On Friday, Arhaus Inc (NASDAQ: NASDAQ:ARHS) experienced a shift in stock rating as a Telsey advisory firm analyst adjusted the company's status from Outperform to Market Perform. Accompanying this downgrade, the price target for Arhaus was also lowered to $11.00, down from the previous target of $12.00.
The decision to modify the rating and price target was based on a set of reasons outlined by the analyst. Primarily, Arhaus has been grappling with negative demand, which is anticipated to continue its downward trend in the low double digits (LDD) in the fourth quarter of 2024. This follows what had been an extended period of strong performance stretching from the second quarter of 2020 through the first quarter of 2024.
Furthermore, to stimulate demand, Arhaus has found it necessary to offer more substantial and extended promotions. This strategy is partly in response to new offerings from competitor RH (NYSE:RH), which resemble Arhaus' top-selling styles but are available at lower price points. Such competition has influenced Arhaus' promotional tactics.
Additionally, Arhaus is channeling funds into ongoing investments aimed at improving business efficiencies. However, these investments, projected to be between $5 million and $10 million in 2025, are expected to curb near-term EBITDA growth despite their potential for long-term efficiency gains.
On a brighter note, the report highlighted that Arhaus' new store openings are performing in line with expectations and the company's expansion is projected to significantly contribute to sales in the coming years.
Regarding tariffs, Arhaus imports around 70% of its merchandise into the United States, with approximately 15% coming from China and 10% from Mexico. The company managed to mitigate the impact of tariffs in 2018 by negotiating with suppliers and implementing price increases between 7% and 10%, which reportedly had a minimal effect on sales.
In other recent news, Arhaus Inc. experienced a series of adjustments from various analysts following its third-quarter earnings report. The furniture retailer reported earnings per share of $0.07, falling short of the estimated $0.10, with revenue and adjusted EBITDA also below expectations at $319 million and $23 million, respectively. BofA Securities downgraded Arhaus from Buy to Neutral, reducing the price target to $11 due to softening demand trends.
Telsey Advisory Group and TD Cowen also lowered their price targets to $12 and $14 respectively, maintaining an Outperform and Buy rating. Jefferies held steady with a price target of $12 and a Hold rating, citing concerns over the company's promotional activities. Despite the adjustments, Stifel initiated coverage of Arhaus with a Buy rating and a price target of $19.50, acknowledging the company's consistent execution and revenue growth.
Arhaus anticipates a decrease in comparable store sales in the fourth quarter by a low double-digit percentage. The company suggests a potential risk of a slowdown in home furnishings purchases as consumer spending may shift towards holiday-related items. These recent developments reflect the dynamic and evolving landscape for Arhaus in the investment community.
InvestingPro Insights
Recent InvestingPro data and tips offer additional context to Arhaus Inc's current situation. Despite the downgrade and challenges outlined in the article, Arhaus has shown a significant return of 13.45% over the last week, suggesting some investor optimism. However, this short-term gain contrasts with the longer-term trend, as the stock has fallen 19.83% over the last three months and 26.63% over the last six months.
The company's financial metrics reveal a mixed picture. Arhaus operates with a moderate level of debt and has been profitable over the last twelve months, with a P/E ratio of 16.29. However, the revenue growth has been slightly negative at -1.44% for the last twelve months as of Q2 2024, aligning with the analyst's concerns about demand trends.
InvestingPro Tips highlight that Arhaus's stock price movements are quite volatile, which investors should consider given the current market conditions and competitive pressures mentioned in the article. Additionally, analysts predict that the company will remain profitable this year, despite expectations of a drop in net income.
For readers interested in a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into Arhaus's financial health and market position.
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