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What changed in Arhaus, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Arhaus, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+282 added−337 removedSource: 10-K (2024-03-11) vs 10-K (2023-03-09)

Top changes in Arhaus, Inc.'s 2023 10-K

282 paragraphs added · 337 removed · 251 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

66 edited+4 added−23 removed40 unchanged
Biggest changeOur print and digital media strategy drives both Showroom and eCommerce net revenue as it raises brand awareness and showcases new merchandise. In-home Desig ner Services . We welcome all clients to use our complimentary in-home designer services with no appointment required.
Biggest changeWe also distribute catalogs for specific categories such as outdoor furnishings, special collections and certain holidays. In addition, we advertise consistently across digital platforms and regularly partner with social media influencers to drive brand awareness. Our print and digital media strategy drives both Showroom and eCommerce net revenue as it raises brand awareness and showcases new merchandise.
We offer merchandise in a number of categories, including furniture, outdoor, lighting, textiles, and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings.
We offer merchandise in a number of categories, including furniture, outdoor, lighting, textiles, and décor. Our curated assortments are presented across our merchandise sales channels in sophisticated, family friendly and unique lifestyle settings.
Our Showrooms are a key component of our brand. We believe the expansion of our Showroom footprint will give more clients the opportunity to experience our inspirational and premium lifestyle concept, thereby increasing brand awareness and driving net revenue. Enhance Digital Marketing Capabilities. Digital advertising, search, on-site offerings, and social media engagement are important branding and advertising vehicles.
Our Showrooms are a key component of our brand. We believe the expansion of our Showroom footprint will give more clients the opportunity to experience our inspirational and premium lifestyle concept, increasing brand awareness and driving net revenue. Enhance Digital Marketing Capabilities. Digital advertising, search, on-site offerings, and social media engagement are important branding and advertising vehicles.
Similar in concept to our in-home designer program, our online designer platform provides clients with expert service and advice from our design professionals via online video chat and virtual design capabilities. We believe bolstering this component of the client experience will drive higher client satisfaction and result in larger total company AOV over time.
Similar in concept to our in-home designer program, our online designer platform provides clients with expert 5 service and advice from our design professionals via online video chat and virtual design capabilities. We believe bolstering this component of the client experience will drive higher client satisfaction and result in larger total company AOV over time.
In addition to our current Showroom model, our Design Studio format (approximately 5,000 sq. ft.) is an extension of our in-home design services and carries a highly curated product selection in smaller, attractive markets. Enhance Omni-Channel Capabilities and Technology to Drive Growth We have several initiatives that continue to enhance our omni-channel capabilities.
In addition to our current Traditional Showroom model, our Design Studio format (approximately 5,000 sq. ft.) is an extension of our in-home design services and carries a highly curated product selection in smaller, attractive markets. Enhance Omni-Channel Capabilities and Technology to Drive Growth We have several initiatives that continue to enhance our omni-channel capabilities.
Our approach begins in our visually captivating, theater-like Showrooms. Our Showrooms drive brand awareness and create meaningful marketing buzz and volume uplift when we open in new markets. Our unit growth strategy is highly complementary to our digital eCommerce platform. As Showrooms open in new markets, we experience significant growth in our eCommerce business and overall client engagement across channels.
Our approach begins in our visually captivating, theater-like Showrooms. Our Showrooms drive brand awareness and create meaningful marketing buzz and volume uplift when we open in new markets. Our unit growth strategy is highly complementary to our eCommerce platform. As Showrooms open in new markets, we experience significant growth in our eCommerce business and overall client engagement across channels.
We are disciplined in our approach to open ing Showrooms in top tier locations and expect to continue our prudent approach as we continue to grow our Showroom footprint. Distribution and Delivery We manage the distribution and delivery of our products through our distribution centers in Boston Heights, Ohio, Dallas, Texas and Conover, North Carolina.
We are disciplined in our approach to open ing Showrooms in top tier locations and expect to continue our prudent approach as we continue to grow our Showroom footprint. 8 Distribution and Delivery We manage the distribution and delivery of our products through our distribution centers in Boston Heights, Ohio, Dallas, Texas and Conover, North Carolina.
This allows us to offer an exclusive assortment of products to our clients at an attractive value. We have a diversified ba se of over 400 vendors, and our top 10 vendors represent approximately 60% of our net revenue.
This allows us to offer an exclusive assortment of products to our clients at an attractive value. 6 We have a diversified ba se of over 400 vendors, and our top 10 vendors represent approximately 60% of our net revenue.
Intellectual Property Our intellectual property has significant value and we vigorously protect it against infringement. The “Arhaus ® ,” “Arhaus Furniture ® ,” “Arhaus the Loft ® ,” “Arhaus Your Home ® ” and “Arhaus Table ® ” trademarks are registered in the United States Patent and Trademark Office.
Intellectual Property Our intellectual property has significant value and we vigorously protect it against infringement. The “Arhaus ® ,” “Arhaus Furniture ® ,” “Arhaus the Loft ® ,” and “Arhaus Your Home ® ” trademarks are registered in the United States Patent and Trademark Office.
In addition to product design and development, we have upholstery manufacturing capabilities which allow us to create intricate, high quality products at attractive prices and margins. Our ability to innovate, curate products, categories, and services, then rapidly scale across our fully integrated omni-channel infrastructure is a powerful platform for continued long-term growth.
In addition to product design and development, we have upholstery manufacturing capabilities which allow us to create intricate, high quality products at attractive prices and margins. Our ability to innovate, curate products, categories, and services, then rapidly scale across our omni-channel infrastructure is a powerful platform for continued long-term growth.
We have longstanding relationships with our vendors which allow us a number of competitive advantages, including the ability to maintain consistent quality and ensure the majority of our products, approximately 95% based on net revenue in 2022, can only be purchased from Arhaus.
We have longstanding relationships with our vendors which allow us a number of competitive advantages, including the ability to maintain consistent quality and ensure the majority of our products, approximately 95% based on net revenue in 2023, can only be purchased from Arhaus.
We have longstanding relationships with our vendors which allow us a number of competitive advantages, including the ability to maintain consistent quality and ensure the majority of our products, approximately 95% based on net revenue in 2022, can only be purchased from Arhaus.
We have longstanding relationships with our vendors which allow us a number of competitive advantages, including the ability to maintain consistent quality and ensure the majority of our products, approximately 95% based on net revenue in 2023, can only be purchased from Arhaus.
Securities and Exchange Commission (“SEC”). We maintain our website at www.arhaus.com. The information contained on our website is not part of this Annual Report. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically.
Securities and Exchange Commission (“SEC”). We maintain our website at www.arhaus.com. The information contained on our website is not part of this Annual Report. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically. The address of that website is www.sec.gov.
Further, our fully integrated and seamless omni-channel experience contributes significant uplift in our markets. 4 Table of Contents Our Growth Strategies We believe there is a significant opportunity to drive sustainable growth and profitability by executing on the following strategies: Increase Brand Awareness to Drive Net Revenue We will continue to increase our brand awareness through an omni-channel approach which includes the growth of our Showroom footprint, enhanced digital marketing, improvement in website features and analytics and continued product assortment optimization: Expand Showroom Footprint.
Further, our seamless omni-channel experience contributes significant uplift in our markets. 4 Our Growth Strategies We believe there is a significant opportunity to drive sustainable growth and profitability by executing on the following strategies: Increase Brand Awareness to Drive Net Revenue We will continue to increase our brand awareness through an omni-channel approach which includes the growth of our Showroom footprint, enhanced digital marketing, improvement in website features and analytics and continued product assortment optimization: Expand Showroom Footprint.
Our omni-channel model allows clients to begin or end their shopping experience online while also experiencing our theater-like Showrooms throughout the shopping process. We believe our omni-channel approach enables us to offer a compelling combination of design, quality and value. Showrooms As of December 31, 2022, we operated 81 Showrooms in 29 states.
Our omni-channel model allows clients to begin or end their shopping experience online while also experiencing our theater-like Showrooms throughout the shopping process. We believe our omni-channel approach enables us to offer a compelling combination of design, quality and value. Showrooms As of December 31, 2023, we operated 92 Showrooms in 29 states.
Additionally, we partner with third-party vendors to provide home delivery services to our clients. These distribution centers serve all of our channels. Our Boston Heights, Ohio facility is approximately 1,003,500 square feet after our expa nsion, approximately 900,000 square feet of this facility is dedicated to distribution (the remainder serves as our corporate headquarters).
Additionally, we partner with third-party vendors to provide home delivery services to our clients. These distribution centers serve all of our channels. Our Boston Heights, Ohio facility is approximately 1,003,500 square feet , approximately 900,000 square feet of this facility is dedicated to distribution and the remainder serves as our corporate headquarters.
Our new North Carolina facility doubled our in-house upholstery manufacturing capacity, improved our production efficiency and increased production square footage from 150,000 to 190,000. Our Industry and Market Opportunity We operate within the approx imately $400 billion U.S. home furnishings and décor market.
Our North Carolina facility doubled our in-house upholstery manufacturing capacity, improved our production efficiency and increased production square footage from 150,000 to 190,000. Our Industry and Market Opportunity We operate within the approximately $400 billion U.S. home furnishings and décor market.
Our vertical model and direct sourcing furnish clients with superior quality products and compelling value at attractive profit margins. We reported gross margin as a percent of net revenue of 42.7%, 41.4% and 39.3% for the years ended December 31, 2022, 2021 and 2020, respectively.
Our vertical model and direct sourcing furnish clients with superior quality products and compelling value at attractive profit margins. We reported gross margin as a percent of net revenue of 42.0%, 42.7% and 41.4% for the years ended December 31, 2023, 2022 and 2021, respectively.
Our Dallas, Texas facility is approximately 800,700 square feet and is managed by a third party. Our facility in North Carolina has approximately 497,000 square feet of space, with approximately 307,000 square feet dedicated to distribution.
Our Dallas, Texas facility is approximately 800,700 square feet and is managed by a third party. Our facility in North Carolina has approximately 497,000 square feet of space, with approximately 307,000 square feet dedicated to distribution and the remainder primarily dedicated to manufacturing.
Competition The U.S . home furnishings and décor market is highly fragmented and competitive with approximately 22,000 retail establishments as of 2021, according to Bureau of Labor Statistics.
Competition The U.S . home furnishings and décor market is highly fragmented and competitive with approximately 23,000 retail establishments as of 2022, according to Bureau of Labor Statistics.
Décor ranges from wall art to mirrors, vases to candles, and many other decorative accessories. 6 Table of Contents Many of our products are conceived of, and developed by, our in-house design team of over 40 hi ghly skilled and experienced members.
Décor ranges from wall art to mirrors, vases to candles, and many other decorative accessories. Many of our products are conceived of, and developed by, our in-house design team of over 50 hi ghly skilled and experienced members.
The following lists the number of Showrooms in each U.S. state where we operate as of December 31, 2022: 7 Table of Contents Locations Showrooms Locations Showrooms Alabama 1 Minnesota 1 Arizona 2 Missouri 1 California 6 New Hampshire 1 Colorado 5 New Jersey 5 Connecticut 1 New York 3 Florida 7 North Carolina 2 Georgia 2 Ohio 9 Illinois 4 Pennsylvania 3 Indiana 1 South Carolina 1 Kansas 1 Tennessee 1 Kentucky 2 Texas 6 Louisiana 1 Utah 1 Maryland 4 Virginia 4 Massachusetts 2 Wisconsin 1 Michigan 3 The following lists the composition of our Showrooms as of: December 31, 2022 December 31, 2021 Traditional showrooms 72 71 Design Studios 6 5 Outlets 3 3 Total Showrooms 81 79 eCommerce Our website allows our clients to shop our current product assortment and experience the unique lifestyle settings reflected in our Showrooms and print media.
The following lists the number of Showrooms in each U.S. state where we operate as of December 31, 2023: Locations Showrooms Locations Showrooms Alabama 1 Minnesota 1 Arizona 2 Missouri 1 California 10 New Hampshire 1 Colorado 5 New Jersey 5 Connecticut 2 New York 4 Florida 8 North Carolina 3 Georgia 2 Ohio 9 Illinois 5 Pennsylvania 3 Indiana 1 South Carolina 1 Kansas 1 Tennessee 1 Kentucky 2 Texas 7 Louisiana 1 Utah 1 Maryland 4 Virginia 4 Massachusetts 3 Wisconsin 1 Michigan 3 7 The following lists the composition of our Showrooms as of: 2023 2022 Traditional Showrooms 80 72 Design Studios 8 6 Outlets 4 3 Total Showrooms 92 81 eCommerce Our eCommerce platform allows our clients to shop our product assortment and experience the unique lifestyle settings reflected in our Showrooms and print media.
Clients increasingly engage with us through digital methods including our website and social media. To capitalize on these trends and continue increasing our client base, we are investing in data analytics to improve the client journey from the moment 5 Table of Contents clients begin browsing online or enter our Showrooms.
Clients increasingly engage with us through digital methods including our website and social media. To capitalize on these trends and continue increasing our client base, we continue to leverage data analytics to improve the client journey from the moment clients begin browsing online or enter our Showrooms.
In addition, we own the domain names “arhaus.com,” “arhaus.net,” and “arhausfurniture.com.” These domain names are renewable. Human Capital As of December 31, 2022, we had approximately 2,120 employees and 60 temporary employees, including approximately 130 part-time employees.
In addition, we own the domain names “arhaus.com,” “arhaus.net,” and “arhausfurniture.com.” These domain names are renewable. 9 Human Capital As of December 31, 2023, we had approximately 2,280 employees and 10 temporary employees, including approximately 130 part-time employees.
Our recent Showroom growth is summarized in the following table: December 31, 2022 December 31, 2021 Showrooms open at beginning of period 79 74 Showrooms opened (1) 4 10 Showrooms closed for relocations (1) (3) Showrooms closed permanently (1) (2) Showrooms open at end of period 81 79 (1) Showrooms opened during the respective periods includes both new and relocated Showrooms.
Our recent Showroom growth is summarized in the following table: 2023 2022 Showrooms open at beginning of period 81 79 Showrooms opened (1) 14 4 Showrooms closed for relocations (3) (1) Showrooms closed permanently — (1) Showrooms open at end of period 92 81 (1) Showrooms opened during the respective periods includes both new and relocated Showrooms.
Our new North Carolina facility opened in December 2021 and has approximately 307,000 square feet of distribution capacity. Furthermore, our new Texas distribution center, opened in July 2022, added approximately 800,700 square feet. The additional distribution centers will help streamline shipping times and further support our rapidly growing d emand and footprint. Increasing Domestic Manufacturing Capacity.
Our North Carolina facility opened in December 2021 and has approximately 307,000 square feet of distribution capacity. Furthermore, our Texas distribution center, opened in July 2022 and has approximately 800,700 square feet. The additional distribution centers will continue to streamline shipping times and further support our growing footprint and resulting demand. Increasing Domestic Manufacturing Capacity.
Only one of our vendors accounts for more than 10% of our net revenue, and one other vendor accounts for more than 5% of net revenue. In 2022, approximately 40% of our net revenues and products were produced or sourced from vendors located in the U.S.
Only one of our vendors accounts for more than 10% of our net revenue, and one other vendor accounts for more than 5% of net revenue. In 2023, approximately 40% of our net revenues and products were produced or sourced from vendors located in North America.
The address of that website is www.sec.gov. 11 Table of Contents The charters for our Board of Directors’ Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as our Code of Business Conduct and Ethics, our Corporate Disclosure Policy and other related materials are available on our website. 12
The charters for our Board of Directors’ Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as our Code of Business Conduct and Ethics, our Corporate Disclosure Policy and other related materials are available on our website. 11
Expand our Showroom Base and Capture Market Share We have a Showroom presence in all four major geographic regions, and our top 10 Showrooms by net revenue are located in 9 different states. We have a significant whitespace opportunity both in existing and new markets.
Expand our Showroom Base and Capture Market Share We have a Showroom presence in all four major geographic regions, and our top 10 Showrooms by net revenue are located in 9 different states. We have a significant whitespace op portunity both in existing and new markets. We believe we can support over 165 Traditional Showrooms in the United States.
We employ a data-driven, thorough process to select and develop new Showroom locations. In selecting new locations, we evaluate data on specific market characteristics, demographics, client penetration and growth, along with considering the brand impact and opportunity of specific sites.
In selecting new locations, we evaluate data on specific market characteristics, demographics, client penetration and growth, along with considering the brand impact and opportunity of specific sites.
Our national omni-channel business positions our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle. Our seasoned sales associates and in-home designers provide expert advice and assistance to our client base that drives significant client engagement.
Our Showrooms are highly inspirational and function as an invaluable brand awareness vehicle, while our eCommerce platform acts as a virtual extension of our Showrooms. Our seasoned sales associates and in-home designers provide expert advice and assistance to our client base that drives significant client engagement.
In-home Designer Services Our in-home designers, who work with clients in the Showroom and travel to our clients’ residences, work in unison with our Showrooms and eCommerce platform to drive client conversion, order size and over all experience.
In-home Designer Services Our in-home designers, who work with clients in the Showroom and travel to our clients’ residences, work in unison with our Showrooms and eCommerce platform to drive client conversion, order size and over all experience. Our in-home designer services provide a more personalized client experience and produce AOVs over four times that of a standard order.
The “Arhaus ® ” trademark is also registered with the China National Intellectual Property Administration (CNIPA) and the Canadian Intellectual Property Office. Our trademark registrations are valid and subsisting and are renewable at the end of their term, except for “Arhaus Table ® ” which is scheduled to expire on July 28, 2025.
The “Arhaus ® ” trademark is also registered with the China National Intellectual Property Administration (CNIPA) and the Canadian Intellectual Property Office. Our trademark registrations are valid and subsisting and are renewable at the end of their term.
We have been successful across all geographic regions we have entered and have proven to be resilient to competitive entrants. Our Showrooms have performed well in large and small markets, urban and suburban locations and across various Showroom formats and layouts. Our average unit volumes are relatively consistent across the Northeast, West, Midwest and South regions.
Our Showrooms have performed well in large and small markets, urban and suburban locations and across various Showroom formats and layouts. Our average unit volumes are relatively consistent across the Northeast, West, Midwest and South regions.
Our in-home designer s, who work with clients in the Showroom and travel to our clients’ residences, work in unison with our Showrooms and eCommerce platform to drive client conversion, order size and overall experience.
In-home Desig ner Services . We welcome all clients to use our complimentary in-home designer services with no appointment required. Our in-home designer s, who work with clients in the Showroom and travel to our clients’ residences, work in unison with our Showrooms and eCommerce platform to drive client conversion, order size and overall experience.
Failure to comply with such laws and regulations, which tend to become more stringent over time, can result in significant fines, penalties, costs, and liabilities, which may be joint and several, or restrictions on operations, civil or criminal sanctions, and could expose us to costs of investigation or remediation, as well as tort claims, and could negatively affect our business, financial condition or results of operations.
We have taken measures to comply with the requirements of Proposition 65, but there is no guarantee that we will not be subject to fines, penalties, and lawsuits and complaints in the future. 10 Failure to comply with such laws and regulations, which tend to become more stringent over time, can result in significant fines, penalties, costs, and liabilities, which may be joint and several, or restrictions on operations, civil or criminal sanctions, and could expose us to costs of investigation or remediation, as well as tort claims, and could negatively affect our business, financial condition or results of operations.
Our Showroom layouts are constantly updated as our highly trained and creative visual managers determine new ways to optimize and maximize the appeal and inspirational nature of our Showrooms.
Our Showroom layouts are constantly updated as our highly trained and creative visual managers determine new ways to optimize and maximize the appeal and inspirational nature of our Showrooms. Our sales associates earn commissions, which can comprise a significant portion of their compensation.
Our Showroom composition includes 72 traditional showrooms, 6 Design Studios and 3 Outlets. Our average Showroom size is approximately 16,100 square feet. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle.
Our Showroom composition includes 80 Traditional Showrooms, 8 Design Studios and 4 Outlets. Our Traditional Showrooms average approximately 16,000 square feet and our smaller format Design Studios average approximately 5,000 square feet. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle.
In addition, we advertise consistently across digital platforms and regularly partner with social media influencers to drive brand awareness. We employ a targeted approach with our print and digital media and also identify lifestyle-driven opportunities to reach potential clients, such as sending postcards or small mailers to people who have recently moved.
We employ a targeted approach with our print and digital media and also identify lifestyle-driven opportunities to reach potential clients, such as sending postcards or small mailers to clients and potential clients who have recently moved. We also employ a digital strategy to reach clients and potential clients through social media, influencers and other digital marketing.
In a 3 Table of Contents market characterized by small, independent competitors, we believe our premium lifestyle positioning, artisan-crafted style, superior quality, significant scale and level of convenience will enable us to increase our market share.
In a market characterized by small, independent competitors, we believe our premium lifestyle positioning, artisan-crafted style, superior quality, significant scale and level of convenience will enable us to increase our market share. 3 Highly Experiential Omni-Channel Approach We strive to offer our products to our clients via our omni-channel approach and operate our business in a channel agnostic way.
Our business witnessed strong performance over the last three years. Our net revenue was $1,228.9 million, $796.9 million, and $507.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Demand comparable growth was 13.8%, 45.3%, and 24.7% in the years ended December 31, 2022, 2021 and 2020, respectively.
Net revenue was $1,287.7 million, $1,228.9 million, and $796.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Demand comparable growth was 7.6%, 13.8%, and 45.3% in the years ended December 31, 2023, 2022 and 2021, respectively. Comparable growth was 1.4%, 51.6% and 51.0% in the years ended December 31, 2023, 2022 and 2021, respectively.
Using these engagement methods within our omni-channel model contributes significantly to our brand awareness, evidenced by approximately 80% of our eCommerce demand originating within 50 miles of a Showroom. We believe that continued investment in brand marketing, data-l ed insights and effective consumer targeting will expand and strengthen our client reach.
Using these engagement methods within our omni-channel model contributes significantly to our brand awareness . We believe that continued investment in brand marketing, data-l ed insights and effective consumer targeting will expand and strengthen our client reach. Grow eCommerce Platform. eCommerce represents our fastest growing channel, with net revenue increasing by approximately 17% in 2023 compared to 2022.
As of December 31, 2022, we had 84 in-home designers in 65 Showrooms compared to 54 in-home designers in 45 Showrooms as of December 31, 2020. 8 Table of Contents Real Estate Strategy Our Showrooms have historically been in high traffic locations, and we favor top tier locations near luxury and contemporary retailers that we believe are consistent with our target clients’ demographic and shopping preferences.
Real Estate Strategy Our Showrooms have historically been in high traffic locations, and we favor top tier locations near luxury and contemporary retailers that we believe are consistent with our target clients’ demographic and shopping preferences. From January 1, 2022 to December 31, 2023, we successfully opened or relocated 18 new Showrooms.
Unique factors in any given quarter 9 Table of Contents may affect comparisons between the quarters, and the results for any quarter are not necessarily indicative of the results that we may achieve for a full year.
As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year. Unique factors in any given quarter may affect comparisons between the quarters, and the results for any quarter are not necessarily indicative of the results that we may achieve for a full year.
As of that date, approximately 870 of our employees were based in our Showrooms, 500 of our employees were based in our distribution centers, 250 of our employees were based in our manufacturing facility, and 560 of our employees were based in our corporate headquarters.
As of that date, approximately 1,000 of our employees were based in our Showrooms, 420 of our employees were based in our warehouses, distribution centers and third party logistic warehouses, 230 of our employees were based in our manufacturing facility, and 640 of our employees were based in our corporate headquarters.
Our omni-channel model allows clients to begin or end their shopping journey online, while also experiencing our theater-like Showrooms throughout the shopping journey. As of December 31, 2022, we operated 81 Showrooms , 65 with in-home interior designers. O ur Showrooms s pan 29 states and consist of 72 traditional showrooms, 6 Design Studios and 3 Outlets.
Our omni-channel model allows clients to begin or end their shopping journey online, while also experiencing our theater-like Showrooms throughout the shopping journey. As of December 31, 2023, we operated 92 Showrooms in 29 states, consisting of 80 Traditional Showrooms, 8 Design Studios and 4 Outlets. Our business witnessed strong performance over the last three years.
At December 31, 2022, our top 10 Showrooms by net revenue are located in 9 different states, and our model has proven successful in a variety of markets and economic cycles.
At December 31, 2023, our top 10 Showrooms by net revenue are located in 9 different states, and our model has proven successful in a variety of markets and economic cycles. Our goal is to open five to seven new Traditional Showrooms plus incremental Design Studios, per ye ar for the foreseeable futur e .
We value diversity at all levels and focus on extending our diversity and inclusion initiatives across our entire workforce. We continue to foster a culture of inclusion, diversity, and equity in which everyone is respected, valued, and has an equal opportunity to contribute and thrive.
We continue to foster a culture of inclusion, diversity, and equity in which everyone is respected, valued, and has an equal opportunity to contribute and thrive. Our commitment is unwavering, and we are steadfast in maintaining our focus on building a workforce that represents the many clients we serve and the communities in which we operate.
Our website also provides our clients with the ability to chat with a designer through our online design services tools. We update our website regularly to reflect new products, product availability and special offers. Print and Digital Media Our January and September catalogs are distributed in both digital and physical formats.
Our website creates a more interactive shopping process through the use of virtual shopping tools to aid clients in visualizing our products in their homes. Our eCommerce platform also provides our clients with the ability to chat with a designer through our online design services tools. We update our website regularly to reflect new products, product availability and special offers.
Leverage Investments to Grow Net Revenue and Enhance Margins We have the opportunity to further drive net revenue and enhance operating margins by continuing to focus on our distribution efficiency and manufacturing capacity. Enhanced Distribution Efficiency and Capacity.
We will continue to innovate and invest in value-added digital and technological capabilities across our omni-channel footprint. Invest in Growth to Build Scale and Enhance Margins We have the opportunity to further drive net revenue and enhance operating margins by continuing to focus on our operating efficiency, including distribution and manufacturing capacity. Enhanced Distribution Efficiency and Capacity.
Our new website creates a more interactive process through the use of virtual shopping tools that allow clients to visualize our products in their homes. Our website is key to our omni-channel model and helps drive Showroom traffic, increases client engagement and streamlines product feedback, which ultimately results in client conversion. Optimize Product Ass ortment.
Our new website creates a more interactive process through the use of virtual shopping tools that allow clients to visualize our products in their homes. Optimize Product Ass ortment. We continue building our product assortment to attract new clients and encourage repeat purchases from existing clients.
Illustrated by the success of our geographically diverse Showroom footprint, our omni-channel model has performed well in every region of the country, across retail formats and across market s izes.
We believe there is potential to more than double our current Traditional Showroom base to ove r 165 locations in the United States in both new and existing markets. Illustrated by the success of our geographically diverse Showroom footprint, our omni-channel model has performed well in every region of the country, across retail formats and across market sizes.
We are proud of the incredible loyalty of our client base and our financial momentum over the past several years. Our Competitive Strengths A Differentiated Concept Delivering Livable Luxury We provide a differentiated concept, redefining the premium home furnishing market by offering an attractive combination of design, quality, value and convenience.
Our Competitive Strengths A Differentiated Concept Delivering Livable Luxury We provide a differentiated concept, redefining the premium home furnishing market by offering an attractive combination of design, quality, value and convenience. Artisan-crafted and globally curated, our products are highly differentiated from both small and large competitors. We create merchandise that offers livable luxury style with elements of durability and practicality.
In addition to visual managers, we also employ enthusiastic and knowledgeable sales associates that fully engage our clients and provide expert service and advice. eCommerce . Our online capabilities are a critical entry point into our ecosystem, providing our clients research and discovery tools and allowing them to begin or complete transactions online.
Our online capabilities are an important entry point into our ecosystem, providing our clients with research and discovery tools and allowing them to begin or complete transactions online. Our online design service professionals and virtual tools complement our eCommerce platform by engaging clients and providing them with expert design advice and capabilities.
This will allow us to target clients with personalized digital offerings to increase online conversion and client lifetime value. In the fourth quarter of 2021, we launched a new website to enhance our virtual Showroom experience.
This will allow us to target clients with personalized digital offerings to increase online conversion and client lifetime value . To further strengthen client engagement and increase client interactions, we continue to expand our designer programs, both in-home and online.
We see tremendous growth potential across our omni-channel platform by increasing our ability to make data-driven decisions and maintaining a comprehensive focus on the client journey. We will continue to innovate and invest in value-added digital and technological capabilities across our omni-channel footprint.
Our Design Studio format, which also leverages these state-of-the-art tools, has experienced positive client receptivity, with the new format outperforming our expectations. We see tremendous growth potential across our omni-channel platform by increasing our ability to make data-driven decisions and maintaining a comprehensive focus on the client journey.
We believe our digital platform provides clients with a convenient way to interact with our brand and full product assortment. Our eCommerce platform enables our clients to shop anywhere at any time and begin or complete transactions online.
We believe recent growth is related to our successful website re-launch in late 2021, our enhanced marketing efforts, attractive product assortment and improving brand awareness. Our eCommerce platform enables our clients to shop anywhere at any time and begin or complete transactions online.
The affected employee is required to observe a quarantine period, monitor symptoms, and follow medical guidance prior to returning to work. Diversity, Equity and Inclusion We believe that much of our success is rooted in the diversity of our teams and our commitment to a diverse and inclusive culture.
Diversity, Equity and Inclusion We believe that much of our success is rooted in the diversity of our teams and our commitment to a diverse and inclusive culture. We value diversity at all levels and focus on extending our diversity and inclusion initiatives across our entire workforce.
Our product development and omni-channel go-to-market capabilities, together with our fully integrated infrastructure and significant scale, enable us to offer a compelling combination of design, quality and value that we believe provides an unmatched experience. Showroom . Our theater-like Showrooms, which average approximately 16,100 square feet, act as an exceptionally strong brand-building tool and drive significant traffic.
Leveraging our proprietary data and technology, we are able to meet our clients wherever they want to shop, whether online or in one of our 92 Showrooms. Our product development and omni-channel go-to-market capabilities, together with our infrastructure and significant scale, enable us to offer a compelling combination of design, quality and value that we believe provides an unmatched experience.
Comparable growth was 51.6%, 51.0% and 0.9% in the years ended December 31, 2022, 2021 and 2020, respectively. Our long-standing direct sourcing partnerships were a significant contributor to our success, as many of our vendors increased capacity to help facilitate our net revenue growth.
Our long-standing direct sourcing partnerships were a significant contributor to our success, as many of our vendors increased capacity to help facilitate our net revenue growth. We benefited from these important, long-term relationships as our vendors worked with us to help meet the unprecedented increase in client demand and significant backlog that we experienced in recent years.
Coupled with our direct global sourcing network, we maintain highly adept in-house product design and development experts that partner with our vendors to innovate and create highly customized offerings. Superior and Consistent Unit Economics Our inspirational, theater-like Showrooms have generated robust unit-level financial results, strong free cash flow and attractive, rapid returns on our investment.
Coupled with our direct global sourcing network, we maintain highly adept in-house product design and development experts that partner with our vendors to innovate and create highly customized offerings. For more information on our Global Sourcing and Product Development see the “Our Products, Sourcing and Product Development” section below.
In addition to our two seasonal catalogs, we distribute catalogs for specific categories such as outdoor furnishings, special collections and certain holidays. We employ a targeted approach with our print and digital media and also identify lifestyle-driven opportunities to reach potential clients, such as sending postcards or small mailers to people who have recently moved.
Print and Digital Media Our spring and fall catalogs are distributed in both digital and physical formats. In addition to our two seasonal catalogs, we distribute catalogs for specific categories such as outdoor furnishings, special collections and certain holidays.
We distribute two large catalogs each year, a January and a September edition, in both an online and physical format to millions of households, which has yielded strong results. We also distribute catalogs for specific categories such as outdoor furnishings, special collections and certain holidays.
Driven by investment in our digital platform, we believe we can increase our eCommerce penetration over time. Print and Digital Media . We distribute two large catalogs each year, a spring and a fall edition, in both an online and physical format to millions of households, which have yielded strong results.
As of December 31, 2022, we had 84 in-home designers in 65 Showrooms compared to 54 in-home designers in 45 Showrooms as of December 31, 2020. Strong Direct Global Sourcing Relationships Our direct global sourcing relationships allow us to provide superior quality, differentiated customization and attractive value.
In-home designer services provide a more personalized client experience and produce average order values (AOVs) over four times that of a standard order. Strong Direct Global Sourcing Relationships Our direct global sourcing relationships allow us to provide superior quality, differentiated customization and attractive value.
Artisan-crafted and globally curated, our products are highly differentiated from both small and large competitors. We create merchandise that offers livable luxury style with elements of durability and practicality. We serve our clients through our Showrooms, eCommerce platform, print and digital media and high-quality client service.
We serve our clients through our Showrooms, eCommerce platform, print and digital media and high-quality client service.
Our in-home designer services provide a more personalized client experience and, since 2017, have produced AOVs over three times that of a standard order. We welcome all clients to use our complimentary in-home designer services with no appointment required.
We welcome all clients to use our complimentary in-home designer services with no appointment required. As of December 31, 2023, we had 110 in-home designers in 78 Showrooms compared to 84 in-home designers in 65 Showrooms as of December 31, 2022.
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We benefited from these important, long-term relationships as our vendors worked with us to help meet the unprecedented increase in client demand and significant backlog. During 2020, we experienced COVID-19 related disruptions to our business. In March 2020, we temporarily closed all of our Showrooms and Outlets. By June 30, 2020, we reopened all of our Showrooms and Outlet stores.
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Showrooms . Our theater-like Showrooms act as an exceptionally strong brand-building tool and drive significant traffic. Our Traditional Showrooms average approximately 16,000 square feet. Our smaller format Design Studios, which are located in areas such as affluent second home markets where a lower square footage format is preferred, average approximately 5,000 square feet. eCommerce .
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Highly Experiential Omni-Channel Approach We strive to offer our products to our clients via our omni-channel approach and operate our business in a channel agnostic way. Leveraging our proprietary data and technology, we are able to meet our clients wherever they want to shop, whether online or in one of our 81 Showrooms.
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Superior and Consistent Unit Economics Our inspirational, theater-like Showrooms have generated robust unit-level financial results, strong free cash flow and attractive, rapid returns on our investment. We have been successful across all geographic regions we have entered and have proven to be resilient to competitive entrants.
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Our Showrooms provide clients with an unparalleled experience, conveying our livable luxury concept designed to showcase product. Our highly trained and creative visual managers walk the floors daily to determine new ways to visually optimize and maximize the appeal and inspirational nature of our Showrooms.
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On an ongoing basis, we expand the product portfolio to address a breadth of lifestyles, home types and rooms within the home through new designs, materials, fabrics and colors to capture constantly evolving trends and client preferences.
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Our online design services professionals and virtual tools complement our eCommerce platform by engaging clients and providing them with expert design advice and capabilities. Driven by investment in our digital platform, we believe we can increase our eCommerce penetration over time, accelerating growth and allowing clients to transact when, where and how they choose. Print and Digital Media .
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Our long-term plan anticipates opening five to seven new Traditional Showrooms plus incremental Design Studios, per year for the foreseeable future. We employ a data-driven, thorough process to select and develop new Showroom locations.
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In-home designer services provide a more personalized client experience and since 2017 have produced average order values (AOVs) over three times that of a standard order. Clients that engage with our in-home designer services program exhibit a significantly higher repurchase rate, with approximately 40% making five or more purchases throughout their client lifetime.
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Grow eCommerce Platform. eCommerce represents our fastest growing channel, with net revenue increasing by approximately 43% in 2022 compared to 2021. We believe recent growth is related to our new website launched in the fourth quarter of 2021, our enhanced marketing efforts, attractive product assortment and improving brand awareness.
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We continue building our product assortment to attract new clients and encourage repeat purchases from existing clients. We plan to expand our product portfolio across select categories and to continue to refine our existing product offering with new designs, materials, fabrics and colors to capture constantly evolving trends and client preferences.
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We have built a comprehensive and sophisticated infrastructure which we believe can support approximately 90 incremental Showrooms in over 40 new metropolitan statistical areas across the United States, 27 of which are currently in our pipeline. Our long-term plan anticipates opening between five to seven new Showrooms each year for the foreseeable future.
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Our new website creates a more interactive shopping process through the use of virtual shopping tools to aid clients in visualizing our products in their homes. To further strengthen client engagement and increase client interactions, we continue to expand our designer programs, both in-home and online.
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We are also investing in Showroom technology, including the installation of touch screen TVs and other augmented reality tools to enhance the client experience. Our new Design Studio format, which also leverages these state-of-the-art tools, has experienced overwhelmingly positive client receptivity, with the new format outperforming our expectations.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeA range of factors involved in the development of new Showrooms may continue to be affected by the impacts of COVID-19, including delays in construction, permitting and other necessary governmental actions. In addition, the scope and cadence of investments by third parties, including landlords and other real estate counterparties, may be adversely affected by the impacts of COVID-19.
Biggest changeDue to COVID-19, we experien ced constrai nts in our merchandise supply chain, which resulted in delays in the manufacture, supply, distribution, transportation and delivery of our products and our inventory levels. 17 COVID-19 also impacted a range of factors involved in the development of new Showrooms, including delays in construction, permitting and other necessary governmental actions.
We rely in part on digital advertising, including search engine marketing and social media advertising, to promote awareness of our brand, grow our business, attract new clients and retain existing clients. In particular, we rely on search engines, such as Google, and social media platforms such as Facebook, Pinterest and Instagram as important marketing channels.
We rely in part on digital advertising, including search engine marketing and social media advertising, to promote awareness of our brand, grow our business, attract new clients and retain existing clients. In particular, we rely on search engines, such as Google, and social media platforms such as Instagram, Facebook and Pinterest as important marketing channels.
Under these rules, a company of which more than 50% of the voting power with respect to the election of directors is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain stock exchange rules regarding corporate governance, including the following requirements: • that a majority of its board of directors consist of independent directors; • that its director nominees be selected or recommended for the board’s selection by a majority of the board’s independent directors in a vote in which only independent directors participate or by a nominating committee comprised solely of independent directors, in either case, with a formal written charter or board resolutions, as applicable, addressing the nominations process and such related matters as may be required under the federal securities laws; and 39 • that its compensation committee be composed solely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
Under these rules, a company of which more than 50% of the voting power with respect to the election of directors is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain stock exchange rules regarding corporate governance, including the following requirements: • that a majority of its Board of Directors consist of independent directors; • that its director nominees be selected or recommended for the board’s selection by a majority of the board’s independent directors in a vote in which only independent directors participate or by a nominating committee comprised solely of independent directors, in either case, with a formal written charter or board resolutions, as applicable, addressing the nominations process and such related matters as may be required under the federal securities laws; and • that its compensation committee be composed solely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
Our substantial lease obligations could have significant negative consequences, including, among others: • increasing our vulnerability to general adverse economic and industry conditions; 27 • limiting our ability to obtain additional financing; • requiring a substantial portion of our available cash to pay our rental obligations, reducing cash available for other purposes; • limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and • placing us at a disadvantage with respect to some of our competitors who sell their products exclusively online.
Our substantial lease obligations could have significant negative consequences, including, among others: • increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring a substantial portion of our available cash to pay our rental obligations, reducing cash available for other purposes; • limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and • placing us at a disadvantage with respect to some of our competitors who sell their products exclusively online.
Showroom locations may become unsuitable due to, and our revenue volume and client traffic generally may be harmed by, among other things: • economic downturns in a particular area; • competition from nearby retailers selling similar products; • changing client demographics in a particular market; • changing preferences of clients in a particular market; • the closing or decline in popularity of other businesses located near our Showroom; • reduced client foot traffic outside a Showroom location; and • Showroom impairments due to acts of God, pandemic, terrorism, protest or periods or civil unrest.
Showroom locations may become unsuitable due to, and our revenue volume and client traffic generally may be harmed by, among other things: • economic downturns in a particular area; 25 • competition from nearby retailers selling similar products; • changing client demographics in a particular market; • changing preferences of clients in a particular market; • the closing or decline in popularity of other businesses located near our Showroom; • reduced client foot traffic outside a Showroom location; and • Showroom impairments due to acts of God, pandemic, terrorism, protest or periods or civil unrest.
Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and operating results.
Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or 22 otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and operating results.
Further, adverse publicity about client or other litigation may negatively affect us, regardless of whether the allegations are true, by discouraging clients from purchasing our products. Our failure to successfully manage the costs and performance of our print media might have a negative impact on our business. Print media mailing is a significant component of our marketing activities.
Further, 23 adverse publicity about client or other litigation may negatively affect us, regardless of whether the allegations are true, by discouraging clients from purchasing our products. Our failure to successfully manage the costs and performance of our print media might have a negative impact on our business. Print media mailing is a significant component of our marketing activities.
In addition, there can be no assurance that we will be able to obtain 41 similar insurance coverage on favorable terms (or at all) in the future. Significant uninsured losses and liabilities could have a material adverse effect on our financial condition and results of operations. Furthermore, our insurance is subject to deductibles.
In addition, there can be no assurance that we will be able to obtain similar insurance coverage on favorable terms (or at all) in the future. Significant uninsured losses and liabilities could have a material adverse effect on our financial condition and results of operations. Furthermore, our insurance is subject to deductibles.
The success of our business depends upon our ability to recruit, hire and retain qualified individuals to work in and manage our Showrooms and manufacturing and distribution centers in the geographic regions in which our Showrooms and manufacturing and distribution centers are located, and our operations are subject to federal and state laws governing such matters as minimum wages, overtime, working conditions and employment eligibility requirements.
The success of our business depends upon our ability to recruit, hire and retain qualified individuals to work in and manage our Showrooms and manufacturing and distribution centers in the geographic regions in which our 20 Showrooms and manufacturing and distribution centers are located, and our operations are subject to federal and state laws governing such matters as minimum wages, overtime, working conditions and employment eligibility requirements.
With the oversight of senior management and our Audit Committee, we have designed and begun to implement a remediation plan which includes: • Updating our policies and procedures to establish and maintain effective segregation of duties for our finance and accounting staff in relation to journal entries, reconciliations and other applicable processes. • Designing and implementing internal financial reporting procedures and controls to improve the completeness, accuracy and timely preparation of financial reporting and disclosures inclusive of establishing an ongoing program to provide sufficient training to our finance and accounting staff. • Enhancing the design and operation of user access control activities and procedures to ensure that access to IT applications and data is adequately restricted to appropriate personnel. 20 • Hiring additional competent and qualified technical accounting and financial reporting personnel with appropriate knowledge and experience of U.S.
Remediation Activities With the oversight of senior management and our Audit Committee, we have designed and begun to implement a remediation plan which includes: • Updating our policies and procedures to establish and maintain effective segregation of duties for our accounting staff in relation to journal entries, reconciliations and other applicable processes. • Designing and implementing internal financial reporting procedures and controls to improve the completeness, accuracy and timely preparation of financial reporting and disclosures inclusive of establishing an ongoing program to provide sufficient training to our finance and accounting staff. • Enhancing the design and operation of user access control activities and procedures to ensure that access to IT applications and data is adequately restricted to appropriate personnel. 19 • Hiring additional competent and qualified technical accounting and financial reporting personnel with appropriate knowledge and experience of U.S.
The principal factors and uncertainties that make investing in our Class A common stock risky include, among others: • risks associated with the incurrence of operating losses in the future or failure to achieve or maintain profitability in the future; • fluctuations in the growth rate of our business and our high rates of growth in terms of revenue, earnings and margins, which may not be sustained in future periods; • our ability to purchase quality merchandise in sufficient quantities at competitive prices, including products that are produced by artisan vendors; • disruption in our receiving and distribution system or increased costs as a result of our recently opened distribution and manufacturing centers • cybersecurity risks and costs associated with credit card fraud, identity theft and business interruption could result in unexpected expenses and loss of revenue; • risks associated with receiving, processing, storing, using and sharing personal data that requires us to comply with complex and evolving governmental regulations related to data privacy and data protection that could expose us to litigation or damage our reputation; • import and other international risks as a result of our reliance on foreign manufacturers and vendors to supply a significant portion of our merchandise; • changes in the health of the high-end housing market, as well as declines in consumer confidence and consumer spending; • risks associated with the interruption of supply and increased costs as a result of our reliance on third-party transportation carriers for shipment of our products; • increased commodity prices or increased freight and transportation costs; • our ability to timely and effectively deliver merchandise to our clients and manage our supply chain; • risks posed by the COVID-19 pandemic or should another or similar outbreak of an infectious disease occur; and • the dual class structure of our common stock, which has the effect of concentrating voting power with our Founder and the Founder Family Trusts, gives our Founder and the Founder Family Trusts substantial control over us, including over matters that require the approval of stockholders, and their interests may conflict with ours or those of our stockholders.
The principal factors and uncertainties that make investing in our Class A common stock risky include, among others: • risks associated with the incurrence of operating losses in the future or failure to achieve or maintain profitability in the future; • fluctuations in the growth rate of our business and our high rates of growth in terms of revenue, earnings and margins, which may not be sustained in future periods; • our ability to purchase quality merchandise in sufficient quantities at competitive prices, including products that are produced by artisan vendors; • disruption in our receiving and distribution system or increased costs as a result of our recently opened distribution and manufacturing centers; • cybersecurity risks and costs associated with credit card fraud, identity theft and business interruption could result in unexpected expenses and loss of revenue; • risks associated with receiving, processing, storing, using and sharing personal data that requires us to comply with complex and evolving governmental regulations related to data privacy and data protection that could expose us to litigation or damage our reputation; • import and other international risks as a result of our reliance on foreign manufacturers and vendors to supply a significant portion of our merchandise; • changes in the health of the high-end housing market, as well as declines in consumer confidence and consumer spending; • risks associated with the interruption of supply and increased costs as a result of our reliance on third-party transportation carriers for shipment of our products; • increased commodity prices or increased freight and transportation costs; • our ability to timely and effectively deliver merchandise to our clients and manage our supply chain; • risks posed by a pandemic should an outbreak of an infectious disease occur; and • the dual class structure of our common stock, which has the effect of concentrating voting power with our Founder and the Founder Family Trusts, gives our Founder and the Founder Family Trusts substantial control over us, including over matters that require the approval of stockholders, and their interests may conflict with ours or those of our stockholders.
There can be no assurance that such competitors will not be more successful than us or that we will be able to continue to maintain our position as a leader in style and innovation in the future. Our lease obligations are substantial and expose us to increased risks. We do not own any of our Showrooms.
There can be no assurance that such competitors will not be more successful than us or that we will be able to continue to maintain our position as a leader in style and innovation in the future. 26 Our lease obligations are substantial and expose us to increased risks. We do not own any of our Showrooms.
In addition, our employees, contractors, vendors or other third parties with whom we do business may attempt to circumvent security measures in order to misappropriate such personal information, confidential information or other data, or may inadvertently release or compromise such data. We expect to incur ongoing costs associated with the detection and prevention of cyber threats.
In addition, our employees, contractors, vendors or other third parties with whom we do business may attempt to circumvent security measures in order to misappropriate such personal information, confidential information or other data, or may inadvertently 28 release or compromise such data. We expect to incur ongoing costs associated with the detection and prevention of cyber threats.
Such events could also result in the deterioration of confidence in the Company by employees, consumers and customers and cause other competitive disadvantages. 30 Furthermore, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting additional state and federal proposals addressing data privacy and security.
Such events could also result in the deterioration of confidence in the Company by employees, consumers and customers and cause other competitive disadvantages. Furthermore, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting additional state and federal proposals addressing data privacy and security.
In addition, the ESG factors by which companies’ corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. Alternatively, if we are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate.
In addition, the factors by which companies’ corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. Alternatively, if we are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate.
We risk damage to our brand and reputation in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. We may be required to make substantial investments in matters related to ESG, which could require significant investment and impact our results of operations.
We risk damage to our brand and reputation in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. We may be required to make substantial investments in matters related to corporate responsibility, which could require significant investment and impact our results of operations.
As a result of our dependence on third-party providers, we are subject to risks, including labor disputes, union organizing activity, adverse weather, natural disasters, climate change, the closure of our carriers’ offices or a reduction in operational hours due to an economic slowdown or the inability to sufficiently ramp up operational hours during an economic recovery or upturn, availability of adequate trucking or railway providers, possible acts of terrorism, outbreaks of disease (such as the COVID-19 pandemic) or other factors affecting such carriers’ ability to provide delivery services and meet our shipping needs, disruptions or increased fuel costs and costs associated with any regulations to address climate change.
As a result of our dependence on third-party providers, we are subject to risks, including labor disputes, union organizing activity, adverse weather, natural disasters, climate change, the closure of our carriers’ offices or a reduction in operational hours due to an economic slowdown or the inability to sufficiently ramp up operational hours during an economic recovery or upturn, availability of adequate trucking or railway providers, possible acts of terrorism, international conflicts, outbreaks of disease (such as the COVID-19 pandemic) or other factors affecting such carriers’ ability to provide delivery services and meet our shipping needs, disruptions or increased fuel costs and costs associated with any regulations to address climate change.
Even if a Showroom location becomes unsuitable, we will generally be unable to cancel the long-term lease associated with such Showroom. 26 Our estimated addressable market is subject to inherent challenges and uncertainties. If we have overestimated the size of our addressable market, our future growth opportunities may be limited.
Even if a Showroom location becomes unsuitable, we will generally be unable to cancel the long-term lease associated with such Showroom. Our estimated addressable market is subject to inherent challenges and uncertainties. If we have overestimated the size of our addressable market, our future growth opportunities may be limited.
That information includes data about our clients as well as sensitive information about our vendors and workforce, including social security numbers and bank account information. If our systems, or those of our third party service providers, are damaged, misappropriated, interrupted or subject to unauthorized access, information about our clients, vendors or workforce could be stolen or misused.
That information includes data about our clients as well as sensitive information about our vendors and workforce, 29 including social security numbers and bank account information. If our systems, or those of our third party service providers, are damaged, misappropriated, interrupted or subject to unauthorized access, information about our clients, vendors or workforce could be stolen or misused.
Any failure in our decision-making or related 34 investments in this regard could affect client perceptions as to our brand. Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead.
Any failure in our decision-making or related investments in this regard could affect client perceptions as to our brand. Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead.
If we raise additional capital through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we may issue could have rights, preferences and privileges superior to those holders of our Class A common stock.
If we raise additional capital through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we may issue could have rights, preferences and privileges superior to those holders of our 34 Class A common stock.
As a result, the dual class structure of our common stock has and may continue to prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate 36 governance practices or otherwise seek to cause us to change our capital structure.
As a result, the dual class structure of our common stock has and may continue to prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure.
If our existing stockholders sell a large number of shares, or if we issue a large number of shares of our common stock in connection with future acquisitions, strategic alliances, third-party investments and private placements or otherwise, the market price of our Class A common stock could decline significantly.
If our existing stockholders sell a large number of shares, or if we issue a large number of shares of our common stock in connection with future acquisitions, strategic alliances, third-party investments and private placements or otherwise, 38 the market price of our Class A common stock could decline significantly.
Client response to our catalogs is substantially dependent on merchandise 24 assortment, availability and creative presentation, as well as the consumers to whom the catalogs are directed, timing of delivery of our mailings, the general retail sales environment and current domestic and global economic conditions.
Client response to our catalogs is substantially dependent on merchandise assortment, availability and creative presentation, as well as the consumers to whom the catalogs are directed, timing of delivery of our mailings, the general retail sales environment and current domestic and global economic conditions.
We believe eCommerce offers a significant growth opportunity and our strategy includes investment in and expansion of our digital platform and eCommerce channel. The success of our eCommerce business depends, in part, on third parties 28 and factors over which we have limited control.
We believe eCommerce offers a significant growth opportunity and our strategy includes investment in and expansion of our digital platform and eCommerce channel. The success of our eCommerce business depends, in part, on third parties and factors over which we have limited control.
General Risks Our operations present risks which may not be fully covered by insurance. We carry comprehensive insurance against the hazards and risks underlying our operations. We believe our insurance policies are customary in the industry; however, some losses and liabilities associated with our operations may not be covered by our insurance policies.
General Risks Our operations present risks which may not be fully covered by insurance. We carry comprehensive insurance against the hazards and risks underlying our operations. We believe our insurance policies are customary in the industry; however, some losses and liabilities associated with our operations 40 may not be covered by our insurance policies.
The PCI Standard contains compliance guidelines with regard to our security surrounding the physical and electronic storage, processing and transmission of cardholder data. Compliance with the PCI Standard and implementing related procedures, technology and information security measures requires significant resources and ongoing attention.
The PCI Standard 30 contains compliance guidelines with regard to our security surrounding the physical and electronic storage, processing and transmission of cardholder data. Compliance with the PCI Standard and implementing related procedures, technology and information security measures requires significant resources and ongoing attention.
We may take certain pricing, merchandising or marketing actions that could have a disproportionate effect on our business, financial condition and results of operations in a particular quarter or selling season, and as a result we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and cannot be relied upon as indicators of future performance. 14 We depend on our ability to purchase quality merchandise in sufficient quantities at competitive prices, including products that are produced by specialty and artisan vendors.
We may take certain pricing, merchandising or marketing actions that could have a disproportionate effect on our business, financial condition and results of operations in a particular quarter or selling season, and as a result we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and cannot be relied upon as indicators of future performance. 13 We depend on our ability to purchase quality merchandise in sufficient quantities at competitive prices, including products that are produced by specialty and artisan vendors.
Further, our amended and restated bylaws provide that our bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of a majority of the votes which all our stockholders would be eligible to cast in an election of directors. 40 The foregoing factors, as well as the significant common stock ownership by our Founder, could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our Class A common stock that could result in a premium over the market price for shares of Class A common stock.
Further, our amended and restated bylaws provide that our bylaws may be amended or repealed by a majority vote of our Board of Directors or by the affirmative vote of a majority of the votes which all our stockholders would be eligible to cast in an election of directors. 39 The foregoing factors, as well as the significant common stock ownership by our Founder, could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our Class A common stock that could result in a premium over the market price for shares of Class A common stock.
Our clients also engage with us online through our social media channels, including Facebook and Instagram, by providing feedback and public commentary about aspects of our business. Omni-channel retailing is rapidly evolving.
Our clients also engage with us online through our social media channels, including Instagram, Facebook and Pinterest, by providing feedback and public commentary about aspects of our business. Omni-channel retailing is rapidly evolving.
Currently, none of our employees are represented by a union or subject to any collective bargaining agreements. We believe that we have good relations with our employees and that these good relations contribute to the success of our operations.
Currently, none of our employees are represented by a union or subject to any collective bargaining agreements. We believe that we have good relations with our employees and that these good relations contribute to the success of our 27 operations.
Our $75 million revolving credit facility that is subject to a borrowing base availability calculation, or the Revolving Credit Facility, with Bank of America, N.A., as administrative agent, and the lenders party thereto, contains restrictive covenants that limit our ability to, among other things, incur certain additional indebtedness, make certain investments, merge, dissolve, liquidate or consolidate all or substantially all of our assets, make certain dispositions or restricted payments, enter into certain transactions with affiliates or make certain amendments to our organizational documents.
Our $75 million revolving credit facility that is subject to a borrowing base availability calculation (the “Revolving Credit Facility”) with Bank of America, N.A., as administrative agent, and the lenders party thereto, contains restrictive covenants that limit our ability to, among other things, incur certain additional indebtedness, make certain investments, merge, dissolve, liquidate or consolidate all or substantially all of our assets, make certain dispositions or restricted payments, enter into certain transactions with affiliates or make certain amendments to our organizational documents.
If our management is unable to certify the effectiveness of our internal control or if our independent registered public accounting firm cannot deliver a report attesting to the effectiveness of our internal control over financial reporting when required, or if we identify or fail to remediate any significant deficiencies or material weaknesses in our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence, which could seriously harm our reputation, and the price per share of our Class A common stock could decline.
If our management is unable to certify the effectiveness of our internal control or if our independent registered public accounting firm cannot deliver a report attesting to the effectiveness of our internal control over financial reporting, or if we identify or fail to remediate any significant deficiencies or material weaknesses in our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence, which could seriously harm our reputation, and the price per share of our Class A common stock could decline.
Specifically, we lacked a sufficient complement of professionals with an 19 appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately.
Specifically, we lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately.
Failure to 21 continue to attract a sufficient number of individuals at reasonable compensation levels could have a material adverse effect on our business, reputation and results of operations.
Failure to continue to attract a sufficient number of individuals at reasonable compensation levels could have a material adverse effect on our business, reputation and results of operations.
Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation. These factors may, therefore, strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members. 42 Item 1B.
Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation. These factors may, therefore, strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members. 41 Item 1B.
In recent years, we have faced significant inflationary pressure on freight costs, which were heightened by tariff-related shipment surges and port congestion. Due to the uncertainty of commodity price fluctuations and inflation, we may not be able to pass some or all of these increased costs on to our clients, which results in lower margins.
In recent years, we have faced significant inflationary pressure on freight costs, which were heightened by tariff-related shipment surges and port congestion. Due to the uncertainty of commodity price fluctuations and inflation, we may not be able to pass some or all of these increased costs on to our clients, which may result in lower margins.
With the growth in importance and the impact of social media, the magnitude of such harm to our business, reputation and brand image may be significantly amplified.
With the growth in importance and the impact of social media, the magnitude of such harm to our 21 business, reputation and brand image may be significantly amplified.
Any disruptions in our receiving and distribution system or increased costs as a result of our new distribution centers could have a material adverse effect on our reputation, business, financial condition, and results of operations. 15 We are subject to import and other international risks as a result of our reliance on foreign manufacturers and vendors to supply a significant portion of our merchandise.
Any disruptions in our receiving and distribution system or increased costs as a result of our new distribution centers could have a material adverse effect on our reputation, business, financial condition, and results of operations. 14 We are subject to import and other international risks as a result of our reliance on foreign manufacturers and vendors to supply a significant portion of our merchandise.
Accordingly, any rapid and significant changes in commodity prices or other supply chain costs may have a material adverse effect on our gross margins, operating results and financial performance. 17 Our business and operating results may be harmed if we are unable to timely and effectively deliver merchandise to our clients and manage our supply chain.
Accordingly, any rapid and significant changes in commodity prices or other supply chain costs may have a material adverse effect on our gross margins, operating results and financial performance. 16 Our business and operating results may be harmed if we are unable to timely and effectively deliver merchandise to our clients and manage our supply chain.
In addition, governmental authorities have imposed regulations or requirements with respect to the compensation of our employees or the manner or location in which our employees may work.
In addition, governmental authorities imposed regulations or requirements with respect to the compensation of our employees or the manner or location in which our employees may work.
The interpretation and application of existing laws regarding this subject are continuing to evolve and many states are considering new regulations in this 33 area.
The interpretation and application of existing laws regarding this subject are continuing to evolve and many states are considering new regulations in this area.
See Item 9A Controls and Procedures , for management’s annual report on internal control over financial reporting as of December 31, 2022 . We have and expect to continue to incur costs related to implementing an internal audit and compliance function in the upcoming years to further improve our internal control environment.
See Item 9A Controls and Procedures , for management’s annual report on internal control over financial reporting as of December 31, 2023 . We have and expect to continue to incur costs related to implementing an internal audit and compliance function in the upcoming years to further improve our internal control environment.
Continued increases in interest rates may further 16 dampen growth in the U.S. housing market and may depress consumer optimism about the U.S. housing market and home buying in the higher-end of the housing market. We believe that our client purchasing patterns are influenced by economic factors including the health and volatility of the stock market.
Continued increases in interest rates may further dampen growth in the U.S. housing market and may depress consumer optimism about the U.S. housing market and 15 home buying in the higher-end of the housing market. We believe that our client purchasing patterns are influenced by economic factors including the health and volatility of the stock market.
The limited capacities of certain of our vendors may constrain the ability of such vendors to replace any defective merchandise in a timely 22 manner.
The limited capacities of certain of our vendors may constrain the ability of such vendors to replace any defective merchandise in a timely manner.
If our revenue does not grow at a greater rate than our operating expenses, we will not be able to maintain profitability. 13 We have experienced fluctuations in the growth rate of our business and our high rates of growth in terms of revenue, earnings and margins may not be sustained in future time periods.
If our revenue does not grow at a greater rate than our operating expenses, we will not be able to maintain profitability. 12 We have experienced fluctuations in the growth rate of our business and our high rates of growth in terms of revenue, earnings and margins may not be sustained in future time periods.
In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our consolidated financial statements.
In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation step s, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our consolidated financial statements.
In the aggregate, as of February 15, 2023, our Founder beneficially owns 45,078,259 shares of our Class B common stock, and the Founder Family Trusts, in the aggregate, beneficially own 42,037,341 shares of Class B common stock, representing all of the outstanding shares of Class B common stock.
In the aggregate, as of February 15, 2024 , our Founder beneficially owns 45,078,259 shares of our Class B common stock, and the Founder Family Trusts, in the aggregate, beneficially own 42,037,341 shares of Class B common stock, representing all of the outstanding shares of Class B common stock.
These factors include, but are not limited to, the following: • macroeconomic conditions, including inflation and factors affecting the housing market; • the failure of securities analysts to continue to cover our common stock or changes in financial estimates or recommendations by analysts; • changes in market valuation or earnings of our competitors; • actual or anticipated variations in our annual or quarterly results of our operations, including our earnings estimates and whether we meet market expectations with regard to our earnings; • significant volatility in the market price and trading volume of securities of companies in the retail and consumer goods sectors in which our business operates, which may not be related to the operating performance of these companies and which may not reflect the performance of our business; • changes in preferences of our customers; • announcements of new products, significant price reductions or promotions by us or our competitors; • share transactions by principal stockholders; • stock price performance of our competitors; • market price and volume fluctuations in the stock market generally; • actual or anticipated negative earnings or other announcements by us or other retail companies; • downgrades in our credit ratings or the credit ratings of our competitors; and 37 • natural or man-made disasters or other similar events including health issues such as COVID-19; and • global economic, legal and regulatory changes unrelated to our performance.
These factors include, but are not limited to, the following: • macroeconomic conditions, including inflation and factors affecting the housing market; • the failure of securities analysts to continue to cover our common stock or changes in financial estimates or recommendations by analysts; • changes in market valuation or earnings of our competitors; • actual or anticipated variations in our annual or quarterly results of our operations, including our earnings estimates and whether we meet market expectations with regard to our earnings; • significant volatility in the market price and trading volume of securities of companies in the retail and consumer goods sectors in which our business operates, which may not be related to the operating performance of these companies and which may not reflect the performance of our business; • changes in preferences of our customers; • announcements of new products, significant price reductions or promotions by us or our competitors; • share transactions by principal stockholders; • stock price performance of our competitors; • market price and volume fluctuations in the stock market generally; • actual or anticipated negative earnings or other announcements by us or other retail companies; • downgrades in our credit ratings or the credit ratings of our competitors; 36 • natural or man-made disasters or other similar events including health issues or pandemics; and • global economic, legal and regulatory changes unrelated to our performance.
For example, we maintain Instagram, Facebook, Twitter, Pinterest and YouTube accounts, as well as our own content on our website. We maintain relationships with many social media influencers and may engage in sponsorship initiatives.
For example, we maintain Instagram, Facebook and Pinterest accounts, as well as our own content on our website. We maintain relationships with many social media influencers and may engage in sponsorship initiatives.
These material weaknesses resulted in a restatement of our previously issued annual consolidated financial statements as of and for the years ended December 31, 2020 and 2019 principally related to selling, general and administrative expenses and other long-term liabilities, and misclassifications in the balance sheets and statements of comprehensive income.
These material weaknesses resulted in a restatement of our previously issued annual consolidated financial statements as of and for the years ended December 31, 2020 and 2019 princip ally related to selling, general and administrative expenses and other long-term liabilities, and misclassifications in the balance sheets and statements of comprehensive income.
This material weakness contributed to the following additional material weaknesses. • We did not design and maintain accounting policies, procedures and controls, or maintain documentary evidence of existing control activities to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls over the period-end financial reporting process, the preparation and review of account reconciliations and journal entries, including segregation of duties and assessing the reliability of reports and spreadsheets used in controls. • We did not design and maintain effective controls to address the identification of and accounting for certain non-routine or complex transactions, including the proper application of U.S.
This material weakness contributed to the following additional material weaknesses. • We did not design and maintain accounting policies, procedures and controls, or maintain documentary evidence of existing control activities over significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls ove r the period-end financial reporting process, the preparation and review of account reconciliations and journal entries, including segregation of duties and assessing the reliability of reports and spreadsheets used in controls. 18 • We did not design and maintain effective controls to address the identification of and accounting for certain non-routine or complex transactions, including the proper application of U.S.
Further, there is an investor rights agreement that contains agreements among FS Equity Partners VI, L.P. and FS Affiliates VI, L.P., (“the Freeman Spogli Funds”), the Founder and the Class B Trusts with respect to the voting on the election of directors and board committee membership.
Further, there is an investor rights agreement that contains agreements among FS Equity Partners VI, L.P. and FS Affiliates VI, L.P., (the “Freeman Spogli Funds”), the Founder and the Class B Trusts with respect to the voting on the election of directors and board committee membership.
For example, we experienced elevated levels of demand for many of our products, and as a result, encountered delays in fulfilling this demand and replenishing to appropriate inventory levels.
For example, in recent years we experienced elevated levels of demand for many of our products, and as a result, encountered delays in fulfilling this demand and replenishing to appropriate inventory levels.
Although we have technology and other resources to support these new work requirements, there can be no assurance that we will not suffer material risks to our business, operations, productivity and results of operations as a result of these restrictions.
Although we have technology and other resources to support such work requirements, there can be no assurance that we will not suffer material risks to our business, operations, productivity and results of operations as a result of these types of restrictions.
Our business trends are frequently correlated closely with conditions in financial markets including the stock market. The global economic environment is currently in a period of widespread uncertainty as governments and central banks continue to respond to the impact of COVID-19, supply chain issues, and raising inflation on business conditions.
Our business trends are frequently correlated closely with conditions in financial markets including the stock market. The global economic environment is currently in a period of widespread uncertainty as governments and central banks continue to respond to supply chain issues and inflation on business conditions.
We have experienced and are experiencing some delays in certain projects on account of the COVID-19 pandemic’s impact on business conditions and may experience similar delays in the future due to COVID-19 or other similar outbreaks of infectious diseases.
We experienced some delays in certain projects on account of the COVID-19 pandemic’s impact on business conditions and may experience similar delays in the future due to COVID-19 or other similar outbreaks of infectious diseases.
The global outbreak of COVID-19 and resulting health crisis has caused, and continues to cause, s ignificant and widespread disruptions to the U.S. and global economies, financial and consumer markets, and our business. The COVID-19 outbreak in the first quarter of 2020 caused disruptions to our business operations.
The global outbreak of COVID-19, and the resulting health crisis, caused s ignificant and widespread disruptions to the U.S. and global economies, financial and consumer markets, and our business. The COVID-19 outbreak in the first quarter of 2020 caused disruptions to our business operations.
Disruption in the financial markets could have a material adverse effect on client demand and our ability to refund client deposits. We collect deposits from our clients at the time of purchase and in advance of delivering products, and as of December 31, 2022, we had approximately $203 million in client deposits.
Disruption in the financial markets could have a material adverse effect on client demand and our ability to refund client deposits. We collect deposits from our clients at the time of purchase and in advance of delivering products, and as of December 31, 2023, we had approximately $174 million in client deposits.
Risks Related to Data Privacy and Information Technology If we are unable to effectively manage our eCommerce business and digital marketing efforts, our reputation and operating results may be harmed. Our eCommerce channel currently represents approximately 17% of total net revenue in 2022.
Risks Related to Data Privacy and Information Technology If we are unable to effectively manage our eCommerce business and digital marketing efforts, our reputation and operating results may be harmed. Our eCommerce channel currently represents approximately 19% of total net revenue in 2023.
In addition, in the event that we communicate certain initiatives and goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals.
In addition, in the event that we communicate certain initiatives and goals regarding corporate responsibility matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals.
Unique factors in any given quarter may affect period-to-period comparisons in our revenue growth, including: • the overall economic and general retail sales environment, including the effects of uncertainty relating to the COVID-19 pandemic or its related impacts on consumer spending, such as inflation and increased interest rates; • the availability of our products and the impact of delays or disruption in our supply chain; • consumer preferences and demand; • the number, size and location of the Showrooms we open, close, remodel or expand in any period; • our ability to efficiently source and distribute products; • changes in our product offerings and the introduction, and timing thereof, of introduction of new products and new product categories; • promotional events by us or our competitors; • our competitors introducing similar products or merchandise formats; • the distribution of our January and September catalogs each year; • the timing of various holidays, including holidays with potentially heavy retail impact; and • the success of our marketing programs.
Unique factors in any given quarter may affect period-to-period comparisons in our revenue growth, including: • the overall economic and general retail sales environment, including the effects of uncertainty relating to consumer spending, such as inflation and increased interest rates; • the availability of our products and the impact of delays or disruption in our supply chain; • consumer preferences and demand; • the number, size and location of the Showrooms we open, close, remodel or expand in any period; • our ability to efficiently source and distribute products; • changes in our product offerings and the introduction, and timing thereof, of new products and new product categories; • promotional events by us or our competitors; • our competitors introducing similar products or merchandise formats; • the distribution of our spring and fall catalogs each year; • the timing of various holidays, including holidays with potentially heavy retail impact; and • the success of our marketing programs.
The shares of Class B common stock beneficially owned by our Founder represent approximately 48.78% of our total voting power. The shares of Class B common stock beneficially owned by the Founder Family Trusts represent, in the aggregate, approximately 45.49% of our total voting power.
The shares of Class B common stock beneficially owned by our Founder represent approximately 48.77% of our total voting power. The shares of Class B common stock beneficially owned by the Founder Family Trusts represent, in the aggregate, approximately 45.48% of our total voting power.
The inability to respond quickly to market changes could have an impact on our expected growth potential and the growth potential of the market. Our business has been and may continue to be affected by the significant and widespread risks posed by the COVID-19 pandemic or a similar outbreak of an infectious disease.
The inability to respond quickly to market changes could have an impact on our expected growth potential and the growth potential of the market. Our business has been and may continue to be affected by the significant and widespread risks posed by an outbreak of infectious disease, such as the COVID-19 pandemic.
These material weaknesses also resulted in immaterial adjustments recorded as of and for the year ended December 31, 2021 principally related to property, furniture and equipment, net, selling, general and administrative expenses and misclassifications in the balance sheet and statement of cash flows.
These material weaknesses also resulted in immaterial adjustments recorded prior to the issuance of the consolidated financial statements as of and for the year ended December 31, 2021 principally related to property, furniture and equipment, net, selling, general and administrative expenses and misclassifications in the balance sheet and statement of cash flows.
Due to the outbreak of the COVID-19 pandemic, our third-party providers have experienced transportation disruptions and restrictions, labor shortages, vessel schedule changes, congestion and delays at ports, and a shortage of shipping containers needed to ship our products, which have adversely impacted our inventory levels and resulted in a high number of client backorders.
For example, d ue to the outbreak of the COVID-19 pandemic, our third-party providers experienced transportation disruptions and restrictions, labor shortages, vessel schedule changes, congestion and delays at ports, and a shortage of shipping containers needed to ship our products, which adversely impacted our inventory levels and resulted in a high number of client backorders.
Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, including any such difficulties resulting from COVID-19 or similar outbreaks, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have ongoing significant liquidity needs even as we make changes to our planned operations and expansion cadence.
Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have ongoing significant liquidity needs even as we make changes to our planned operations and expansion cadence.
Although we have developed and begun to implement a plan to remediate the material weaknesses and believe, based on our evaluation to date, that the material weaknesses will be remediated in a timely fashion, we cannot project a specific timeline on when the plan will be fully implemented.
GAAP and SEC financial reporting requirements. Although we have developed and begun to implement our plan to remediate the material weaknesses and believe, based on our evaluation to date, that the material weaknesses will be remediated in a timely fashion, we cannot project a specific timeline on when the plan will be fully implemented.
Many of our products are produced by artisans, specialty vendors and other vendors that are small and may be undercapitalized, unable to scale production or have limited production capacity, and we have from time to time in prior periods, including the COVID-19 pandemic, experienced supply constraints that have affected our ability to supply high demand items or new products due to such capacity and other limits, including production and shipping delays related to the COVID-19 pandemic, in our vendor base.
Some of our products are produced by artisans, specialty vendors and other vendors that are small and may be undercapitalized, unable to scale production or have limited production capacity, and we have from time to time in prior periods experienced supply constraints that have affected our ability to supply high demand items or new products due to such capacity and other limits, including production and shipping delays in our vendor base.
All of our products manufactured overseas and imported into the United States are subject to duties collected by the U.S. Customs Service.
All of our products imported into the United States are subject to duties collected by the U.S. Customs Service.
These working arrangements and other related restrictions, including severe limitations on travel, may have an effect on our operations and the ability of our executives to lead our teams.
In the event necessary in the future, these working arrangements and other related restrictions, including severe limitations on travel, may have an effect on our operations and the ability of our executives to lead our teams.
GAAP and SEC financial reporting requirements, including non-routine and complex transactions, to design, execute and/or provide appropriate oversight of activities related to internal control over financial reporting, or ICFR. • Implementing additional program change management policies and procedures, control activities, and tools to ensure changes affecting key financial systems related to IT applications and underlying accounting records are identified, authorized, tested, and implemented appropriately. • Designing and implementing a formal systems development lifecycle methodology and related program development controls to ensure significant IT change events are appropriately tested and approved. • Enhancing the design and operation of control activities and procedures within the computer operations domain to ensure key batch jobs are monitored, processing failures are adequately resolved, and recovery capability is tested. • Identifying and evaluating key IT dependencies including key reports, automated application controls, interfaces, and end user computer facilities.
GAAP and SEC financial reporting requirements, including non-routine and complex transactions, to design, execute and/or provide appropriate oversight of activities related to internal control over financial reporting, or ICFR. • Implementing additional program change management policies and procedures, control activities, and tools to ensure changes affecting key financial systems related to IT applications and underlying accounting records are identified, authorized, tested, and implemented appropriately. • Designing and implementing a formal systems development lifecycle methodology and related program development controls to ensure significant IT change events are appropriately tested and approved. • Enhancing the design and operation of control activities and procedures within the computer operations domain to ensure key batch jobs are monitored, processing failures are adequately resolved, and recovery capability is tested. • Identifying and evaluating key IT dependencies including key reports, automated application controls, interfaces, and end user computer facilities. • Enhancing the design of the control activity over the review of our consolidated balance sheet and statement of cash flows to ensure the classification of operating and investing activities is appropriately presented in the statement of cash flows.
If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with COVID-19, our operations may be negatively affected, potentially materially adversely affecting our business, liquidity, financial condition or results of operations.
If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with an outbreak of infectious disease, our operations may be negatively affected, potentially materially adversely affecting our business, liquidity, financial condition or results of operations.
To the extent COVID-19 or other outbreaks adversely affects our business, they may also have the effect of heightening many of the other risks described in this “Risk Factors” section. We have identified material weaknesses in our internal control over financial reporting.
To the extent outbreaks of infectious diseases adversely affect our business, they may also have the effect of heightening many of the other risks described in this “Risk Factors” section. We have identified material weaknesses in our internal control over financial reporting.
For example, we purchased upholstery products representing approximately 15% of our total net revenue in 2022 from McCreary Modern, Inc.
For example, we purchased upholstery products representing approximately 10% of our total net revenue in 2023 from McCreary Modern, Inc.
During the course of the COVID-19 pandemic, public health officials and other governmental authorities imposed and may impose new mitigation measures, regulations and requirements to address the spread of COVID-19. Public health officials and other governmental authorities also imposed directives and may impose additional directives that could require changes in our business practices.
During the course of the COVID-19 pandemic, public health officials and other governmental authorities imposed mitigation measures, regulations and requirements to address the spread of COVID-19. Public health officials and other governmental authorities also imposed directives that required changes in our business practices.
At various times since the beginning of COVID-19, many of our employees have been subject to state and local shelter-in-place requirements, which have varied over time and resulted in many members of our team being required to work remotely.
At various times during the COVID-19 pandemic, many of our employees were subject to state and local shelter-in-place requirements, which varied over time and resulted in many members of our team being required to work remotely.
Any extreme weather, natural or man-made disasters, catastrophic events, terrorism, blackouts, widespread illness (such as the COVID-19 pandemic) or unfavorable regional economic conditions could materially adversely affect our business.
Any extreme weather, natural or man-made disasters, catastrophic events, terrorism, blackouts, widespread illness or unfavorable regional economic conditions could materially adversely affect our business.
There can be no assurance that we will succeed in opening additional Showrooms, which could have a material adverse effect on our business, financial condition, operating results and prospects. 25 Our ability to successfully open and operate new Showrooms depends on many factors, including, among other things, our ability to: • identify new markets where our brand and products will be accepted and the revenue at our Showrooms will meet our targeted revenue levels; • obtain desired locations, including Showroom size and adjacencies, in targeted high traffic street and urban locations and top tier retail locations; • adapt our Showrooms to address public health concerns or public health crises, such as the COVID-19 pandemic; • negotiate acceptable lease terms, including satisfactory rent and tenant improvement allowances; • achieve brand awareness and attract new clients in new markets; • manage capital expenditures while designing new Showrooms and remodeling our existing Showrooms; • hire, train and retain Showroom associates and field management; • assimilate new Showroom associates and field management into our corporate culture; • source and supply sufficient inventory levels; • employ the adequate technologies needed to serve our clients and protect their transactions with us; • successfully integrate new Showrooms into our existing operations and information technology systems; and • meet our capital needs, including to fund the opening of new Showrooms.
Our ability to successfully open and operate new Showrooms depends on many factors, including, among other things, our ability to: • identify new markets where our brand and products will be accepted and the revenue at our Showrooms will meet our targeted revenue levels; • obtain desired locations, including Showroom size and adjacencies, in targeted high traffic street and urban locations and top tier retail locations; • adapt our Showrooms to address public health concerns or public health crises; • negotiate acceptable lease terms, including satisfactory rent and tenant improvement allowances; • achieve brand awareness and attract new clients in new markets; • manage capital expenditures while designing new Showrooms and remodeling our existing Showrooms; • hire, train and retain Showroom associates and field management; • assimilate new Showroom associates and field management into our corporate culture; • source and supply sufficient inventory levels; • employ the adequate technologies needed to serve our clients and protect their transactions with us; • successfully integrate new Showrooms into our existing operations and information technology systems; and • meet our capital needs, including to fund the opening of new Showrooms.
We cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to prevent some infringement of our rights by others (especially with respect to infringement by non-U.S. entities with no physical U.S. presence), including imitation of our products and misappropriation of our images and brand.
We cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to prevent some infringement of our rights by others (especially with respect to infringement by non-U.S. entities with no physical U.S. presence), including imitation of our products and misappropriation of our images and brand. 31 If we are unable to protect and maintain our intellectual property rights, the value of our brand could be diminished, and our competitive position could suffer.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe following table sets forth the location, use and size of our corporate, distribution, manufacturing and warehouse facilities as of December 31, 2022 : Location Use Approximate Square Footage Boston Heights, Ohio (1) Corporate headquarters and distribution center 1,003,500 Conover, North Carolina (1) Distribution center and manufacturing facility 497,000 Dallas, Texas (1) Distribution center 800,700 Walton Hills, Ohio (1) Warehouse 235,900 Showrooms, Design Studios and Outlets (1)(2) Retail 1,307,900 (1) See Note 6 - Leases to our Consolidated Financial Statements included elsewhere in this Form 10-K.
Biggest changeThe following table sets forth the location, use and size of our corporate, distribution, manufacturing, warehouse, and retail facilities as of December 31, 2023 : Location Use Approximate Square Footage Boston Heights, Ohio (1) Corporate headquarters and distribution center 1,003,500 Conover, North Carolina (1) Distribution center and manufacturing facility 497,000 Dallas, Texas (1) Distribution center 800,700 Walton Hills, Ohio (1) Warehouse 235,900 Traditional Showrooms, Design Studios and Outlets (1)(2) Retail 1,438,200 (1) See Note 7 - Leases to our Consolidated Financial Statements included elsewhere in this Form 10-K.
(2) We lease our Showrooms, Design Studios and Outlets in multiple locations across 29 states.
(2) We lease our Traditional Showrooms, Design Studios and Outlets in multiple locations across 29 states.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed4 unchanged
Biggest changeSee Note 12— Commitments and Contingencies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details. Item 4. Mine Safety Disclosures Not applicable. 43 Part II
Biggest changeSee Note 13— Commitments and Contingencies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details. Item 4. Mine Safety Disclosures Not applicable. 43 Part II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

2 edited+4 added−2 removed7 unchanged
Biggest changeThe number of holders of record presented here also does not include beneficial stockholders whose shares may be held in trust by other entities. Dividend Policy No dividends have been declared or paid on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
Biggest changeThe number of holders of record presented here also does not include beneficial stockholders whose shares may be held in trust by other entities.
The graph assumes $100 was invested in our Class A common stock at the market close on November 4, 2021, which was the first day our Class A common stock began trading, and its relative performance is tracked through December 31, 2022.
The graph assumes $100 was invested in our Class A common stock at the market close on November 4, 2021, which was the first day our Class A common stock began trading, and its relative performance is tracked through December 31, 2023.
Removed
There is no public trading market for our Class B common stock. Holders of Record As of February 28, 2023, there were 154 stockholders of record of our Class A common stock and 4 stockholders of record of our Class B common stock.
Added
There is no public trading market for our Class B common stock. Share Repurchases The following table contains information with respect to repurchases of shares made by the Company during the three months ended December 31, 2023. The table reflects shares delivered to the Company by employees to satisfy tax withholding obligations due upon the vesting of restricted stock.
Removed
Issuer Purchases of Equity Securities None. Item 6. [Reserved] 45
Added
These shares were not repurchased in connection with any publicly announced share repurchase programs.
Added
Period Total number of shares purchased Weighted average price paid per share Total number of shares purchased as part of publicly announced plans Approximate dollar value of shares that may yet be purchased under publicly announced plans October 2023 332 $ 8.90 — $ — November 2023 — — — — December 2023 929 9.81 — — Total 1,261 $ 9.57 — $ — Holders of Record As of February 29, 2024, there were 136 stockholders of record of our Class A common stock and 4 stockholders of record of our Class B common stock.
Added
Dividend Policy On February 29, 2024, the Board of Directors of the Company declared a special cash dividend on the Company’s Class A and Class B common stock of $0.50 per share, payable April 4, 2024, to shareholders of record at the close of business on March 21, 2024.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

2 edited+0 added−0 removed0 unchanged
Biggest changeFinancial Statements and Supplementary Data 57 Consolidated Balance Sheets 58 Consolidated Statements of Comprehensive Income 59 Consolidated Statements of Changes in Mezzanine Equity and Stockholders’/Members’ Equity (Deficit ) 60 Consolidated Statements of Cash Flows 62 Notes to Consolidated Financial Statements 64
Biggest changeFinancial Statements and Supplementary Data 56 Consolidated Balance Sheets 59 Consolidated Statements of Comprehensive Income 60 Consolidated Statements of Changes i n Stockholders’/Members’ Equity (Deficit ) 61 Consolidated Statements of Cash Flows 63 Notes to Consolidated Financial Statements 65
Item 6. [Reserved] 45 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 46 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 56 Item 8.
Item 6. [Reserved] 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 54 Item 8.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeStatement of Consolidated Comprehensive Income Data: Year Ended (In thousands) 2022 2021 Net revenue $ 1,228,928 $ 796,922 Cost of goods sold 703,869 466,989 Gross margin 525,059 329,933 Selling, general and administrative expenses 340,388 296,117 Loss on disposal of assets — 466 Income from operations 184,671 33,350 Interest expense, net 3,387 5,432 Loss on extinguishment of debt — 1,450 Other income (1,294) (320) Income before taxes 182,578 26,788 Income tax expense (benefit) 45,944 (10,144) Net and comprehensive income $ 136,634 $ 36,932 Less: Net income attributable to noncontrolling interest — 15,815 Net and comprehensive income attributable to Company $ 136,634 $ 21,117 Other Operational Data: Year Ended (Dollars in thousands) 2022 2021 Net revenue $ 1,228,928 $ 796,922 Comparable growth 51.6 % 51.0 % Demand comparable growth 13.8 % 45.3 % Gross margin as a % of net revenue 42.7 % 41.4 % Selling, general and administrative expenses as a % of net revenue 27.7 % 37.2 % Income from operations as a % of net revenue 15.0 % 4.2 % Net and comprehensive income $ 136,634 $ 36,932 Net and comprehensive income as a % of net revenue 11.1 % 4.6 % Adjusted EBITDA (1) $ 222,536 $ 122,892 Adjusted EBITDA as a % of net revenue 18.1 % 15.4 % Total Showrooms at end of period 81 79 (1) See “How We Assess the Performance of Our Business” for a definition of adjusted EBITDA and a reconciliatio n of adjusted EBITDA to net income. 51 Comparison of the Years Ended December 31, 2022 and December 31, 2021 Net Revenue Net revenue increased $432.0 million, or 54.2%, to $1,228.9 million in 2022 compared to $796.9 million in 2021.
Biggest changeConsolidated Statements of Comprehensive Income Data: Year Ended December 31, (In thousands) 2023 2022 Net revenue $ 1,287,704 $ 1,228,928 Cost of goods sold 747,281 703,869 Gross margin 540,423 525,059 Selling, general and administrative expenses 376,112 340,388 Income from operations 164,311 184,671 Interest expense (income), net (3,351) 3,387 Other income (1,027) (1,294) Income before taxes 168,689 182,578 Income tax expense 43,450 45,944 Net and comprehensive income $ 125,239 $ 136,634 50 Other Operational Data: Year Ended December 31, (Dollars in thousands) 2023 2022 Net revenue $ 1,287,704 $ 1,228,928 Comparable growth 1.4 % 51.6 % Demand comparable growth 7.6 % 13.8 % Gross margin as a % of net revenue 42.0 % 42.7 % Selling, general and administrative expenses as a % of net revenue 29.2 % 27.7 % Income from operations as a % of net revenue 12.8 % 15.0 % Net and comprehensive income $ 125,239 $ 136,634 Net and comprehensive income as a % of net revenue 9.7 % 11.1 % Adjusted EBITDA (1) $ 203,481 $ 222,536 Adjusted EBITDA as a % of net revenue 15.8 % 18.1 % Total Showrooms at end of period 92 81 (1) See “How We Assess the Performance of Our Business” for a definition of adjusted EBITDA and a reconciliatio n of adjusted EBITDA to net income.
Net cash used in investing activities Investing activities consist primarily of capital expenditures related to investments in retail Showrooms, supply chain investments as well as information technology and systems infrastructure upgrades.
Net cash used in investing activities Investing activities consist primarily of capital expenditures related to investments in retail Showrooms, information technology and systems infrastructure upgrades as well as supply chain investments.
While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, new household formation and the affordability of homes for first time home buyer s, the higher end of the housing market may be disproportionately influenced by 46 other factors, including stock market prices, t he number of second and third h omes being purchased and sold, tax policies, interest rates, and perceived capital appreciation prospects in higher end real estate.
While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, new household formation and the affordability of homes for first time home buyer s, the higher end of the housing market may be disproportionately influenced by other factors, including stock market prices, t he number of second and third h omes being purchased and sold, tax policies, interest rates, and perceived capital appreciation prospects in higher end real estate.
We expect certain of these expenses to continue to increase as we open new Showrooms, develop new product categories and otherwise pursue our curren t business initiatives. SG&A expenses as a percentage of net revenue are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are relatively fixed. EBITDA.
We expect certain of these expenses to continue to increase as we open new Showrooms, develop new product categories and otherwise pursue our curren t business initiatives. SG&A expenses as a percentage of net revenue are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are fixed. EBITDA.
Factors Affecting the Comparability of our Results of Operations Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition. Showroom Openings and Closings New Showrooms contribute incremental expense, new Showroom opening expense and net revenue to the Company.
Factors Affecting the Comparability of our Results of Operations Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition. 49 Showroom Openings and Closings New Showrooms contribute incremental expense, new Showroom opening expense and net revenue to the Company.
Shifts in consumption patterns may continue to have an impact on consumer spending in the U.S. premium home furnishings market. In the past, we have experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods. Housing Market and Housing Turnover .
Shifts in consumption patterns may continue to have an impact on consumer spending in the U.S. premium home furnishings market. In the past, we have 46 experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods. Housing Market and Housing Turnover .
Because adjusted EBITDA omits certain non-cash items and items that we believe are not reflective of underlying operating performance in a particular period, we feel that it is less susceptible to variances in actual performance resulting from 49 depreciation, amortization and other non-cash charges and can be more reflective of our operating performance in a particular period.
Because adjusted EBITDA omits certain non-cash items and items that we believe are not reflective of underlying operating performance in a particular period, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and can be more reflective of our operating performance in a particular period.
GAAP results in addition to using these non-GAAP financial measures. The non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We consider the following financial and operating measures that affect our results of operations: Net Revenue and Demand .
GAAP results in addition to using these non-GAAP financial measures. The non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We consider the following financial and operating measures that affect our results of operations: 47 Net Revenue and Demand .
We define EBITDA as consolidated net income before depreciation and amortization, interest expense, net and income tax expense (benefit). Adjusted EBITDA. We believe that adjusted EBITDA is a useful measure of operating performance as the adjustments eliminate items that we believe are not reflective of underlying operating performance in a particular period.
We define EBITDA as consolidated net income before depreciation and amortization, interest expense (income), net and income tax expense. Adjusted EBITDA. We believe that adjusted EBITDA is a useful measure of operating performance as the adjustments eliminate items that we believe are not reflective of underlying operating performance in a particular period.
When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the 55 carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset.
When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset.
The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at December 31, 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.
The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at December 31, 2023 and 1.50% at December 31, 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.
Discussions regarding our financial condition and results of operations for 2021 compared to 2020 not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Discussions regarding our financial condition and results of operations for 2022 compared to 2021 not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
For a discussion of such risk factors, see the section in this Annual Report entitled “Risk Factors.” This discussion and analysis addresses 2022 and 2021 items and year-over-year comparisons between 2022 and 2021.
For a discussion of such risk factors, see the section in this Annual Report entitled “Risk Factors.” This discussion and analysis addresses 2023 and 2022 items and year-over-year comparisons between 2023 and 2022.
For the year ended December 31, 2022, these other expenses consisted largely of $5.0 million of costs related to the opening and set-up of our Dallas distribution center and $1.6 million of severance, signing bonuses and recruiting costs.
For the year ended December 31, 2023, these other expenses consisted largely of $0.5 million of public offering costs. For the year ended December 31, 2022, these other expenses consisted largely of $5.0 million of costs related to the opening and set-up of our Dallas distribution center and $1.6 million of severance, signing bonuses and recruiting costs.
Information on all of our significant accounting policies can be found in Note 2 — Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements. The following critical accounting policies reflect the significant estimates and/or judgments used in the preparation of our consolidated financial statements.
Information on all of our significant accounting policies can be found in Note 2 — Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements. The following critical accounting policy reflects the significant estimates and/or judgments used in the preparation of our consolidated financial statements.
Comparison of the Year Ended December 31, 2022 and December 31, 2021 For 2022 , net cash used in investing activities was $52.7 million primarily due to investments in supply chain expansion, Showrooms and information technology and systems infrastructure.
Comparison of the Year Ended December 31, 2023 and December 31, 2022 For 2023 , net cash used in investing activities was $96.7 million primarily due to investments in Showrooms, supply chain expansion and information technology and systems infrastructure.
In addition, cost of goods sold includes all logistics costs associated with shipping product to our clients, partially offset by delivery fees collected from clients (recorded in net revenue on the consolidated statements of comprehensive income). Sellin g, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses include all operating costs not included in cost of goods sold.
In addition, cost of goods sold includes all logistics 48 costs associated with shipping product to our clients, partially offset by delivery fees collected from clients (recorded in net revenue on the consolidated statements of comprehensive income). Sellin g, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses include all operating costs not included in cost of goods sold.
We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. As of December 31, 2022 , we had cash and cash equivalents of $145.2 million. In 2021, the Company entered into a revolving credit facility (the “2021 Credit Facility”).
We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. As of December 31, 2023 , we had cash and cash equivalents of $223.1 million. In 2021, the Company entered into a revolving credit facility (the “2021 Credit Facility”).
The use of cash from working capital was primarily driven by an increase in merchandise inventory of $78.1 million, a decrease in client deposits of $62.3 million primarily due to improved delivery of our backlog orders and lower demand comparable growth in 2022, a decrease in operating lease liabilities of $33.7 million primarily due to payments made under the related lease agreements, an increase in accrued expenses of $27.7 million, an increase in accounts payable of $14.0 million and an increase in prepaid and other currents assets of $9.3 million.
The use of cash from working capital was primarily driven by an increase in merchandise inventory of $78.1 million, a decrease in client deposits of $62.3 million due to improved delivery of our backlog orders and lower demand comparable growth in 2022, a decrease in operating lease liabilities of $33.7 million primarily due to payments made under the related lease agreements, an increase in prepaid and other assets of $6.9 million, which were partially offset by an increase in accrued expenses $27.7 million, an increase in accounts payable of $10.3 million.
Our level of net revenue has been adversely affected in prior periods by supply chain constraints, including the inability of our vendors to produce or ship sufficient quantities of some merchandise to match market demand from our clients, leading to higher levels of client backlog. See “Effects of COVID-19 on Our Business.” Consumer Preferences and Demand .
Our level of net revenue has been adversely affected in prior periods by supply chain constraints, including the inability of our vendors to produce or ship sufficient quantities of some merchandise to match market demand from our clients, leading to higher levels of client backlog. Consumer Preferences and Demand .
For example, our large catalogs in January and September may drive higher demand in those two months than in other months in the year. Variable expenses related to demand will also be higher in those months. Net revenue related to demand is recorded in later months, depending on when the client obtains control of the merchandise.
For example, our large catalogs in the spring and fall may drive higher demand in the months they are released than in the other months in the year. Variable expenses related to demand will also be higher in those months. Net revenue related to demand is recorded in later months, depending on when the client obtains control of the merchandise.
For 2022, net cash provided by operating activities was $74.5 million and consisted of net income of $136.6 million and an increase in non-cash items of $80.4 million, which were partially offset by a change in working capital and other activities of $142.5 million.
For 2022, net cash provided by operating activities was $73.2 million and consisted of net income of $136.6 million, an increase in non-cash items of $80.4 million, which were partially offset by a change in working capital and other activities of $143.8 million.
The increase was driven by the factors described above. 52 Liquidity and Capital Resources Liquidity Outlook Our primary cash needs have historically been for merchandise inventories, payroll, marketing catalogs, Showroom rent, capital expenditures associated with opening new Showrooms and updating existing Showrooms, as well as the development of our infrastructure and information technology.
Liquidity and Capital Resources Liquidity Outlook Our primary cash needs have historically been for merchandise inventories, payroll, marketing catalogs, Showroom rent, capital expenditures associated with opening new Showrooms and updating existing Showrooms, as well as the development of our infrastructure and information technology.
Our recent Showroom growth is summarized in the following table: December 31, 2022 December 31, 2021 Showrooms open at beginning of period 79 74 Showrooms opened (1) 4 10 Showrooms closed for relocations (1) (3) Showrooms closed permanently (1) (2) Showrooms open at end of period 81 79 (1) Showrooms opened during the respective periods includes both new and relocated Showrooms.
Our recent Showroom growth is summarized in the following table: 2023 2022 Showrooms open at beginning of period 81 79 Showrooms opened (1) 14 4 Showrooms closed for relocations (3) (1) Showrooms closed permanently — (1) Showrooms open at end of period 92 81 (1) Showrooms opened during the respective periods includes both new and relocated Showrooms.
We use these non-GAAP measures to help assess the performance of our business, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with U.S.
How We Assess the Performance of Our Business In addition to U.S. GAAP results, this 10-K contains references to the non-GAAP financial measures below. We use these non-GAAP measures to help assess the performance of our business, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with U.S.
On December 9, 2022, the Company amended the 2021 Credit Facility to increase the revolving credit commitment thereunder by $25.0 million. After giving effect to such increase, the aggregate amount of all commitments under the 2021 Credit Facility is $75.0 million. At December 31, 2022, we had no borrowings on the 2021 Credit Facility.
On December 9, 2022, the Company amended the 2021 Credit Facility to increase the revolving credit commitment thereunder by $25.0 million. After giving effect to such increase, the aggregate amount of all commitments under the 2021 Credit Facility is $75.0 million. The 2021 Credit Facility expires on November 8, 2026.
These initiatives include expanding our Showroom footprint, enhancing our digital marketing capabilities and eCommerce platform, optimizing our product assortment and expanding our supply chain infrastructure.
These initiatives include expanding our Showroom footprint, enhancing our digital marketing capabilities and eCommerce platform, optimizing our product assortment, expanding our supply chain infrastructure and continuing to invest in technology and related enhancements.
For the year ended December 31, 2022, our principal sources of liquidity were cash flows from operations. We believe our operating cash flows will be sufficient to meet working capital requirements and fulfill other capital needs for at least the next 12 months, although we may enter into borrowing arrangements in the future.
We believe our operating cash flows will be sufficient to meet working capital requirements and fulfill other capital needs for at least the next 12 months, although we may enter into borrowing arrangements in the future.
Although these orders do not result in net revenue until the order is delivered at a later point in time, management utilizes this metric to evaluate core performance. Comparable growth is an additional measure that management utilizes to compare the dollar value of orders delivered (based on purchase price) in a period compared to the prior comparable period.
Demand comparable growth provides insight into business levels in a particular period by comparing the dollar value of orders (based on purchase price) placed in that period to the prior comparable period. Although these orders do not result in net revenue until the order is delivered at a later point in time, management utilizes this metric to evaluate core performance.
For 2021 , net cash used in investing activities was $47.9 million primarily due to investments in Showrooms, information technology and systems infrastructure, supply chain expansion and an airplane purchase.
For 2022 , net cash used in investing activities was $51.4 million primarily due to investments in supply chain expansion, Showrooms and information technology and systems infrastructure.
As of December 31, 2022 and 2021, we operated the following: December 31, 2022 December 31, 2021 Traditional 72 71 Design Studios 6 5 Outlet 3 3 Total Showrooms 81 79 Total Square Footage (in thousands) 1,308 1,288 Showrooms with in-home designers 65 58 States where we operate 29 28 Gross Margin.
As of December 31, 2023 and 2022, we operated the following: 2023 2022 Traditional Showrooms 80 72 Design Studios 8 6 Outlets 4 3 Total Showrooms 92 81 Total Square Footage (in thousands) 1,438 1,308 Showrooms with in-home designers 78 65 States where we operate 29 29 Gross Margin.
This is partially due to the general lag in time between when an order is placed and when an order is delivered. When the time gap from order to delivery increases, due to supply chain challenges for example, it may take longer for comparable growth to reflect demand comparable growth.
When the time gap from order to delivery increases, due to supply chain challenges for example, it may take longer for comparable growth to reflect demand comparable growth.
Comparable Showrooms are defined as permanent Showrooms open for at least 15 consecutive months, including relocations in the same market. Showrooms record demand immediately upon opening, while orders delivered take additional time because product must be delivered to the client. Comparable Showrooms that were temporarily closed during portions of 2021 were not excluded from the comparable Showroom calculation.
Comparable Showrooms are defined as permanent Showrooms open for at least 15 consecutive months, including relocations in the same market. Showrooms record demand immediately upon opening, while orders delivered take additional time because product must be delivered to the client. The dollar value of orders delivered for Outlet comparable locations is included. Demand Comparable Growth .
The increase in net revenue was driven by increased demand for our product in our Retail and eCommerce sales channels, as well as elements of our supply chain continuing to catch up with client demand. Comparable growth was 51.6% in 2022 compared to 51.0% in 2021. Demand comparable growth was 13.8% in 2022 compared to 45.3% in 2021.
The increase was driven primarily by increased demand for our products in both Showrooms and eCommerce channels, as well as elements of our supply chain continuing to catch up with client demand. Comparable growth was 1.4% in 2023 compared to 51.6% in 2022. Demand comparable growth was 7.6% in 2023 compared to 13.8% in 2022.
Gross margin improvement was driven by the increase in net revenue, partially offset by increased variable expense related to the higher revenue, including $151.5 million of higher product costs, $51.2 million of increased transportation costs and $17.4 million of increased variable rent expense, in addition to $8.2 million of higher credit card fees related to higher demand and $5.3 million of increased fixed Showroom costs during these time periods.
The increase was driven by the increase in net revenue, partially offset by increased expense related to the higher net revenue, including $16.1 million of higher product costs, $10.6 million of increased Showroom costs, $9.8 million of increased transportation costs and $3.6 million of higher credit card fees related to higher demand during these time periods.
As a percentage of net revenue, gross margin increased 130 basis points to 42.7% of net revenue in 2022 compared to 41.4% of net revenue in 2021.
As a percentage of net revenue, gross margin decreased 70 basis points to 42.0% of net revenue in 2023 compared to 42.7% of net revenue in 2022.
From January 1, 2021 to December 31, 2022 , we successfully opened or relocated 14 new Showrooms in 14 markets, including 10 new markets.
From January 1, 2022 to December 31, 2023 , we successfully opened or relocated 18 new Showrooms.
In addition, our needs and uses of capital may change in the future due to changes in our business or new opportunities that we choose to pursue. Capital Expenditures Historically, we have invested significant capital expenditures in opening new Showrooms and in 2022, our distribution center footprint expansion was a focus of our capital expenditures.
In addition, our needs and uses of capital may change in the future due to changes in our business or new opportunities that we choose to pursue.
Recent Accounting Pronouncements See Note 2 — Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements regarding the impact or potential impact of recent accounting pronouncements. Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”).
Recent Accounting Pronouncements See Note 2 — Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements regarding the impact or potential impact of recent accounting pronouncements.
The dollar value of orders delivered for Outlet comparable locations is included. Demand Comparable Growth . Demand comparable growth is the year-over-year percentage change of demand from our comparable Showrooms and eCommerce, including through our direct-mail catalog.
Demand comparable growth is the year-over-year percentage change of demand from our comparable Showrooms and eCommerce, including through our catalogs and other direct mailings.
We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, décor, and outdoor. Our products, designed to be used and enjoyed throughout the home, are sourced directly from factories and vendors with no wholesale or dealer markup, allowing us to offer an exclusive assortment at an attractive value.
Our products, designed to be used and enjoyed throughout the home, are sourced directly from factories and vendors with no wholesale or dealer markup, allowing us to offer an exclusive assortment at an attractive value. Our direct sourcing network consists of more than 400 vendors, some of whom we have had relationships with since our founding.
The increase in SG&A expenses was primarily driven by a $38.8 million increase in warehouse expenses, a $38.3 million increase in corporate expenses to support the growth of the business, a $10.7 million increase in selling expenses primarily related to new showrooms and higher demand and a $9.5 million increase in new public company costs.
The increase was primarily driven by a $19.2 million increase in corporate expenses to support the growth of the business, a $15.8 million increase in selling expenses primarily related to new Showrooms and higher demand, the donation to The Nature Conservancy of $10.0 million and a $3.6 million increase in stock based compensation expense.
For demand purposes, comparable Showrooms are defined as permanent Showrooms open for at least 13 consecutive months, including relocations in the same market. Comparable Showrooms that were temporarily closed during portions of 2021 were not excluded from the comparable Showroom calculation.
For demand purposes, comparable Showrooms are defined as permanent Showrooms open for at least 13 consecutive months, including relocations in the same market. Outlet comparable location demand is included.
For 2021, net cash provided by operating activities was $146.2 million and consisted of net income of $36.9 million, an increase in non-cash items of $62.2 million and an increase in working capital and other activities of $47.1 million.
For 2023, net cash provided by operating activities was $172.3 million and consisted of net income of $125.2 million and an increase in non-cash items of $90.9 million, which were partially offset by a change in working capital and other activities of $43.8 million.
The decrease was driven by interest income earned on money market fund investments of $1.9 million. Income Taxes Income tax expense was $45.9 million in 2022 compared to an income tax benefit of $10.1 million in 2021.
Interest Expense (Income), net Interest expense (income), net decreased $6.7 million in 2023 compared 2022. The decrease was driven by interest income earned on money market fund investments and interest-bearing checking accounts of $8.8 million. 51 Income Taxes Income tax e xpense was $43.5 million in 2023 compared to $45.9 million in 2022.
While our capital expenditures vary year to year, they have increased in the past and may continue to increase in future periods as our distribution centers become fully operational and we open additional Showrooms.
Capital Expenditures Historically, we have invested significant capital expenditures in opening new Showrooms and these capital expenditures have increased in the past and may continue to increase in future periods as we open additional Showrooms.
We believe in p roviding a dynamic and welcoming experience in our Showrooms and online with the conviction that retail is theater. Our national omni-channel business positions our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle.
Our national omni-channel business positions our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle. Our seasoned sales associates and in-home designers provide expert advice and assistance to our client base that drives significant client engagement.
Historical capital expenditures are summarized as follows: Year Ended (In thousands) 2022 2021 Net cash used in investing activities $ 52,658 $ 47,870 Less: Landlord contributions 16,159 18,052 Total capital expenditures, net of landlord contributions $ 36,499 $ 29,818 54 Total company fund ed capital expenditures increased by $6.7 million in 2022 compared to 2021.
Historical capital expenditures are summarized as follows: Year Ended December 31, (In thousands) 2023 2022 Net cash used in investing activities $ 96,722 $ 51,382 Less: Landlord contributions 21,900 16,159 Total capital expenditures, net of landlord contributions $ 74,822 $ 35,223 53 Total company fund ed capital expenditures increased by $39.6 million in 2023 compared to 2022.
Our seasoned sales associates and in-home designers provide expert advice and assistance to our client base that drives significant client engagement. Our omni-channel model allows clients to begin or end their shopping journey online, while also experiencing our theater-like Showrooms throughout the shopping journey. As of December 31, 2022, we operated 81 Showrooms , 65 with in-home interior designers.
Our omni-channel model allows clients to begin or end their shopping journey online, while also experiencing our theater-like Showrooms throughout the shopping journey. As of December 31, 2023, we operated 92 Showrooms in 29 states, consisting of 80 Traditional Showrooms, 8 Design Studios and 4 Outlets.
Overview Arhaus is a rapidly growing lifestyle brand and premium retailer in the U.S. home furnishings market, specializing in livable luxury supported by globally-sourced, heirloom-quality merchandise. We offer a differentiated direct-to-consumer approach to furniture and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings.
We offer a differentiated direct-to-consumer approach to furniture and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. We offer merchandise assortments across a number of categories, including furniture, outdoor, lighting, textiles, and décor.
Our direct sourcing network consists of more tha n 400 vendors , some of whom we have had relationships with since our founding. Our product development teams work alongside our direct sourcing partners to bring to market proprietary merchandise that is a great value to clients, while delivering attractive margins.
Our product development teams work alongside our direct sourcing partners to bring to market proprietary merchandise that is a great value to clients, while delivering attractive margins. We believe in providing a dynamic and welcoming experience in our Showrooms and online with the conviction that retail is theater.
Net cash used in financing activities Comparison of the Year Ended December 31, 2022 and December 31, 2021 For 2022, net cash used in financing activities was $0.2 million, which represents principal payments under finance leases. For 2021, net cash used in financing activities was $31.5 million.
For 2022, net cash used in financing activities was $0.2 million, which represents principal payments under finance leases. Off-Balance Sheet Transactions Our liquidity is currently not dependent on the use of off-balance sheet transactions. We had no material off-balance sheet arrangements as of December 31, 2023 .
The gross margin increase as a percentage of net revenue was primarily the result of leverage on fixed Showroom costs over higher net revenue and favorable product costs, contributing 230 and 50 basis points to the gross margin improvement, respectively .
The gross margin decrease as a percentage of net revenue was primarily the result of higher Showroom costs, transportation costs and credit card fees, which together increased 100 basis points as a percentage of net revenue. This was partially offset by favorable product costs, contributing 40 basis points as a percentage of net revenue .
As a percentage of net revenue, selling, general and administrative expenses decreased 950 basis points to 27.7% of net revenue in 2022 compared to 37.2% of net revenue in 2021. Interest Expense, net Interest expense decreased $2.0 million to $3.4 million in 2022 compared to $5.4 million in 2021.
This was partially offset by a $7.5 million decrease in warehouse expenses and the non-recurring costs of $5.0 million related to the opening and set-up of our Dallas distribution center. As a percentage of net revenue, selling, general and administrative expenses increased 150 basis points to 29.2% of net revenue in 2023 compared to 27.7% of net revenue in 2022.
Since delivery generally coincides with recognition of net revenue, with appropriate reserves, comparable growth trends will more closely track trends in reported net revenue than demand comparable growth trends. While increases or decreases in demand comparable growth will translate into increases or decreases in comparable growth over time, the trends do not necessarily correlate in any particular period.
While increases or decreases in demand comparable growth will translate into increases or decreases in comparable growth over time, the trends do not necessarily correlate in any particular period. This is partially due to the general lag in time between when an order is placed and when an order is delivered.
Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, including any such difficulties resulting from COVID-19, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have significant ongoing liquidity needs even as we make changes to our planned operations and expansion cadence. 53 Cash Flow Analysis The following table provides a summary of our cash provided by operating, investing and financing activities: Year Ended (In thousands) 2022 2021 Net cash provided by operating activities $ 74,454 $ 146,243 Net cash used in investing activities (52,658) (47,870) Net cash used in financing activities (177) (31,467) Net increase in cash, cash equivalents and restricted cash equivalents $ 21,619 $ 66,906 Net cash provided by operating activities Comparison of the Year Ended December 31, 2022 and December 31, 2021 Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, operating lease amortization, deferred income taxes, equity based compensation and the effect of changes in working capital and other activities.
New Showrooms may require different levels of capital investment on our part in the future. 52 Cash Flow Analysis The following table provides a summary of our cash provided by operating, investing and financing activities: Year Ended December 31, (In thousands) 2023 2022 Net cash provided by operating activities $ 172,299 $ 73,178 Net cash used in investing activities (96,722) (51,382) Net cash used in financing activities (1,799) (177) Net increase in cash, cash equivalents and restricted cash $ 73,778 $ 21,619 Net cash provided by operating activities Comparison of the Year Ended December 31, 2023 and December 31, 2022 Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, operating lease amortization, deferred income taxes, equity based compensation and the effect of changes in working capital and other activities.
The following is a reconciliation of our net income to adjusted EBITDA for the periods presented: Year Ended (In thousands) 2022 2021 Net income $ 136,634 $ 36,932 Interest expense, net 3,387 5,432 Income tax expense (benefit) 45,944 (10,144) Depreciation and amortization 24,901 23,922 EBITDA 210,866 56,142 Equity based compensation (1) 4,288 9,147 Loss on extinguishment of debt — 1,450 Derivative expense (2) — 44,544 Other expenses (3) 7,382 11,609 Adjusted EBITDA $ 222,536 $ 122,892 (1) Equity based compensation represents compensation expense for equity awards provided to employees and compensation expense related to John Reed’s one-time transfer of Class A Common stock to certain long-tenured employees in 2021.
The following is a reconciliation of our net and comprehensive income to EBITDA and adjusted EBITDA for the periods presented: Year Ended December 31, (In thousands) 2023 2022 Net and comprehensive income $ 125,239 $ 136,634 Interest expense (income), net (3,351) 3,387 Income tax expense 43,450 45,944 Depreciation and amortization 29,442 24,901 EBITDA 194,780 210,866 Equity based compensation 7,909 4,288 Other expenses (1) 792 7,382 Adjusted EBITDA $ 203,481 $ 222,536 (1) Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, third-party consulting costs, one-time project start-up costs, severance, signing bonuses, recruiting and project-based strategic initiatives.
The cash provided by working capital was primarily driven by an increase in client deposits of $110.8 million primarily driven by higher demand comparable growth in 2021, an increase in merchandise inventory of $100.3 million, an increase in accounts payable of $17.6 million and an increase in accrued expenses $17.3 million.
The use of cash from working capital was primarily driven by a decrease in client deposits of $28.8 million, a decrease in operating lease liabilities of $25.8 million primarily due to payments made under the related lease agreements, an increase in prepaid and other assets of $20.7 million, a decrease in accrued expenses of $1.5 million, which were partially offset by a decrease in merchandise inventory of $32.1 million and an increase in accounts payable of $1.2 million.
This was partially offset by higher variable Showroom costs and transportation costs, which together increased 200 basis points as a percentage of revenue. Selling, General and Administrative Expenses SG&A expenses increased $44.3 million, or 15.0%, to $340.4 million in 2022 compared to $296.1 million in 2021.
Selling, General and Administrative Expenses SG&A expenses increased $35.7 million, or 10.5%, to $376.1 million in 2023 compared to $340.4 million in 2022.
Removed
O ur Showrooms s pan 29 states and consist of 72 traditional showrooms, 6 Design Studios and 3 Outlets.
Added
Revision of Previously Issued Consolidated Financial Statements This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been amended to give effect to the revision of our consolidated balance sheet and consolidated statements of cash flows, as more fully described in Note 1 – Nature of Business to the Notes to Consolidated Financial Statements – Revision of Previously Issued Consolidated Financial Statements Overview Arhaus is a rapidly growing lifestyle brand and premium retailer in the U.S. home furnishings market, specializing in livable luxury supported by globally-sourced, heirloom-quality merchandise.
Removed
Reorganization and Initial Public Offering On November 4, 2021, the Company completed its initial public offering (the “IPO”) and sold 12,903,226 shares of Class A common stock at an IPO price of $13.00 per share and received proceeds of $151.4 million, net of underwriting discounts and commissions of $10.4 million and offering expenses of $5.9 million.
Added
Comparable growth is an additional measure that management utilizes to compare the dollar value of orders delivered (based on purchase price) in a period compared to the prior comparable period. Since delivery generally coincides with recognition of net revenue, with appropriate reserves, comparable growth trends will more closely track trends in reported net revenue than demand comparable growth trends.
Removed
Shares of the Company’s Class A common stock are traded on the Nasdaq under the ticker symbol “ARHS.” In connection with the IPO, the Company reorganized its ownership structure from a limited liability company to a corporation for the purpose of issuing common stock on a publicly traded exchange (the “Reorganization”).
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Comparison of the Years Ended December 31, 2023 and December 31, 2022 Net Revenue Net revenue increased $58.8 million, or 4.8%, to $1,287.7 million in 2023 compared to $1,228.9 million in 2022.
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Working capital needed to finance our operations typically reaches the highest levels when we increase our inventory in preparation for new product launches and to fulfill demand driven by catalog releases. Effects of COVID-19 on Our Business The COVID-19 outbreak in the first quarter of 2020 caused disruption to our business operations.
Added
Gross Margin Gross margin increased $15.3 million , or 2.9%, to $540.4 million in 2023 compared to $525.1 million in 2022.
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In our initial response to the COVID-19 pandemic, we undertook immediate adjustments to our business operations including temporarily closing all retail locations, furloughing employees, minimizing expenses and delaying investments, and pausing some inventory orders while we assessed the impact to our business.
Added
Our effective tax rate was 25.8% in 2023 and 25.2% in 2022. Net and Comprehensive Income Net and comprehensive income decreased $11.4 million to $125.2 million in 2023 compared to $136.6 million in 2022. The decrease was driven by the factors described above.
Removed
Our approach to the pandemic evolved quickly and business trends substantially improved during the second through fourth quarters of 2020, as a result of both the reopening of our Showrooms and strong consumer demand for our products. We reopened all of our Showrooms and Outlet stores by June 30, 2020.
Added
At December 31, 2023, we had no borrowings on the 2021 Credit Facility. For the year ended December 31, 2023, our principal sources of liquidity were cash flows from operations.
Removed
While we have been able to serve our clients and operate our business through the COVID-19 pandemic, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the pandemic remains uncertain.
Added
This increase was primarily related to the opening of new Showrooms. Net cash used in financing activities Comparison of the Year Ended December 31, 2023 and December 31, 2022 For 2023, net cash used in financing activities was $1.8 million, primarily due to the repurchase of shares for payment of withholding taxes for equity based compensation.
Removed
Future adverse developments in connection with the COVID-19 pandemic, 47 including additional waves or resurgences of COVID-19 outbreaks, new strains or variants of the virus, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 pandemic, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or our financial results and business performance in future periods.
Removed
Various constraints in our merchandise supply chain have resulted in delays in our ability to convert demand into net revenue at normal historical rates. We expect that our supply chain may catch up to demand in the foreseeable future, but business circumstances and operational conditions cannot be predicted with certainty.
Removed
Depending on the future course of the pandemic and further outbreaks, we may experience further restrictions and closures of our Showrooms and Outlet stores. Although we experienced strong demand for our products, some of the demand may have been driven by consumers reinvesting in their homes and furnishings as they spent more time at home due to the pandemic.
Removed
The exact impact that COVID-19 will have on future consumer behavior and related demand for our products cannot be predicted with certainty. How We Assess the Performance of Our Business In addition to U.S. GAAP results, this 10-K contains references to the non-GAAP financial measures below.
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Outlet comparable location demand is included. 48 Demand comparable growth provides insight into business levels in a particular period by comparing the dollar value of orders (based on purchase price) placed in that period to the prior comparable period.
Removed
Refer to Notes 8 — Mezzanine Equity and Stockholders’/Members’ Equity (Deficit) and 9 — Equity Based Compensation for additional discussion of each expense. (2) We repaid a term loan from a prior credit facility (“Term Loan”) in full on December 28, 2020.
Removed
The derivative expense relates to the change in the fair value of the exit fee at the end of each reporting period. See Note 5 — Long-Term Debt for additional discussion of the exit fee.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeWe purchase the majority of our inventory from vendors outside of the United States in transactions that are primarily denominated in U.S. dollars and, as such, any foreign currency impact related to these international purchase transactions was not significant to us for the years ended December 31, 2022, 2021 and 2020 , respectively.
Biggest changeWe purchase the majority of our inventory from vendors outside of the United States in transactions that are primarily denominated in U.S. dollars and, as such, any foreign currency impact related to these international purchase transactions was not significant to us for the years ended December 31, 2023, 2022 and 2021 , respectively.
We currently do not use derivative instruments to manage this risk. Interest Rate Risk We are primarily exposed to interest rate risk with respect to borrowing under our 2021 Credit Facility and as of December 31, 2022, we have not drawn upon the 2021 Credit Facility.
We currently do not use derivative instruments to manage this risk. 54 Interest Rate Risk We are primarily exposed to interest rate risk with respect to borrowing under our 2021 Credit Facility and as of December 31, 2023, we have not drawn upon the 2021 Credit Facility.
We currently do not use derivative instruments to manage this risk. 56
We currently do not use derivative instruments to manage this risk. 55

Other ARHS 10-K year-over-year comparisons