Lovesac Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
September 12, 2024

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Lovesac Second 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, Ms.

Operator

Caitlin Churchill, Investor Relations for Lovesac. 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 Siegner, 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 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'd 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 2nd quarter 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 Q2 results.

Speaker 2

We're pleased to deliver results in line or slightly favorable to our expectations, including total net sales of $156,600,000 and adjusted EBITDA of $1,500,000 These results reflect positive net sales growth of 1.3% for the quarter, indicative of continued market share gains despite the ongoing headwinds facing our category. Total omni channel comparable net sales decreased 5.4%, but this was more than offset by new and non comp touch point contributions. Net loss and net loss per common share were pressured by slight declines in gross margins and deleverage in SG and A, partially offset by leverage in advertising and marketing, all of which was expected and consistent with our previous guidance. 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 this commitment to innovation, in Q2, we successfully launched our PillowSac Accent Chair Frame or PACF, which saw incredible response and is surpassing our expectations.

Speaker 2

In fact, the Accent Chairframe sold out just a few weeks after launching. Let me share some highlights. Our PACF launch post was Lovesac's top performing single social post to date with over 8 point 8,000,000 views. 2 thirds of all pillow sacks sold since launch were ordered with an accent share frame. PACF excitement was haloed onto the entire Sac business, which was grown double digits plus 25% since we launched the PACF.

Speaker 2

Looking ahead, we are actively developing more innovations against this highly successful offering, as well as our broader Sacs platform. But perhaps most exciting of all is that the PACF has driven incremental Lovesac market penetration. Greater than 50% of PACF purchases since launch have been from existing Lovesac customers. And this is just the beginning of our plan to ramp up our efforts to generate more repeat business, which I'll talk more about in just a minute. Following the PACF success, we are excited to have just launched the new Anytable.

Speaker 2

Anytable brings the unrivaled adaptability of Sactionals to a table and represents the first of Lovesac's entry into an adjacent furniture category, tables and case goods. Any table seamlessly integrates into new and existing Sactional setups in many configurations connected to the Sactionals or freestanding connected to each other. You can grow it and change it and rearrange it. It offers style, functionality and hidden storage, and it's designed with future innovations in mind. There's more to come on the Anytable platform.

Speaker 2

Anytable is available in 3 wood finishes that match our newly redesigned Sactionals accessories, weathered gray, dark brown and blonde. Speaking of accessories, we're also launching an entirely new suite of redesigned Sactionals drink holders, coasters and the all new Sactionals tray in the same 3 wood finishes that coordinate with all of the new wood designs from Lovesac. We're moving closer to a design point of view on the entire living room and someday the entire home, if not every product category, then at least the ones that really matter to people and how they live their everyday lives. We're solving problems that people didn't even know they had with products that are totally unique to Lovesac. And of course, built to last a lifetime and designed to evolve as lives change.

Speaker 2

This is our Design for Life business model unfolding in real time, where all products coordinate, build on each other and make the customers core Lovesac purchase that perhaps they made years ago, even more valuable and useful to them than it did when they bought it in the 1st place. There is no other home brand designing or marketing in this way. We have much more to come. Through these launches, our plans for a few other smaller launches still yet to come this year and a major launch in fiscal 2026, we are driving momentum. These will give us entry into more rooms in households and expand our reach.

Speaker 2

Combine reach with our CRM and omni channel tools that we have invested in over the past few years and we believe we have a massive opportunity to capture much more repeat customer action in the future. Before we move on to the outlook, in addition to our product innovations, we have some exciting collaborations happening right now. First up, we're thrilled to launch our collaboration with Fashion Phenom Kids Super during Fashion Week in New York City just a couple of days ago. So keep your eye on pop culture, fashion and Fashion Week to see how Lovesac shows up in the most avant garde channels out there. The focus on innovation that is ingrained in our DNA at Lovesac, coupled with the appeal of our Design for Life platform, our convenient omni channel model and compelling marketing are all enabling us to deliver continued market share gains against a still challenged industry and category backdrop.

Speaker 2

That playbook remains in place and remains our goal regardless of the macro situation. Now listen, we'd all love to see interest rate decreases create a potential tailwind for our category and they might, but we believe it's prudent given actual spending data and recent promotional intensity within the category to leave our industry outlook unchanged at this point. As such, our outlook still assumes that the category will be down 10% versus last year. Based upon that macro foundation and where we sit after 7 months of our fiscal year, we are tightening our guidance range for net sales. While the midpoint of the range is slightly lower than before, it still reflects growth for the fiscal year.

Speaker 2

We remain well positioned to deliver on our objectives for this year and beyond. And should the environment change, our teams are nimble and poised to pivot quickly with the ability to chase growth. In summary, our teams are at the heart of what we do day in and day out at Lovesac and I want to thank them for their ongoing hard work and disciplined execution as we continue to navigate a dynamic consumer environment. Lovesac's runway for growth is long and attractive with a large and extremely fragmented addressable market of which we currently enjoy very low share even in our current platforms. Our strengthening market position, profitable and growing business and debt free balance sheet, all enabled our recently announced first ever share buyback authorization.

Speaker 2

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 of our stakeholders. We look forward to sharing more on our long term vision during an Investor Day, which we are targeting to host during our Q4. So stay tuned for more details. With that, I'll hand it over to Mary to cover our strategic priorities and progress in more detail. Mary?

Speaker 3

Thank you, Sean, and good morning, everyone. As Sean discussed, we're pleased to have delivered results in line with our guidance for quarter 2, even as the category remains challenging. Importantly, not only did net sales grow versus last year, but on a 5 year basis are up 2 25% from pre pandemic levels compared to the comparable category performance of flattish. Our adjusted EBITDA margin has increased 430 basis points over the same time period. In quarter 2, we outperformed the category, gaining market share underpinned by our customer and product centric focus and our unique omni channel Infinity flywheel.

Speaker 3

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 continue to extract benefit from disciplined investments in our strategic initiatives and capabilities that expand our addressable markets and enhance underlying profitability. I'll now provide key highlights of our go forward plans on each of our strategic initiatives. Firstly, product innovation. We are happy to launch a number of innovations this year, starting with the PillowSac Accent Chair in May.

Speaker 3

I just want to add a few details beyond what Sean shared earlier. Our marketing team brought this unique innovation to life, leveraging our Architectural Digest partnership through a 3 60 degree campaign of digital marketing, PR, influences and social media, building excitement and intrigue amongst consumers, influencers and media. We've delivered and media. We've delivered over 2,000,000,000 earned impressions and over 500 media placements, thereby building buzz and news not only for PillowStack Accent Chair, but for Lovesac, the brand. We're extracting the learnings from this entire process to sharpen our approach on all of our upcoming innovation launches.

Speaker 3

PillowStack Accent HelloStack Accent Chair also serves as a great experiment for driving greater repeat customer business. Existing HelloStack owners have been buying the Accent Chair frame, allowing them to experience their stack in a new way, And many are buying multiple covers to truly accent their rooms. From boucle to plush furs or even seasonal covers such as the top selling limited edition pine quilted velvet, it's a fun way to add interest and style and appreciate the flexibility that's actually in every product Lovesac makes. We see the tremendous opportunity to tap into this and drive incremental lifetime value with future innovations. Building on this momentum, we've just launched the 2nd innovation of the year, Any Table, with the 3rd right behind in the newly redesigned Sactionals accessories platform, including the Sactionals drink holder, coasters and a much more contemporary tray.

Speaker 3

Our teams are super excited to share these with our customers and are already off to a strong couple of days. We'll continue to refine our launch program and repeat customer outreach, putting us in an increasingly effective position ahead of much bigger launches coming in the future. 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 thereby enable us to accelerate our market share gains. We look forward to sharing more details with you closer to launch. On Monday, we launched the first of its kind collaboration, which merges Lovesac's ingenuity in furniture design with one of the most talented and trending fashion designers today.

Speaker 3

Teaming up with disruptive fashion house Kids Super, we have launched a limited edition collection of home furnishing styles that merges our cloud like comfort and boundary pushing streetwear. The hero of this collaboration and campaign is our PillowSac Action Chair, featuring KidSuper's iconic kissing design. We're very proud of this groundbreaking collaboration and of the energy and excitement at the launch event with its coverage flowing past our expectations. 2nd is our omnichannel experience. We continue to strengthen our position as a true omnichannel retailer through a combination of our physical touch points and our digital platform.

Speaker 3

1st, during the quarter, we opened 10 touch points and we remain on track to deliver at or just over 30 net showroom openings in fiscal 2025. 2nd, during the quarter, we launched a series of website enhancements that nurture long term relationships with new and existing customers and support our plan to have the best in class omni channel experience. We made significant enhancements to MyHub, a singular destination on lovesac.com that allows for seamless pre and post purchase experiences. In quarter 2, the focus was providing enhanced personalization of the shopping experience that more closely mirrors touch points, allowing the customer to easily and seamlessly add to, adjust or otherwise reconfigure their Lovesac where, when and how they choose. This has led to a significant increase in account creation, which provides us with a greater opportunity to engage the customer in a more personalized and relevant manner.

Speaker 3

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. Early performance is extremely positive, indicating that customers are responding well to these new features. The next exciting website enhancement was our replatforming to Adobe Edge, a technologically evolved platform experience that significantly improves website performance, data and software integration. A more performant website benefits not only the on-site experience, but also SEO and organic search. We're already seeing notable improvements in these areas and improved conversion of customers online.

Speaker 3

Importantly, as a result of our unique omnichannel experience, our customer satisfaction scores continued to strengthen and sequentially increased in quarter 2, especially our digital experience. These scores improved year over year to our highest levels recorded. 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 marketing spend, especially during the Memorial Day and July 4 market share events and improved efficiency and return on ad spend and cost per acquisition. Looking ahead, we will actively test in the media space to optimize our investments for growth, especially considering opportunities in the spaces of video, connected TV, search and audience targeting, as well as broadening our brand awareness.

Speaker 3

We continue to see inflationary cost pressure, especially in paid search, but have become incredibly efficient in driving the right audience into touch points and to the website, resulting in higher conversion rates. We're also excited about progress we've made expanding our reach on YouTube as another lever, not only for brand awareness, but throughout the purchase funnel. In quarter 2, we continued to have success marketing to our existing customers and saw strong growth in existing customers' transaction count. In quarter 2, we completed the infrastructure requirements necessary to deploy our 1st phase of offering services. Last week, we launched our beta resale platform piloting with our own associates before launching a customer facing experience in the near future.

Speaker 3

We're very excited about the progress we've made in this important area, 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. Now finally, making disciplined infrastructure investments and driving efficiencies. In quarter 2, we delivered material cost of goods and inbound freight improvements through prudent management and planned infrastructure investments both in capabilities and technology that we continue to realize the benefit from. As we shared at the 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 has benefited us both in overall better pricing and availability of containers as well as deemphasizing the spot market pricing inflation, and this represents significant cost avoidance.

Speaker 3

From a gross margin perspective, these savings were offset by an increase in promotional discounting in the quarter as we continue to see higher promotional levels in the category. We also delivered a 16% reduction in total inventory at the end of the quarter, driven by the benefits of recent investments, including our new order management system. We're making strong advancements in our outbound logistics model, and we've successfully introduced local parcel providers in one key market, which is helping deliver overall lower costs and 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 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 3

I will now pass the call over to Keith.

Speaker 4

Thanks, Mary. Let's jump right on into a quick review of Q2 followed by our outlook for the rest of fiscal 2025. Net sales increased $2,100,000 or 1.3 percent to $156,600,000 in the Q2 of fiscal 2025 compared to the prior year. This was consistent with our guidance and reflective of continued market share gains driven by expansion of physical and digital footprint, promotional efficacy, product news, marketing and our excellent customer experience across the board. Showroom net sales increased $600,000 or 0.6 percent to $98,800,000 in the Q2 of fiscal 2025 compared to the prior year, which was driven by the net addition of 31 new showrooms, partially offset by a decrease of 5.4% in omni channel comparable net sales.

Speaker 4

While we have seen week to week volatility depending on timing of holidays, promotions and product launches, underlying trends have been relatively stable. Internet net sales increased $2,900,000 or 7 percent to $44,300,000 in the Q2 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 $1,400,000 or 9.3 percent to $13,500,000 in the Q2 of fiscal 2025 compared to the prior year period. This is primarily due to lower productivity of our temporary online pop up shops on costco.com. As a reminder, we may engage in limited open box inventory transactions with ICON going forward in order to ensure our warehouses are operating as efficiently as possible.

Speaker 4

Consistent with what we discussed last quarter and which was the case for Q2, we believe the fiscal 2024 quarterly run rate is reflective of a potential baseline level to use in your models, reaching approximately $12,000,000 for the fiscal year. By product category in the Q2, our Sactional net sales increased 2%. Sac net sales were flat, which was the strongest performance in several quarters as a result of the strength in our PillowSac Accent Chair. Encouragingly, we have some backlog on PAC given it's sold out on high demand and we currently estimate net sales catching up with demand in the Q4. Our other net sales, which includes decorative pillows, blankets and accessories decreased 15% over the prior year.

Speaker 4

Gross margin decreased 80 basis points to 59 percent of net sales in the Q2 of fiscal 2025 versus 59.8% in the prior year period, primarily driven by a decrease of 110 basis points in product margin driven by higher promotional discounting and an increase of 50 basis points in outbound transportation and warehousing costs. This was partially offset by a decrease of 80 basis points in inbound transportation costs. SG and A expense as a percent of net sales was 47% in the Q2 of fiscal 2025 versus 41.3% in the prior year period. The increased percentage is primarily related to investments in payroll, equity based compensation, professional fees, rent and infrastructure. The increase in selling, general and administrative expenses was primarily related to an increase of $6,400,000 in payroll, $1,500,000 in equity based compensation, dollars 900,000 in professional fees, dollars 700,000 in rent and $500,000 in infrastructure investments in the business to support current and future growth.

Speaker 4

Rent increased by $700,000 related to a $1,200,000 increase in rent expense from our net addition of 31 showrooms, partially offset by a $500,000 reduction in percentage rent. We estimate non recurring incremental fees associated with the restatement of prior period financials was approximately $1,900,000 in the second quarter. These are very difficult to forecast and have been above our original fiscal 2025 forecast for the past two quarters. We will continue to highlight any, if applicable, each quarter. Advertising and marketing expenses decreased $3,200,000 or 12.2 percent to $23,300,000 for the Q2 of fiscal 2025 compared to the prior year period.

Speaker 4

Advertising and marketing expenses were 14.9% of net sales in the 2nd quarter as compared to 17.2% of net sales in the prior year period with the decreased percentage primarily due to costs related to our 25th anniversary campaign in fiscal 2024, not repeating in fiscal 2025. Operating loss for the quarter was $8,400,000 compared to $1,000,000 in the Q2 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 $5,900,000 or negative $0.38 per common share compared to net loss of $600,000 or negative $0.04 per common share in the prior year period. During the Q2 of fiscal 2025, we recorded an income tax benefit of $1,800,000 as compared to less than $100,000 in the prior year period.

Speaker 4

Adjusted EBITDA for the quarter was $1,500,000 as compared to $5,300,000 in the prior year period. Turning to our balance sheet. We ended the 2nd quarter with a very healthy balance sheet. First, we reported $72,100,000 in cash and cash equivalents, which was flattish sequentially and up nicely year over year. 2nd, our total merchandise inventory levels are in line with our projections.

Speaker 4

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. 3rd and last, I want to provide an update on our credit facility, which ended the Q2 with $36,000,000 in committed availability and no borrowings. During the second quarter, and we enhanced numerous other elements within the agreement. Combined, the amendment further increases Lovesac's financial flexibility to continue to invest in the business while also delivering value to shareholders. To that end, we were also pleased to announce the authorization of an inaugural share repurchase program.

Speaker 4

Lovesac's Board of Directors authorized the repurchase of up to $40,000,000 of outstanding common stock expected to be funded through existing cash and future free cash flow. The timing, manner, price and amount of any repurchases are dependent on many factors and we plan to be measured but opportunistic. But for some baseline context, we initially estimate offsetting the dilution of stock compensation at a minimum. We look forward to discussing more with you in coming quarters. Please refer to our earnings press release for other details on our Q2 financial performance.

Speaker 4

So now for our outlook. 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 revenue should drive expanding flow through of top line growth to bottom line growth. Specifically, we have not changed our baseline assumption for a 10% full year category decline, which underpins our fiscal 2025 outlook.

Speaker 4

The fiscal first half 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 or vice versa. For the full year fiscal 2025, we are tightening our guidance ranges. We estimate net sales of $700,000,000 to $735,000,000 We expect adjusted EBITDA between $52,000,000 $59,000,000 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 40% as a percent of net sales. We estimate net income to be between $17,000,000 $21,000,000 We estimate diluted income per common share in a range of $1.01 to 1.26 dollars and approximately 16,900,000 estimated diluted weighted average shares outstanding.

Speaker 4

As a reminder, fiscal 2025 will contain 52 weeks versus fiscal 2024, which contained an additional 53rd week in the Q4. For the fiscal Q3, we estimate net sales of $152,000,000 to $160,000,000 representing another quarter of slight growth at the midpoint. We expect adjusted EBITDA to be between a loss of $3,000,000 to an income of $1,000,000 This includes gross margins of approximately 58%, advertising and marketing of approximately 15% as a percent of net sales and SG and A of 45% to 47% as a percent of net sales. We estimate net loss to be between $4,000,000 $8,000,000 We estimate basic loss per common share is expected to be $0.28 to 0.50 dollars with 15,600,000 weighted average shares outstanding. I'd like to take a minute to preempt the question on the implied net sales growth acceleration in fiscal Q4 as compared to fiscal Q3.

Speaker 4

We estimate sequential growth acceleration owing to a few factors. 1st, catch up on demand shipments for PillowSac Accent Chair and Stealth Tech, both of which had some delays in shipments owing to longer lead times. 2nd, new innovation recently rolled out will have a full quarter of sales and more awareness in Q4, whereas last year new innovation primarily benefited the Q3 following the launch of angled side. Lastly, we forecast a modest category improvement from Q3 to Q4, though clearly still declines as rates begin to lower and election uncertainty subsides post election. In summary, stabilization of the category and an eventual return to category growth are ahead of us.

Speaker 4

In the meantime, even while the category declines linger, we believe we can balance growing revenues and profitability with investments in foundations and product innovation, thereby optimally positioning us to generate stakeholder value for years to come. I'll now turn the call back over to the operator to start our Q and A session.

Operator

Thank you. At this time, we'll be conducting a question and answer session. You. Our first question comes from the line of Michael Baker with D. A.

Operator

Davidson. Please proceed with your question.

Speaker 5

Okay. Thanks. You did preempt my question on that 4th quarter ramp, which still is pretty aggressive to me. But I guess I get the factors. So if I could follow-up on that though, how much can you quantify how much sort of pent up demand you have for the new Accenture and Stealth Tech?

Speaker 5

How much were the delays? So I presume some of that revenue, you have a lot of visibility into it. So if you can just quantify how much of that helps that 4th quarter ramp?

Speaker 6

Yes, sure thing, Mike. So that impact started to impact in the Q2, near the end of the second quarter, pick up a little bit more through the Q3 and then resolve in the Q4. It's 1,000,000 of dollars, but it's in the single digits. So single digit 1,000,000 of dollars of transfer that will recover within the Q4. We've got really good visibility into the closure of those lead times and when we could ship.

Speaker 6

So that's a number we feel real confident in.

Speaker 5

Okay. Thank you. That's helpful. A couple more quick follow ups. Some of the industry data that we track at least has already started to get a little bit less worse and I think you sort of implied that as well just as rates have come down.

Speaker 5

Are you any green shoes anything you can point to maybe terms of mix or higher end versus lower end or any sort of early signs of mortgage rates coming way down that might be helping your business or at least give visibility into the back half outlook?

Speaker 6

Hold on one second. Sean is on mute, I think.

Speaker 5

I thought I dumped you.

Speaker 6

Bear with us for a second. He's coming up.

Speaker 2

Yes. Best way to characterize what we're seeing in the business right now is Lovesac has been in growth mode for so long. And as we look at what we're as we look at the competition, we are pretty shocked at the promotional environment, right? And so that is one of the at the moment, one of the biggest bellwethers of kind of what's going on in the industry. For Lovesac itself, we've really tried to hold the line in terms of where our promotional levels lie, and we've been pretty pleased with the resilience of the business.

Speaker 2

And so it's hard to say that we're seeing any meaningful green shoots. We continue to be very vigilant in terms of how we plan the business quarter to quarter, even month to month. And obviously, we're all watching the macro. We're all observing the fact that interest rates will likely be coming down and that should have an effect on this category. But our point of view, if you were to if you're asking us as the management team is to be really conservative in terms of when that might take effect.

Speaker 2

And so for us, it's more of the same for now. And then our business, we have the benefit of this innovation, right? So you asked about Green Shoots. Part of the reason I think we continue to be resilient in fairness is because we continue to launch new products that have new momentum for us, like the Pillow Factory Accent Frame, which is driving both repeat business as well as, of course, new business, like the Anytable that just launched this last week. And so for us these are inorganic or I should say non cyclical kind of opportunities that we're creating for ourselves.

Speaker 2

But as far as industry green shoots, it's more of like a steady holding pattern right now.

Speaker 6

Mike, just one thing to one data point to add in case this is of interest to you. So we've seen some interesting trends this year in the utilization of the Lovesac credit card program, basically the financing program that our customers use. We had told you in the very beginning of the calendar year, we've seen some decreases in the percentage of revenues run through the program, with particular emphasis on the low end consumer that then stabilized for several months. But then we had these changes, which were industry wide, nothing specific to Lovesac related to program fees, implemented by a lot of the banks on these types of programs. This quarter, Q2 in aggregate, we did end up seeing several 100 basis points lower utilization of the credit card as a percentage of revenues than we did in the past.

Speaker 6

And it does seem to really relate to the implementation of that program fee. So we're working with our partners on that to try to see what was the impact of that on our overall demand trends. How do we tweak our offers to make sure that we're as relevant as we can be, whether that's using lower duration, deferred interest programs, things like that to try to make sure that we have the most compelling offer that we possibly can as we get into the back half of the year. So look, if rates start to come down and therefore implied interest fees start to come down, that will all help as well. So we'll juggle this, but I did want you to know that post that implementation, we have seen a couple of 100 basis points decline in our utilization rate.

Speaker 5

Yes, that is interesting. Thanks for that color. One more quick one. Does your guidance include any buybacks? You said that you expect to offset dilution.

Speaker 5

But I guess specifically, as we do our model, are you planning should we include buybacks in the estimates? And just bigger picture, how did that decision come about? We know there were some shareholder letter written during the quarter. Just trying to understand the buyback philosophy a little bit more.

Speaker 6

So just to give you some of the background, the discussion has been underway between management and the Board for quite some time. As we've discussed on prior calls, there was a sequence that needed to be followed, which included addressing the nearing expiration of the credit facility before the implementation of a change in capital management philosophy. So we had to do the credit facility first. Now that that was accomplished, I think what the message here is, is we feel very good about the health of the balance sheet in the way that we're managing and balancing both the current environment and the desire to continue to fund all this like really powerful innovation, some of which you've seen and more of which is on the come. We've not built any into the forecast.

Speaker 6

That program was just increased. I did say on the call and this is probably like the extent of what I can get into today, which is we are thinking about offsetting the dilutive impact of equity compensation as sort of a good healthy base rate. That's less than $10,000,000 a year would be required to accomplish that. So as you think about your models, that's probably a healthy place to start.

Speaker 5

Thank you. Appreciate all the time.

Operator

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

Speaker 7

Great. Good morning and thanks for taking my questions. First, I just wanted to follow-up on your full year guidance. So with Q2 coming in more or less sort of in line with expectations to maybe slightly better, Can you maybe talk about your thoughts around narrowing your guidance, especially on the kind of on the upper end? And it seems like there is a little bit of shift in sales that's happening from Q3 into Q4, but kind of as we look at the full year guidance, is there anything that you're seeing now versus, let's say, last quarter?

Speaker 6

Not really. I think we're very bullish on our innovation, but there's lingering uncertainty in the macro environment, especially heading into this election. Your promotional activity has intensified as well. And you heard Sean talk about this a little bit before. We've seen some of the competitors extending and increasing promotional rates through the it was interesting at a macro level.

Speaker 6

And if you look at some of the data that's out there, headline promotions were slightly higher than they were for Labor Day, were slightly higher than they were for Black Friday last year. So look, we're just trying to be pragmatic taking into account all these factors. No real major changes other than that and we felt it was prudent to tighten the range.

Speaker 7

Got it. Does that make sense? And then secondly, can you maybe refresh us on your latest thoughts around the optimal number of showrooms and maybe overall touch points for the business? And I guess any color maybe you can share on incremental uplift to sales and brand awareness sort of when you add new showrooms now compared to, let's say, a couple of years ago?

Speaker 3

Yes. Hi, Maria. Thank you. Great question. So we've always shared we see a runway of just over 400 showrooms.

Speaker 3

And obviously, as we see for this year, we're going to be delivering around the net 30. So we continue to be able to see that opportunity. We refresh our model all the time as we think about how we go to market. So feel very good around that runway. I think the second piece, as you rightly called out, is when we open up a showroom, we also see that incremental halo around our digital business.

Speaker 3

And as you see that penetration of our business kind of continue to grow, particularly around some of the technology that we've added, as I talked about MyHub, it really goes hand in hand. So you're able to drive business, not just in terms of the showroom, but also kind of broadly from an omnichannel point of view. And for us, the showrooms really do act as driving awareness. And then we know so many customers, they want to come in and actually fit in our couch and experience our product. One of the things that was interesting, Sean, as we talked about PillowStack Accent Chair, it created a buzz for the whole brand.

Speaker 3

People came into the showrooms to see this new product. And then they're like, hey, these Sactionals are cool and they went through a demo and bought Sactionals. So just so much opportunity as you go back to thinking about our flywheel and the ability to be able to demo, experience the product, bring in great innovation that gets people excited about the brand. We see a long runway ahead. So they're very happy in terms of this year and then obviously the plans for next year.

Speaker 7

Got it. That's very helpful. Thank you, Mary and thank you, Keith.

Operator

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

Speaker 8

Great. So first off, Sean, Mary and Keith, congrats on the quarter. I have one question and one follow-up. So Sean, can you give us your current thoughts on your strategy for new product development? How you think about new lines such as Stealth Tech?

Speaker 8

And how you think about adjacent products such as Anytable?

Speaker 2

Yes. Thanks for the question, Tom. First and foremost, as we've said for years, our Design for Life philosophy underpins everything that we do, right? And for just to make sure everybody's tracking, this means products that are built to last a lifetime designed to evolve. We believe that this point of view is completely unique in the landscape.

Speaker 2

We don't see any other home companies or really any other product companies able to live up to that kind of an ethos. And it goes beyond our product. It really informs our business model. Everything that we're doing on the horizon with services, trade in, trade up, everything that we've spoken of before really pays off this design for life way of doing business. Now that said, I'll repeat something we've also said before, but not recently.

Speaker 2

We view our territory as from the mailbox to the backyard fence, right? And we take a very long point of view on our business. We believe we're building a brand that will be here for many, many decades and be very loved because of our commitment to the ethos that I just described. And so, for now, we've been very focused on the living room, Sactionals and extensions on Sactionals, including the recent Any Table launch. It is a Sactional and it can integrate with Sactionals, for instance, but it can also stand alone as a coffee table.

Speaker 2

At the same time, the Any table has been designed to accept future innovation. And one of the things that I'm most proud of, it has attributes and dimensions and different elements to it that could allow Anytable to potentially be its own platform and grow into other extensions and case goods, etcetera. But it also allows us in the nearest term to stay very focused on a business that continues to do well and really take market share in a powerful way. That is, of course, the business of Sactionals. And so it's kind of a straddle product at the moment, and it does have the opportunity to grow into bigger and broader things.

Speaker 2

In terms of, leaping into other rooms, let's say, within the home or from that mailbox, the backyard fence, it will come. And we are actively developing, patenting and prototyping in other realms outside of the living room. But in the nearer term, we continue to remain very focused. And I think that time is on our side. Were we to launch the next greatest whatever in a completely new category at this time, I think it would be lost on everyone, not just things like the election, but where the state of the economy, the state of this category, we can't overemphasize what we're living through in the home category is worse than 2,008, 'nineteen, and thankfully we're more than a few years into it.

Speaker 2

And so I don't mean to be glib, but I think Lovesac's weathered it well. And it's really given us cover to continue to lean into innovation, like I'm describing vaguely at a time when I believe many of our competitors have experienced layoffs and probably pared back on a lot of this kind of stuff. And I think it's going to allow us to emerge with strength, as the world continues to change and evolve and this category continues to change and evolve. So we are both hands on the wheel, all hands on innovation and really excited about what the future holds and really enjoying this time to invest in this way in the business even as of course we manage expenses well and try to continue to generate profits and cash. So innovation is what drives us and we can't be it's what gives us energy and we really look forward to sharing with you more at this Investor Day that's coming up.

Speaker 2

That's probably the thing and the opportunity for you to get the best glimpse and for us to be a little less vague on what's coming. Excellent.

Speaker 8

And then for my follow-up, can you talk about the gross margins and the contribution margins on new products such as the PillowSac exit chair and Anytable? I would think that the contribution margins would be quite favorable because unless you're directly advertising them, I feel like historically, at least with Stealth Tech, you advertised the Sactional, but then included it as part of the advertising. So I'd appreciate your thoughts on that.

Speaker 2

Yes. Sure thing.

Speaker 5

Go ahead, John.

Speaker 2

Yes. First, let me just bridge one thing on Stealth Tech because you asked the question and I didn't comment. And I think it's important. And then, Keith, you take it on the margin front. Self Tech for us is has, of course, been a major innovation in the last few years.

Speaker 2

And what you'll see it become is really sort of in our metaphor of Lovesac or will really be the sinuous tissue that binds together all of our future product platforms and really separates us. I think as a company that has embraced technology in a way that's very different, of course, from those that we compete with in sectional sofa land and not just sectional sofa land, but the home category broadly. From Stealth Tech to these new innovations, we are very disciplined about how we manage the gross margin profile and develop the products to compete. Being designed for life. There's a lot that goes into the design of these products and the production of these products, but we're very disappointed about maintaining those gross margins.

Speaker 2

I'll let Heath give you some color on that.

Speaker 6

Yes. I think Sean said it well. When we think about this process and we think about our holistic business model returns on capital and where gross margins fit into that puzzle, these new product innovations start with where we play and how we win, what our relative brand positioning is, what price points the customers will respond to most for us relative to the other offerings. We use that to engineer products that meet those expectations yet provide us the margins that we need, right, to keep this business model going for the long term, as Sean said. So we're very purposeful when we think about this.

Speaker 6

Look, and then there's new things we learn all the time, for example, with the Pillarsac Accent Chair, here's a product that's sold out given such high demand, how we approach discounting or promotions, other things like that, particularly on new products. There's a lot of things we can take away from this. And look, I'll go back to what Mary said on the call, which is as this pace of innovation is really ramping up, we're absolutely codifying the learnings from things like PillowSac Accent Chair, testing it and enhancing it as we move into the next product with Anytable. And then we'll continue to refine this as we move into much bigger products that are on the come over the next couple of years. So this is a constant data driven exercise to optimize and but we do think about it all holistically.

Speaker 6

It's not haphazard.

Speaker 3

Yes. And I think Keith just to add the Tom just on your marketing question. So when we are obviously launching Anytable right now, it's as focused on selling more seats and sides, more Sactionals. And look, your Sactional just got a whole lot better because of this amazing innovation with Anytable. So it's back to the power of the platform and you can continue to reinforce the platform and then injecting this incredible innovation.

Speaker 3

It's just continuing the playbook that we've seen as you referenced with Svelteq and we will continue to do that with all of our innovations.

Speaker 8

Thanks, Mary.

Operator

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

Speaker 9

Hi, good

Speaker 6

morning. Nice quarter. Congratulations.

Speaker 9

So for my questions, I actually want to focus on innovation. You've given it's a key topic of the reported call today. But I guess the first question I asked, as we think about recognizing your sectors remains choppy. But as we think about the top line growth algorithm for Lovesac, I mean, and now with product innovation kicking up, maybe going to a more consistent cadence, I mean, how should we think about product innovation as a contributor to your top line growth algorithm?

Speaker 6

Great question. And this is something we're going to talk a little bit more about at the Investor Day that Sean mentioned. Look, the real trick for us is everything starts with seats and sides, right? That's the core of the business model. That's what generates the profits and the cash flows.

Speaker 6

That's what provides the capital necessary to pull this innovation that we have lots of in the pipeline forward and actually commercialize it and launch it. What we're trying to do is to balance the reality of the category and the cash that we generate, we see some sides against the unleashing of that product portfolio, if that makes sense, and we have to be balanced through this time. If the category was absolutely ripping upward and we had more cash off seats and sides, we could accelerate even more. That's the juggle that we're going through, and that's what influences the way it shows up in the business model and the top line, Brian, if that makes sense. So some of what we're doing is continuing to put ourselves into a position to enhance that or accelerate that should the macro really generate the profit to cash flows to support it.

Speaker 6

Again, the macro is driving a lot of that pace. We'll talk more about that. But that's really a little bit of context for how it shows up in the model.

Speaker 9

That's helpful, Keith. And then my follow-up, and I think you talked about this in the prepared comments. But just as we look at that, the Pillarsach Accent chair and the initial demand for that, so has that been is it existing new customers? I mean, how are you seeing that initial demand makeup for that new innovative product?

Speaker 2

Yes, it's fifty-fifty, which is really exciting for us because we're seeing tremendous repeat business, which to build on the question earlier is just so great for our business from a gross margin and net contribution standpoint, right? These are customers that we don't have to go find again. We don't have to pay the marketing expense to get them again. And that continues to roll in because the product has been sold out. The product we continue to, by the way, to take in container loads of it, and it continues to sell out as fast as it can land.

Speaker 2

And so, we're really excited about that product and everything that it represents and it's just been a phenom on social media, right? The Pillow Factor Actuant Frame in particular, I mean, our best performing post ever. And by the way, Luxac is no slouch in social media land. And so it really says something. I think we really struck a nerve somehow with that product and the way it appears and the way it's showing up for us and what it does for our brand.

Speaker 2

And it's an accent chair, which has not been in our Bailiwick. It's a very unique one. It doesn't look like your mother's armchair, but it puts us in a new niche of the category that we weren't competing in before. And so we're very heartened to see that so many existing customers are buying the product, by the way, along, of course, with so many new customers. And so we'll continue to lean into it.

Speaker 2

And I think the last piece on that, I think, is also heartening to the model. Again, our overall model constantly being oppressed by the macro environment, but we have these bright spots, like this one, is that this is a product we'll be selling for the next couple of decades at least. And that's how we designed it, right? Like if you really break down that pillow factor accent frame, it's built in a way, as we say, built to last a lifetime, designed to evolve. And by the way, we took a long time as simple as that a product like that looks, we took a long time refining it.

Speaker 2

We could have launched it much earlier if we had lower standards. But because of that, it's going to continue to attract new customers and continue to drive repeat business for a long time inside of our ecosystem. And we're just going to layer one after the next after the next. And I think when we get the benefit of at least reduced headwinds, forget tailwinds, I think Lovesac will I think all of these innovations will really take flight.

Speaker 9

Thanks, John. Very helpful. Appreciate it.

Operator

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

Speaker 10

Hey, guys. Good morning. Just wanted to cover, I think, Keith mentioned in the prepared remarks, underlying demand was steady throughout the quarter. Just wondered maybe if you could unpack a little bit more about the cadence that you saw in terms of month by month. And just anything you can share in terms of August September trends in terms of what you've seen?

Speaker 10

I guess, is it fair to say demand is consistent with sort of the Q3 guidance that you provided? I think it's a low single digit growth rate that's embedded there. Or are we counting on any other kind of bigger promotions later in the quarter that drive

Speaker 3

demand? Hey, Matt. Thank you for the question. So yes, obviously, Keith had commented, Q3 is very much in line with Q2 and our underlying trends have been stable. We have a bit of week to week variability, whether it be holiday timing, promotions, product launches.

Speaker 3

Labor Day was to where we expected and followed a very similar cadence to what we saw through the last 2 market share events of Memorial Day in July 4. And as we delivered mid single low single digit revenue growth in Q2, we're guiding to being at a similar level for the midpoint for Q3. We feel really good on this guidance based on the Labor Day performance. It was a lot more competitive through Labor Day, as Keith talked about. So you saw promotions being even stronger than before.

Speaker 3

But I think the good news for us, as we've shared in the past, and we test all the time, is as long as we have a 3 in front of it, we don't need to be anywhere near where others are. So as others are 40, 50, 60 off, we just need to be at that 30 off. And we've seen a lot of benefits of how we build that sweet spot between delivering the top line as well as driving gross margin. So more of the same from Q2 into Q3, that's how we plan for the rest of this quarter and feel good to be able to deliver that.

Speaker 10

Okay. That's helpful, Mary. Thank you. And then just on the I guess the implied ramp in EBITDA margin in the Q4 is relatively high. Looks like sort of the midpoint of the guide is implying something in the mid-twenty percent range, which would be a little bit higher than what you've done in the past.

Speaker 10

Maybe if you guys could talk about the levers to get there. I know you kind of gave some gross margin commentary, but I guess it implies also that you're going to see significant operating leverage in the 4th quarter. So maybe just if you could parse out where you're seeing that between SG and A and marketing, that'd be super helpful.

Speaker 6

Yes, Matt. So there are a whole bunch of pieces to the profit puzzle. I'd point you to a couple of things. Number 1, there's a lot of leverage to the top line, right? And we're back to more top line growth is at the midpoint.

Speaker 6

Number 2, from a gross margin perspective, we'll start to see some benefit from the outbound logistics stuff as we talked about over the last couple of quarters. That starts to kick in more. We've seen some good initial savings starting here and then that ramps through the rest of the year. So we feel really good about that. We, from an SG and A perspective, as you recall, carried a lot of expenses through the end of last year for the restatement.

Speaker 6

We're hoping that that does not continue at those levels. So you get some leverage on that. We also see some opportunities just across the board on things like professional fees. There are quite a few line items here and there that contribute to this. So it's sort of we're not overly reliant on one particular line item in this process.

Speaker 6

It's these are numbers and ranges that we feel quite good about at this time.

Speaker 10

Okay, great. And could I sneak one more in just on the financing program that you mentioned, Keith? You mentioned there are program fees that started to kick in that may have reduced sort of the penetration of revenue that's financed through the credit card program. Could you cover the timing of when that happens? And maybe it sounded like the levers to get back to a more similar rate of financing are just more kind of tweaking promotions.

Speaker 10

But is there anything else that you can do on that front to kind of boost the penetration of financing?

Speaker 6

Yes. Like this is stuff that's there's a lot of discussion about either purveyors and backers of these private cards, they give tons of details about when it all went into effect. It's probably best suited for that. During the quarter, that's kicked in. In many cases, you have a, let's call it, a 2% fee upfront now.

Speaker 6

That's been implemented by many of the backers and issuers of these programs. So that's what we were referring to and we can get into more details about this offline, but there are other offers that you can make that are not subject to that program fee, that initial 2%. So we're going to test things like that to see if we take a different than historical program, right, because we've mostly done equal payments, no interest in the past. If we change and use other forms of financing offers, does that affect behavior? That's the stuff we're testing now.

Speaker 6

We don't know the answers to that yet, but that's what we're going to test and we're going to learn. And we're going to see if it does make a difference, we'll shift around and make sure that the customers have something that's very compelling to them, especially as we get into the big selling season for holiday. That's kind of more what we're getting at.

Speaker 10

Okay. Makes a lot of sense. I'll leave it over here. Thanks.

Operator

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

Speaker 11

Hey, guys. Thanks for taking my question. A lot of talk here about accelerating new product development. I was wondering if you can kind of quantify a little bit for us how much of your business this year do you expect to come from new products? And I know that's probably a little bit easier to ask than answer considering some products are more geared towards incremental sales than others.

Speaker 11

But just any way you could frame that for us? And then is it fair to assume that the contribution from new products is going to be a lot more significant next year?

Speaker 6

Maybe I'll just start on this and then if Sean, if you want to comment on any of this. Alex, it's a good question, a difficult one to answer and I'll explain why, right? So for example, with Pillarsac Accenture from I think this is a perfect case. Because we launched such a unique and compelling and exciting product within our SAC platform, we know we sold more Sactionals. Do we know exactly how many more Sactionals we sold?

Speaker 6

No, that's a little bit difficult, right? But it's a very positive and constructive brand forward way to engage customers and make them think about the overall value proposition that we offer. So we sell more of everything, right? And that's really what the power of Lovesac is, is as we enhance our ecosystem, our suite of products that are designed for life, we think it reinforces the overall value proposition we have, but we'll sell more of everything. So, Sean, that's my take.

Speaker 6

So, Sean, I don't know if you want to add to that at all.

Speaker 2

Yes. I think your question is I'm excited to get to the end of the year and find an answer to your question. How much of our sales were from new products? And I don't mean to sound ignorant. Like we said, the Pillow Satcher accident frame has outstripped our plans, which were robust, right?

Speaker 2

Obviously, we were excited about the product. We believe we had a good launch plan. And for Lovesac, we don't I mean, you could then argue we should plan better or something, I don't know. In fairness, we're going to be selling this product for the next few decades. So if we have some outages in the beginning when we launch, we're okay with that.

Speaker 2

There's we're building a long term customer base. We're looking to build relationships. We're not just hawking new items. And I know that's not the tone of your question, but it does give you just a glimpse into how we think, how we plan. We're both aggressive and conservative simultaneously.

Speaker 2

We'll be aggressive in how we go to market, we'll be conservative in how we plan our inventory sometimes, etcetera, especially in times like this. And so we're chasing on that product. We'll obviously see how the Any table does. And we're dealing with some extended lead times on some other products, etcetera, just in this kind of environment. So I think, obviously, we have a layer cake that we've built for our own models that shows and answers your question, but it's not something that we really talk about overtly in the way that you're asking the question.

Speaker 2

So I think that as we maybe for Investor Day, it's something that we could think about how we speak to that because as Keith said, our products are so integrated like the PillowSac to Axle Frame is connected to the PillowSac and the sack business in general. The any table is connected to the Sactionals. And ultimately, if we can sell more $510,000 and $15,000 couches because of this clever table and not just the table, let me just put a plug in there for all of the new wood products that we launched, new drink holders, new coasters, new trades. I mean, go into a Lovesac showroom and see these things. We have made a big push into wood products.

Speaker 2

What for us is a big push. And it's also by the way us putting us a foot into the water, because wood is a big part of the home and we need to get better at it. And I think you'll see us doing that in real time right now, right? But the ultimate goal is to sell more seats and sides and stay very focused on that in the near term, as we continue to gain market share and gain strength versus the category. So I'm sorry, we can't give you like a better kind of model analyst accretive question answer to the question that you answered.

Speaker 2

But it's got us thinking. I appreciate the question.

Speaker 11

Excellent. Well, I appreciate all that color and thanks very much.

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 2

Just want to say thank you to all of the investors, shareholders and the extended Lovesac family that keeps this company going. We appreciate your support.

Operator

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

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Key Takeaways

  • Q2 results delivered net sales of $156.6 million (up 1.3%) and adjusted EBITDA of $1.5 million, with a 5.4% decline in omni-channel comparable sales offset by new and non-comparable touchpoint growth.
  • Innovation momentum continued as the PillowSac Accent Chair Frame sold out in weeks, drove 8.8 million social views, 25% Sac business growth and over 50% repeat purchases, while the new Anytable and redesigned Sactionals accessories expand Lovesac into tables and case goods.
  • Omni-channel enhancements included opening 10 showrooms in Q2 (31 year-to-date), launch of a personalized MyHub online experience, and replatforming to Adobe Edge to improve website performance, SEO and conversion.
  • Operational improvements yielded significant savings in inbound logistics, a 16% inventory reduction, piloted local parcel carriers, and maintained a debt-free balance sheet with $36 million in credit availability plus a $40 million share buyback authorization.
  • For fiscal 2025, guidance was tightened to $700–735 million net sales and $52–59 million adjusted EBITDA (assuming a 10% category decline), with Q3 sales of $152–160 million and a planned Q4 ramp from product backlogs and modest category improvement.
A.I. generated. May contain errors.
Earnings Conference Call
Lovesac Q2 2025
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