25%. Our net revenue growth was driven by both demand and the continued delivery of orders in our backlog. Our first quarter gross margin increased 31% to $128 million in the quarter, driven by our higher net revenue partially offset by higher variable costs related to the increase in net revenue, including products, transportation and variable rent expense, as well as higher fixed showroom costs and higher credit card fees related to increased interest rates and demand. Gross margin as a percent of net revenue increased 240 basis points to 42%, primarily reflecting favorable product costs and our ability to leverage our fixed showroom occupancy costs over the higher net revenue, partially offset by higher variable showroom costs and transportation expense. First quarter SG&A expense increased 11% to $83 million. The increase was primarily driven by higher corporate expenses to support the growth of our business and higher selling expenses related to new showrooms and demand, partially offset by lower product storage fees. As we have expanded our warehouse capacity and delivered more of our backlog. SG&A expense as a percentage of net revenue decreased 320 basis points to 27%, primarily driven by leverage on fixed costs on the 24% net revenue increase. First quarter 2023 net income increased 112% to $34 million. Adjusted net income in the first quarter of 2023 increased 101% to $34 million, compared to adjusted net income of $17 million in the first quarter of 2022, primarily driven by the factors just described. Adjusted EBITDA in the quarter increased 76% to $55 million from $31 million in the first quarter of 2022. First quarter 2023 net revenue of $305 million and adjusted EBITDA of $55 million resulted in an 18% adjusted EBITDA margin in the quarter, an increase of 530 basis points year-over-year. Turning to the balance sheet and cash flow. As of March 31, 2023, cash and cash equivalents were $145 million and the company had no long-term debt. Net merchandise inventory was $292 million, up 2% from December 31, 2022, and up 18% year-over-year as we continue to build inventory in response to client demand and as inventory value has increased due to higher freight and product costs. Client deposits decreased to $198 million, down $5 million from December 31, 2022, and down $108 million year-over-year, primarily due to the improved delivery of orders in the backlog and lower demand comp growth relative to prior period. For the three months ended March 31, 2023, net cash provided by operating activities was $8 million and net cash used in investing activities was $8 million with landlord contributions of $1 million. As a result, total capital expenditures, net of landlord contributions were approximately $8 million in the first three months of 2023. Let's move now to our outlook. As we announced this morning, we are reaffirming our full-year outlook for 2023. We continue to expect full-year net revenue of $12.4 billion to $1.3 billion, representing growth in the range of 1% to 6%. Full-year comparable growth in the range of negative 4% to positive 1% net income of $95 million to $110 million and adjusted EBITDA of $180 million to $195 million. Our outlook reflects the expectations that we will continue delivering our backlog through 2023, achieve a demand comp range of negative 1% to up mid-single-digits. And carefully manage our expenses, even as we continue to invest in growth, including new showrooms, marketing, product development and investments to enhance omnichannel and technology capabilities, including information technology and systems infrastructure, all of which are expected to accelerate brand awareness, support growth and generate efficiencies from scale. We remain confident in our full-year guidance, understanding there may be some variation in our original first-half and second-half assumptions. For example, first-half net revenue may be up low-teens versus the high-teens we originally expected, based on the cadence of delivery and demand trends. And given Q1 EBITDA margin performance, first-half EBITDA margins could be up greater than the 100 basis points we initially guided to. But overall, we see nothing to-date causes us to modify our previously issued outlook for the year. For all other details related to our results and 2023 outlook, please refer to our press release. In closing, we are pleased with our first quarter performance and despite an ever changing macro environment, we believe our strong debt free balance sheet coupled with a strategic growth plan to build on our share gains in the highly fragmented $100 billion premium home furniture market position us to weather any economic cycle and emerge in an even stronger position. Poised to deliver on our longer term growth plans and drive value for all stakeholders. Thank you for your attention and we would now like to open the call up for questions.

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from Steven Forbes of Guggenheim.

Hi, this is [Indiscernible] for Steven Forbes. And thanks for taking our question. I wanted to ask a question on the product line up, how are customers engaging with the nearest just, kind, of given the environment? And then very quickly touch on the real estate pipelines, our understanding that it's the largest number of showroom projects in your history and just given the market out there for real estate. What you're seeing, anything from landlords and incremental negotiating leverage? And if you could please touch on and give us an update on what those pre-opening costs are looking like, that'd be great. Thank you.

Good question, [Steven] (ph). Good morning. Yes, the answer to your question on the product, response has been phenomenal. We've launched some -- we think some very creative, very exciting products that our clients are really responding to. It's not only well designed, things that no one has ever seen anywhere else literally in the world. It's a great value for what it is. The really hot stuff is really more handmade things, very unique things, that people responding to. We're thrilled with our new launches and we see them continuing throughout the year. As we expand into more SKUs, more sizes, more categories of similar looks of some of this product. As far as landlords go, yes, as you know, we do have the largest opening -- store opening ever. Those deals were done mostly during COVID, when landlords were a little anxious on their showrooms. So we feel we've got a great value going. These are A plus locations, their centers tend to be 100% filled. It's not like they're struggling to look for tenants. I still believe the retail locations are key to our business and to our growth, but we're really focusing on great locations. So some of the rents aren't as cheap as going to B or C locations, but you get our traffic of our clients. They live in there. And they visit it many times a month and it's working for us. So we're happy with everything from how we negotiated the leases. What we're paying. We think it's very, very fair. And like I said, most of those were done during COVID, because we need to be at least two years out on getting new stores open at a minimum.

Great. Thank you. And just very quickly, just on pre-opening expenses and just start-up costs for new stores. Any color you can provide on that would be great. Thank you.

Good morning. This is Dawn. So we haven't disclosed what the pre-opening costs are, but we did say there would be a drag in the second-half of it just as it -- we're thinking about the length of time it takes to open a new showroom and when that rent starts to be incurred on the P&L. So there is some compression in the back half related to the new showrooms that we are opening next year as well this year.

And as far as cost, obviously as we all know everything went up in price. Labor, materials, light fixtures, wood. Everything has really gotten much more stable though, we found this year. So we know what our costs are in other words. No surprises at all. Our construction guys are hitting deadlines, we see no delays right now that we can foresee in anything. All the pieces and parts are coming together. But certainly, yes, things cost more than they did three years ago for sure. As everything did, it does, I should say in this world right now. But we've already factored all that in and that's all part of the plan.

Awesome. Thank you.

Thanks.

Thank you. The next question comes from the line of Peter Benedict of Baird.

Hi, guys. Good morning. First question just on the first-half low-teens versus the prior high-teens view. Just maybe talk a little bit more about that? I mean how much of that is the demand environment you're seeing? How much is maybe backlog, fill, sliding into the second-half? And as you think about the second-half, are you still thinking down high-single-digits or does that benefit from the shift or should we be thinking, kind of, lower end of the revenue plan is probably more likely at this point? That's my first question.

Good morning, Peter. So the first-half we expect some of the backlog to push into the second-half. Really, it's dependent upon a variety of factors, including a lot of clients are continuing to build and remodel and are not quite ready to take the product into their home yet. And then we've also seen a really nice acceleration in the number of large orders that we've had over the last few years. And so some of those clients while we may have the majority of the pieces for that order, we're waiting on one piece. So in order to be as efficient with the client as possible, we're waiting for that one piece to be receded in and then we can deliver it to their home. So those are a couple of the larger reasons that it will cause some of that backlog to push into the second-half.

Okay. Thanks. And then just on the demand being flattish at this point. Can you talk a little bit about, I don't know, is there a regional tone to that shifting down? I mean, obviously, it's expected that you're going to see your demand moderate, but just any color on what you're seeing around demand would be helpful. Thank you.

Yes. We haven't seen anything too meaningful from a regional perspective. I will say there was a little bit of noise perhaps in the California market in March, in particular. John or Dawn, do you want to add any color on it?

Well, a big part of that was weather. They were getting those huge, huge rainstorms. And I think that slowed a little bit down. But yes, we haven't seen anything. Normally, the Midwest is a little more cautious in times of uncertainty than the rest of the markets, but it's a very small, small -- very small percent. And yes, I mean, we're being 149% up over the last few years being flattish, we're pretty excited about that. And like I said, we're getting set to getting all these new stores in place, getting this new product in place. We're renovating quite at these stores on top of the 12 are opening, where we're really setting ourselves up for a great position that when people really start booming and the economy starts booming, again, we're set to capture our share of that market.

That's helpful. And I guess my follow-up would just be on inventory, up 18% year-over-year. You're adding stores clearly. Just talk a little bit about the complexion of the inventory, how you feel about it, what your plans are for the balance of the year in terms of adding inventory. And in the event that demand continues to moderate further than you expect your kind of promotional plans for the year, how you're thinking about your marketing approach.

Sure. So I'll start with the promotional cadence. We feel confident in our product assortment offerings and how we have positioned ourselves from a price perspective. That being said, we certainly have promotions as a lever if we choose to deploy those. We chose not to in March and April and still came in quite nicely, flat comps. So feel good about where we're positioned, recognize that we have some dry powder if we choose to exercise that. From an inventory perspective, we -- our lead times are coming down from a receded in perspective relative to where they were before. certainly as high as a pandemic. So that provides us a little bit more flexibility as we're looking out into the next 6, 12 months. We are very vigilant with our inventory. We're paying close attention and analyzing where we're at a very detailed level. A significant amount of our inventory still is at that higher freight cost rate as well. So keeping that in mind is that's going to flow through the P&L this year. We did bring on a new SVP of Planning about 6 months ago who's been really helpful in helping us to understand and kind of engage with vendors and analyze our inventory position. And I think we've mentioned this in prior calls, we're also looking to deploy some planning software that's really going to help our team be able to be a little bit more efficient and effective with the inventory planning over the coming months. So more to come on that, but at this point in time, we don't see any inventory issues that would cause us to have significant margin degradation for the year.

Thanks so much. Good luck.

Thank you.

The next question comes from the line of Peter Keith from Piper Sandler.

Hi, thanks. Good morning, everyone. Maybe just to follow up a little bit on the last question with promotions and the like. You did call out lower product costs as a key driver to the nice gross margin expansion. And I'm wondering if you could unpack that a little bit more. Are you holding price and then your suppliers are lowering price. Is that just a one-quarter benefit? Or is that something that has potential to continue as the year progresses?

Sure. I can start that, Peter. Good morning by the way. The -- I think a lot of the costs we're seeing is really in the freight. The freight costs have come down so much from last year. Granted, we still own some inventory at that freight cost. But obviously, every day, we're delivering that. And then any of the new product that's coming in is at the lower freight cost. As far as our vendors go, we've seen a little bit of decrease in price, but the good thing is we haven't seen anybody increasing prices certainly this year. So we've held very steady with that. We're constantly out negotiating as we -- as some of our new products surprise us, and we're selling more than we had even thought the manufacturers get a little more efficiency as they make a little bit more at a time and they're certainly passing those savings on to us. But it's not a huge amount. So we see throughout the year, as we sell down on this inventory that we paid so much in freight, that certainly is going to help the margin.

Okay, that’s helpful. Thank you.

Hey Peter, just to add in a little bit. So the 2 percentage point favorability versus last year on product COGS, that's really a combination of freight product mix? And then also, keep in mind that with the North Carolina facility really ramping up, our cost is at a landed cost. So as you think about all the upholstery that priorities to incur cost to come up to Ohio, it's now basically just going kind of across the street, down the street. So there's also some favorability from that. So as we move through the year, we would expect to continue to see favorability from the upholstery facility, product mix freight, it's really going to be contingent upon the product mix that is being delivered and the timing of when we received that in. So we do still have a substantial amount of inventory at above 20% freight cost as a percent of inventory. So just to give a little bit added context there.

Okay. All right. That's helpful and encouraging. Maybe, Dawn, I'll stick with the next question for you. The -- just jotting down notes that you were laying out with the guidance. I think on the demand comp, if I'm not mistaken, you say that you would expect the full year to be down 1 to up mid-single digit.

That's correct.

So just thinking about if Q1 was good, but a little bit of slowdown. I guess it does imply some reacceleration as the year progresses. Can you just give us a sense of that, are we thinking about like stack trends and holding stock trends? Do you have some initiatives you think can reaccelerate the demand? Just maybe get us a little more comfortable with the potential improvement in the months to come.

Yes. So we have a lot of exciting marketing initiatives, which I'll hand over to Jen. We're investing more this year in additional touch points and excited for that. I mentioned we have some dry powder with promos if we need. If we choose to exercise those. But the first quarter was mid-single digits, so up really nicely. We think there are some things that occurred specific to probably March and April that kind of pulled down the comp a little bit. But still, we're really pleased with that first quarter comp. I mean mid-single digits is great. So I don't know, Jen, do you want to talk about some of your marketing up for this year?

Yes, sure. Hi, good morning. As Dawn said, we're really excited by the responses we've seen to our marketing so far this year and then also what we have planned for the rest of the year. To touch on a few things on prior calls about being a little bit more aggressive in going out after some new client acquisition and prospecting, in particularly through our direct mail campaigns. We're really pleased with the results we saw both the January campaign, which hit homes at the end of December and then also our March outdoor campaign that hit homes in the beginning of March. Our summer campaign just hit homes end of last week, beginning of this week. So really anxiously looking forward to seeing the results off of that as well. But really, really pleased, particularly with the response from that new client acquisition. As John mentioned earlier, we're really seeing incredibly strong response from clients as they get introduced to the brand, people responding to the storytelling, they're responding to the quality of our products. They're responding to the ads and craftsmanship, how unique the product is. And we're really, really encouraged by that looking forward. I think in terms of other marketing initiatives, continue to be really optimistic about what we're seeing in the digital space. As I've mentioned on prior calls, and I think everybody in the industry mentioned digital marketing has been tough over the last few years. Costs are going up, having to pay really close attention to campaigns. But we have an incredible team in-house who has incredible relationships with the various players in the market. And really, happy with the performance that we're seeing. The teams are managing those campaigns on a daily basis to really optimize the performance. But really getting cautiously optimistic and excited about some new campaigns and initiatives and tactics that are coming down the path as well, just as we think about getting our story and our product in front of the right people at the right time in their journey. When we get them on the site, too, we're seeing really good engagement there. So we're seeing great traffic to site and great sales on the site. But also really excited by the length of time people are spending exploring products. And as you know, we've really been investing in the rhouse.com experience and the digital experience as a whole really as a lever and a channel and a way to connect with customers for that omnichannel experience. We see the majority of our clients are engaging with us digitally regardless where they're purchasing. So we really see that as an investment and an opportunity to continue to bring clients into and convert sales, both online and in stores. In terms of experiences then, last year, we're really excited to launch our partnership with the SurfLodge in Montag. We are really pleased with how that came about and how the summer turned out to really find exciting opportunities to get our products literally a bunch of new prospective clients, people sitting on them engaging with that product. So we're really excited to continue with that partnership this year. And then we've also partnered with the white elephants in Nantucket. The White Elephant hotel is an iconic property in Nantucket. They're actually celebrating their 100-year anniversary this year and have done an incredible renovation and refurbishment of the space, and we'll be positioning our outdoor products around their property. So starting Memorial Day, clients will really be able to experience that. A really cool assortment inspired by Nantucket of our great tie New England collections, and we're able to partner with them to custom create some cushions in the iconic white elephant blue fabric as well and a great performance fabric. So really excited about that. Obviously, Nantucket is beautiful, but looking forward to being able to share more details about that on future calls. We've also really been exploring and building out our partnerships with influencers with designers, with personalities, partnering with trade and just really a lot of great things coming down the pipeline this year. And then I think it's important to just to stress how excited we are about the new store openings. As we've mentioned, with our brand awareness, new stores continue to be the number one driver of new brand awareness within clients. People see the showrooms, they get drawn into the showroom, they get engaged with the product. And number two is recognition from friends and family. So as we see all of these new stores being opened there just such a great way for us to engage with new clients with existing clients who maybe have a second home in their store or have recently relocated or maybe engaged with us digitally and now gets experienced us in a store. So we're really going to be investing a lot of time and attention in supporting those openings back half of this year as well and excited to see the results there.

And I just wanted to add one thing to that, that our clients buy from us. And the number one request that we get from our sales team and designers out in the stores is our clients just love the story of how our products -- how it came about, how it's made. So we're doubling down on that. We just did -- Jen and her team just did an amazing not only small catalogue but also a digital video on going into our factories and literally showing our clients exactly how things are made, how they're created, how they're designed. And we think that inspiration because that's why clients buy it from us. I mean they're inspired by our product. They just think it's so unique, not to mention unbelievably practical and comfortable and everything else that you need in furniture. But -- so we're really doubling down on that and showing the emotional side of our product, which is why people buy us. Everybody could go to IT and buy things and they're cheaper than us. But our product is so unique and special that clients love it. They love to bring it in their home and they love the stories about do you know how this table is made? It takes us long and this kind of material and so forth. And when they see that, they get us inspired and they buy more products. So Jen and her team has come up with some really cool catalogs and videos that we're going to be pushing out to our clients for the rest of the year.

Alright. Well, great guys. Lots of good content and answer, I appreciate it very much. Thank you.

You bet.

Thank you. The next question comes from the line of Seth Sigman of Barclays.

Hey, everybody. Good morning. Thanks for taking the question. I was hoping you could provide a little bit more context on the moderation in demand comps that you saw in March and then the stabilization in April. Obviously, there's a lot of noise during that period, particularly in March. But I think the stabilization in April is kind of interesting. So if you could just give us a little bit more context on that? And then I have a follow-up. Thank you.

Hey, Seth. Sure, so we have seen for the first quarter, we saw a number of transactions were up nicely. AOV with average order value was up nicely. Traffic was up. So all of the metrics kind of driving for the first quarter were strong. We're really pleased with that. We did -- John did mention that there was some weather that we saw impacting March. We certainly know here in the Midwest it's been a bit chillier than what we would like it to be. So I think there's -- we're excited about the touch points that we have coming out. Our summer catalogue just dropped actually got it in my home yesterday. So we think that's going to be a nice traffic driver, great touch points to stay top of mind with consumers and clients as they're starting to kind of emerge from the winter chills. So we think there's some good opportunity ahead of us. We are very mindful and paying very close attention to what is happening on a day-to-day basis, both in March and April. But yes, I think more to come when we report next quarter on how Q2 is going to perform in the balance of the month.

Got it. All right. Fair enough. And then I guess just a follow-up question on the promotional points earlier, fully appreciating the differentiation of our house product and the position in the market. I guess I'm curious, are you seeing consumers look for more discounts, right? Because you have an indirect online competitor today discussing more promotional events, potentially sharpening their pricing through this year, even some deflation in pricing, and it does seem like they're seeing some improvement in trends possibly related to that more promotional activity. So I guess I'm curious, what are you seeing from your consumer? Is there any evidence that they are seeking more value?

I mean, I'll take a first pass and then certainly pass along. What we firmly believe is that, look, consumers in general love a discount, but our product is unique and such a great quality and great aesthetic that folks are willing to pay for it. It's unique. It's different. It's kind of what we based our whole company around. So I think there's certainly a subset of our consumer who is a little bit more promotionally driven, who might wait until we post the promo on a holiday weekend. But the majority of clients of our clients, they know what they want. They love our product, and they're willing to pay for it. I don't know, Jen or John?

Yes. I mean they truly buy our product because they want their home to be really special and they want it to be -- this is 1 or 2 times in their lifetime that they furnished their homes. And they don't -- sure. Our clients are very smart people. If we're going to give them a discount, they're going to take it, of course. But that's not -- absolutely not the deciding factor. We've never seen that even through recessions and so forth. The deciding factor is it's a great product. It's a very, very fair value for what it is and it makes their home really, really special, and that's what it's all about. And that's what we always focus on, not only in the stores, but in our marketing.

Okay, thank you for that.

Thank you. The next question comes from the line of Jonathan Matuszewski of Jefferies.

Hey, good morning, John. Good morning, Dawn. Thanks for taking my questions. First one is just on your interior designer customers. We have the customer deposit number on the balance sheet. But curious if you could shed some light on conversations with your interior designer customers, how their books of business are looking? And what are they hearing from their customers regarding propensity of their clients to spend in this backdrop? That's my first question.

Yes, I just spent some time with some of them. And I -- from what I've should been told by them, I haven't interviewed every single one of them. But I've talked to 10, 20 of them. And they're saying business as usual. They're booked -- they're packed getting out to our clients' homes, helping them. So many people are finishing remodels or their new homes were finally billed after two or three years, because everybody had to get in line for builders, which from what I understand, is going to continue for the next few years. So no, they're packed. They're as busy as ever. And they're not hearing from clients that, hey, we're going to wait till you lower your prices or something like that. They -- their homes are being done. They're finished. They want their furniture. They want to move into it and move on with their lives. So when I've heard, that they are busy as ever.

And the data that we have, Jonathan would support that. So we're seeing the in-home designer program, the demand penetration is continuing to increase every quarter. So really pleased with that. And then the AOV still remains nicely over 3 times for sales that are assisted by an in-home designer. So…

And not only our own in-home designers, but we do a ton of business with the trade out there. The folks that have their own businesses. And every month that consistently grows quite a bit. I get a count on it every middle of each month, how many people we've signed up for and have bought trade folks that have come and bought with us, it continues to grow. And we don't see any slowing down that at all.

That's really helpful. And you mentioned trade. I guess my follow-up question is on the other side, maybe contract. You mentioned the Surf lodge deal, you mentioned the White Elephant can you frame the scale of your contract business today? And are there initiatives to kind of scale this further similar to what some of your peers have done? Any color there would be helpful in terms of just initiatives. I'm not sure if you're trying to be more proactive in terms of going beyond end consumers and designers, but maybe small and medium-sized businesses or hospitality. What's the opportunity there? What's the priority level? Thanks.

Great question, Jonathan. I'll let Dawn jump in. But yes, it's a part of our business. It's a smaller part of our business. It's one that we've talked about. We do have a team focusing on it. And we think there's a good opportunity to grow that and grow significantly. As I'm sure all of you guys know, the hospitality business is back in business finally, and they're renovating their restaurants, their boutique hotels, they want to look really cool, and we're seeing some nice growth there. But we think we have an opportunity to do a lot more there.

Yes. And just to add on to that, I think we have so much opportunity you can grow the business overall. Contract is certainly an opportunity, but it does rank lower on the priorities as we're focusing on showroom expansion and increasing brand awareness in general. So significant opportunity, but we're focusing on the strategies that we think will drive the fastest kind of biggest results today and then contract is certainly something we have our eye on, but we want to make sure that we are doing -- executing our strategies correctly in a very strong manner. So making sure we don't try to execute too much too fast is important. So more to come on that one over the coming years, I think, but certainly opportunity.

Makes a lot of sense. Best of luck.

Thank you.

And the next question comes from the line of Simeon Gutman of Morgan Stanley.

Good morning, everyone. Hope you are good? Can I clarify something that -- it came more out on the call than it did in the release. The demand comp for the rest of the year, I think, is expected to hold or I don't know, improve, and that may be misinterpretation versus the overall sales guidance is now expected to maybe decelerate from your original guidance. Can you just square the two and make sure we have that right.

Sure, Simeon. So we didn't change anything in our guidance from last quarter. We -- everything is the same. So the full-year net revenue growth -- total growth is expected to be 1% to 6%. The demand comp range is negative 1% from -- to up mid-single digits. So holding steady with what we provided when we reported last quarter.

I guess with the first quarter though, being a little bit better, that's where the nuance could come in. And I thought it was asked on the call that maybe something gets better or worse based on how the first quarter came in. But I appreciate that hadn't been changed, but one seems to be getting better where the other one seems to be implied getting worse, but I guess you weren't trying to imply anything.

No, we're not trying to plan anything. I think what we're trying to say is there's a lot of uncertainty for the remainder of this year. And we feel confident in our ability to hit this guide. And we'll see what levers we choose to pull as we move through the year. But I feel -- we feel confident in the guide that we put out there and don't think it's prudent at this point in time to make any significant changes. But not trying to imply that anything is different than what it was last quarter.

Okay. And then a follow-up. You mentioned dry powder and promotions were asked a couple of different ways. First, has anything changed? Is anything changing? And then what may prompt you, I guess, in subsequent quarters, are you seeing anything at the margin even in the second quarter where retailers are getting a little more aggressive?

So our promotional cadence is pretty flat year-over-year. We feel good about how we're managing promotions. We did lap the mid-single-digit price increase in early April that we implemented last year. So I think that's helpful to recall. Jen, do you want to talk about what we're seeing from a competitive set from promotional gains?

Yes. I mean so we're definitely continuing to see that elevated promotional cadence out there in the market. I think it's really interesting in March and April, you saw a lot of outdoor promos going out in the market as well. So people are really launching that product at a promotional rate. As Dawn mentioned, we were very flat to last year. And so we continue to just be focused on our business and driving our business and continuing to deliver the incredible product. We're happy with what we're seeing right now. As Dawn said, we always have levers in the future if we need to pull them. But right now, it's really focused on supporting that product launch, getting great marketing out there, really monitoring and engaging how people are responding to it and optimizing our business.

Thank you.

The next question comes from the line of Cristina Fernandez of Telsey Advisory Group.

Hi, good morning, everyone. I wanted to ask about brand awareness. You've mentioned a couple of times on the call about how it had increased. I wanted to see if you have measured recently and how that number tends to be compared to six, 12 months ago.

Yes. Hi Cristina, good morning. We conducted a study with an external consulting firm back at the end of last year and Q4 time period, just comparing where our brand awareness levels were to 2 years prior, back in 2020, and we were really pleased. We did see some relative improvements versus the market, showing that we are increasing our awareness versus some of our peers. But to be totally transparent with everybody, I was actually more excited by how much opportunity we continue to have going forward. So despite those relative improvements, we're still significantly underpenetrated in terms of name recognition and brand awareness to the peers in the space. So we have a lot of opportunity to address that. As I touched on earlier, I'm really excited about the upcoming new store openings. We're really excited about the response to some of our more aggressive prospecting opportunities. We're really excited about some of these experiential and partnership opportunities to get our name out there. And as John talked about, I think we have an incredibly passionate team here at our house. It's actually really amazing watching how passionate our internal product development teams and vendors get when they're developing new products. Similarly, our marketing teams and our stores teams are equally as excited about that. But if I could point to one thing, I don't think we've fully realized our opportunity as a marketing team to tell those stories and really make sure that everybody out there is aware of how special our product is, how much goes into it, the material, the quality, the obsessive attention to performance and the ability to be able to use this furniture in your day-to-day life, even though it looks absolutely beautiful. And so really, really excited as we look at being able to introduce our health as a brand to new potential clients, they're responding incredibly well to our marketing as it stands today. But I think to John's point earlier on the call, we have a lot of opportunity to improve how we're telling those stories and how we're showcasing those uniqueness. So really, really excited to how clients will respond to that back half of this year and going forward.

And then my follow-up is on the product side. So perhaps for John, you spoke about the introduction here for spring summer around outdoor. Can you share some color on why you have planned for the back half for the fall and holiday season?

New products?

Yes, new products.

Yes. As Jen reminds me, we typically roll out more than she's up with. But yes, the back half, we're focusing on, obviously, indoor products, particularly the upholstery business. We think we're going to really, really explode this fall. We've got some incredible new not only fabrics, but leathers that are really custom-made just for us. And in our business, the indoor products, if you're not furnishing a kitchen or a vendor, it kind of all starts with the upholstery. Then from there, you buy the rug, the pillows, the lamps, coffee tables and so forth. So we're focusing on delivering some really, really cool new designs, credible values, credible fabrics that can be used. Our clients have live data families, they have pets, and they're very interested in things that you can use. It just is in the room to lock off and look at. And we think that makes us really unique in the market that we go to great lengths to make sure everything from the frames of our upholstery is almost indestructible to the cushions to certainly the fabrics and so forth. And then we're really coming on some really cool designs that I don't think people have seen in this country. And we think that's going to be exciting for the fall.

Thank you.

You’re welcome.

The next question comes from the line of Philip Blee of William Blair.

Hi, thank you. Last quarter, you initially spoke about the remaining backlog of about $100 million expected to be fulfilled in the first-half. Can you share how much of that is left after the first quarter? And can you go a bit deeper into the margin impact and related fall-through expected in the second half? And should we still consider a mid-teens percent of trailing 12-month sales, a more normalized level of backlog? Thank you.

So we don't want to get into the habit of disclosing backlog every time we report. We thought it was helpful just for the year-over-year comparisons to give the full year. So there is still significant amount of backlog to push through. So any kind of margin impact is factored into the guide relative to -- I assume you're asking relative to kind of the freight component, but certainly clarify if that's not the case. So everything is factored into the guide. We don't guide to gross margin, but we did give some context on an adjusted EBITDA margin. And then apologies, what was the last part of your question?

Just considering what a more normalized level of backlog is, is that still kind of the mid-teens range as a percent of trailing 12-month sales?

Yes. For now, I think that's appropriate. As we're consistently working to improve our -- from our pre-pandemic lead times, particularly around -- I know the merchant team is working pretty diligently to reduce lead times on some special order type products. So that could come down a little bit. But for now, I think just using the historical average is appropriate until we have some kind of firm strategies deployed.

Okay. That's great. Thanks. And as a quick follow-up. One of your competitors announced plans to launch a smaller format services-focused location. Do you view this as a potential risk to your plans to accelerate the design studio footprint or your ability to lease a similar-sized box? And then can you remind us how the sales productivity and margins of this format compared to your traditional showrooms? Thank you.

Yes. We heard that, too. But no, it's not changing our strategy whatsoever, and we don't think it's going to impact our business. We have no idea what our competitors are doing, but we've got a nice plan, and things like we just opened up in Asheville, North Carolina last month and did phenomenal well, let me away how well they did and places like that, where there's pockets of very much wealth. And -- but you wouldn't want to put a full-size store there. So our design studios are working well. We've got lots and lots of runway -- years of runway to go on those. So we're continuing to tweak them a little bit trying to get more productivity out of each square footage. And we're just putting together a really talented team of experienced people to focus on those. So no, we're excited and we're not changing our strategy one little bit.

And then from a financial perspective, our traditional showrooms, we have said that we're targeting a $10 million revenue number with average contribution margin of 32%. So the design studios would be a lower showroom net revenue number, but it would have a higher average contribution margin of around 35% is what we target, and that's driven by, as you can imagine, the rent and the staffing levels primarily.

Okay. That’s, great.

So that does conclude the question.

Yes.

Thank you. The next question comes from Mak Rakhlenko of Cowen & Company.

Yes, thanks a lot for taking my question. Sorry, I hopped on late in case you already addressed this, but what is your view on our house's ability to hold this new higher pricing level longer term? I think you're up at least high teens compared to 2019. So do you think this is sort of the new baseline? Or could you need to take pricing gradually lower over time? And this is more longer term, so excluding some of the near-term promos and things like that. Just curious on the run rate for the business.

We have no intentions of lowering our prices unless we can get lower prices from our vendors or from the freight cost where we're more than happy to pass along savings to our clients. If it's appropriate, we keep our margins where we want them. But other than that, we don't have any plans to continue to lower prices whatsoever because we don't think we need to. We've got great product. That's an incredible value, and it's unique. Nobody else has it in the world. And with that, our clients really desire our products. And again, they buy it because they really want their homes to be special and nice, not because they can save $200 on a sofa or something like that. I always tell my team that once -- once our clients buy our product, 6 months a year from now, they don't remember what they paid. If they got a deal or not on it, what they remember is if they love their product and their sofas right and they're not caving in and with cheap foam and cheap trains and all that kind of stuff. And they appreciate it, and they love it and they tell their friends. But they're not saying, "Hey, look at this. I got $300 off on this sofa. I mean that's not why they buy our product. And so we have no intentions of lowering our prices unless, again, we can if we get lower prices from vendors or from freight costs.

Got it. Okay, that great. Thanks a lot.

Ladies and gentlemen, that does conclude our question-and-answer session. I would now like to turn the conference over to Wendy Watson for closing remarks.

Thank you, everyone, for your participation in our call and your interest in our house. We look forward to speaking to you again next quarter.

Thanks, everybody.