Lovesac Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
June 13, 2024

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Lovesac First Quarter Fiscal 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 conference over to your host, Caitlin Churchill with ICR.

Operator

Please go ahead.

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, 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 measures to such non GAAP financial measure has been provided as supplemental financial information in our press release. Now I'd like to turn the call over to Sean Nelson, Chief Executive Officer of The Lovesac Company.

Speaker 2

Thank you, Caitlin. Good morning, everyone, and thank you for joining us today. I'll start our discussion by reviewing highlights from our Q1 performance and sharing thoughts about our outlook. Then Mary Fox, our President and COO will update you on the progress we are making on our key growth initiatives before passing the call to Keith Signer, our CFO, who will review our financial results and outlook in more detail. Turning to the highlights of our fiscal Q1.

Speaker 2

During our earnings conference call in April, we discussed a difficult 1st month of the Q1 and why generate better results going forward. Well, we're pleased that the adjustments we made to promotions and refinements in our approach with our new digital agency worked. And we delivered net sales, adjusted EBITDA, net loss and EPS at or slightly favorable to the high end of our guidance ranges. Specifically for the Q1, total net sales were $132,600,000 reflecting a year over year decline of 6% as we anniversaried strong quarter last year and continued to contend with a challenging category backdrop. Total omni channel comparable net sales declined 14.8% for the quarter.

Speaker 2

Though as Keith will outline later, this was nearly all a result of the difficult 1st month before we made the adjustments I described earlier. 1st quarter adjusted EBITDA and net loss fell meaningfully versus the prior year Q1. The decline in sales exacerbated the deleverage from opening 35 new touch points and investments in future sales driving initiatives, while we also saw increases in professional fees and marketing, some of which was non recurring. Despite the full quarter results being below our recent trends, they still represented another quarter of market share gains in a category that was down double digits. Additionally, at the midpoint of our newly issued guidance range for net sales in the fiscal second quarter, we'd be back to growth even against our 25th anniversary campaign last year.

Speaker 2

As we have outlined on the last several calls, the reason for our long term consistent outperformance boils down to our focus on the customer. Our advantaged products and our unique omnichannel business model with an omnichannel infinity flywheel unlike any other. Our design for life philosophy permeates everything we do. We are a platform company as opposed to a product company or a merchant led retailer. Innovation is in our DNA, but always with reverse compatibility in mind, reinforcing our commitment to sustainability or sustain hyphen ability as we like to say, product platforms that can actually sustain.

Speaker 2

Our platforms are built to last and designed to evolve. That's the perfect segue into our latest product innovation. The Sac that does it all now does even more. Welcome the PillowSac Accent Shareframe. Sacs are the product that Lovesac was founded on 26 years ago and our namesake, the world's most comfortable seat.

Speaker 2

Saks have firmly established their role in the family room, lounge, playroom, bedroom and many other casual spaces in the home. We continue to be the leading brand in this subcategory that we established. What we've done with the introduction of the Accent Chair Frame is to elevate the pillow sack literally and figuratively. Combined, the PillowSac Accent Chair is an eye catching, inviting, sophisticated and stylish way to enjoy cloud comfort in your more formal spaces. In fact, Architectural Digest believes we turned this accent into the living room's ultimate statement piece.

Speaker 2

We've seen tremendous response from both new and existing customers who are all finding ways to express their own personal style, sometimes purchasing numerous covers to fit different occasions. It's generating buzz, appreciation for our design for life approach and leading customers to ask us what's next. On that front, our product innovation pipeline remains very healthy. We have a few more launches coming this fiscal year that are on the smaller side of platform extensions. Following those, we have a larger launch in early fiscal 'twenty six that we believe will open the aperture of potential customers and benefit AOV for a core platform

Speaker 3

of ours.

Speaker 2

Following that, we have plenty more in the works, including entirely new categories, but you'll have to wait for more details. We're also laying the foundations for services that support our commitment to circular operations and support the value proposition for customers to deepen their love for the Lovesac brand. Mary will give you more details, but resale and trade in for our timeless and uniquely durable products are up first, so stay tuned. I'll close by touching on our outlook for the remainder of the year, which we reiterated today. As we discussed before, we are planning prudently.

Speaker 2

We're not counting on a macro balance to make our numbers. In fact, we're still basing our full year outlook off another down year for the category, down 10% compared to last year. We're uniquely built as a business, primed to over participate in a category rebound whenever it occurs in near real time. This will support top line growth and expanding profitability. But I want to be clear, we are not just waiting idly for the tide just lift our boat.

Speaker 2

We're expanding our physical accessibility through touch points. We're expanding our digital accessibility with new CRM tools and more. We're reinforcing tech foundations to ensure profitable scalability. We're innovating and adding products in existing and new categories. We're building a powerful brand, certainly one that is unlike any other in our category.

Speaker 2

The opportunity is massive and we're in a position of strength. Before I turn the call over to I want to thank the amazing Lovesac team for their role in delivering yet another strong outperformance versus the industry. With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail.

Speaker 4

Thank you, Sean, and good morning, everyone. As Sean discussed, we over delivered to our net sales guidance for quarter 1, which reflects a dramatic inflection in trend for March April as compared to February and helps to put the quarter's tough start into context as what we believe is an anomaly. Importantly, on a 5 year basis, our sales were up 2 24% from pre pandemic level compared to the category of flat for the same time period. And our adjusted EBITDA margin has increased 365 basis points. In quarter 1, we outperformed the category, underpinned by our customer and product centric focus and our unique omni channel 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, best in class touchpoint economics and an advantaged supply chain. We're also pleased with our performance as we start the Q2 and we expect our growth to further benefit from disciplined investments in our strategic initiatives and capabilities that expand our addressable market. I'll now provide key highlights of our go forward plans on each of our strategic initiatives. Firstly, product innovation.

Speaker 4

We were happy to launch the first of a number of great innovations this year, the PillowSac Action Chair. You now have so many options with the PillowSac. You can lounge in a peapod, you can lay it flat and create a guest bed or place it in the new accent chair frame for a stylish seat. In addition to selecting from over 150 machine washable, changeable covers, you can customize your accent chair with elegant hardware finishes and strap options. Existing PillowSac owners can seamlessly integrate the Blonde Oak frame bradded functionality, allowing them to experience their Sac in a whole new way, while new customers are discovering just how sophisticated a SAC can be.

Speaker 4

As we launched this great innovation, we leveraged our strong Architectural Digest partnership with an editor event last month in New York. Over 60 editors, content creators and interior design professionals were in attendance to celebrate the perfect bridge of style with cloud like comfort. The initial response has been everything we hope for and we look forward to sharing more in the upcoming quarter. Angle side, which we also launched last summer, continues to be a highlight for us. Notably, it continues to gain share, representing the largest mix of sides within our Sactional business and driving a higher average order value than Sactionals without Angle Sides.

Speaker 4

We recently launched Angle Side in Costco and it is already the number one style choice. Additionally, customers who select Angle Side report having an even higher satisfaction with Comfort than our standard side customers. We're on track for our material innovation launch in early fiscal 'twenty six that we expect to significantly open the aperture of where we compete in the couch category and enable us to accelerate our market share gain. We look forward to sharing more details with you closer to launch. 2nd is our omni channel experience and we continue to strengthen our position as a true omni channel retailer through a combination of our physical touch points and our digital platform.

Speaker 4

During the quarter, we opened 24 touch points and expanded our Best Buy partnership with 7 additional shop in shops. In quarter 1, we launched an enhanced post purchase journey, MyHub, that further reduces the friction within the omnichannel customer experience. This has led to a significant increase in customers creating an account online and these accounts provide us with a greater opportunity to engage the customer with personalized experiences and product recommendations, including new launches and more. Everything is designed to help us build long term relationships. And in Phase 2 of MyHub plan this year, we are launching a seamless quote update and conversion capability for our customers that will deliver an enhanced customer experience, increasing the conversion and customer satisfaction.

Speaker 4

Importantly, as a result of our unique omnichannel experience, our customer satisfaction scores continue to improve and sequentially increase in quarter 1, especially our digital experience and fulfillment scores. These scores improved year over year to our highest levels recorded, driven in particular by the strategic investments in resources and technology in our customer service capabilities, supply chain and our digital experience. 3rd is our ecosystem, which is centered around acquiring onboarding of our new agency who will enhance this effort. Together, we leveraged our marketing mix using national advertising in traditional formats, including TV and established media coupled with various digital strategies leveraging social media, non linear TV and influencer advertising. Our digital marketing efforts focus heavily on driving conversion using localized and targeted tactics, driving shoppers into a Lovesac touch point to experience our products in person.

Speaker 4

This reinforces our commitment to a truly omnichannel business model, meeting customers where they choose to interact with us. Looking forward, we will continue to actively test in the media space to optimize our investments for growth, especially considering opportunities in the space of video, search and audience targeting as well as broadening our brand awareness. In Q1, we successfully tested new targeting and promotional messaging for existing customers, including specific offers for the repurchase of covers. As we grow our customer base, we believe that speaking differently to this segment is a key driver of success and building lifetime value of loyalty and our efforts aided in strong growth of existing customer repurch in quarter 1. Lastly, on services within our ecosystem, we are focused on building these capabilities and further unlocking the right side of our flywheel and customer lifetime value.

Speaker 4

We're in the early phases of standing up the infrastructure to offer fully digitized resale and trading capabilities later this year, all further extending the life of each Lovesac product continuing to deliver on our promise to create products that are designed for life and supported by circular operations. Now making disciplined infrastructure investments and driving efficiencies. In quarter 1 fiscal 2025, we delivered material gross margin improvement through COGS and inbound freight reductions. We also continue to make infrastructure investments both in capabilities and technology that we're already realizing the benefits from. We delivered a 9% reduction in total inventory at the end of the quarter, driven by the benefits of recent investments, including the new order management system.

Speaker 4

Beginning of 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 benefits us both in better overall pricing and availability as well as deemphasizing the spot market pricing inflation and this represents significant cost avoidance. We're also making strong advancements in our outbound logistics model and we've successfully introduced new local parcel providers in one key market, which is delivering lower costs than our national partner and importantly improved customer satisfaction. We'll continue to expand this program throughout this year and beyond. So in summary, we're pleased with the progress on our strategic priorities and the strength of our performance that continued into the Q2 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.

Speaker 4

I will now pass the call over to Keith.

Speaker 5

Thanks, Mary. Let's jump right on into a quick review of Q1, followed by our outlook for the rest of fiscal 2025. Net sales decreased $8,600,000 or 6.1 percent to $132,600,000 in the Q1 of fiscal 2025 compared to the prior year period. This is slightly above our expectations, reflecting a successful adjustment to our promotional strategy and ironing out of inefficiencies following our agency transition, both of which heavily impacted the 1st month of fiscal Q1. Despite that difficult 1st month, we were pleased to once again deliver market share gains even against a still uncertain macro backdrop.

Speaker 5

Showroom net sales decreased $2,000,000 or 2.3 percent to $81,600,000 in the Q1 of fiscal 2025 compared to the prior year period, driven by a decrease of 14.8% in omni channel comparable net sales, partially offset by the net addition of 35 new showrooms compared to the prior year period. For more perspective on intra quarter trends, omni channel comparable net sales were down only low single digits for the aggregated second and third periods of the fiscal Q1. Performance of our new showrooms continue to be strong and operational efficiencies from construction to opening enabled some earlier than planned openings. Internet net sales decreased $3,600,000 or 9 percent to $36,600,000 in the Q1 of fiscal 2025 compared to the prior year period. Other net sales, which include pop up shop, shop in shop and open box inventory transactions decreased $3,000,000 or 17.1 percent to $14,400,000 in the Q1 of fiscal 2025 compared to the prior year period, primarily due to lower productivity of our temporary online pop up shops on costco.com.

Speaker 5

As a reminder, we may engage in limited open box inventory transactions with ICON going forward to ensure our warehouses are operating as efficiently as possible. We believe the fiscal 2024 quarterly run rate is reflective of a potential baseline level to use in your models. By product category, in the Q1, our Sactional net sales decreased 5%. Sac net sales decreased 17% and our other net sales, which includes decorative pillows, blankets and accessories decreased 23% over the prior year. Gross margin increased 430 basis points to 54.3 percent of net sales in the Q1 of fiscal 2025 versus 50.0 percent in the prior year period, primarily driven by a decrease of 7.90 basis points in inbound transportation costs, partially offset by an increase of 2 40 basis points in outbound transportation and warehousing costs, as well as a decrease of 120 basis points in product margin driven by higher promotional discounting.

Speaker 5

SG and A expense as a percent of net sales was 51.6% in the Q1 of fiscal 2025 versus 40.0% in the prior year period. The increased percentage is primarily related to lower net sales as well as investments in payroll, professional fees, rent, infrastructure, selling related expenses and equity based compensation. In dollars, overhead expenses increased $6,300,000 consisting mainly of increases of $4,500,000 in professional fees and $1,200,000 in infrastructure investments into the business to support current and future growth as well as $500,000 in equity based compensation. Employment costs increased by $4,000,000 primarily driven by an increase in new hires in fiscal 5. Rent increased by $1,000,000 related to a $1,400,000 increase in rent expense from our net addition of 35 showrooms, partially offset by a $400,000 reduction in percentage rent.

Speaker 5

Selling related expenses increased $600,000 principally due to credit card fees related to an increase in credit card rates. We estimate non recurring incremental fees associated with the restatement of prior period financials was approximately $2,300,000 in the Q1. These are very difficult to forecast, so we will continue to highlight any, if applicable each quarter. Advertising and marketing expenses increased 1,100,000 6.4 percent to $18,000,000 for the Q1 of fiscal 2025 compared to the prior year period. Advertising and marketing expenses were 13.6 percent of net sales in the Q1 as compared to 12.0 percent of net sales in the prior year period with the increased percentage primarily a result of lower net sales as well as some timing of expenditures arising as part of our agency transition.

Speaker 5

Operating loss for the quarter was $17,900,000 compared to operating loss of $5,700,000 in the Q1 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 $13,000,000 or negative $0.83 per common share compared to net loss of $4,100,000 or negative $0.27 per common share in the prior year period. During the Q1 of fiscal 2025, we recorded an income tax benefit of 4 to $1,300,000 in the prior year period. Adjusted EBITDA for the quarter was a loss of $10,300,000 as compared to adjusted EBITDA loss of $2,100,000 in the prior year period.

Speaker 5

Turning to our balance sheet. We ended the Q1 with a very healthy balance sheet inclusive of $72,400,000 in cash and cash equivalents as well as $34,000,000 of availability on our revolving line of credit with no borrowings. Our total merchandise inventory levels are in line with our projections. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry leading in stock positions and delivery times. Please refer to our earnings press release for other details on our Q1 financial performance.

Speaker 5

So now our outlook. Much remains the same as when we spoke in April. We aim to grow irrespective of the category in the near term, continuing our track record of market share gains. Plus, we're 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 revenues should drive expanding flow through of top line growth to bottom line growth.

Speaker 5

Specifically, we've not changed our baseline assumption for a 10% full year category decline, which underpins our fiscal 2025 outlook. The full fiscal Q1 category decline was about 12%, roughly consistent with our original assumption, which also expected modestly better category conditions in the second half versus the first half. Again, should the category perform better, we would expect to perform better as well or vice versa. For the full year fiscal 2025, we are reaffirming our guidance. We estimate net sales of $700,000,000 to $770,000,000 We expect adjusted EBITDA between $46,000,000 $60,000,000 This includes gross margins of 57% to 59%, advertising and marketing of approximately 13% as a percent of net sales and SG and A of approximately 39% as a percent of net sales.

Speaker 5

We estimate net income to be between $18,000,000 27,000,000 We estimate diluted income per common share in the range of $106,000,000 to $1.59 and approximately 17,000,000 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 fiscal second quarter, we estimate net sales of 150 $2,000,000 to $160,000,000 representing slight growth at the midpoint, a significant improvement from the fiscal Q1. We expect adjusted EBITDA loss between $2,000,000 $5,000,000 This includes gross margins of approximately 58%. Advertising and marketing of 14% to 15% as a percent of net sales and SG and A of 45 percent to 47% as a percent of net sales.

Speaker 5

We estimate net loss to be between $6,000,000 $8,000,000 We estimate basic loss per common share is expected to be $0.53 to $0.37 with 15,600,000 weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us. In the meantime, we're balancing prudence and efficiency and expenses with our belief that it's essential to stay focused on the big picture. That's the massive long term opportunity for tremendous value creation for all Lovesac stakeholders. We are building the Lovesac brand and investing in new product innovation that spans style, function and new categories.

Speaker 5

The PillowSac accent chair is but one example. Try it. I think you'll love it. I'll now turn the call back to the operator to start our Q and A session.

Operator

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

Speaker 6

Good morning and thanks for taking my questions. First, could you maybe share a little bit more color on your marketing efforts and how the partnership with the new media agency has been progressing so far? And then maybe more broadly, what are some examples of things that you can do differently or maybe more effectively now that you're working with a larger agency?

Speaker 4

Hey, good morning, Maria. Thank you for the question. So I think firstly, we feel really good as we got through the initial onboarding in February. And I think the teams have really got set up around the customer segmentation and all just the learning curves in understanding our business. So that transition we feel good on.

Speaker 4

We see it in our results and the performance and the return on ad spend through March April. And I think as we look forward around even optimization around some of our digital marketing, overall, I think the whole reason for the transition is just they have so much more resource for us around data analytics, the economics of scale. I think we've shared with you before that their buying power and everything that they can bring through. So we've already forged a really strong relationship with the team. We're seeing it in the performance, as Keith, Sean and I have shared, as we even step through into quarter 2.

Speaker 4

And I think this is just the beginning. And I think just so much more support around the results and the team, there's more to come.

Speaker 6

That's very helpful. And Mary, you talked about sort of moving to direct carrier relationships. Can you maybe give us a little bit more color on that? Is that something that you've already launched? Is it sort of is there anything you can share around sort of maybe the timeline of the launch?

Speaker 6

And how should investors think about incremental benefits to gross margins as a result?

Speaker 4

Yes. No, great. I'll start that and then maybe Keith will add. Yes, we're very grateful. Our teams actually started doing a lot of this heavy lift, Maria, at the end of last year.

Speaker 4

So we have transitioned to that direct carrier model versus using the freight forwarders. And that work is now being realized. So the majority of our containers that we are actually booking through this model and therefore not as vulnerable to some of the spot market spot rate inflations you're hearing about. Also, in addition to that, it means we get availability of bookings and ensure that we remain in stock. So great progress from the team, and we continue to feel very good about all of the supply chain leverage points that we keep sharing with you strategically

Operator

Absolutely

Speaker 5

Absolutely. So good question, Maria. So we knew about this plan given the early year implementation when we provided the original gross margin guidance for the full year that we reiterated today. So I think when you think about the quarterly cadence of what's still to come, really what is going to boil down to now is as we implement more of these changes on things like last mile freight that Mary discussed in her call, you're going to see an increasing benefit from those throughout the year. So when I think about the quarterly cadence, because the prior year compares get a lot more difficult than what you saw in the Q1, The gross margin outlook for 2Q shows slight pressure year over year, but we should be back to gross margin expansion in Q3 and Q4 as you think about your models with a little bit more of that in Q4 as we gain momentum on some of these other initiatives.

Speaker 6

Got it. That's very helpful. Thank you so much for the color.

Operator

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

Speaker 3

Hi, good morning. First off, again, congrats on managing well in a very difficult environment.

Speaker 5

Thank you very much.

Speaker 3

So the first question I have, and I think it's a bit of a follow-up to that prior question, but you talked about this inflection in your business that margin able being much better than February. So you shifted as you discussed, you shifted, I guess, advertising partners. But can you talk more specifically about the steps you took that helped to fuel that inflection stronger in your business beginning in March?

Speaker 4

Yes, sure. Brian, I'll start and then if anyone else wants to add. So I think what we'd shared, I think there were 2 really key elements that we saw to the choppiness that we experienced in February. I think the first was that we shared we tried to step down in promotion, as we had typically seen happen in the category coming off the highs of Black Friday. And as we stepped into that in February, what we actually saw through Presidents' Day is that everyone else actually remained even more elevated.

Speaker 4

So as we had shared, we moved back to the 30 off campaign that we've been driving. And I think what's really exciting for us as we saw the progress through March, April, even into quarter 2, is there isn't a direct linear relationship between necessarily what competitors are doing and where we need to be. There's just a headline effect that we need to deliver, which is very powerful at that three number. Whether the competition are at 36 off or 39 off or even a lot of them are advertising even at 60 off, it's working very well for us. So I think we feel very good with that inflection.

Speaker 4

As Keith shared before, that's baked into our guidance and feel that, that will really enable us to get the traffic through at that time. And then I think as we talk through with the agency, really just focusing their capabilities specifically around targeting the customers that really are very interested in our product, young parents, have adults and so forth. There's just a lot of work. That just takes a bit of time. And I think as we shared before, February is a quite a month for us.

Speaker 4

It's never a good time to do a transition, but we got through it. And I think as we've talked through, the results actually demonstrate that benefit. So more to come. And the whole point really with this agency is that it will actually bring a lot more benefits to us both in the analytics, the buying power, but also frankly just the optimization of our flywheel.

Speaker 3

That's very, very helpful, Mary. Second question I have. Just from a backdrop perspective, I know you've all continued to highlight that the success that Lovesac has had in taking share in a difficult backdrop. But I just want to check-in on the backdrop. Do you think it's getting worse?

Speaker 3

I mean, we're hearing more data points out there to suggest that particularly the lower income, maybe middle income consumers actually pulling back further. Are you seeing actually a difficult backdrop in merger?

Speaker 5

Sean, do you I think you're do you want to take

Speaker 7

that? Yes. Observe so many different sources of data besides, of course, our own sales to try to determine our outlook for the year. So far, based on what we're seeing for our customer, things are pretty steady. We remain vigilant.

Speaker 7

We remain a bit paranoid. We have been, I think, forever as a company that's come up somewhat scrappy in our early days and it served us well. So as we look at, for instance, the outlook that we put out there for our performance, we are not expecting any recovery in the macro this year per se. We still think that that could happen. In terms of what we're seeing from customers, the trends that we've articulated on prior calls maybe for the last 2 or 3 quarters remain the same where we have seen customers be just a little bit more thoughtful about the size of their configurations and attachment of different accessories and things like that, just a little bit more conservative overall, but that's baked into our plans as they're laid.

Speaker 7

And the trends that we're seeing in real time now feel about the same for this customer. So while I don't disagree, we also read the print that talks about the lower end consumer being very pinched by what's happening with inflation, etcetera. Our customer is not exactly that customer, more affluent, more stable. And so far, the trends hold. And so we'll remain vigilant.

Speaker 7

We'll remain paranoid. And we think that there is also the case for upside to be had should the housing market kick back in or various factors that would particularly affect our customer?

Speaker 3

Thanks, Sean. Appreciate all the color.

Operator

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

Speaker 8

Great. Thanks. So Sean, Mary and Keith, congrats on the quarter. I have one question and one follow-up. So for the first question, can you talk about the frequency of product innovation for Saks?

Speaker 8

I can't remember the last time you had something of this nature. And then can you talk about how consumers respond in the past when you've had product innovation for Saks?

Speaker 7

Yes. Thanks for pointing that out. It's an astute observation. We have probably as a brand neglected our sat category a bit in the past few years as Sactionals has just been such a driver of our growth. While we do continue to innovate in Sactionals, we the Sac innovation engine is now officially turned back on and we're very excited to see the performance of the postac Accenture frame.

Speaker 7

It's really been impressive from our point of view and without being more specific, we're really energized by it. So the reaction is very favorable. The product we're very proud of. And we actually see a lot of upside in stacks over the next number of years. We have an innovation pipeline that continues to develop.

Speaker 7

There are products being cooked on right now that we expect to be launching just over the next number of quarters? And the success of the early success of the given its success and ways that it can evolve and do what Design for Life products are meant to do. So we're really excited by that. And we think that Accent shares in general is obviously territory that Lovesac has license to play into. We have a number of, as we've talked about, let's call them singles, as we've said, smaller innovations launching this year like this one that's turned out to maybe be more than a single we'll see.

Speaker 7

But we'll continue to evolve our platform, Sactionals, Saks and even as we work towards other categories as well. So we're really excited about it. Great.

Speaker 8

Thank you for that, Sean. All right. So you talked on this in your prepared remarks, but I was hoping you can give some additional comments on your in house re commerce efforts and your long term vision for Lovesac's re commerce strategy.

Speaker 4

Yes. Hey, Tom, thank you for the question. And yes, it's a big passion of ours internally. And we've talked a lot about circular operations, and this is a big step towards delivering on that. So we already expanded an internal test with our own associates around open box item sales and just building all of the infrastructure capabilities, both in just the SOPs and also building out some technology through a great third party who is an expert around resell and trade in.

Speaker 4

So that work is already underway, and that will enable us to be able to reactivate and really bring that right side of the flywheel that we've talked about in so many ways and truly demonstrate the customer lifetime value through services. So I think that's kind of one key piece that you'll see and resell and trading over there. I think the second one that we've also and we'll share more as it literally just happened is we have re platformed to a much faster platform through Adobe Edge for our e commerce site and the speed change from this replatform that just happened is incredible. And all of this, again, will help us enable for frictionless conversion of our customers as we start to think about just moving beyond just selling our great products, but also being able to build those lifetime relationships. And more to come on that, that we'll share coming up, and a lot of great work and energy that we'll start to share some of the initial results on through this year.

Speaker 4

Great.

Speaker 8

Thank you, Mary. I look forward to that.

Speaker 4

Yes. Thank you, Tom.

Operator

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

Speaker 9

Hey, guys. Good morning. Thanks for taking the questions. Just wanted to touch on the sales outlook for the full year and sort of what the back half implied numbers would suggest. I guess to get back to the mid point of the full year sales guide, we would require, I guess, a return to kind of mid single digit growth in the back half of the year.

Speaker 9

Can you just talk about what the omnichannel comps would look like in that scenario? Do they get back to breakeven or even positive?

Speaker 5

It's a good question, Matt. I mean, that's probably a little bit more specific than we're going to get into this morning. I think it all starts with the category, right? So we talked about 10% for the full year, down 12% in the Q1. So the basic math is obviously slightly better than that 10% for the back half.

Speaker 5

Look, a big part of this is going to be not only that, but also the cadence of new product introductions and the changes we're making in terms of how we're engaging with and talking to customers. Mary was getting into some of that before as well, but like things like, for example, working with our new partner to change the way we cadence it from like, let's say, we have a big holiday promotion and how do we change our approach? We might drive more top of funnel in the beginning with a more aggressive approach on bottom of funnel conversion that we've done in the past. Lots of opportunities around that too. It's a combination of all of this.

Speaker 5

Some improvement in the macro, new product, buzz news and excitement around the brand as a result of those. It's changes in how we approach the marketing and our use of discounts and finance offers to really drive conversion, all of this as well as new touch points that will be expanding. We just opened at the end of Q1 a bunch of new touch points, particularly showrooms. We'll start to leverage those more as people gain awareness for them within those local markets as we progress through the year. So all of this combined gets us to be comfortable with a return to growth at the midpoint of the range.

Speaker 5

And like we said, the midpoint of the range even for Q2 is back to growth. So hopefully, we proved to be conservative, but we're encouraged by what we're seeing thus far.

Speaker 9

Helpful. And then maybe just dovetailing out what you just mentioned, Keith. The touch points for the year, maybe it sounds like it's probably front half loaded just given that we opened a bunch toward the end of the Q1. But maybe if you could talk about progression of showroom openings for the year and have we changed any plans on that front in terms of total amount to be open?

Speaker 5

Yes. No change in plans on that front. We're still looking for on a gross basis about 40%. And as you know, we opened low 20s in the Q1. So a much lighter cadence of openings as we progress through the year.

Speaker 5

That's been consistent with our prior and consistent with our guidance. Although we did get a few more open in late first quarter, which pulled some forward from 2Q and 3Q.

Speaker 9

Okay, helpful. And then maybe if I could sneak one more just as a follow-up on gross margin question that was asked earlier. I guess it sounds like to get to the high-50s, we're getting a little bit less benefit from inbound freight, but then outbound becomes a positive driver as we move into the Q2 and beyond. I guess the plug for me is what pressure are we factoring in on product margins for the rest of the year? Maybe you could just touch on that and any change to sort of planned promotional activities?

Speaker 5

Yes. So we are building in pressure on product marketing or let's call it discounts, so what we get to product margin for the year. Nothing really changes on that from what we gave in the original guidance back in April to now. Let me think about it from a full year perspective, it's a couple of 100 basis points of pressure that we've built in. So again, I think we're not the way

Speaker 9

I would think about it is this.

Speaker 5

While we'll see winning benefits on the inbound freight side of things, there's still plenty of other pieces of the puzzle that we didn't really highlight as major drivers that of the puzzle that we didn't really highlight as major drivers that will come into play here. It's things like warehousing. It's things like how we interplay the discounts versus the financing offers. It's going to be the last mile piece that we just discussed, which includes everything from how we're shipping, where we're shipping from and who we're shipping it through, right? So there's a whole bunch of moving pieces, a lot of smaller cats and dogs that add up to this.

Speaker 5

But again, we were very comfortable with this full year range of 57 to 59. Percent.

Speaker 9

Okay, very helpful. I'll jump back in queue. Thanks guys.

Operator

Thank you. Our next question comes from the line of Kegan Cox with D. A. Davidson. Please proceed with your question.

Speaker 10

Hi, guys. I just wanted to ask about the promotional environment. How do you guys feel you stack up against the competition? Your promotions were a little bit more in this quarter than 4Q 'twenty three. So just wondering how that is going to trend throughout the year?

Speaker 4

Yes. Hey, Guy. Keegan, thank you for the question. So we've all seen the cash flow become a lot more promotional, and this did intensify into quarter 1 and even into quarter 2. So if you look at the latest Goldman report, we see the category discounting anything up to 39%, and we are significantly below that.

Speaker 4

And again, so much around the brand stickiness that we have and 40% of our customers don't even cross shop with anyone. So I think that all just reinforces everything. I think as we've shared before in quarter 1, in February, we tested at a lower level, but we just found that, that went down too far because at the same time, the competition actually scaled up in discounts and even using a lot of headlines around clearance. So we continue to test and learn. I think we're seeing some great success even doing some promotional events outside of what you would see typical So it's all baked in, in terms of the higher rate So it's all baked in, in terms of the higher rate of velocity that we've seen in the promotions of p shared for the rest of this year.

Speaker 4

We're going to continue to test through this year. And but really assuming that the competition remains at the high level. And as I shared earlier, what we've seen is we don't need to be at the same level as the competition. We just need to have the right headline number. And I think that's the success that we feel very good on and we'll continue to test through the rest of this year.

Speaker 10

Awesome. Thank you. And then a follow-up is just we saw yields come down a little bit yesterday and your stock reacted positively to it. So how sensitive do you guys think you are to interest rates?

Speaker 5

From a demand perspective? Like Sean, you want to talk about the demand piece first?

Speaker 7

Yes. We believe that we are inexorably linked to the housing market to some extent, no question. And we believe that lower rates are going to have a significant impact on housing and therefore home in general. To that end, we just do not know what's coming and we wouldn't pretend to. And so we've just tried to be very conservative in that realm and not bake anything in.

Speaker 7

But we do believe that there will be significant upside. I don't think you have to be an economist to know that tend to have a neighbor friend or perhaps yourself waiting to move. And we know that moving and relocation in general is just a major driver for the couch category in particular and we're one of the most significant players now in the couch category. Sactionals are probably the best selling couch in the United States of America in terms of a single model couch. And so this is the category that currently drives our business, seating in general along with Saks.

Speaker 7

And so we're just we're really energized by what's ahead at some point. But in the meantime, we're just going to run the business really conservatively. And I think the thing to pay attention to with Lovesac is that when it does come back, we will be the first to the plate. The way that our supply chain works, our couches as anyone who understands them understands, we pack 100 of these onto containers, for instance, overseas, where others pack dozens. We are able to ship within days to your home almost no matter what fabric you buy or what have you.

Speaker 7

And these are advantages that are the competitor the competition just doesn't have. Our ability to scale the supply chain even for things that we stock in our warehouses is so rapid because we're always in production. We don't change often. We're not doing quarterly and even yearly changes. But all of these benefits that really tied back to the product itself allow us to be more nimble when some of the more favorable conditions happen.

Speaker 7

And in the meantime, we're trying to operate very conservatively. So yes, it's a factor we pay a lot of attention to and we'll see where it goes.

Speaker 5

Operator, I think we have time for one more question.

Operator

I'm not showing any other questions at the moment. I'll turn the floor back to you for any final comments.

Speaker 7

Great. Well, thank you so much for all the support from our investors as well as everyone in the Lovesac family that continues to make Lovesac the vibrant company that it is. Have a wonderful day.

Operator

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

Powered by Quartr
Earnings Conference Call
Lovesac Q1 2025
00:00 / 00:00