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This one just reported and is just up a couple percent at the time of this note, so I think it’s fair game. Pretty quick hitter but we can follow up:

Arhaus just reported 3Q results, in which they essentially doubled street EPS estimates. Impressive but that’s not what’s most interesting to us. Buried in the release is their underlying demand comp for the quarter, which actually accelerated meaningfully on a 3-year basis, and our store-level work, supplier / industry checks, and data suggest trends have continued into 4Q. I’ll come back to this in a sec.

The other reason the next few quarters are going to be special is that meaningful price increases will be flowing through the P&L at the exact same time when freight and other cost side pressures are falling off a cliff. On price, they took 3 mid-high single digit price increases earlier this year, all of which don’t hit the P&L for roughly 6 months; on costs, they had over 700 bps of headwind that is about to become an enormous tailwind (spot container rates have gone from 18,500 bucks to 5,000 bucks over roughly the past year, illustratively).

What’s most exciting is I think some reasonable analysis that is just a few degrees removed from this company has people very sharply offsides. Short interest is at all time highs on the back of RH saying ARHS is being promotional (they were actually less promotional yoy and on a 3 year basis, and our data scraping and other work shows the same for 4QTD), one research shop came out suggesting their EPS could get cut in half next year (35 cents), and others on the buyside have been thinking written comps are currently running down 15%. We just learned they’re running up 15% for 3Q and still healthily positive in 4Q. Seems like anybody short needs to cover full-stop.

Even if demand comps were to slow to negative on a 1 year basis but still healthy on a 3-year basis, seems like stock is a massive long. However, they’re doing far better than this in real-time - comps just accelerated by ~20 percentage on a 3-year basis. Point is we think next year earnings are probably more likely to be up 50% than down 50%. And in the long-term, there are only two consumer companies I’ve seen demonstrate new-store productivity like these guys, Chipotle and Lululemon; and clearly they are taking market share like clockwork, which are two key characteristics that garner growth multiples. So even in a new rates regime, businesses that grow units profitably 1/3^rd this quickly with can easily trade at 20-25x EPS, and on current year EPS of at minimum $1 and outyear $1.50 EPS feasible, we can see valuation at $20 to $37.5 in a wide range over time = in a wide range 100% to 300% upside.

We’ll follow up shortly with a proper write up or at least supporting analysis on the back of this, but thought I’d send a few thoughts out here quickly as fodder.

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