ARHS - Arhaus: Buy This Stock For Potentially Handsome Returns

2023-03-21 18:18:42 ET

Summary

• ARHS announced solid FY22 and Q4 FY22 results with a significant increase in its revenues and net income.
• They are expanding their business by opening new showrooms and studios.
• They were able to report strong yearly results thanks to fewer supply chain problems.
• I assign a buy rating on ARHS.

In the home furnishings industry, Arhaus ( ARHS ) serves as a premium retailer. They offer merchandise assortments across several categories, like furniture, textiles, and outdoors. Their furniture products consist of the dining room and home office furnishings, which include accent chairs, beds, dressers, bookcases, and sofas, and outdoor products, including chairs, lighting, décor, and fire pits. Additionally, they offer lighting products like various unique and beautiful lighting fixtures, including pendants and sconces. They recently announced their FY22 and Q4 FY22 results. In this report, I will analyze its financial performance and discuss its growth potential. I believe they are undervalued, and I also believe it might provide sizable returns to its investors soon. Hence, I assign a buy rating on ARHS.

Financial Analysis

ARHS recently announced its Q4 FY22 and FY22 results . The net revenue for FY22 was $1.2 billion, a rise of 54.2% compared to FY21. Higher demand in their e-commerce and showroom channels as well as quicker distribution of their backlog, in my opinion, were the primary causes of the increase. Their e-commerce and showroom channel were up 43% and 57% in FY22 compared to FY21. In addition, I believe that their Dallas distribution center's effectiveness helped them deliver their backlog of products quicker; they had planned to do so in 2023 but were able to do so in 2022. The net income for FY22 was $136.6 million, a rise of 270% compared to FY21. I think the primary cause of the increase was the company's ability to deliver more products to its customers' homes, thanks to faster-than-expected delivery of backlog orders because of an improved supply chain.

The net revenue for Q4 FY22 was $356.3 million, a rise of 49.5% compared to Q4 FY21. I think the management's investments in its distribution and supply chain infrastructure, which allowed them to speed up delayed delivery, were the main driver of the rise. The net income for Q4 FY22 was $47 million, a rise of 463.5% compared to Q4 FY21. I think that a substantial increase in net income was caused by robust demand in their showroom and online sales channels. In my opinion, ARHS's financial success in FY22 was excellent. Due to their effective management, which resolved their supply chain problems which generously rewarded them, their revenues and net income increased considerably.

Technical Analysis

ARHS is trading at the level of $8.5. It is trading below its 200 ema, which is at $10. It shows that the stock is in a downtrend. The stock is currently moving closer to a $7 zone of solid support. The stock hit the $7 level in October 2022 and increased by more than 100%, as a result, indicating that buyers are present at that price. Therefore, in my opinion, one can buy it when it reaches around the $7 level.

Should One Invest In ARHS?

The revenue estimate for FY23 is around $1.27 billion, which is higher than FY22 revenue. I think they might meet their revenue goals. The management is growing its company by opening new showrooms, which is why I am saying this. The management plans to establish 12 new showrooms in 2023. In 2022, they opened two new showrooms in White Plains and Colorado Springs. They are actively focusing on product designs, quality, and development, which, in my opinion, sets them apart from their competitors. Additionally, they overcame problems with the supply chain and improved their distribution capabilities, which will support their future development. They are, in my opinion, growing steadily and could soon offer stockholders respectable returns.

Taking about its valuation. To evaluate its value, I'll employ two valuation measures. The equity price is divided by earnings per share to arrive at the P/E ratio, which is the first ratio. Compared to the sector's 13.34x P/E ((FWD)) ratio, theirs is 11.25x. It demonstrates how underrated they are. The EV/EBIT ratio, which compares a company's enterprise worth to its EBIT, is the second ratio. Compared to the sector's ratio of 12.59x, their EV/EBIT ((FWD)) ratio is 9.51x. Both ratios indicate that they are undervalued and have significant room for growth, in my opinion.

Risk

Changes in product costs as a result of rising commodity prices or inflation, including with regard to freight and transportation costs, have a major impact on their operating results. Certain materials used in its products, such as lumber, resin, copper, cotton, and petroleum, are prone to price fluctuations as a result of shifting labor, fuel, and transportation costs, as well as changes in trade tariffs and trade restrictions. They have experienced substantial inflationary pressure on freight costs in recent years, which was exacerbated by tariff-related surges in shipment and port congestion. They might not be able to pass all of these increased costs along to their customers as a result of inflation and product price volatility, which results in lower margins.

Bottom Line

Arhaus announced impressive quarterly and annual results, with rising sales and net income. They gained from overcoming supply chain obstacles. The management is committed to growing the company by introducing new products and establishing new showrooms. They are investing a lot of money in the design, development, and quality of new products, which will, in my opinion, help them boost their revenue growth. They are, in my opinion, on a strong development trajectory and could soon offer their shareholders sizable returns. Hence, I assign a buy rating on ARHS.

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