What Happened:
Shares of luxury furniture retailer Arhaus (NASDAQ:ARHS) fell 26.3% in the pre-market session after the company reported second-quarter earnings results. It cited a soft consumer landscape and lowered its full-year revenue and EBITDA guidance, which fell short of Wall Street's estimates. In addition, revenue came in below expectations during the quarter. Overall, this was a weaker quarter for the company.
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What is the market telling us:
Arhaus's shares are very volatile and over the last year have had 21 moves greater than 5%. But moves this big are very rare even for Arhaus and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 28 days ago, when the company gained 8.2% as investors seemed to be rotating out of large-cap tech winners like NVDA, GOOGL, and MSFT and into smaller cap stocks, with housing stocks as a bright spot in particular. The rotation was likely sparked by the inflation report by the Bureau of Labor Statistics. It revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of June 2024 came in better than expected at 3% year on year (the lowest level in more than three years).
The recent inflation prints supported the argument that the Fed will start cutting rates this year as the headline figures moved closer to the 2% target. Lower rates greatly impact the housing market, which has been tepid in the last year-plus. Specifically, lower rates make homebuying more affordable for consumers because on the same value home, monthly payments are less with a lower mortgage rate. Before rates began to rise 2022, many potential homebuyers anchored on a home value they could afford--let's say $450,000. As rates rose, the home they could afford with the same monthly payment fell--let's say towards $300,000. However, they weren't very excited about buying a lesser home after having their eyes on higher-value homes. Many chose not to transact.
On the other side of the coin, many homeowners with mortgage rates in the 2-3% range chose not to sell because of the prospect of having top buy a new home with a 6-8% mortgage rate attached to it. Demand suffered. Supply suffered. Today's inflation report could be an early sign that the housing market could thaw and even become hot if the Fed cuts rates.
Arhaus is down 2.6% since the beginning of the year, and at $11.37 per share it is trading 42.2% below its 52-week high of $19.68 from June 2024. Investors who bought $1,000 worth of Arhaus's shares at the IPO in November 2021 would now be looking at an investment worth $888.28.
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