Lovesac Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2023

There are 10 speakers on the call.

Operator

Greetings. Welcome to Lovesac's Third Quarter Fiscal 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. Question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Elizabeth Schneier. Ms. Schneier, you may now begin.

Speaker 1

Thank you. Good morning, everyone. With me on the call is Sean Nelson, Chief Executive Officer Mary Fox, President and Chief Operating Officer And Keith Signer, Chief Financial Officer. Before we get started, I would like to remind you that some of the information discussed will include forward looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects.

Speaker 1

Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call Based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non GAAP financial measures, including EBITDA and adjusted EBITDA.

Speaker 1

These non GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to Such non GAAP financial measure has been provided as supplemental financial information in our press release. Now, I would like to turn the call over to Sean Nelson, Chief Executive Officer of The Loves

Speaker 2

Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll start this call off by reviewing the highlights Our Q3 fiscal 2024 briefly providing an update on our operational accomplishments and finishing up with our outlook. Then Mary Fox, our President and COO, will update you on the progress we made against our strategic initiatives. And finally, Keith Signer, our CFO, will review our financial results and a few other items related to our outlook in more detail.

Speaker 2

Turning to the highlights of our results. Not a lot has changed since we spoke with you 4 weeks ago. Lovesac continues to deliver strong financial results and category outperformance backed by a very strong balance sheet. For Q3, we're pleased to confirm top and bottom line results that were in line with the outlook provided on our Q2 call on November 3rd. The headline is that 3rd quarter net sales grew double digits in a double digit negative category.

Speaker 2

To be clear, the macro backdrop largely remains the same as last month. Lingering macro uncertainty leads to consumer caution And pressure on the furniture category, which we estimate was down mid to high teens in the 3rd quarter. However, our playbook also remains largely unchanged and continues to deliver. Our disruptive design for life platforms, Impactful product innovation, compelling marketing and highly productive omni channel footprint continue to distinguish our unique brand and engender customer More specifically, for the Q3, total net sales were $154,000,000 up 14.3% versus the prior year period and 32% on a 2 year basis. Omnichannel comparable net sales growth was 2% for the quarter, a key metric for how we evaluate and manage our unique omnichannel business.

Speaker 2

We delivered gross margin expansion Substantial abatement in SG and A deleverage as expected, which led to materially improved profitability compared to the Q3 of fiscal 2023. Adjusted EBITDA reached a positive $2,500,000 compared to a negative $6,900,000 in the prior year period. Net losses also improved to $2,000,000 compared to a net loss of $7,000,000 in Q3 last year. And that's despite non recurring expenses related to the restatement that are called out in our press release. The Lovesac team continues to execute across all our priorities, including our innovation agenda, physical footprint expansion, Omnichannel experience from order to delivery and marketing efficiencies.

Speaker 2

Mary will discuss in more detail the progress of these growth strategies in a moment. As we look to the final quarter of the year, which includes the all important holiday selling weeks, I'd like to note the following. The macro environment and in turn the discretionary home category has remained challenging. As we said on our last call, we are not planning And yes, as expected, the promotional environment was more competitive The Black Friday and Cyber Monday periods than last year. But as we discussed with you last month, we adapted our plans, Increasing the discount slightly and delivering relevant and distinctive marketing with strong gross margins to boot.

Speaker 2

Taking all of that into account and with the Black Friday and Cyber Week events behind us, I'm happy to say that Lovesac has continued to grow and outperformed the category. As a result, we are further tightening our full year net sales guidance range, now 710,000,000 $720,000,000 which represents high single to nearly double digit growth, even excluding the impact of the 53rd week this year, A truly standout performance. We are not ready to provide guidance for fiscal 2025 today. However, we will prudently control expenses and with a focus on efficiency, balanced against proactive investments in new products to drive profitable growth. In summary, we are pleased to deliver 3rd quarter results that were in line with our expectations and which Once again, are ahead of the competition.

Speaker 2

The operational progress we are making against our growth strategies along with disciplined investments in key foundational areas like technology, new product innovation and insights continue to fortify our flywheel, thereby driving consumer demand and expanding our market leadership, which we believe can last well into the future. Finally, I want to thank the entire Lovesac team for their tireless execution of our strategies and delivery of our goals, especially during this critical time of the year. Our disruptive model enables us to continue to grow, thrive, innovate and invest in this business. But it is our people who ensure an outstanding customer experience and are the reason that our Lovesac family is growing so steadily as we enjoy a great holiday season together. With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail.

Speaker 2

Mary?

Speaker 3

Thank you, Sean, and good morning, everyone. As Sean discussed, with sales growth of 14.3%, our quarter three results Again reflected industry leading growth driven by our unique omnichannel business model. Importantly, on a full year basis, our sales up 196% from pre pandemic levels, and our adjusted EBITDA margin has increased 8 80 basis points over the same time period. Category outperformance has continued this quarter with strength in demand versus last year during Cyber 5 from Black Friday through Cyber Monday, And we are very pleased with our early results. Some highlights from Cyberfied include having our 2 largest sales days And the largest week in our history.

Speaker 3

We believe this peak in sales that is unique to our business within our category It's due in part to our investment in building a brand that is unmatched in the furniture category, coupled with delivery to customers' homes in just a few days. Our clear strategy for growth and the team's consistent execution against our growth strategies allows us to continue to fuel our flywheel and drive operational excellence across the business. I will now share the highlights of our operational progress in quarter 3. Firstly, starting with product innovation. During quarter 3, we expanded distribution of our newly launched Angle Side, Which is now available across our showroom base as well as our e com platform, and we're very happy with the impact and feedback.

Speaker 3

Angleside performance is even above our original expectations, which were ambitious, emphasizing how it is a meaningful driver of our overall continued growth and category outperformance. As I shared before, we partnered with Architectural Digest to launch anglesides to the consumer and designer world. The event was well attended by influencers as well as media outlets The event was surrounded by Architectural Digest paid media, further empowering the success we've seen since launch. In short, we're very happy with the early performance of Angle's side as it's approaching becoming Lovesac's number one style choice after only a few months. We're also launching some strong collaborations into the holidays, including a partnership with Nordstrom and Swarovski To develop a foot sack that will be featured within Nordstrom and on nordstrom.com this holiday.

Speaker 3

We continue to demonstrate that we will market share through our new product introductions and brand collaborations as awareness and appreciation continue to grow, all of which reinforce the Our omni channel experience, this model is driven by a combination physical touch points in our digital platform. During Q3, we opened 10 showrooms and 16 Best Buy shop in shops. With regards to our Best Buy partnership, sales were up 42.8% in quarter 3, driven by increased shop in shop presence versus last year. Our e commerce channel performance continued to show strong growth and increased 20% for last year and contributing meaningfully to our category outperformance. Our omnichannel model and investments into touchpoint and website technology Continues to drive improved customer satisfaction scores as we continuously monitor feedback and improve the overall customer shopping experience.

Speaker 3

We made significant improvements to the website shopping experience before entering our holiday code freeze, including new configurators Enable us to continuously improve the omni channel experience. 3rd is our brand ecosystem. At the center of our ecosystem lies our efficient marketing and effective driver of brand awareness, familiarity, love And ultimately customer acquisition, which supports our strong customer lifetime value to customer acquisition cost ratio. Overall, we continue to be agile with our marketing mix as the backdrop for customers' interaction with our category continues Let me share a few highlights of what we've been working on. For awareness more broadly, increasing efficiency and achieving reach enabled us to drive reach And also improved targeting simultaneously.

Speaker 3

Live thoughts upfront are a key example of this improvement. While on this subject, hopefully, you all have seen our newest commercial that tested very strongly across all metrics. We continue to closely scrutinize digital Marketing program optimizations to our SEM and social programs, which have driven improvements in our overall ad exposure And cost metrics, along with improving conversion rates and ROI. We've had strong success with some social partnerships Reinforce the resonance of our brand with culture, Charli D'Amelio posted from her new home on Lovesac products she'd requested. And as you know, she has more than 151,000,000 followers on TikTok and over 9,000,000 YouTube subscribers.

Speaker 3

We collaborated with Justin Pugh on a special stack when his Saturday Night Football intro referenced straight off the couch. And these two collaborations garnered over 35,000,000 impressions and are just a few examples of the work our team are doing building brand love and stickiness. And not to be forgotten, direct mail campaigns once again delivered strong ROIs for us and not only drove customer acquisition, But aided increasing lifetime value of our customers. Lastly, we are really excited to see that Esquire named Deltek, one of its best 37 gadgets for 2023. Yes, that is right.

Speaker 3

The couch made the best gadgets list, reinforcing the And finally, disciplined infrastructure investments and efficiencies. During quarter 3, we continued to make investments in technology and research and development as we scale our business for the long term. We completed the national rollout of Predict Spring, our new POS system, in all of our touch points. This rollout enhances The customer experience through speed of transactions and unlocks new and modern payment options like pay by link capability. Our quick delivery continues to drive customer satisfaction and our investments in supply chain, which we remain on track to deliver by the end of this year, are Expected to help drive inventory productivity improvements of 20%, as we have previously stated.

Speaker 3

As mentioned last quarter, we continue to make progress on Circular operations and open box inventory as we focus on improving the executional effectiveness and brand And we are seeing over 0.48 percent improvement in units back to stock versus last year. As a result of these We expect to see improvements in working capital as well as associated cost reductions across inbound freight and warehousing, which we saw in quarter 3 and will continue to realize in quarter 4. Investments in Gladly, our customer service platform, has allowed us to better serve Customers as part of our sales and service strategy, driving over 8 points of increase in CLOV customer satisfaction scores In quarter 3, over the same quarter last year, an impressive increase in service performance versus last year during Cyber5. We are laser focused on operational excellence, and we will continue to manage our cost structure and Capital allocation as we deliver operational performance ahead of our competitors. In summary, we are pleased with our results for the 3rd quarter and our continued and consistent track record of market share gains.

Speaker 3

I want to echo Sean's gratitude to our amazing team members For helping drive these financial and operational outcomes, for the big holiday weeks that we just covered and the ones to come, One thing that is certain is that we are ready for them and look forward to closing out our fiscal year having built on our market share gains, Expanded our physical footprint with highly productive locations, improved our digital go to market position, Made important infrastructure investments and doing all of this while advancing our innovation agenda. I will now pass the call over to Keith to review our 3rd Quarter results and our outlook for the Q4. Keith?

Speaker 4

Thanks, Mary. Let's jump right into a quick review of the Q3 followed by our outlook for the rest of fiscal 'twenty four. Net sales increased $19,200,000 14.3 percent to $154,000,000 in the Q3 of fiscal 'twenty four, with the year over year increase Being driven by web and showrooms. This was in line with what we projected for the quarter, driven by our 25th anniversary celebration and the launch of angled side. Showroom net sales increased $15,700,000 or 18.9 percent to $98,700,000 in the 3rd quarter as compared to $83,000,000 in the prior year period.

Speaker 4

The increase in showroom sales was driven by an increase of 2% in omni channel comparable net sales growth related to higher point of sale transactions with higher promotional discounting than the prior year, as well as the net addition of 41 net new showrooms compared to the prior year period. You'll notice that beginning this quarter, we've replaced Previously provided comparable sales growth metrics with a new metric, omni channel comparable net sales growth. This is the metric most closely aligned with how we evaluate and manage the financial performance of our omnichannel business. It also eliminates noise caused through the inclusion of demand based metrics in the past, such as orders placed, but that have not been shipped, and should therefore be far more useful for your models. Internet net sales increased $6,700,000 or 20.1 percent to $40,000,000 in the Q3 of fiscal 'twenty four as compared to $33,300,000 in the prior year period.

Speaker 4

Other net sales, which include pop up shop, shop in shop and open box inventory transactions, Decreased $3,100,000 or 17.1 percent to $15,400,000 in the Q3 of fiscal 2024. The decrease was principally due to a lower open box inventory transaction level, only $2,500,000 compared to $4,200,000 Our open box inventory transactions with ICON are a part of our circular operations, Design for Life and ESG initiatives. As we discussed last quarter, these transactions are waning in materiality As our initiatives to optimize our process for return product kick in, this better aligns with our sustainability goals and should retain more profits for Lovesac at the same time. We may engage in limited open box inventory transactions with ICON going forward To ensure that our warehouses are operating as efficiently as possible, by product category, in the Q3, our Sactional net sales increased 18 SAC net sales decreased 10% and our other net sales, which includes decorative pillows, blankets and accessories, Decreased 15% over the prior year. Gross margin increased 9 20 basis points to 57.4 percent of net sales in 3rd quarter versus 48.2 percent in the prior year quarter, primarily driven by a decrease of 10 70 basis points In total, distribution and related tariff expenses, this was offset partially by 150 basis points of pressure from higher promotional discounting.

Speaker 4

The decrease in total distribution and related tariff expenses over the prior year It's principally related to the positive impact of 11 60 basis points decrease in inbound transportation costs, partially offset by 90 basis points in higher outbound transportation and warehousing costs. SG and A expense as a percent of net sales increased by 4 20 basis points in the 3rd quarter or half the deleverage seen in the 2nd quarter. The deleverage was primarily due to deleverage within employment costs, selling related expenses tied to the Lovesac credit card, continued investments to Current and future growth and also professional fees. In dollars, overhead expenses increased $10,000,000 consisting mainly of increases of $6,300,000 in professional fees and $3,700,000 in infrastructure investments And other miscellaneous items, employment costs increased by $2,900,000 primarily driven by an increase in new hires in fiscal 2024. Selling related expenses increased $1,500,000 principally due to credit card fees related to the increase in net sales and an increase in credit card rates.

Speaker 4

We estimate non recurring incremental fees associated with the restatement of prior period financials It was approximately $1,700,000 in the 3rd quarter. Advertising and marketing expenses increased $2,000,000 10.8 percent to $21,100,000 for the Q3 of fiscal 'twenty four compared to $19,100,000 in the prior year period. Advertising and marketing expenses were 13.7 percent of net sales in the 3rd quarter as compared to 14.1% of net sales in the prior year period. Operating loss for the quarter was $3,600,000 compared to operating loss of $10,100,000 in the Q3 of driven by the factors we just discussed. Before we turn our attention to net loss, net loss per diluted share and adjusted EBITDA, Please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier this morning.

Speaker 4

Net loss for the quarter was $2,300,000 or negative $0.15 per diluted share compared to a net loss of $7,400,000 or negative $0.48 per diluted share in the prior year period. During the Q3 of fiscal 2024, we recorded an income tax benefit of $1,000,000 as compared to $2,800,000 for the Q3 fiscal 'twenty three, the change in benefit is primarily driven by the reduction in net loss for the quarter. Adjusted EBITDA for the quarter was an income of $2,500,000 as compared to adjusted EBITDA loss of $6,900,000 in the prior year period. Adjusted EBITDA for the Q3 was ahead of our expectations, principally driven by the upside to gross margins. Turning to our balance sheet.

Speaker 4

Our total merchandise inventory levels are in line with our projections and have leveled out as we discussed on our prior call. This is despite the addition of angled sized SKUs, and we believe this is a clear highlight of the uniqueness of our business model. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry leading in stock positions We ended the 3rd quarter with a very healthy balance sheet, inclusive of $37,700,000 in cash and cash equivalents As well as $36,000,000 in availability on our revolving line of credit with no borrowings. Please refer to our earnings press release for other details on our 3rd quarter So now our outlook and let's start with the fiscal Q4. We estimate net sales of $260,000,000 to $270,000,000 We expect adjusted EBITDA between $48,000,000 to $56,000,000 This includes gross margins just under 60%.

Speaker 4

Merchandising and advertising of 10.5% to 11% as a percentage of net sales and SG and A of 31 to 32 as a percent of net sales. We estimate net income to be $29,000,000 to $33,000,000 This includes approximately $1,500,000 of non recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per share is expected to be $1.77 to $2.02 With 16,600,000 diluted weighted average shares outstanding. Now for the full year fiscal 2024. We are tightening the range of our full year outlook for net sales to $710,000,000 to $720,000,000 We expect adjusted EBITDA between $54,000,000 $62,000,000 This includes gross margins of 57% to 57.5%, Merchandising and advertising of approximately 13% as a percentage of net sales and SG and A of approximately 38 As a percentage of net sales, we estimate net income to be between $22,000,000 $26,000,000 These fiscal 2024 estimates include $4,500,000 to $5,000,000 of non recurring incremental expenses Associated with our restatement of prior period financial statements, we estimate diluted income per common share In the range of $1.35 to $1.60 and approximately 16,500,000 Estimated diluted weighted average shares outstanding.

Speaker 4

As a reminder, the 53rd week in the 4th quarter is expected to contribute approximately $6,000,000 in Sales. Quickly on our cash balance outlook. We were very pleased to have reported such a strong cash position for the 3rd quarter, As we monetize inventory through the busy season, we continue to estimate we will end fiscal 'twenty four with a higher net cash balance than we ended fiscal So in conclusion, we're pleased with our 3rd quarter results and how early holiday sales have supported Continuation of competitively superior results as is reflected in our outlook. Market share gains, Strengthening foundations, exciting new growth drivers and a healthy balance sheet put Lovesac in an enviable position. The more I get to know the teams, the more excited I get about our collective commitment to optimizing the opportunity ahead of us.

Speaker 4

With a strong focus on growth, underpinned by an ROI based approach to measured reinvestment, I'm confident in the outlook. Now, I'll turn the call back to the operator to start our Q and A session.

Operator

Thank you. Our first question today is from the line of Maria Ripps with Canaccord Genuity. Please proceed with your questions.

Speaker 5

Good morning and thanks for taking my questions. First, recognizing that it's still pretty early and you're not to next year, but maybe can you talk about sort of your current expectations for the category growth and consumer demand next year? And what kind of macro assumptions are embedded in your sort of internal forecast for next year?

Speaker 3

Hey, Maria, lovely to hear from you. Thank you for the question. Yes, as obviously, we're fully focused on quarter 4 and this All important holiday season, we'll share more when we come through to our earnings for quarter 4. In terms of our Plans for next year, we still anticipate the macro environment will be choppy and the cash flow will be remaining challenging And we have planned that way, but as we've demonstrated the job results this year, last year, we continue to obviously really outperform the Degree really driving tremendous growth. And I think just so much of that goes back to the fact our brand Strength continues to just really grow.

Speaker 3

I think our customers, even just being out in the showroom Last week, they just love the brand. They believe in Design for Life. So we plan to continue to be pragmatic, prudent in terms of our investments With obviously a deep focus on ROI, but obviously as soon as things turn, We hope it will as the category starts to improve, then we'll be the ones that will be the fast

Speaker 4

Yes. Maria, this is Keith. Just to add to that a little bit. I mean, that's one of the really, really alluring aspects of this business model to me. Because of our approach not being merchandise led, but primarily selling seats and sides and sacks with the various covers, Our ability to scale up with upside surprises to the macro is really advantageous.

Speaker 4

Starting from a position of shipping in less than 2 weeks, even if we needed to potentially extend that a tiny bit In order to if it was a really material upside macro surprise, we could do so. So we sort of retain the ability to participate in macro surprises in a way that I think is sort of unmatched.

Speaker 5

Got it. That's helpful. And then secondly, sort of you've made a lot of progress on gross margin expansion over the past couple of quarters. Can you maybe talk about your philosophy around preserving that margin versus maybe passing on some of the savings to the consumer to Drive volumes, especially kind of here in the near term in this macro environment.

Speaker 4

Sure. I'll start off on So we've been really pleased with this and there's a whole host of factors behind it that we walked through on the call or that I walked through on the call earlier. And you could see as we get into 4th quarter with the guidance that we gave that we're looking for continued gross margin expansion through the 4th quarter, Yes, let's call it heavily rounded half the benefit year over year that we saw here in the Q3. But I think I would say this, we've sort of settled into where we think is a healthy range for us. Barring any material shocks, Whether it's on inbound freight or outbound freight, there's always potential for some type of systemic shock.

Speaker 4

But barring anything like that, I think we feel pretty good about this. Then what it becomes for us is a balancing act across pricing, across promotions, Across managing all of those inbound and outbound freight costs plus how we leverage our marketing and Our ineffective promotions we offer through the financing through the Lovesac credit card. So put it all together, I think these

Speaker 5

Got it. Thank you for the color.

Operator

Our next question is from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.

Speaker 6

Good morning. Nice quarter. Nice start of the holiday season. Congrats.

Speaker 4

Thank you.

Speaker 6

The first question I want to ask, and I think it's a bit of a follow-up just to that prior gross margin question. You mentioned In the comments, we've heard this elsewhere too that it's more promotional out there. I mean, there's more promotional backdrop. So I guess the I have with regard to gross margins, as we look at the results you put up, say, for Q3 and the guidance for Q4, to what degree Your consumers react more favorably to price promotions. And how much of a driver as you do that How much of a driver of the business is that account?

Speaker 7

Yes. Look,

Speaker 2

I think promotions is a very powerful tool in our arsenal, especially given our High gross margins to begin with and the competitive nature of our unique products, We try to be very strategic with them. We're as you know, we're trying to build a business that's here Forever, for 50 years, we're trying to build a generational brand And a brand that means something. And so, we have long leveraged promotions at Fairly healthy levels because in this industry in particular, it's a considered purchase. And so, people spend quite a long time researching products, researching competitors, research our product before they make the decision to purchase. And what we found, especially during the holidays, is while we our business spikes, as we all know during Q4, Kind of uniquely in our category, Lovesac, and sometimes we look at that, is that a blessing or a curse?

Speaker 2

But we enjoy the extra business that comes by the exposure being out there in shopping centers during this time of year when there's foot traffic, etcetera. But actually, most of those sales, as we observe them and as I observe them in the wild On the frontlines and showrooms come from these considered processes where customers are weighing the value. It actually most of the time is not a gift or even related to gifting. It's just kind of a psychological excuse to purchase. And so During this time of year in particular, the way that we manage promotions is really critical, because we have people that have been shopping us Maybe throughout the entire year and finally pull the trigger and are waiting to see if they might get better, etcetera.

Speaker 2

So we've Exercise, I think, a pretty disciplined hand this season, particularly because it's maybe the most promotional season it's ever been, At least in recent history, given the industry right now. And so our promotions are lower Then what we observe by really any of our competitors, and as you can see by the numbers, We are competing very robustly. I think we probably have the strongest growth in the category. And so we think we have that right balance of promotion and healthy fundamentals in the business for the Category right now and the nice thing is, should things in the category get worse or just continue to languish, we have a strong Opportunity to leverage promotions further to drive the business if necessary, but we're not chasing business to chase business. Again, we're trying to Balance building a brand that people can love and trust and have consistency as well as of course Compete in real time and generate cash and generate profits, returns for investors.

Speaker 3

I think Sean, just maybe Brian, to add a little bit more, I mean, what we see as well is consumers, they love the deal and the excitement of that deal, but it doesn't mean about the lowest price. We've shared with you before, nearly 40% of consumers that come into our brand, They don't even cross us with anyone else. So we feel very good in terms of gross margin and are being maintained. We have been doing some selective price increases in places as we have ladder out particularly on our more premium fills, and we've seen Great performance from that. So we're constantly adjusting the levers that we have available.

Speaker 3

And as you can see From our results, gaining huge market shares, outperforming everything else, then this algorithm has been working for us. We saw from The Goldman Sachs report yesterday, the promotional level was high through quarter We're at about 40% and at a similar level through November, and we are substantially lower. So I think, again, But we do feel good on the gross margin.

Speaker 6

That's very helpful. That's very helpful. My follow-up question, Different topic. So I think it was Mary. I think you were talking in your comments just about the or highlighting, I guess, the ongoing success A big relationship with Best Buy.

Speaker 6

So the question I have is, I know you always as a company you're very guarded by your future plans. I mean, should we expect Newer distribution type partnerships with companies like Best Buy to help basically get the Lovesac products out there?

Speaker 3

Yes. No, before I think where we always want to be is best in class partners Where consumers, it's really on their mind to be making sure that So Costco has obviously been an incredible partner for Best Buy, particularly as we farm where home meets tech. There's no one better to We want to be with Bookstep staff. So yes, we've continued to expand the relationship Best buy and more to come and we'll share more obviously at the end of this year. But we Gaining share, they're very happy in terms of relationship and want to continue to advance it.

Speaker 3

And then we're always considering Brian in terms of any other Best in class partners that we should be partnering with as you consider the whole ecosystem, whether it be showrooms, whether The cost curve by our own ecom platform, just where should we be and where are those footsteps But always on our mind strategically, but very thoughtful how we do it to ensure that we really Trying to understand the way that we believe and consumers expect to find us.

Speaker 6

Very helpful. Congrats again. Happy holidays. Thanks.

Speaker 3

Yes. Thank you, Brian. Thank you.

Operator

The next questions are from the line of Matt Koranda with ROTH MKM. Please proceed with your questions.

Speaker 8

Hey, guys. Good morning. Thanks for taking the questions. Just wanted to spin back to the Black Friday, Cyber Monday Commentary, the holiday commentary in general that you had. Just wondering if you could maybe speak to sort of consumer behavior that you're observing.

Speaker 8

Of the things we've seen sort of quarter to date from a number of folks is that consumers seem to be responding to Promotions within kind of sitting on their hands in between those promotional periods. I'm just curious if that's the trend that you're seeing. And then any willingness to sort of quantify the Black Friday, Cyber Monday growth that you said, I know you mentioned 2 record days and a record week, but any further quantification would be appreciated there.

Speaker 3

Yes. No, thank you for the question, Matt. So I think first thing to say, we were incredibly happy with our performance of Cyber5, as you mentioned. And from all industry reports, we know we outperformed the category significantly upon a lot of market share. I think in terms of dynamics, all of our channels contributed to the strong performance.

Speaker 3

It really felt like we were back to 2019, Strong traffic in showrooms, e commerce growth well into the late evening, and it was great being back in the front line. I think We saw consumers coming in that had done their research, were very focused in what they wanted to buy. And as we said with you back in the last call a month ago, we're not seeing anything in terms of trade down. I saw some trade up particularly in the fill, but also just storage racks in the seats and other things that It really drives up AOV. So that continued financing trend that's all continued.

Speaker 3

I think as you talked about, were people waiting for sure and we saw that across the industry with Others come out with deals even earlier than Halloween. I'm sure we were a little bit later. We promised that we gave them the best deal and we were holding to that And we did. So you could see a little bit more of that pent up demand coming, which is obviously the results that we've said. So Super happy from obviously everything we've done, and we've baked all of that performance into our guidance for this year.

Speaker 3

With a third of the way And just a great job to our teams. I mean, managing those record days is Little showrooms with incredible productivity. It was great to sit in there and they did an amazing job.

Speaker 8

Okay. Very helpful, Mary. Thank you. And then maybe for Keith, just on the gross margin, I wanted to attack it from a different angle. So In the Q3, you had an upside surprise versus sort of the commentary that you had last call.

Speaker 8

Just wondering what drove the upside? And then for 4th quarter, in terms of product margin, are we baking in a deeper headwind in that Sub-sixty outlook that you talked about, just maybe talk about the bridge, especially as it pertains to product margin in the Q4? Thank you.

Speaker 4

Yes, sure. So starting with the Q3 and where maybe some of that upside came from, I think it gets back to what Mary was just saying, which is We've been seeing some decent premium upgrades, things like Lovesoft, things like storage seats and add ons along those lines, as well as a little bit more shift towards Sactionals within the mix of product versus where we might have been. The surgical price increases we've been taking on certain of those Products has also been beneficial. It's not been broad based or materially large in terms of price But put the whole package together and that got us a little upside on the quarter. When you're thinking about 4th quarter, really what's happening is we're lapping Some of the abatement of the inbound freight costs that we're really pressuring last year, that's why we're seeing less of a year over year benefit in the Q4.

Speaker 4

It's more the easing of the tailwind on a year over year basis that's causing that deceleration and expansion. You'll notice that like we do get a higher absolute gross margin in Q4 than Q3 because do get some leverage. The higher sales gives us some leverage over things like warehouse costs and so on and so forth. That's why what I was saying earlier was when we think about holistically where we are in gross margins here in these high 50s, this feels like a good level For a full year basis for us and barring any systemic shocks, I think the way the business is trending, we feel good here.

Speaker 8

Okay. Much appreciated and best of luck for holiday guys. Thanks.

Speaker 4

Thank you.

Operator

Our next question is from the line of Alex Fuhrman with Craig Hallum Capital. Please proceed with your question.

Speaker 9

Hey guys, thanks very much for taking my question and congratulations on a really strong year. Mary, I think you mentioned a couple of times and Sean touched on as well that you set new records for peak days And weeks here during the holiday season so far, you guys have done a really good job historically over the last couple of years of being able to handle those Volumes without any kind of shipping delays or anything like that. But can you talk about the profitability of those

Speaker 3

Performance is, I think the team has planned for everything and as we go through different scenarios and working with our last mile Our partners, we plan for that capacity. So therefore, there wasn't any incremental costs That really came in. So from that side, certainly to what we planned for and the team did a great job I think the second piece, as we think about we talked about predict Spring, we completed that full rollout and that's significantly improving the speed of transaction. So when you have 5 or 6 customers No room on those peak days or even more. Just having that speed and the technology to be able to transact has really, So again, just back to the kind of reinforcement of the omnichannel model, but nothing that we see in terms of any profitability impact.

Speaker 3

It was as we planned.

Speaker 9

Okay. That's really helpful. Thank you, Mary.

Speaker 3

Thank you, Alex.

Operator

Our next question is from Thomas Forte. Please proceed with your question.

Speaker 7

Great. Thanks. So Sean, Mary And Keith, congrats on the quarter and strong start to the Q4. So two questions. The first one is, Can you give your updated thoughts on your ability to generate free cash flow and your thoughts on what you intend to do with the free cash flow As you advance the model.

Speaker 4

Absolutely. So and I appreciate the question. Thanks. Starting to lay the foundations for how we're going to approach this on a go forward basis, which is as we transition into generating more So we fully anticipate ending this year having been in a cash generative position, New systems and other tools and optimization programs are being put in place all the time. We are going to balance that, as Sean has said, as Maria said and I have said, against those future sales drivers.

Speaker 4

Our goal is You'll translate more of the top line growth to bottom line growth going forward and that should create more cash flow Out of the business, which we can use strategically along those balance lines I was just talking about.

Speaker 7

Great. Thanks, Keith. And then you've pretty consistently generated a lot of market share gains. Sean, you've talked in the past about your ability to consistently Outperformed the market at high teens, perhaps low 20 percentage point rate. I wanted to talk about the source of the market share.

Speaker 7

Do you feel like you're getting market share from the same players or do you think it's changed over time?

Speaker 2

Yes, that's a great question. It's hard for us to know for sure, but Our observations on the category and we try very hard to stay abreast of every player who sells couches, that's our And therefore, any firm that sells couches, we consider A competitor and we track them all. I think that I think there's kind of in our world there are 2 Main buckets, competition. And remember, of course, we are operating at a certain price point, But this brand, Lovesac stretches across broad I think fairly broad demographics because We can sell to the very high end customer who has a massive home and Is excited to put a 20 seat Sactionals with Stealth Tech in their basement or entertainment room. And we can sell to Middle America, where this is their main piece of furniture and we pull them up to our price point Through the real value that Sactionals create.

Speaker 2

And so we compete With all of the established brands in home that we've maybe be in the mall with or otherwise, We compete with brand new startups to kind of copycat the Sactionals format, modularity, etcetera, and try to mimic that value prop. And so I think that in this environment, we're taking market share from all of them. And as you can see with Most of our competitors negative growth and obviously our positive growth, we are certainly taking market share. So I think that based on the health of that marketplace. And for instance, I think that in startup land, capital is much more dear than it was over the last Number of years and so they're not spending in necessarily the same ways across the board, Just chasing growth and I think the incumbents have some of their own problems to deal with in this Within the category that is.

Speaker 2

This category is known for very low aided awareness and it's very fragmented. And so we are taking market share based on the competitors' unaided awareness. It's hard for furniture brands to gain real brand awareness because Consumers buy from furniture brands and home brands sporadically and sometimes with years in between. And therefore, as you observe Lovesac's strategy of building a brand in between, leveraging pop culture, Being in the zeitgeist through celebrity influencer, of course, our very sticky brand name, All of these things give us strength where I think many of our competitors Can't mimic that aspect of what we do and how we do things. And I think the SAC is a major player In establishing that brand.

Speaker 2

So, for

Speaker 6

all these reasons,

Speaker 2

I think that, we certainly are taking market share. It's hard for pin down exactly where and who it's coming from. And I think that does change based on the state of the category, which also has been influx recently.

Speaker 7

Great. Thanks for taking my questions.

Speaker 2

Great to hear from you.

Operator

Thank you. We've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.

Speaker 2

Yes. Thank you so much for joining the Lovesac 3Q conference call for fiscal 2024. We look forward to reporting again at the wrap up of our fiscal year, and we want to Just thank investors and all of the hashtag LoveSackfamily for building this brand that we hold so dear.

Operator

This will conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Lovesac reported Q3 net sales of $154 million, up 14.3% year-over-year (32% over two years) and outpaced a furniture category down mid-to-high teens, while omnichannel comparable sales grew 2%.
  • The company achieved a 57.4% gross margin (up 920 basis points) driven by lower inbound freight and a premium product mix, leading to adjusted EBITDA of $2.5 million versus a $6.9 million loss a year ago, and narrowed the net loss to $2.3 million.
  • During Black Friday and Cyber Week, Lovesac set record-breaking results—its two highest-ever daily sales and the strongest single week—despite a more promotional environment and slightly deeper discounts.
  • Strategic progress included the launch of AngleSide sofas (now nearing the top-selling style), opening 10 new showrooms and 16 Best Buy shop-in-shops, and 20% growth in e-commerce sales for Q3.
  • Lovesac has tightened its fiscal 2024 net sales guidance to $710 – 720 million (high single- to nearly double-digit growth ex-53rd week), expects to end the year cash-flow positive, and will balance ROI-focused investments with disciplined expense control for 2025.
A.I. generated. May contain errors.
Earnings Conference Call
Lovesac Q3 2024
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