Arhaus May Be Under Pressure Near Term After Secondary Offering, Analyst Cautions

Telsey Advisory Group analyst Cristina Fernández reiterated an Outperform rating on Arhaus, Inc. ARHS, with a price target of $15.

Arhaus recently announced that its private equity sponsor, Freeman & Spogli, plans to sell 12 million shares through a secondary offering (13.8 million including the overallotment). The analyst estimates the deal will reduce their holding to 13% (12% including overallotment) from 22%. 

This is the first secondary offering for ARHS since its IPO in November 2021, when 12.9 million shares were priced at $13, Fernández notes.

Shares of Arhaus could be under some pressure near-term, given the

selling associated with the secondary, the analyst notes.

However, the analyst adds that the offering follows a strong 2Q23 report in which Arhaus showed its demand trends continue to outpace those of peers.

The company's brand benefits from product introductions and marketing in May and June that drove an acceleration in order intake to up 15%-low 20% from flat in April, mentions the analyst.

Arhaus also benefits from lower ocean freight costs, allowing it to deliver better yearly profitability despite absorbing lower ASPs (MSD reduced prices on average in mid-June) and the $10 million donation to The Nature Conservancy.

Looking to 2H23, Arhaus seems to be baking in some conservatism into its outlook, which could result in an upside to both sales and EBITDA projections.

Meanwhile, in 2024, Arhaus stands to benefit from the 11 stores that will be opened in 2023.

For 3Q23, the analyst lowered the EBITDA estimate to $35 million vs. $45 million previously. The EBITDA estimate for 4Q23 moves higher to $43 million vs $33 million previously.

For FY23, the analyst sees revenue growth of 3.6% and adjusted EBITDA of $197 million, equating to an adjusted EBITDA margin of 15.5%.

Price Action: ARHS shares are trading lower by 16.4% to $10.20 on the last checked Wednesday.