Lovesac Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
December 12, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Lovesac Third Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Ms.

Operator

Caitlin Churchill, Investor Relations. Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone. With me on the call is Shawn 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 are 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 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 Lovesac Company. Sean?

Speaker 2

Good morning, everyone, and thank you for joining us. I'll start by sharing a high level overview of our Q3 results and outlook. Then Mary Fox, our President and COO, will discuss our key growth initiatives. Finally, Keith Signer, our CFO will review our financial results and a few other items related to our outlook in more detail. Turning to the highlights of our Q3 results.

Speaker 2

Total net sales were $149,900,000 reflecting a year over year decline of 2.7%. As you're aware from many others in our category, headwinds clearly persisted in the pre election period. For us, we felt this in some pressure on average order size, where we saw encouraging growth in quotes for very large setups, but less conversion of those quotes than we expected.

Speaker 3

Total omni channel comparable net sales decreased 8.3%, which was partially offset by new and non comp touchpoint contributions.

Speaker 2

Adjusted EBITDA and net loss were pressured by deleverage in SG and A, partially offset by gross margin expansion and leverage in advertising and marketing. Despite the quarter results being below our recent trends and expectations, the 3rd quarter still represented market share gains against a category that was down high single digits and saw us end the quarter with our highest pre holiday cash balance in years. Underpinning our performance is our highly productive omni channel footprint, which is built upon our Designed for Life platform, enhanced by the love evidenced in our customer engagement, compounded by compelling marketing and reinforced by our accelerating focus on product innovation. Demonstrating our commitment to innovation, in Q3, we successfully entered the case goods category with our Any table, completed an overhaul of our surface products like the drink holder, coaster and the new tray and addressed a common request from our fans by offering insert protectors. All of these new introductions expand our prolific Sactionals platform in ways that make it even more competitive in the marketplace, while simultaneously driving repeat business through add on opportunities to keep our installed base of over 1,000,000 households coming back for more.

Speaker 2

More details to come. As we are now well into Q4, we're also super excited to have even more new product news to share. We've recently launched the ChargeSide extension to our Stealth Tech platform. Now you can add charging to any Sactional side even without the full surround sound embedded. Also, thanks to collaborative work done by many teams, we were able to pull forward and soft launch the long awaited Sactionals recliner.

Speaker 2

This is the world's most innovative power recliner. If you haven't done so already, you really need to find your way into any one of our 258 proper Lovesac showrooms to experience this sleek, sophisticated, 0 wall clearance, rearrangeable marvel of engineering in person. Besides kicking back and enjoying the 0 gravity positioning, take the time to remove the cushions and look under the hood. This is a thing of beauty. Nearly 3 years and more than 80,000 design and engineering hours went into the creation of this product that we'll be selling now for decades.

Speaker 2

Of course, it can be utilized seamlessly with any Sactional setup ever sold. It simply replaces one seat. It works with the sides, these are the arms and backs that our customers already own. But even more miraculously, it can be set up to function wide ways or deep ways in any Sactionals configuration. It is smooth and silent.

Speaker 2

It is durable and of course, Lovesac Comfy. It is truly the only designed for life recliner on earth and there are numerous patents pending and issued relating to it. To frame up the market opportunity a bit, a full 25 percent of the broader sectional category demands reclining capabilities. As successful as we have been to date with Sactionals, we believe Sactionals are currently the best selling sectional platform in the U. S.

Speaker 2

Already. We have been effectively locked out of this huge recliner market until we launched this product just a few weeks ago. Already it is exceeding our expectations in terms of our internal attachment rates and customer feedback. As I just explained, the reclining seat is reverse compatible, but it is also future compatible in ways we have not yet revealed. The reclining seat really says to existing Sactionals customers, the investment you made in Sactionals maybe years ago was one of the best investments you ever made.

Speaker 2

You can trust Lovesac to continue to expand its product catalog in ways that makes your original purchase with us more valuable and compelling over time, not less. This way of doing business is 100% unique to the world of consumer goods and retail. This is designed for life in action. We are proud of it. Clearly, the pace of innovation has step changed higher at Lovesac with many more significant product launches yet to be announced even for fiscal 2026.

Speaker 2

Yes, I said even for fiscal 2026, which is only a few months away for us. All of this innovation comes from the compounding investments made over the last 5 years, including numerous product engineers and industrial designers, specialists in research and marketing and supply chain and sourcing professionals, all working in lockstep to deliver sophisticated design for life solutions that we will leverage to drive new and repeat business for decades to come. We have been investing in the foundations for profitable growth for years despite a tough category. Hopefully, you can see that these investments are now paying off, which should reinforce why we're so excited about a massive growth potential for Lovesac. At our upcoming Investor Day to be held in New York City next Tuesday, December 17th, we'll reveal more about our strategic framework, new products and growth initiatives, commitment to operational excellence and financial ambitions, which should supercharge our growth going forward.

Speaker 2

Despite our gains in new customers and some green shoots in attacking the repeat business opportunity off the back of these recent launches, The home category remains severely challenged, still not recovered from post pandemic pull forward. Black Friday gave us so much to be excited about in terms of brand buzz, double digit quote pipeline growth and more. But as indicated by our outlook for Q4, there is still lingering uncertainty holding the consumer back. We're focused on converting those clearly interested customers in our quote pipeline and bringing in new customers as well, but we believe it's wise to adjust our outlook accordingly as Keith will share. In summary, we remain focused on controlling expenses and protecting profitability, even as we continue to invest prudently in what we believe is a unique and powerful secular growth story, one that is supported by an expanding portfolio of new design for life product platforms that will drive future growth and expansion for this brand.

Speaker 2

Our teams are at the heart of what we do day in and day out and they have all worked very hard to bring about the launch of the reclining seat months earlier than scheduled, even while executing through the all important holiday season. I want to thank all of them for their ongoing hard work and disciplined execution as we continue to navigate through this dynamic consumer environment. Lovesac's runway for growth is long and attractive with large and extremely fragmented addressable markets of which we currently enjoy a very low share even in our current platforms. Our strengthening market position, profitable and growing business and solid net cash position on the balance sheet all enabled our first ever share buybacks made during Q3. As Keith will review, we intend to continue to operate and deploy capital with discipline, focused on delivering long term sustainable profitable growth that should create value for all our stakeholders.

Speaker 2

We look forward to sharing more on our long term vision during our Investor Day, attendance by invite only in New York City on December 17. With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail. Mary?

Speaker 4

Thank you, Sean, and good morning, everyone. As Sean discussed, our net sales of $149,900,000 for quarter 3 was slightly down from last year, but up 11.2% on a 2 year basis, even as the category remains challenging. Importantly, on a 5 year basis, net sales are up almost twofold from pre pandemic levels compared to the comparable category performance of flattish. Our adjusted EBITDA margin has increased 8 95 basis points over the same time period. In quarter 3, we continued to outperform the category, gaining market share underpinned by our customer and product centric focus and our unique omnichannel Infinity flywheel.

Speaker 4

We've built a business model and a platform unlike anyone else in the category, resulting in a total addressable market opportunity that is significant, brand health that is strong and growing, a best in class e commerce experience, high return touchpoint economics and an advantaged supply chain. We continue to extract benefit from disciplined investments in our strategic initiatives and capabilities to set us up for enhanced underlying profitability for years to come. I'll now provide key highlights of our go forward plans on each of our strategic initiatives. Firstly, product innovation. We know you're excited and curious, so let's jump right into our most recent soft launch of the Ultimate Power Recliner.

Speaker 4

We have been targeting a quarter 1 fiscal 'twenty six launch date for the recliner, but with a herculean effort from all of our teams, including supply chain and commercialization, we were able to soft launch this in touch points and online just ahead of the key holiday period. We'll lean in more aggressively to drive awareness and conversion of Recliner throughout fiscal 'twenty six. But even without full media support, it's off to a strong start. The organizational capability we have built to be able to bring Design for Life products to market is stronger than ever, and I just want to add a few more details. Refining seat is a breakthrough powered recliner innovation that will drive category penetration by attracting incremental customers to the Sactionals platform.

Speaker 4

Importantly, the reverse compatibility with existing Sactionals enables us to drive greater repeat customer business. The recliner delivers unparalleled comfort and flexibility while maintaining the sleek, sophisticated aesthetic that Lovesac is known for. Unlike traditional recliners that are limited to specific spots within a couch or sectional, a single reclining seat can be positioned virtually anywhere in a factional configuration and in multiple orientations. We see tremendous opportunity to open the aperture for the Sactional's addressable market by tapping into the recliner market and driving incremental customer lifetime value with this and future innovation. We will have the full launch campaign kick off early next year and look forward to sharing more with you during our Investor Day on December 17.

Speaker 4

We also continue to forge brand relevant ambassador partnerships that lean into culture real time. For example, in quarter 3, we partnered with Olivia Rodrigo by creating the GUTS World Tour SAC for her international concert tour. Her first worldwide tour has been widely anticipated by Libby, and she has more than 30,000,000 followers on Instagram and TikTok. The gut stack exploded on Instagram, both in impressions and by helping grow our follower base by more than 6,000,000 in a matter of days. 2nd, our omnichannel experience.

Speaker 4

We continue to strengthen our position as a true omnichannel retailer through a combination of our physical touch points and our digital platform. 1st, during the quarter, we opened 5 touch points and we remain on track to deliver at or just over 30 net new showroom openings in fiscal 2025. Second, during the quarter, we continued to launch website enhancements that nurture long term relationships with new and existing customers and support our plan to have the best in class omnichannel experience. We made significant enhancements to the pre and post purchase experiences, including an improvement to the showroom locator as well as enhancements to MyHub, improving the post purchase customer journey with enriched order information. Building long term relationships with our highly engaged addressable base of existing customers remains a significant opportunity for Lovesac and a key strategic focus as we continue to launch new products that integrate into their existing purchases.

Speaker 4

Backwards compatibility gives us a unique advantage to nurture and deepen customer relationships long after their initial purchase. On the heels of the PillowSac accent chair, the launch of Anytable in quarter 3 assisted in driving a double digit increase in existing customer mix and sales versus last year. In addition to attracting new customers, we will continue to leverage our loyal base of existing customers as we launch new innovations like reclining seats and charge sides. Another area of strategic focus is optimizing programming for our highly engaged open quote holders. Through better data capture, we are augmenting the assets of our amazing Sharoon partners, enabling us to reach out more to this audience systematically with the right message at the right time.

Speaker 4

3rd is our ecosystem, which is centered around acquiring, delighting and maintaining relationships with loyal, loving customers. We continue to leverage our marketing mix and spend throughout the quarter and strategically pulled back on linear TV during the period leading into the 2024 election. Our optimizations into video, including CTV and YouTube, are generating positive traffic trends and ROI, helping to offset continued inflationary pressures in paid search and social media. As effective as we've been in using marketing to build this beloved brand and grow net sales through good and bad macro conditions, we see significant upside potential from expanding and enhancing our marketing approach and playbook. With the Lovesac brand well established and anchored by a portfolio of designed for life product platforms, we are recruiting our 1st Chief Marketing Officer to shepherd us into the next chapter of growth.

Speaker 4

We will share developments as we have more information. Now an update on our first phase of launching services. In quarter 3, we launched a beta website offering meticulously inspected Lovesac products for resale to our internal associates in a curated experience. We've seen great results with this internal test, and we're looking forward to bringing the experience to our customers, leveraging open box inventory to fuel our endeavor and continuing to expand on our promise to create products that are designed for life and supported by circular operations. Finally, making disciplined infrastructure investments and driving efficiency.

Speaker 4

In quarter 3, we delivered material cost of goods and inbound freight improvements versus last year through prudent management and planned infrastructure investments, both in capabilities and technology. A key element of this is our continued diversification of manufacturing outside of China, which is delivering savings on tariff costs year over year. As we mentioned earlier this year, we enhanced our inbound logistics strategy moving from a freight forwarder model to a direct carrier relationship, minimizing our reliance on spot rates. This continues to benefit us both in better overall pricing and availability of containers as well as deemphasizing the spot market pricing inflation, representing significant cost avoidance. From a gross margin perspective, these savings were partially offset by an increase in promotional discounting in the quarter as we continue to see higher promotional levels in the category.

Speaker 4

We also delivered a 3% reduction in total inventory at the end of the quarter driven by the benefits of recent investments, including our new order management system, which benefits our outbound logistics assets. On that front, we continue to make strong advancements in our outbound logistics model and successfully introduced local parcel providers in 2 key markets, which is helping deliver lower costs overall and improved customer satisfaction. We'll continue to evaluate and expand this program into next year and beyond. So in summary, we're pleased with the progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive as well as support the substantial growth that lies ahead. I will now pass the call over to Keith.

Speaker 5

Thanks, Mary. Let's jump right on into a quick review of the Q3 followed by our outlook for the rest of fiscal 2025. At a high level, Q3 net sales fell slightly short of our guidance for the reasons Sean discussed. The disciplined management of controllable expenses enabled us to achieve the favorable end of our guided profit ranges regardless. That's even despite incremental expenses related to last year's restatement of prior period financials.

Speaker 5

As we begin with performance metrics, please note that all references to the Q3 refer to fiscal 2025 unless otherwise noted. Net sales decreased $4,100,000 or 2.7 percent to $149,900,000 in the Q3 compared to the prior year period. Showroom net sales decreased $7,700,000 or 7.8 percent to $91,000,000 in the Q3 compared to the prior year period, driven by a decrease of 8.3% in omni channel comparable net sales, partially offset by the net addition of 28 new showrooms. Internet net sales increased $4,900,000 or 12.1 percent to $44,900,000 in the Q3 compared to the prior year period. Other net sales, which include pop up shop, shop in shop and open box inventory transactions decreased $1,400,000 or 8.6 percent to $14,000,000 in the Q3 compared to the prior year period, primarily due to lower productivity of our temporary online pop up shops on costco.com.

Speaker 5

Open box inventory transactions with ICON were flattish year over year at $2,500,000 in the 3rd quarter. We do not currently anticipate any of these transactions in the fiscal Q4. By product category, in the Q3, our Sactional net sales decreased 2%. Saks net sales decreased 4%. We continue to expect we will be largely caught up with the backlog on Stealth Tech and PillowSac accent chair in the Q4.

Speaker 5

Combined, these accounted for less than $5,000,000 in transfer of net sales from 2nd and third quarters to the Q4. Our other net sales, which includes decorative pillows, blankets and accessories, decreased 16% over the prior year period. Gross margin increased and 10 basis points to 58.5 percent of net sales in the 3rd quarter versus 57.4% in the prior year period. This is primarily driven by decreases of 120 basis points in inbound transportation costs and 40 basis points in outbound transportation and warehousing costs, partially offset by a decrease of 50 basis points in product margin driven by higher promotional discounting. SG and A expense as a percent of net sales was 47.9 percent in the 3rd quarter versus 43.9% in the prior year period.

Speaker 5

The increased percentage is primarily related to investments in payroll, equity based compensation and rent as well as lower net sales. The increase in selling, general and administrative expense dollars was primarily related to an increase of $5,000,000 in payroll, $1,700,000 in equity based compensation, dollars 800,000 in rent, partially offset by decreases of $1,400,000 in professional fees, dollars 1,000,000 in credit card fees and $900,000 in infrastructure investments in the business support current and future growth. Rent increased by $800,000 related to $1,400,000 increase in rent expense from the net addition of 28 showrooms, partially offset by $600,000 reduction in percentage rent. We expect non recurring incremental fees associated with the restatement of prior period financials was approximately $3,300,000 in the Q3, which included the settlement with the SEC. These are very difficult to forecast and while we would hope these should be much smaller going forward, we'll continue to highlight any, if applicable, each quarter.

Speaker 5

Advertising and marketing expenses decreased $1,200,000 or 5.5 percent to $19,900,000 for the Q3 compared to the prior year period. Advertising and marketing expenses remained flat at 13.3% of net sales in the 3rd quarter compared to 13.7% of net sales in the prior year period. Operating loss for the quarter was $7,700,000 compared to $3,600,000 in the Q3 of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss per common 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. Net loss for the quarter was $4,900,000 or negative $0.32 per common share compared to net loss of $2,300,000 or negative $0.15 per common share in the prior year period.

Speaker 5

During the Q3, we recorded an income tax benefit of $2,100,000 as compared to $1,000,000 in the prior year. Adjusted EBITDA for the quarter was $2,700,000 as compared to $2,500,000 in the prior year period. Turning to our balance sheet. We ended the 3rd quarter with a very healthy balance sheet that provides substantial flexibility for Lovesac to invest in growth to enhance long term value creation for shareholders. First, we reported $61,700,000 in cash and cash equivalents, while retaining $36,000,000 in committed availability and no borrowings on our recently amended credit facility.

Speaker 5

While our cash balance was slightly down sequentially, it was up meaningfully from the 3rd quarter balances in fiscal 2023. 3rd quarter has historically been our seasonally lowest cash flow balance as we build inventory ahead of the holiday selling season. So this emphasizes the strength of our net cash position. 2nd, our total merchandise inventory levels are in line with our projections. We feel very good about both the quality and quantity of our inventory and our ability to maintain industry leading in stock positions and delivery times.

Speaker 5

3rd, during the quarter, we repurchased approximately 131,000 shares of our common stock at an average price of $26.13 for approximately $3,400,000 This leaves approximately $36,600,000 remaining under our existing share repurchase authorization. We plan to provide more details around our strategic approach for managing potential excess capital next week at our Investor Day. Please refer to our earnings press release for other details on our Q3 financial performance. Now for our outlook. Our early anecdotal evidence is that the Cyber 5 period was quite a challenge for furniture companies, so we don't have hard numbers just yet.

Speaker 5

Our baseline assumption for a 10% full year category decline largely still holds, so it's unclear whether the full 4th quarter will improve or deteriorate from the roughly 7% declines we saw in our fiscal Q3. Regardless, we aspire to grow irrespective of the category, let alone sustain market share gains. We aim to recover quickly from our initial 4Q outlook and believe we have a solid secular growth plan to do so, which we'll talk a lot more about next week at the Investor Day. Plus, as always, owing to our unique business model, we are primed to capitalize on the category rebound as soon as it happens and in more real time than our peers. As this occurs, the additional revenue should drive expanding flow through of top line growth to bottom line growth.

Speaker 5

For the full year fiscal 2025, we are lowering our guidance ranges. We estimate net sales of $660,000,000 to $680,000,000 We expect adjusted EBITDA between $37,500,000 $48,500,000 This includes gross margins of 58% to 59%, advertising and marketing of approximately 13% as a percent of net sales and SG and A of approximately 42% as a percent of net sales. We estimate net income to be between $4,500,000 12,500,000 We estimate diluted income per common share in the range of $0.27 to $0.74 and approximately 16,900,000 estimated diluted weighted average shares outstanding. As a reminder, fiscal 2025 will contain 52 weeks versus fiscal 2024, which contained an additional 53rd week in the Q4. For the Q4, we estimate net sales of $221,000,000 to $241,000,000 We expect adjusted EBITDA between $43,000,000 $55,000,000 This includes gross margins of approximately 60.5 percent Advertising and marketing of approximately 11.5% as a percent of net sales and SG and A of approximately 29% as a percent of net sales.

Speaker 5

We estimate net income to be between $28,000,000 $36,000,000 We estimate diluted income per common share in the range of $1.67 to $2.14 and approximately 16,800,000 estimated diluted weighted average shares outstanding. In conclusion, stabilization of the category and an eventual return to category growth are ahead of us, even if that exact timing remains unclear. In the meantime, even while the category headwinds linger, we believe we can balance near term performance and profitability with investments in product innovation and long term growth, thereby optimally positioning us to generate stakeholder value for years to come. Before I turn the call back over to the operator to start our Q and A session, we'd like to ask that the questions refer primarily to our results and near term expectations. We plan to provide full context and perspective around our strategic framework, new products, growth initiatives and financial ambitions at our Investor Day next Tuesday 17th.

Speaker 5

This event will include formal presentations, a Q and A section. We'll even have plenty of our amazing Design for Life products there for folks to interact with. We really hope you'll join us and please e mail investorrelationslovesac.com to request details. With that, over to you, operator.

Operator

Thank you. You. Our first question comes from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question.

Speaker 6

Great. Good morning and thanks for taking my questions. First, I just wanted to ask about your Q4 outlook. So if we look at your sort of updated guidance versus prior implied outlook, can you maybe share a little bit more color on how much of that sort of delta is sort of attributable to the changes in factors that you talked about last quarters last quarter, sorry, like catching up on delayed shipments, new products and just broader category improvement?

Speaker 5

Sure. Thanks. I'll kick this off and then I'll pass it over to Sean to talk a little bit more about some of the details. Honestly, the biggest delta between the previous guidance and now is the category. We were there were relatively few surprises in terms of the backlog amounts as we talked about last quarter being in the mid single digit millions or in the single digit millions and turned out to be a little less than $5,000,000 The supply chain teams did a great job getting Steltek back in stock after some delays in long lead times that we had in sourcing.

Speaker 5

So most of all of those factors were relatively consistent. I mean even actually from a recliner perspective, pulling it forward and soft launching it has been very encouraging to us. We've seen great feedback and great interest. And I'm sure we'll get into that more on this call, but like that's been quite encouraging to us. Really what it boiled down to was conversion of quotes.

Speaker 5

So Sean, why don't you talk a little bit about more what we've seen in terms of that dynamic?

Speaker 3

Yes. I think the most heartening thing about what we're seeing in the business is our quotes way up year over year. This is the business functioning as it's supposed to other than at conversion, which as we're experiencing anecdotally customers being more cautious with their spending, particularly pre holiday. Look, the year is not over and we're going to fight until the last minute to drive sales, drive revenue and put more people into the fold of our Lovesac family because that's where the repeat process begins. And now that we have a full suite of products, including the recliner that we just pulled forward to launch early, which is driving tremendous new business for us as well as repeat business.

Speaker 3

Obviously, not enough to offset this headwind that we're seeing in this category that continues to persist. It's well over a couple of years now going on 3 years of severe headwinds and we recognize that. Meanwhile, we're innovating and we've got exciting news to share next week at the Investor Day. And so while we are paranoid about the day to day business and remain totally focused on driving sales, we just don't know exactly what's going to transpire with the consumer over the next few weeks that are left in our fiscal year. And so the guidance that you're seeing is us being cautious as well as of course optimistic and focused on driving business until the end.

Speaker 6

Got it. And then secondly, can you maybe talk about how your recent product launches and the pipeline for next year sort of inform your approach to building brand awareness and sort of broader marketing strategy for next year?

Speaker 5

Sean, I think you're on mute.

Speaker 3

Yes. You're going to see a further expansion of our Designed for Life strategy rolled out. I mean, what's I think most exciting is as you're seeing with all of the launches this year, the pace of innovation at Lovesac is increasing. It used to be 2 or 3 new introductions a year. Now we've done more than half a dozen this year.

Speaker 3

And this not only provides customers with more fulsome ability to adopt our brand into their lives, but gives us so many opportunities to drive repeat. We're going to share some data in a few days that speaks to the power of this flywheel where people make often large purchases with us one time and then over a number of years increase their spend with us as we give them opportunities to add on. And this is not just a great business outcome. This is totally unique in the landscape. There is no other consumer company that I'm aware of that allows you to truly expand on the initial purchase.

Speaker 3

And not only in this way drive sustainability, right? These are products that can actually sustain, but also make that initial purchase more valuable a few years later than when you originally made it. And so not only are you going to see evidence of this in on the platforms you're aware of, Sactionals and Sacs, But we're going to speak to new platforms that are coming and that's really exciting for us.

Speaker 4

Yes. I think Sean, just to add Marie on your question. So a couple of things. We continue to drive awareness bringing more quote growth with double digits and actually building even more. And customers spend more than 30 minutes with us as they build their quotes and choosing their ideal configuration and the covers.

Speaker 4

So we see that brand health continuing and awareness is obviously critical for us because we still see a huge amount of opportunity. I think the second thing I talked about the fact we're going to be hiring our 1st Chief Marketing Officer, very excited about that opportunity and being able to drive funnel effectiveness. And as we Sean, you talked about the Reclina launch, we haven't even on our media campaign. This is a soft launch because we pulled it earlier just due to the Herculean efforts of our teams, which was just incredible and it's such a great product. And then we are going to switch on what is going to be an incredible campaign early next year to really tell people about why we have the best Repline app and how they can current customers can come and buy it and add it into their configuration.

Speaker 4

And then just attracting a lot of new customers that just wouldn't have considered us in the past because we didn't have a recliner. We now have the best recliner on the market.

Speaker 6

Great. Thank you so much for the color and looking forward to Investor Day next week.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Thomas Forte with Maxim Group. Please proceed with your question.

Speaker 7

Great. Thanks. So first, congrats on the recliner soft launch. I have one question and one follow-up. So Sean and team, how should we think about your promotional strategy and what is a highly promotional environment for the category, including your willingness to lose sales to protect profitability?

Speaker 3

Yes. I'll say a couple of things and Mary can add on. We have worked really hard over the past 3 years in particular since COVID to be thoughtful about our promotional strategy and not extend into realms further than sometimes what you'll see 30% off different things. This is important to us. In the marketplace, we're seeing significantly higher promotional levels from our peers and we recognize that.

Speaker 3

We're seeing 40%, 50%, 60% off a lot of different products out there. And our peers admittedly have a much broader catalog than we do. And there are obviously advantages and disadvantages to that. As it pertains to Lovesac in particular, we are not promoting as heavily on our new inventions, for instance, like the recliner and the Any Table and some of the new products out there. And we're holding the line.

Speaker 3

Why are we doing that? We're doing that because, as Mary said, we're seeing double digit quote growth year on year, right? So this is a sales and marketing machine that is functioning quite well up until the very end of conversion where we need a little bit more to get us over the hump and help us meet our original goals. We believe there is still time in the fiscal to do that, but we're being cautious. As it pertains to the go forward, we are here to build a brand.

Speaker 3

We're not here to just sling self buzz and make a buck and myopically focused on that. We believe that we're building a brand that will be here for decades. And I think as you see us expand into new categories, some of which we'll talk about in just a few days, you'll understand why we're so confident about this business in real time and on, of course, on the go forward. And so not being, flippant to the current state of the category that we're in, we've built cash, we're protecting, profitability through controlling SG and A. And so we're just not in a position where we want to go crazy with discounts and promotions.

Speaker 3

We feel very good about the businesses that we're seeing for the most part.

Speaker 4

And I think just a last bit Tom to add is we continue to test and learn and I think that's one of the great elements of our team is that agility. So we'll continue to do that. But as we have always talked, as long as we have a 3 in front of our promotions, we don't need to go as deep as we see others that are 40, 50, 60 off. And again, that goes back to the power of the brand. And the new innovation doesn't have a material discount at all, and yet we're seeing really good uptake there.

Speaker 4

So continue to work. The team are determined to be able to pull those really strong quote pipelines through to conversion, and we appreciate them for that and that tenacity.

Speaker 7

Wonderful. And then for my follow-up, how does the gross margin of the recliner compare relative to your other products?

Speaker 3

Yes, it's in line. We're really proud of this product. We've targeted to have it be in line with our overall gross margin profile. We're proud of our gross margins. As you know, they're perhaps the highest in the category or amongst the highest in the category.

Speaker 3

And we're seeing significant adoption of the recliner at the moment, almost fifty-fifty between customers that exist and new customers obviously adding into their configuration. So, it's up and running and we haven't even begun advertising it to its full extent.

Speaker 7

Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Matt Koranda with ROTH Capital Partners. Please proceed with your

Speaker 8

Just in the interest of focusing on near term stuff, wondering if you could unpack how the Q4 is tracking relative to the down 7% guide. I guess, what did you see specifically during the Black Friday, Cyber Monday period? Was it sort of negative, high single digits in line with that guide? And then maybe, Keith, could you share the underlying omni comp assumption that's embedded in the Q4 guidance? Just trying to get a sense for apples to apples comparison as we had that extra week last year.

Speaker 5

Sure thing, Matt. So totally fair question. We appreciate that. Just to be clear in terms of the specific trends for Black Friday as to how they told into our full Q4 guidance. Understand we're going to be we're not going to be totally clear there for a couple of reasons.

Speaker 5

We still have a long way to go in this quarter. We have double digit quote pipeline growth year over year. We have seen some of the let's call it lower conversion rates, particularly at the very large configuration size. But there's a long time to go here in this quarter. There's tons of interest.

Speaker 5

We have phone numbers, email and relationships with that entire quote pipeline of people that we are focused on converting. As Sean mentioned, we've taken a very conservative and pragmatic approach to our ability to accelerate that conversion. That's what's factored in. We would hope that we were able to be more successful at converting a lot like that pipeline through the rest of the quarter. But given the backdrop right now, we're not going to lean in too much in terms of the guidance.

Speaker 5

The Black Friday period, the Cyber 5 period is fully encapsulated within that updated guidance we gave for the Q4. What I would tell you is a couple of things to think about with the omnichannel quotes and how it pertains to let's call it say showrooms versus web and others just I think it will be useful for you. So first, remember in July, we had rolled out Phase 2 of our MyHub, which is our omni channel quote and CRM tool. So now no matter where you begin your journey with Lovesac, whether it's in a showroom, whether it's on our website, whether it's any of that, you now have a full seamless omnichannel way to engage with us and close that quote. As expected before launch and as we've talked about, we continue to see people come into the fold in the showrooms, but then execute or close on the web, which is driving our Internet sales growth higher.

Speaker 5

So that's totally as expected and what we want is an omnichannel brand. So when you're thinking about our omnichannel quotes and the Internet sales growth that you see in the Q versus others, just keep that in mind. The trends that the once you take that into account, the difference between omni channel and revenue growth really will be consistent because the contribution from the new showroom openings on a year over year basis is stable Q2, Q3, Q4. So really the delta will remain the same in Q4 as well.

Speaker 8

Okay. All right. Got it. Wondering on the it sounds like we have like a near term conversion challenge just given the double digit growth in quotes that you guys have mentioned several times. Maybe could you put a finer point on just the initiatives that we have in place or the tools at our disposal to start boosting conversion within this quarter?

Speaker 8

Curious on that front. And then maybe just anything on the recliner initial reads that you have in terms of attach rates to the Sactionals platform that would be very helpful.

Speaker 4

Hey, Matt. Yes, let me take those questions. So I think as we continue to test and with this quote pipeline strength that we have, compressed

Speaker 5

holiday

Speaker 4

shopping period, Because we've had a lot around with this compressed holiday shopping period, people just really need to focus on gift buying. But they came in to build a configuration because they know that they want this. It's just a matter of timing in terms of getting through this holiday period. So we'll stay connected with our customers. We're testing.

Speaker 4

You're going to see a couple of great events that we've got leading through into the holidays with gift with purchase, gift for you as well as convert for your family. So again, the agility of the organization to be able to drive that powered by the connections that we have with our customers and the relationships, we feel very strongly with, and we'll continue that through the quarter. In terms of on the recliner performance, we feel really good in terms of the start. It just launched 3 weeks ago into our showrooms and online as we talked pulling that forward and just great work with the teams. Early results are we're significantly exceeding our KPIs.

Speaker 4

We've already sold over 4,000 units and that's to both customers that have a fractional already and are adding it in and they're just super excited to have that recliner component. And then also a very great level of new customers that are coming in to add that into their initial setup. And we've done this without switching on any of the media campaign or any material

Operator

discount, as Sean mentioned, because we

Speaker 4

really believe that we're material discount, as Sean mentioned, because we really believe in the power of this incredible innovation. Customers are coming back and they're telling us they're just blown away by the comfort. They love the fact that you're able to put it in any location of the sectional, which is just a huge advantage to anyone else. And then also that you can actually have it set up flat against the wall without having to have any clearance, which is a huge advantage for that. So super early days, and a lot more opportunity for us to go after the eyeballs that are buying recliners as we launch the campaign.

Speaker 4

And in the meantime, zooming back up, the teams are all over the opportunity to be able to drive the improvements through quarter 4 as we certainly have the customers there. We just need to get them across the line. So very grateful for them.

Speaker 3

Yes. And just to build on what Mary said, I think we're very optimistic about the period post Christmas. Remember, our fiscal year doesn't wrap up till the end of January, which is a strong month for home decor as people shift their thinking from entertaining or celebrating studying their space for the year. And it's also, as Mary said, a shortened or as we talked about, a shortened holiday season, right? And so I think the frenetic pace of holiday buying and being an election year, all these things pile on to really change the dynamic of purchasing.

Speaker 3

So you might say, why not leave your guidance where it was or chase that look? We're seeing these shifts in real time. We remain optimistic. We have a lot of tools at our disposal. And this quote pipeline that Mary speaks of is just to put a finer point on that, really unique to Lovesac.

Speaker 3

Let me explain why. While it's certainly not unique in the furniture landscape to come into some of our better competitors and generate quotes for different things. There is no way to transact on Sactionals, particularly a showroom without a handheld experience with 1 of our tremendous frontline salespeople. They're good at what they do. You're going to play with some blocks.

Speaker 3

You're going to look at all the add ons from that are that can be quite complex from Stealth Tech to Deep Sides to your reclining seats to your choice of arms. This requires a quote process that gives us not just the customer's email, but their phone number in most cases. We're texting, we're calling, we're working and clienteling in ways that I think a lot of businesses don't and can't because either the information wasn't gathered as people wander around showrooms and look at price tags and make their own notes, which you can't really do at Lovesac or from our e commerce competitors where no such clienteling is possible. And so Lovesac, this is a really unique strength for Lovesac and that's why I think if we sound calm in the face of some of these headwinds, it's because we're seeing the significant quote growth. We will find a way to close a lot of it.

Speaker 3

It's just a question of whether we'll close it enough of it before the end of this fiscal year exactly. And so we continue to charge forward and appreciate the questions.

Speaker 8

Okay, guys. Thank you for all the detail and I'll leave it there and look forward to next week.

Operator

Thank you. Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.

Speaker 8

Hey guys, thanks very much for taking my question. I'd love to ask about the transition to the new media buying agency. I think I remember earlier this year, there were some headwinds just during the very early days of the transition. Now that you've had more time and some experience during the peak holiday season. Can you talk about how that transition has gone and if you think that was a good move?

Speaker 4

Hey, Alex, thank you so much. Yes, we continue to see based on our media performance and the return on ad spend, we feel very good about that transition. And as we've shared before, it was choppy in quarter 1 as we moved everything across. But their performance has continued to be a lot stronger both in buying power, so their ability to get access to much better pricing as well as even just much better media spots. So we've been investing in things like MBA, which we know is having a key cultural moment and a lot of uplift in terms of customers really watching that medium as well as even just a lot more optimization.

Speaker 4

As we see inflation in paid search. They're continually moving and driving at a lot more real time than we were able to do a year ago. So from that side, we feel very good on their performance and obviously that's led with our teams working with them. We do though see a continued opportunity as we've talked about the strength of our brand and being able to drive that accelerated conversion. So we're going to continue to test and learn.

Speaker 4

Again, they have more resources that are able to be doing that for us. And we're seeing even more step into things like influencer marketing that we've done a great job with, but the teams are really starting to drive that more. And then I think the last piece is just the digital marketing efforts really heavily focused around localized targeted tactics to get shoppers in. So I love that touch point and build a quote and have a demo. I think as Sean talked about, is just such an important part of our media effectiveness.

Speaker 4

So feel good, I think continuing to drive that spend through Q4 and looking forward to obviously seeing those improvements come through.

Speaker 8

Okay. Thanks very much, Mary. Appreciate that color.

Speaker 4

Thank you, Alex.

Operator

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Speaker 7

Hi, this is Andrew on for Brian. Thanks for taking our questions. So the first is just kind of a follow-up to a lot of the commentary around Q4 guidance. I know in your prepared remarks, Sean, you commented on the near term weakness around pre election period, while also noting that market share gains and the strength in the competitive positioning around recent product launches. So I guess the question is really what are you seeing in this post election period and how we should balance the commentary around product launches being positive and potentially market share gaining with also softer top line guidance for Q4?

Speaker 3

Yes, great question. It's a mixed bag for sure. We certainly were interested to see how the consumer would react post election, pre election choppy for all the obvious reasons. And post election for this category has continued to be about the same. We haven't seen a major shift in consumer behavior that perhaps we were hoping for.

Speaker 3

On the other hand, as we said, this combination of the increased quote pipeline, people are out there, people are shopping, they're just being a lot more cautious with their wallets and being more considered, especially in the shortened quality period. As it pertains to market share gains, our comments and conclusions there come from the fact that Lovesac has continued to beat the category. Despite the fact that we're a little bit down or flat, depending on which metric we're talking about, the category is double digit down and has been for a very long time. And so, we feel good that we are gaining market share. We also are we have a real time or near real time brand tracker.

Speaker 3

Lovesac is data obsessed, right? And so we're looking at how our brand compares to other brands in the marketplace. We have very detailed research in the landscape that we pay close attention to. And we feel good about the efficacy of our top of funnel and mid funnel marketing really all the way through, we're just not closing on quite enough quotes in real time before Christmas to make us feel uber confident about the guidance that it stood before. And so we'll see what happens post Christmas.

Speaker 3

We will continue to pull levers. We will continue to find more clever ways to promote, more clever ways to communicate. And we're cautiously optimistic. But so far, it's been steady as she goes, which in this environment for this category is not ideal. And we're recognizing that.

Speaker 5

And one other thing to add on this, just a dynamic that's been playing out that we're working on understanding and addressing real time has been the use of our customers of the Lovesac financing program. Through the Q3 and through Black Friday, we saw almost 500 basis points less of our revenues flowing through that financing program than we saw the year before. There's a number of things that could be driving that, including changes that came out through that whole industry earlier this year, where there was program fees put in place for programs like the equal payments, no interest. And as such, we've been toying around with shorter duration types of programs that don't have the initial fee, and so on and so forth. So we're in the process of tweaking that with our partner in Synchrony to try to optimize and see if that could be part of what's leading to less conversion at the end of the day of quotes thus far.

Speaker 5

So that's another opportunity for us to lean into and sort through. What's the optimal approach for a financing promotional offer to help drive that quote conversion. But I did think that might be interesting.

Speaker 7

Absolutely. No, I appreciate that. And then if I could just throw a follow-up in. We appreciate your commentary around the recliner seat and the consumer reaction around that. Any additional commentary you can provide around consumer reaction to the other various product launches you've had throughout the year?

Speaker 4

Yes. Yes. Sean, you want to take it first?

Speaker 3

No, you got it.

Speaker 4

Yes. So we've shared with you before Anytable came out in quarter 3 and we're seeing a great opportunity with current customers where they're adding in any table and then new customers that see great opportunity to be able to have this coffee table or in line table that can actually support how they live their lives with all of that functionality. So we see that and we've not been promoting, as Sean said, around on our renovation. So again, learning through in terms of the feedback when it is full price and where the customer engagement is. We're seeing customers particularly with larger configurations are really engaging in any table.

Speaker 4

And then I think the other one just probably as I highlighted the Pillar Stock accent chair. As we shared before, that was off to an incredibly strong start, highlighted as the accent share of the season. We did sell out, so that was on us in terms of the recovery around supply chain, which is, as Keith said, we're starting to see in quarter 4, and then be able to switch back on media there as well because with the longer lead times, we did pull that back a little bit. So that one in particular, we feel very excited as we build out. And then I don't know Sean, if you want to talk about the other exciting innovation on the Charge side that we just launched a few weeks ago?

Speaker 3

Yes. I mean the list of innovations from Lovesac this year is our longest ever and it speaks to the bigger picture of the brand we're building and the investments that we've made. We've invested in a lot of headcount and a lot of resource in order to put out innovation faster and drive sales. And this is the big reasons for our market share gains even in this down year. And it's important, I think to recognize that.

Speaker 3

Were it not for these new product introductions, things we would not be making the market share gains we believe that we're making. And so, as Mary said, besides the Pillow Satcher Accent Frame, which has its now it's kind of Internet famous, this product. It's gone viral on TikTok and Instagram. We sold out not because we ordered 2Q. Obviously, we ordered 2Q plan, but it would blew the cover off the ball of that product, even in this context.

Speaker 3

And recently, the charge side, right? This is the Stealth Tech introduction. This is the side where you can have one of those embedded chargers invisible to the touch, invisible to the eye, underneath the Sactionals cover. And this one, you can not just have in one position on the arm or the back, by the way, they're interchangeable, right? A Sactional side can be used as an arm or a back.

Speaker 3

But the charger itself can be placed within the piece near the front, near the middle, near the back of that arm, underneath the cover. These are inventions that don't exist. They don't exist in the marketplace. We're on the cutting edge of technology embedded in furniture. We're the only one doing anything like this, particularly with this degree of sophistication.

Speaker 3

It's a faster wireless charger than the one that preceded it in the original Stealth Tech program. And we have a lot of other Stealth Tech innovations to come over this next year on top of, of course, the furniture innovations. What's this all driving? It's driving not only attachment rate, of course, and AOV up overall in the bigger picture, But it's driving customer loyalty, right, because you can't once you're on this platform, it's a very sticky platform and it pays off. You made your Sactionals investment a couple of years ago, now you can add on, now it could change it.

Speaker 3

Holy cow, I didn't even know that this thing would be able to do this stuff when I bought it a couple of years ago, but it's also driving a huge repeat business. I think what's really exciting is that a few of these innovations, most of these innovations that have been mentioned, and there's more by the way that we're not even talking about, the surface products, we've got the we call them P protectors, the insert protectors. These are covers within your covers to protect your animals or your kids from making messes on your Sactionals and protecting that investment. These are things that the customer has been asking for. So what we're seeing with almost all these introductions mentioned is about fifty-fifty adoption, right?

Speaker 3

We're seeing as much repeat business, old customers coming back and adding on as we are the new customers picking it up because they're demoed in real time in showrooms. So it's a really exciting time. It's frustrating that the macro is not cooperating and we'll see where it goes. But we're who is a cucumber, we are focused on the future. We've got lots of cash and lots of ability to pull levers and protect SG and A and we're prudent about this business.

Speaker 3

We're not here to just meet a quarter or what have you. We're here to build a brand that's here for decades and we're going to manage the business in that manner.

Speaker 7

Thank you very much for that color. Appreciate it. And yes, looking forward to hearing about your initiatives next week at your Investor Day. So thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Nelson for any final comments.

Speaker 3

Yes. We just want to say thank you to all of the investors that continue to support this business. And of course to all the Lovesac family members out there, both employees and customers that really make this business thrive. Hope you have a wonderful holiday season.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Total net sales in Q3 were $149.9M, down 2.7% YoY with omni-channel comps falling 8.3%; adjusted EBITDA was $2.7M amid gross margin expansion but SG&A deleverage, while gaining market share in a down category.
  • Product innovation accelerated with Q3 launches including the Anytable, new surface products, insert protectors, plus early Q4 introductions like ChargeSide and the soft-launched “Ultimate Power Recliner” seamlessly compatible with existing Sactionals.
  • Full-year FY25 guidance was lowered to $660M–$680M in net sales and $37.5M–$48.5M in adjusted EBITDA, citing persistent category headwinds; Q4 is slated at $221M–$241M net sales and $43M–$55M adjusted EBITDA.
  • Omni-channel footprint expanded with 28 new showrooms in Q3 (258 total), enhanced digital tools (site upgrades, MyHub CRM) and double-digit quote pipeline growth, though customer conversion remained pressured ahead of the holidays.
  • Balance sheet strength is highlighted by $61.7M cash, unutilized $36M credit facility and no debt borrowings, alongside a $3.4M share buyback in Q3; an Investor Day on December 17 will detail the long-term strategic and growth plan.
A.I. generated. May contain errors.
Earnings Conference Call
Lovesac Q3 2025
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