Piper Sandler cuts Arhaus stock rating, targets $12 from $15

On Thursday, Piper Sandler reduced the stock rating of Arhaus Inc (NASDAQ:ARHS) from Overweight to Neutral and lowered its price target to $12.00 from the previous $15.00. The adjustment follows significant management changes and concerns over the company’s financial performance. According to InvestingPro data, the stock has already taken a significant hit, dropping over 10% in the past week, with current market capitalization standing at $1.54 billion.

The firm’s analysts pointed out that Arhaus has experienced notable turnover within its management team, losing its CFO, COO, and SVP of Investor Relations over a short span of two and a half months. This reshuffling at the top adds execution risk and could affect how the company communicates with Wall Street, potentially impacting investor relations. InvestingPro analysis indicates the company maintains a Fair financial health score, though recent developments have contributed to increased stock volatility.

Another reason for the downgrade is the lack of margin expansion. Arhaus’s EBITDA margins have seen an average decline of 10% in the second half over the last two years. Furthermore, the company’s guidance for 2025 suggests no expected margin expansion. While this forecast may be conservative, the analysts at Piper Sandler express concern that the path to margin recovery for Arhaus remains unclear. The company currently trades at a P/E ratio of 21.19 and maintains a gross profit margin of 39.4%, based on InvestingPro data, which offers 8 additional key insights about the company’s financial health and prospects.

Additionally, Arhaus faced a significant demand downturn in mid-2024, which led to a 30% reduction in EBITDA guidance. Such volatility in financial results is likely to constrain the company’s multiple expansion until there is a clearer and more consistent pattern of performance.

In their analysis, Piper Sandler has adjusted the valuation multiple assumption for Arhaus to 9 times from 12 times the estimated earnings for 2025, reflecting the lowered growth expectations. This recalibration of the price target and rating reflects the firm’s cautious stance on the furniture retailer’s stock amidst the current challenges it faces.

In other recent news, Arhaus Inc. reported its financial results for the fourth quarter of 2024, surpassing analysts’ expectations. The company achieved an earnings per share of $0.15, significantly higher than the forecasted $0.08, and posted revenue of $347 million, exceeding the anticipated $315.09 million. Despite these strong results, the company’s full-year revenue saw a 1.3% decline year-over-year, totaling $1.271 billion. Arhaus ended the year with a robust cash position of $198 million and no debt, while also projecting a potential revenue growth of up to 3% for 2025. The company’s strategic initiatives include plans to open 3-5 new showrooms and achieve an adjusted EBITDA between $140 million and $150 million. Meanwhile, Guggenheim Securities and Piper Sandler analysts have been actively engaging with the company’s management, indicating interest in Arhaus’ pricing strategies and product pipeline. Despite macroeconomic challenges, Arhaus remains focused on expanding its showroom presence and enhancing its product offerings.

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