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Good morning, and welcome to the Arhaus Second Quarter 2026 Earnings Call. Please note that this call is being recorded and the reproduction of any part of this call is not permitted without written authorization from the company. I will now turn the call over to your host, Tara Atwood-Saja, Vice President and Head of Investor Relations. Please go ahead.
Good morning, and thank you for joining us for the Arhaus Second Quarter 2026 Earnings Call. Joining me on today's call for prepared remarks are John Reed, our Founder, Chairman, and Chief Executive Officer, and Michael Lee, our Chief Financial Officer. We issued our earnings press release and Form 10-Q for the quarter ended June 30, 2026, before the market opened today. Those documents are available on our Investor Relations website at ir.arhaus.com. A replay of the call will be available on our website within 24 hours. I would like to remind everyone that our remarks today concerning future expectations, events, objectives, strategies, targets, trends, or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties. For a summary of these risk factors and additional information, please refer to this morning's press release and the cautionary statements and risk factors described in our most recent annual report on Form 10-K and subsequent 10-Qs as factors may be updated from time to time in our filings with the SEC. The forward-looking statements are made as of today's date and except as may be required by law, the company undertakes no obligation to update or revise these statements. We will also refer to certain non-GAAP financial measures, and this morning's press release includes the relevant non-GAAP reconciliations. Now, I will turn the call over to John. John, over to you.
Thanks, Tara. Good morning, everyone, and thank you for joining us. This morning, we reported second quarter results that reflect the continued strength of the Arhaus brand and the resilience of our business. We generated record net revenue and strong comparable written sales, reflecting continued client engagement and momentum across our three customer demand channels, which is a testament to the strength of our differentiated model. While the broader environment remains dynamic, the high-end consumer continues to demonstrate resilience supported by a relatively healthy U.S. economy, solid consumer spending, and the positive wealth effects of higher stock prices. We delivered record net revenue of $385 million, above the high end of our guidance range. Comparable written sales increased 12.5% in the quarter, bringing year-to-date comparable written sales to 2.8%. Our clients remain highly engaged and continue to prioritize investments in their home, driving strong demand for our differentiated product assortment and the elevated experience Arhaus provides. Turning to products. For 40 years, Arhaus has been built on the belief that furniture and decor should be responsibly sourced, lovingly made, and built to last for generations. That philosophy continues to differentiate our brand and remains one of our strongest drivers of client demand. During the quarter, we saw strength across our assortment and collections. Clients responded to our distinctive mix of heirloom quality furnishings, globally curated designs, and handcrafted pieces made with natural materials and time-honored techniques. Strong written sales reflected continued interest in new product introductions alongside our extensive customization capabilities, giving clients the opportunity to create spaces that feel uniquely their own. This balance of timeless design and thoughtful innovation continues to resonate with both our new and existing clients. Demand was broad-based across categories, including upholstery, outdoor, and The Collected Home, our vintage-inspired collection celebrating craftsmanship, heritage, and enduring designs. Our domestic upholstery manufacturing capabilities in North Carolina remain an important competitive advantage, allowing us to deliver exceptional quality, customization, and service while providing greater flexibility and control over production. We remain committed to keeping our assortment fresh while staying true to the aesthetics that define Arhaus. We believe the strength of our product strategy lies in offering distinctive furnishings that are difficult to replicate, supported by disciplined merchandising, continuous product innovation, and meaningful investments in our product pipeline. Looking ahead, we have several important events in the coming weeks to engage with our clients. We will launch our special 40th Anniversary Fall Catalog, reaching more than double the number of households compared to our Spring Catalog, including a focus on high-potential prospective clients, followed by our September semi-annual store-wide sale. Combined with compelling new product introductions and a strong in-stock position, we believe this positions us well for the important fall selling season. Better inventory availability allows us to offer clients more of what they want, when they want it, supporting higher conversion, stronger delivered sales, and an even better client experience. I want to thank our product team and artisan partners around the world. Their passion for great design, commitment to craftsmanship, and ability to anticipate emerging trends continue to differentiate the Arhaus brand and bring our vision to life for our clients. Turning to our clients, the second quarter reinforced the breadth and quality of demand across all three demand channels: our core customers, Arhaus Interior Design, and trade. Throughout the quarter, we continued to see clients investing in home through larger, higher-value projects, reflecting healthy engagement with our premium assortment and no meaningful evidence of trade down. We believe this speaks to the resilience of our client base, the differentiated value of the Arhaus brand, and the enduring appeal of our product offering. Interior Design continued to be an important driver for client engagement, as more clients use our complementary design services to bring larger, whole-home projects to life. These relationships not only create a highly personalized experience but also create deeper client loyalty and long-term engagement with Arhaus. We have also been encouraged by the early response to the enhanced trade program, which relaunched earlier this year. Supported by the dedicated team focused on expanding relationships with design professionals, we believe the program represents a meaningful, long-term opportunity to broaden our reach and to cultivate a growing base of recurring project-driven business. Overall, the continued strength across our core customer, interior design, and trade channels highlights the multiple ways clients choose to engage with Arhaus. We believe this diversified demand model, combined with the differentiated product and elevated client experience, positions us to continue building lasting customer relations and supporting sustainable long-term growth. Turning to showrooms. Our showrooms are the front door of the Arhaus brand and one of the most important drivers of awareness, engagement, and conversion. They bring product to life, support our interior design and trade channels, and provide an immersive client experience that differentiates Arhaus. Demand across the showroom portfolio was broad-based during the quarter. We generated strong written sale growth across every region and all of our showroom formats, including our traditional and Design Studio showrooms. This breadth gives us confidence that demand is not dependent on a single geography or market and that our product and brand resonates with clients from coast to coast. We continue to see significant white space for expansion while maintaining a disciplined approach to growth. During the second quarter, we opened a nearly 20,000-square-foot traditional showroom in Ashburn, Virginia. We relocated our Westlake, Ohio, showroom and expanded our Park Meadows showroom in Lone Tree, Colorado. And just last week, we opened our newly relocated Charlotte, North Carolina, showroom at the Village at SouthPark. At approximately 35,000 square feet, it is our second largest traditional showroom after our Pasadena, California, showroom and provides an elevated immersive destination for our clients in an important market for us. The opening also reflects our long-standing connection to North Carolina, where skilled artisans craft many of our signature upholstery pieces. For 2026, we continue to expect approximately 10 to 14 total showroom projects, including 4 to 6 new openings, and 6 to 8 relocations, renovations, and expansions. We maintain a disciplined approach to evaluating projects against our targeted return criteria, and recent openings have continued to perform in line with our expectations. A key reason for our showrooms to perform well is our people. Ashburn demonstrates the importance of combining the right location with the experienced team. We placed established leaders from nearby showrooms at the location and hired and trained the broader team well ahead of the opening. As a result, Ashburn opened with a team that understood our product, client, design services, and service model, and the showroom has performed ahead of our expectations since opening. We continue to believe that our physical presence remains an important competitive advantage and a meaningful driver of awareness, client engagement, and conversion. As we look ahead, we remain focused on executing the strategy that has served us well for four decades: creating exceptional products, delivering an elevated client experience, and investing thoughtfully in the long-term growth of the Arhaus brand. We believe we are well positioned for the important fall selling season and remain confident in the signature opportunities ahead. I want to thank our team members and artisans around the world for their passion, craftsmanship, and commitment to excellence. Their dedication is what makes Arhaus special and continues to strengthen the relationship we have with our clients. With that, I'll turn the call over to Mike.
Thanks, John, and good morning, everyone. Our second quarter performance reflected disciplined execution against our most difficult year-over-year comparison of 2026. We delivered results above the high end of our guidance range across all our key financial metrics and generated strong comparable written sales, reinforcing our confidence in the full-year outlook. This marked our seventh consecutive quarter of delivering results at or above our guidance. Before I turn to our results, I want to address an unplanned benefit related to IEEPA tariffs that was recognized in the quarter and not included in our previous financial guidance. Arhaus requested refunds of $37.8 million for IEEPA tariffs previously paid. As of June 30, 2026, we recognized a receivable of $32.7 million, which is included in prepaid and other current assets within the balance sheet, and we received $5.1 million in cash refunds. During the quarter, we recognized a benefit in cost of goods sold of $23.8 million for the recovery of IEEPA tariffs paid, of which $15.5 million is related to inventory sold prior to April 2026, and $8.3 million is related to inventory sold in the quarter. Additionally, we reported $14 million primarily related to a reduction in inventory costs in merchandise inventory, net, within the balance sheet. As of today, we have received a full tariff refund in cash. Moving on to our results for the quarter. Net revenue was approximately $385 million in the second quarter, up 7.4% year-over-year, marking the highest net revenue in our 40-year history. This performance is particularly notable as we lapped a prior-year period that benefited greatly from the accelerated ramp following the insourcing of our Dallas Distribution Center. We grew over that comparison, and year-over-year comparisons ease through the balance of 2026. Gross profit was $172 million, up 16.1% versus last year. This increase included a recognized $23.8 million benefit from the recovery of previously paid IEEPA tariffs, of which $15.5 million related to inventory sold prior to April 2026. Excluding this benefit and to better reflect a more normalized gross profit for the quarter, gross profit would have been $157 million, up 5.6% versus last year, primarily due to higher net revenue. Gross margin was 44.7%, an increase of 330 basis points versus last year. This increase included 400 basis points of benefits related to the IEEPA tariff recoveries associated with the inventory sold prior to April 2026. Excluding this benefit, gross margin would have been 40.7%, down 70 basis points versus last year, driven largely by higher fuel and shipping costs. Notably, we increased our delivery fee in June to help offset these inflationary pressures, and this will start to flow through in the third quarter. Selling, general, and administrative expenses were $118 million, up 16.1% versus last year. The increase was primarily driven by an $8.4 million increase in general and administrative costs, including approximately $3 million of strategic investments related to technology licensing and other costs incurred to support our business transformation. We also saw a $7.9 million increase in selling expenses, primarily related to new showrooms and increased demand for our products. As a result, SG&A load increased 230 basis points to 30.6%. While our strategic investments create some near-term expense pressure, we believe they are important to strengthening the client experience, improving scalability, and supporting long-term profitable growth. Net income was $40 million, up 13.1% versus last year, and adjusted EBITDA was $70 million, up 16.8% versus last year, both above the high end of our guidance range. Excluding the $15.5 million tariff refund benefit associated with inventory sold prior to April 2026, adjusted EBITDA would have been $55 million, down 8.9% versus last year, primarily reflecting higher fuel and shipping costs, increased selling expenses associated with new showrooms, and strategic investments to support long-term growth of the business. Adjusted EBITDA margin was 18.3%, an increase of 150 basis points versus last year. Excluding the 400-basis-point tariff refund benefit associated with inventory sold prior to April 2026, adjusted EBITDA margin would have been 14.3%, down 250 basis points versus last year, driven largely by higher fuel and shipping costs, increased selling expenses associated with new showrooms, and strategic investments to support the long-term growth of the business. Turning to our comparable metrics. Comparable delivered sales increased 4% in the second quarter, exceeding the high end of our guidance range against our most difficult delivered sales comparison for the year. Year-to-date, comparable delivered sales were 1.4%, consistent with our full-year outlook of flat to positive 3%. Comparable written sales increased 12.5%, bringing year-to-date comparable written sales to positive 2.8%. We believe the second quarter acceleration reflected a combination of factors. As John mentioned, we saw broad-based strength across our product assortment, including newness, upholstery, customization, outdoor, and the collected home assortment. In addition, our interior design team continued to generate strong momentum by inspiring clients, deepening engagement with the brand, and helping convert larger, more complex projects. We also benefited from increased marketing activity designed to drive engagement, conversion, and brand awareness. These efforts included incremental investment in paid search and digital optimization, as well as our planned catalog expansion to additional households. As we have seen historically, periods of temporary softness can be followed by stronger demand as clients re-engage. And overall, we believe this second quarter performance reflects a combination of some recovered demand from the first quarter and healthy underlying momentum across the Arhaus brand. Before turning to our balance sheet and outlook, I would like to provide additional context around our long-term financial framework and how we are positioning Arhaus for sustainable growth. While quarterly results can vary based on the timing of written to delivered conversion, our promotional cadence, investment timing, and the broader macroeconomic environment, our long-term strategy remains consistent. We are focused on building a larger, more profitable business by balancing market-leading revenue growth with expanding profitability over time. This is summarized by our three strategic imperatives as follows. First, achieving market-leading sales growth. We continue to see meaningful opportunities to grow the Arhaus brand by simplifying the selling experience across our channels, creating a more seamless, omni-luxury journey for our clients, expanding our showroom footprint, growing our interior design, trade, and contract businesses, broadening brand awareness, and strengthening our digital and e-commerce capabilities. Together, we believe these initiatives deepen client engagement, expand our market share, and support sustainable long-term growth. Second, strengthening our product leadership. Our product remains our greatest point of differentiation and the foundation of the Arhaus brand. We continue to invest in innovation and newness while preserving the timeless design aesthetic that defines us. Our focus remains on extending our leadership in luxury upholstery, building on the strength of our best-selling collections, and attracting luxury customers through fresh, relevant assortments. Third, advancing operational excellence and perfecting the client experience. As we grow, we remain focused on building a more efficient and scalable operating model by accelerating product flow from concept to showroom, enhancing execution across the business, and digitally enabling the enterprise. Technology is a key enabler of this strategy. And during the second quarter, we successfully launched TMS, and our ERP and OMS implementations remain on track for a February 2027 go-live. In addition, we are opportunistically pulling forward the implementation of our new modern POS platform into the fourth quarter of this year, ahead of our original timeline. This pull-forward simplifies our overall technology roadmap, accelerates our transition from legacy systems, and equips our showroom teams with a more modern and intuitive selling platform. Over time, we believe these investments will create a more seamless, connected experience across our customer demand channels, improve operational efficiency, and further elevate the client experience. Turning to our balance sheet and liquidity, we ended the quarter with $226 million in cash and cash equivalents, maintaining our strong liquidity position. Net merchandise inventory totaled $354 million, up 4.3% from December 31, 2025. The composition of our inventory remains healthy, with aged inventory down both sequentially and year-over-year. Importantly, best-seller inventory improved during the quarter, and we exited June with strong in-stock levels across our network. Overall, we believe we are well positioned in inventory to support current demand, continued product newness, and the conversion of written orders into net revenue. Client deposits ended the quarter at approximately $264 million, up 11.8% year-over-year, reflecting the strength of second quarter written demand. Turning to tariffs and sourcing. Following the recent implementation of the new Section 301 tariff framework, we estimate our 2026 tariff impact to be approximately $30 million to $40 million. We continue to address this headwind through our diversified global sourcing strategy, vendor negotiations, pricing actions, and ongoing operational efficiencies. These initiatives provide us with many levers to help mitigate tariff-related costs while maintaining our focus on product quality, value, and long-term profitability. While the tariff environment remains dynamic, our diversified sourcing model and disciplined operating approach position us well to adapt as policies evolve. We will continue to monitor developments and adjust our sourcing and pricing strategies as appropriate. Turning now to our outlook. As I mentioned earlier, the second quarter marked our seventh consecutive quarter of delivering results at or above our guidance. This consistency reflects our understanding of the business, our disciplined execution, and our measured approach to forecasting in an environment that remains dynamic. We were very pleased with our second quarter results and the meaningful acceleration in comparable written sales. The quarter strengthened our confidence in the full-year outlook. At the same time, we believe it remains appropriate to maintain a prudent net revenue range that reflects multiple potential scenarios for the consumer environment. For the full year, we continue to expect net revenue between $1.43 billion and $1.47 billion, representing year-over-year revenue growth of between 3.7% and 6.6%. We continue to expect comparable delivered sales of flat to positive 3%. We are updating our full-year profitability guidance to reflect the benefit recognized from the recovery of previously paid IEEPA tariffs, and we now expect net income of $71 million to $80 million and adjusted EBITDA of between $160 million and $171 million. As we've discussed, we view the IEEPA tariff recovery as a discrete one-time benefit that is being allocated as follows. First, and consistent with our long-term capital allocation philosophy, we are reinvesting a portion of these recoveries back into the business to support strategic growth imperatives. These investments include more than doubling the distribution of our fall catalog and increasing our spring 2027 catalog circulation in a similar manner, as well as expanding our marketing and digital investments, and pulling forward the implementation of our new POS system. These incremental investments, which are reflected in our updated guide, are expected to total between $7 million and $10 million during fiscal 2026. Second, the recovery helps offset meaningful cost pressures we continue to face across the business, including approximately $10 million of elevated fuel expense and $10 million of higher shipping costs for the year, driven by disruption in the Middle East, as well as ongoing labor and inflationary pressures, while preserving the economic flexibility as the tariff environment continues to evolve. And finally, after funding these strategic investments and offsetting the incremental costs, the remaining benefit of approximately $10 million flows through to adjusted EBITDA and is reflected in our updated full-year profitability guidance range. Importantly, our outlook does not assume a meaningful improvement in housing turnover, consumer confidence, or the broader macroeconomic environment. Turning to the third quarter, we expect continued business momentum balanced against ongoing macroeconomic uncertainty and variability in the timing of written sales conversion to delivered sales. Our outlook is supported by healthy product availability, continued strength across our interior design and trade channels, compelling new product introductions, our 40th anniversary fall catalog, and our September semi-annual store-wide sale. From a profitability perspective, we expect the third quarter to reflect the continued impact of tariffs, elevated fuel and shipping costs, and planned investments in technology and marketing. These pressures are expected to be partially offset by the growing benefit of our June delivery fee increase, pricing actions we've taken, and transportation productivity initiatives, including the initial TMS benefits, as well as continued disciplined expense management. For the third quarter of 2026, we expect net revenue between $355 million and $375 million, representing year-over-year growth of between 3% and 8.8%. We expect comparable delivered sales of minus 1% to positive 5%, net income of between $8 million and $13 million, and adjusted EBITDA of between $26 million and $34 million. We are pleased with our second quarter results and the progress we have made across Arhaus. We delivered results above the high end of our guidance. We saw a meaningful acceleration in written sales, and we continue to execute against the operational and strategic priorities supporting long-term growth. While the environment remains dynamic, we are focused on the factors within our control, which include driving demand, improving conversion, managing our costs with discipline, and building a stronger, more scalable, and more profitable business. I want to thank our teams across Arhaus for their continued focus and execution and our shareholders for their ongoing support. With that, I turn the call over to the operator. We are happy to take your questions.
分析師問答
Thank you. Our first question will come from Jonathan Matuszewski with Jefferies.
John and Mike, nice results here. Your results confirm a narrative that's kind of building around a widening divergence in affluent consumer spend on this category relative to maybe a mass consumer. So, can you add some more context around your second quarter demand trend? As we think about the acceleration, how much of that has been driven by an uptick in new customers entering your file? How much did discrete pricing adjustments contribute? And it sounds like mix is playing a role as well with consumers maybe leaning towards higher value complex projects. So, how did your second quarter demand break down across some of those drivers? Thank you.
Sure, Jonathan. First of all, across the board, we didn't see any meaningful change in new customers versus existing customers. It stayed pretty much as it has been. The product assortment has gotten so much better that we're seeing basically larger sales per customer. A lot of people are renovating, some new home builds, but a lot of people are putting money back into their homes as they decided maybe not to move. And so we're seeing a really nice increase in people coming in, being very serious about renovating a room or entire house. And that certainly has helped our business. Anything to add, Mike?
Sure, I can build on that. Jonathan, I'd say just looking at overall traffic in the quarter, we were very happy with traffic. It was a big rebound versus Q1. And when you break down the fundamentals of existing versus new customers, I agree with John, it was very consistent, but in total up versus where we were in Q1. Looking at things like order average, order value, units per transaction, those all continue to perform quite strong. And then even looking at order sizes and order counts for large sales, we were very happy with Q2 looking at orders above $10,000, orders above $25,000, orders above $100,000. It was quite strong. So, we are very happy with what we're seeing from our customer base and would concur that the high-end consumer continues to perform well.
And our next question will come from Steven Forbes with Guggenheim Securities.
This is Jake Nivasch on for Steve. So, John, just a question on the trade program. Given the strength in written demand trends, curious if you can expand upon the trade program, how it's performing, and maybe give us some high-level commentary on the size of that business today if you're able to quantify what key initiatives you're leaning into to scale it here.
Sure, Jake. I'd be glad to. So, the trade program is one that we've focused on as we've been talking about. A few things we've done. We've adjusted or given an option on how the trade professionals can earn on buying our products. We had been paying a commission-based structure. Now we're also doing a discount option. So, we're letting the trade members decide which way they want to go, which has been extremely successful. We've been adding thousands of new trade members each month since we started that. And that just launched a few months ago. With that, we've also added a significant amount to the team—folks that are living all over the country that are in the trade business and are helping us attract new trade design firms to come and work with us because we offer everything. They can come in and do everything from the lighting to the rugs to the upholstery. It's a full-service shop, whereas most trade members have to go through catalogs and order things from many different companies. We make it simple. We warehouse it for them. We stand behind it. We repair it if something happens to it. The trade members are loving that. So, we think it's a huge opportunity. We're just really getting started with it. And the future should be amazing.
And moving next to Madeline Cech with Bank of America.
Could you provide a little more color on how comps progressed through the quarter, including the exit rate in June and what trends you saw in July that keep you confident in your full-year outlook?
Hi, Madeline. Yes, we don't get into monthly disclosures anymore, but I will tell you that we were happy with the quarter overall. We alluded to the fact on our last call that we were getting into a V-shaped recovery into the second half of April. Overall for the quarter, we were quite happy with the performance. Normal seasonality ebbs and flows with the flow of our promotions, but quite happy. The other thing, just to build on that, Madeline, in terms of promotions, one of the things that we started doing in the quarter that we really plan to continue over the next six months is the promotion strategy that we implemented around some of these up to 50% off discounts. We're really focused on some of our long-dated inventory. We found that it proved to be a really good traffic driver, created a lot of excitement in the showrooms, and also allowed us to move through some of that long-dated inventory. And when you look at the margin impacts of that, it was quite modest because those up to discount offers were really limited to mid-single-digit mix of sales overall. So, it didn't have a large impact in terms of the financials or mix of sales, but allowed us to move through that inventory. So, we're coming out of Q2 pretty encouraged about our results. And Q3 is shaping up to look pretty well. The consumer continues to be happy. As John mentioned, we're in a great position from a product perspective; we're in a better position from an in-stock status than we've been in for many months, really since I got here 14 months ago. So, we're very encouraged about where the business is and where it's headed.
And I'll just add to that quickly too. When we think about coming into the fall, Maddie, we talked about that 40-year anniversary catalog. We're incredibly excited about that. It's doubling in terms of the household that we're getting that to, the newness John alluded to as well, just the incredible designs and also that semi-annual sale. So, that will certainly provide strength in demand and people coming in and engagement. John, do you want to add anything about the product and newness we're seeing for the fall?
Yes, that's the most exciting part of our business: the new product has been performing extremely well. We're just getting started with it. We rolled out a lot of newness products in the first quarter. We tested them in a fair amount of stores. Now that we've seen what is working, we are rushing to get it to all stores in many cases. When we launch the September catalog, we think it's by far the best ever—the best-looking catalog and the best lineup of new products we truly have ever had. We think it's going to carry us through the third and fourth quarter into next year for sure. It's going to be an exciting second half of the year.
Some of the leading indicators on newness for the fall: we're starting to get early indicators from customers that we're going to outpace newness relative to last year as well. Really excited about the newness that's coming out.
And our next question will come from Peter Keith with Piper Sandler.
This is Alexia Morgan on for Peter. We were wondering if you could elaborate more on assumptions around the sustainability of the Q2 momentum for full-year guidance, since it seems like the full-year demand comp guidance assumes some deceleration in the second half.
Yes, again, I think our business is going to be strong. We certainly are cautious with external things going on in the world, including trade costs and geopolitical issues we can't control. So, we're rather conservative in our thinking, but we think it's going to be strong. If everything stays the way it is now, it should be pretty strong, and we're very happy with it.
Alexia, internally when we're forecasting our business, we've always got sensitivities around the forecast between high-side and low-side scenarios when we get into our merchandise plans. There is a lot of optimism today within our merchandising teams on the second half possibilities. We are protecting against some of the high-side forecasts that we're seeing just to make sure that if the performance continues at Q2 levels we're well positioned to support that business. That does not change the guidance we're providing, but it gives you a peek at internal sentiment on the business.
And we'll hear next from Peter Benedict with Baird.
A question on product margins down 190 basis points in the quarter. If you could dig in a little further on what the drivers were there, maybe bucket those, and then how you think about that over the back half of this year, thinking fourth quarter in particular as you lap the inventory impairment and related items, and how the delivery fee increase from June 1 is impacting the guidance over the back half of the year? Thank you.
Thanks, Peter. Good question. I can cover some of the key drivers of margin, though we don't provide quarterly guidance on gross margin per se. The number-one driver on margin is tariff assumptions, and we continue to expect $30 million to $40 million of tariff impact for the year. Last quarter we had mentioned coming in at the lower end of that range, but with the latest on tariff announcements, we're coming in closer to the midpoint, slightly above the midpoint. That $30 million to $40 million range continues to be valid. On fuel, this is difficult to forecast, but we do expect fuel surcharges to remain elevated into Q3 and Q4 at similar levels to Q2. Depending on geopolitical events, this could change. Our current forecast assumes about a $10 million impact for the year. Approximately $4 million of that's behind us. Expect about $5 million to $6 million impact in the balance of the year. From a shipping and supply chain perspective, we have about $10 million of impacts factored into our guide on shipping, supply chain, and manufacturing headwinds. Even though we are largely hedged on shipping because our containers are under contract, when we go to the spot market for additional containers, we're exposed to spot market prices, and spot market prices have spiked over the last 60 to 90 days. Our logistics team is working to avoid those spot prices where possible, but we do purchase on the spot market. From a manufacturing perspective, fuel inputs go into materials like foam, and foam costs have gone up in manufacturing. Much of this is driven by recent shocks; we don't see these as durable long-term cost headwinds. Regarding the delivery fee, we're really happy with the move implemented in June. This is the first time we've taken a fee increase in several years, and there's been almost zero negative impact from customers or our internal selling team. This is worth about $5 million to $6 million annually in run rate, and we expect that to start flowing through as a benefit in Q3, though not a full Q3 benefit due to timing. We're also building into our margin forecast benefits from the Transportation Management System. We project $4 million to $5 million of annualized run-rate savings when fully realized and expect some of that to flow through in Q3 and Q4. Occupancy costs from opening new showrooms act as a drag on gross margin until those showrooms scale. In Q3 versus Q2, occupancy costs are similar and then start to moderate in Q4. Finally, the tariff refunds discussed earlier will have additional flow-through in Q3 and Q4. We're expecting $5 million to $7 million in flow-through in Q3 and a similar amount in Q4, though it could vary. We took an inventory impairment in Q4 last year, so comparisons reflect that action. In Q4 last year our margin was just above 38%, and in Q3 we were around 38.7%. For the second half, despite headwinds and tailwinds discussed, we expect to come in north of those marks in our forecasting. Happy to follow up if you'd like more detail.
And our next question will come from Simeon Gutman with Morgan Stanley.
A couple of questions and one quick clarification. Does the higher delivery fee—the $5 million to $6 million—flow through comp? And then, John, when you talk about the excitement around new product and showroom expansion, when does this business get to a mid-single-digit comp on a sustainable basis? It feels like it's getting close; curious if you underwrite that for 2027. And Michael, a follow-up: second quarter SG&A dollars rose a lot. Was there something related to tariffs in there? If you take out the gross margin benefit from refunds, it looks like core SG&A would have been well above average, such that the flow-through wasn't so great. I wanted clarification on how noisy it was.
Sure. Regarding sales and product: looking forward to the third and fourth quarter and into next year, our product is resonating with clients across categories. We've launched new collections and fresh products that are performing well. We tested many items, learned what's working, and are getting successful product broadly into stores. We're launching some of our most impressive upholstery collections and products that appeal to both existing and new customers. We're broadening our taste reach—still aligned with our aesthetic but appealing to a wider audience, including some sharper price-point items for younger customers and higher-priced items for larger projects. We're executing on product, supply chain, and promotion to support continued momentum into the fall and next year.
Simeon, to add to John's comment, a big part of reaching mid-single-digit sustainable comp growth is improving e-commerce. Year-to-date, e-commerce performance is modest, and we believe it should be a growth business for us. We announced last month our intent to prioritize this channel. On your other questions, the delivery fee is not included in comp, so be mindful of that. Second quarter SG&A was a bit elevated for two reasons. First, strategic IT investments are elevated as we invest in the transformation. Second, selling costs were higher, and some selling costs are driven by written sales. When you have a big written sales month relative to delivered sales, you can get some near-term deleveraging until written and delivered converge. SG&A for the year will be elevated; we expect SG&A to land around 100 basis points higher on a percent of revenue basis than prior year. That increase supports the catalog investments—doubling the fall circulation and increasing spring circulation—and the POS pull-forward and digital transformation investments. We view these as necessary investments to drive mid-single-digit comp growth and long-term margin expansion.
And we'll go next to Seth Sigman from Barclays.
I want to ask about pricing. You've raised prices periodically over the last year. Could you update us on the strategy from here? Specifically related to the tariff refunds, it seems like you're investing in longer-term drivers rather than changing price. What are you seeing across the industry with pricing and how others are using tariff refunds? And a follow-up on the investment cycle: is it fair to say you're including the $7 million to $10 million costs but not necessarily including the sales benefit since you kept the full-year sales unchanged?
Seth, on pricing: we're not changing our approach significantly beyond what we've done this spring and summer. There are headwinds like delivery and container costs, but we've worked with our vendors and do not see a need to raise prices broadly at this time. We're holding pricing steady and have no plans to change it for the remainder of this year.
I'll add clarity on the reinvestments and how we treated the tariff refunds. Tariff refunds totaled $37.8 million, with $23.8 million recognized in Q2 and $5.1 million received in cash as of June 30. We're forecasting $5 million to $7 million of additional benefit in Q3 and Q4 respectively. We will reinvest about $5 million back into marketing to accelerate growth—primarily in catalogs, doubling the fall circulation and increasing spring circulation. On technology, we plan $4 million to $6 million of incremental spend relative to the beginning-of-year digital transformation plan, driven by the decision to pull forward the new POS system. That POS pull-forward will be $2 million to $3 million of P&L this year and is part of a roughly $20 million, five-year digital transformation spend with $2 million to $3 million in 2026. We're also allocating $2 million to $3 million into IT for additional resources to address a backlog of initiatives. These reinvestments are OpEx and are included in our updated guidance. The remainder of the tariff recovery offsets cost headwinds—fuel and shipping—and the rest flows to adjusted EBITDA. So yes, the P&L reflects those investments now, and there is no immediate revenue attached because these are in-flight projects; we expect revenue and efficiency benefits to materialize over time. We are carefully managing scope and budget and remain on schedule for our technology milestones.
This now concludes our question-and-answer session. I would like to turn the floor back over to Tara Atwood-Saja for closing comments.
Thank you, everyone, for joining us.
Thanks, you guys. Appreciate it. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.