Greetings, and welcome to the Lovesac Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel Schacter of ICR. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Jack Krause, President and Chief Operating Officer; and Donna Dellomo, Chief Financial Officer. Before we get started, I would like to remind you that some of the [Audio Gap] discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial predictions and our plans and prospects. 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. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to this 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 Shawn Nelson, Chief Executive Officer of the Lovesac Company.

Thank you, Rachel. Good morning, everyone, and thanks for joining us on our first conference call as a public company. It's an exciting time at Lovesac and as we continue to build the brand, grow our showrooms, digital presence, drive profitability and start to realize a significant potential we believe exists for this business. I will begin today's call by discussing the highlights of our second-quarter results, after which I'll spend a few moments elaborating on what differentiates Lovesac; and Jack Krause, our President and COO will outline our key growth initiatives; and we'll turn it over to Donna Dellomo, our CFO, to review our financial results and a few items related to our outlook in more detail. We're very pleased with our second-quarter financial performance. Net sales in the second quarter of this year we call fiscal 2019 increased 60.3% to $33.2 million from $20.7 million in the second quarter of fiscal 2018, which was last year. Comparable sales, which includes showroom and Internet sales, increased by 41%, driven by a strong showroom comp increase of 34.2% and growth of our Internet business of 71.3%. Our second-quarter fiscal 2019 comparable sales were driven by transaction and ticket growth as we continue to attract both new and existing customers alike to Lovesac through our marketing strategies, e-commerce platform and showroom presence. We opened 5 and remodeled 2 showrooms in the second quarter, and as of the end of the second quarter, operated a total of 72 Lovesac showrooms across the country, representing an increase of 16.1% versus the prior-year period. Our first off-mall location, which is also our first New York City showroom in the Flatiron neighborhood, soft-opened to great customer reception in Q2, and we look forward to the full grand opening of the showroom next week. Our experience…

Thanks, Shawn, and good morning, everyone. I'd like to review the key growth priorities that Shawn just mentioned. Starting with the first pillar of our growth strategy, expanding our digital TV and direct mail marketing. As Shawn mentioned, the 2 key metrics we use to assess the effectiveness of our marketing strategies are: one, customer acquisition cost, which measures our marketing expenses versus the number of customers we acquired in that period and inclusive of premium, we actually pay for our showrooms; and two, the customer lifetime value, which is a fixed estimate of the average gross profit we expect to receive from a customer during his or her purchasing lifetime, which is currently measured at 3 years. Given that in fiscal 2018, the customer lifetime value of nearly 1,236 well exceeded our customer acquisition cost of approximately $283, we see significant opportunity to increase our marketing to drive revenue growth. Digital marketing has been a key to our marketing strategy and provides us numerous ways to engage our customers through content and also creates brand awareness. Television and direct mail have also been very powerful and synergizes our digital strategy. Recently, we have seen success from digital, direct marketing to potential customers and geographies without showrooms to get them engaged with our brand by providing an offer for a starter kit, which includes a Sactionals seat inside. Historically, we haven't invested very much in marketing. However, we are stepping up that investment this year given the very encouraging returns we are seeing. We have some exciting programs in the pipeline as we lean into additional marketing in Q3, including the Labor Day campaign that we just ran. The second element of our growth strategy is updating existing showrooms. Our products are sold through our tech-enabled experiential showrooms that allow…

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our fiscal 2019 second quarter results and then provide some commentary around our thoughts for the remainder of fiscal 2019. As Shawn said, we are very pleased with our Q2 results. Net sales increased 60.3% to $33.2 million from $20.7 million in the prior-year quarter, driven by strong showroom, Internet and shop-in-shop performance as a result of an increase in new customers, combined with an increase in the total number of units sold, reflecting a higher average order volume per customer and increases in marketing investments which drives brand awareness. Comparable sales, which includes showroom and Internet sales, increased 41%. Comparable showroom sales increased 34.2%, which represents our seventh consecutive quarter of positive COGS showroom sales increases. Internet sales increased 71.3% versus an increase of 56.2% in the prior-year period. We opened 5 new showrooms and closed 1 in the second quarter to end the quarter with 72 showrooms. During the second quarter, we remodeled 2 legacy stores into our new showroom format. As Jack mentioned, our new showrooms averaged 700 to 1,000 square feet with average sales per square foot of approximately $1,300 and opened with a relatively low new showroom investment of less than $350,000, which includes CapEx, floor model inventory and pre-opening expenses. New showrooms are opening with a payback period of less than 2 years. With 72 showrooms as of the end of the second quarter, we see a significant whitespace opportunity to grow our showroom footprint. We view our channel sales, particularly across showrooms and our website as very symbiotic given the cross-shopping behavior of our customer, and in many cases, their utilization of all of our channels in their path to purchase. That said, looking at our results by…

[Operator Instructions] Our first question comes from the line of Dave King with Roth Capital.

First, on the showroom opening. I guess now with the IPO under your belt, do you expect to accelerate the pace of those that are all -- were remodeled for that matter, particularly as you look out to 2019? And then Shawn, how should we be thinking about the overall number of showrooms and what's the potential as we think domestically sort of longer term?

Go ahead, Jack.

I'll start with that. So on the showroom remodels, we're really in a place where we are remodeling now currently at the rate of when leases expire. So we had some acceleration initially based on the results and we did -- we wanted to correct some of those showrooms that were not as brand appropriate as possible. At this point, remodels will be done based on lease expiration. In terms of the opportunity to accelerate a new showroom growth going forward from approximately the current rate of 15 a year we have currently planned, we do see opportunities. We have a very -- the way we look at it is we have a universe of potential showroom sites of more than 100-plus that are out there that have not been opened and the rate of showroom openings, in many cases, is dictated by the ability to open those and make agreements with landlords. So there's a lot of flex there, but we will lean into those as much as we can and remain productive and consistent. In terms of the overall -- the other questions, what do we see in terms of the total showroom count? I can tell you this. It's something we're not sure about right now because of, Dave, as we spoke about during the roadshow, we have a very intense learning agenda. And one of the things we're really focused right now on is understanding the most effective way to go into trade areas. And obviously, the denser the population in the trade area, the more likely it is to be able to support a showroom. But at the same time, we're having significant learnings in terms of how to operate and grow the business in the absence of showrooms. So I think there's a lot of learning, and I think in the next 6 to 12 months, we'll be able to share with you a more defined runway as we go into the future.

Okay. No, fair enough. Switching gears a bit, I saw you started running a national TV spot recently. I guess, between that and the Labor Day campaign, what sort of returns are you getting on those efforts, how's the traffic been to the site and the conversion? Just any color there I think would be helpful.

Yes. Obviously, those -- the national campaign is in the third quarter, so I don't want to give you a lot of details about that, and in fact, the campaign results are still coming in and not completed. I would tell you that, at this point, we're very pleased with what we're seeing. We're learning a lot and it gives us a consistent -- consistent with what we said earlier. We're fulfilling some of those objectives of our learning agenda and I believe we will continue to lean more in the marketing and the forward -- and the quarters going forward.

Okay. And then, I guess, one last one for me. Donna, do you have what the marketing costs were in the quarter, either in dollar terms or as a percentage of sales?

Yes. We have -- I want to say for the quarter, we spent about $1.6 million I think the number was -- or $1.7 million more than we did prior year, so we -- I think, Jack, you have the number there. It's what, 3.6 or 3 for the quarter?

Yes. We -- yes, for the quarter, in terms of working media, basically our overall spend in marketing rose over 80% in the quarter over last year are media spend. So that was our marketing spend overall. Our media spend jumped over 300% to account for about 60% of our dollar spent. Our digital and social marketing increased approximately 200% to roughly 30% of our dollars.

Our next question comes from the line of Alex Fuhrman with Craig-Hallum.

Wanted to ask about the increased marketing spending. It seems like that has certainly been driving a lot of your accelerating revenue growth here in the first half of the year. Specifically, I'm most interested in your customer acquisition costs. It seems like the marketing spending is up almost double here, you mentioned in the second quarter. Do you feel you're still getting that customer acquisition cost in the $300 ballpark and you're still getting that 4.5:1 lifetime value to acquisition cost-revenue -- ratio. And do you think, as you continue to scale up your marketing spending and expand into more channels with print and digital and TV, that you're going to be able to hold those types of numbers?

Yes, a couple of things. One is I want to be very careful that when we look at -- we certainly internally will look at CAC and CLV on a constant basis. But due to the fact that there's so much variation and there's usually a 10-week to -- up to a 36-week return on marketing, it is really, I believe, not a good indicator and not a good discussion point in terms of looking at CAC and CLV on a quarterly basis. Now with that said, there are obviously some things that we are doing to make sure we're in a good place. We're looking at ROIs. We're continuing to see increased ROIs on our programs, and we're also seeing a dramatic increase in Sactional new customers, and they are buying at an initial purchase price that's growing at a rate of 20% over the previous year. So what I would expect to see is growth in CAC and CLV and a consistent ratio going forward. But I can't share you the details of that until we get through the fiscal year.

Sure, that makes sense. And then if I could ask also about some of your distribution plans for this year and next year, seems like you've had a big increase in your pop-up business at Costco, which looks like that's going to continue going forward. Can you give us a sense of just as we think about the 500-or-so Costco locations in the U.S., it sounds like you're going to do a number of pop-ups that are not too dissimilar from that? Are you typically revisiting some of these stores, maybe every quarter or twice a year? Is there an opportunity to turn some of these pop-ups into an annual event? And then just thinking about your opening in New York City as well, it sounds like that certainly a new initiative having an urban standalone store for you. Just wondering as we kind of size up the opportunity and the size of that investment, if you could give us a sense of how big you expect that store to be in terms of -- anything you could share with us in terms of the investment cost relative to that $350,000 in terms of pre-opening rent and CapEx and inventory it takes to get a typical showroom up and running?

Okay. So it sounds like a couple of questions to unpack there. In terms of opportunities going forward and in terms of market and showrooms, we certainly see growth opportunities both in malls and off-malls and also different models to penetrate trade areas. I think the key thing to think about related to our discussion we were just thinking about is looking at a go-to-market strategy being really focused on going into a market and achieving the best ratio of CLV to CAC. And in some areas, that will be what we've historically been doing. Other areas that we'll be trying to grow are shop-in-shops, which are more efficient, and in other areas maybe even doing other things in terms of testing asset-light executions, which we'll be doing. We certainly see opportunity for continued growth. I can't give you a number right now with Costco, but they're certainly happy as well with what we've seen, and we are continuing to talk about them in terms of potential expansion as we go forward of those programs. Does that answer all your questions? Sorry, I want to be sure I got them.

That sure does. Absolutely.

Our next question comes from the line of Scott McConnell with D. A. Davidson.

So my question is how should we think about your long-term product strategy? And it seems also the approach of looking at furniture such as Sactionals as binary with bases inside, could this be applied to more products in the future beyond just Sactionals today?

Yes. The answer is yes. The long-term product strategy -- let me first comment -- this is Shawn, by the way. Let me first comment on our more near-term product strategy. Sactionals, we view as a product that can absolutely be in every home in the United States, and we have a tiny sliver of the market currently. Because to be in every home, by the way, we don't have to be in every room, right? There's a -- we believe, a place in every home for this washable, changeable, modular, be-anything-you-needed-to-be couch. And so we are very focused on making that happen through our marketing efforts of all types. And we are also simultaneously focused on expanding that very valuable and patent-protected platform in ways to deliver more appeal to new customers who are considering the product, maybe you haven't heard of it yet or who are hearing about it now, as well as new ways for existing customers to expand on their Sactionals' collection specifically. And we will also, by the way, do the same for Sacs. But of course, Sactionals are such a huge dollar take for us that we've been very focused on Sactionals platform growth. And so we have, I would estimate, years of further development just on the Sactionals platform in myriad ways, both in breadth and in depth, and we're very excited about what that brings to us. At the same time, we have a very active and adept product development team focused on invention of all kinds and leveraging what we've learned from our experience with Sactionals in particular. And we have intellectual property, patents already issued as well as patents pending on things unrelated to couches at all, and we're very excited about the potential that, that brings to our business. However, we continue to be focused on the near and midterm on expanding the platforms that we have yet to tell the world about as we -- as evidenced by our very small awareness levels. And so that's how we view the long term. We absolutely believe that we -- our Designed for Life philosophy, building products that are built to last a lifetime and designed to evolve, is totally unique in the landscape. I would challenge you to tell me another -- to describe another product that meets those 2 criteria, and that is the lens by which we will approach product development going forward.

Yes, and just to build that on, Shawn. You may recall during the roadshow, we've talked about it incredibly, given a company with 2 product platforms and generating 40% of our customer orders that are repeat orders. That puts into perspective the opportunity that these platforms, as we start to innovate off of them and give our customers additional reasons to build their platform out, just a huge opportunity for future revenue.

Great. And then second question, how should we think about your long-term financial model? I mean, what is your target for long-term, just EBITDA margin, and what would your gross margin and operating expense would look like to reach this target?

This is Donna, obviously. Well, we are -- we will continue to accelerate revenue. We'll continue -- our plan is to continue to maintain margins at the level of what we had shown on an annual basis of last year. We'll continue to leverage certain overhead expenses, continue to invest in marketing and continue to grow EBITDA. Without giving you specifics, I'm hoping that kind of -- each one of our lines, we do continue to see acceleration and all while continuing to invest heavily in marketing.

Yes, I would just add that there are numerous growth models out there now in the landscape for new up-and-coming disruptive companies, et cetera. And we're very -- we believe that we are very confident in our ability to continue to deliver high growth rates while continuing to grow EBITDA. And so that, we believe, is our unique value prop for investors and we maintain our commitment to doing that.

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Thanks so much for joining us. Again, we're happy to have you on our Lovesac family. And we look forward to speaking with you when we report third-quarter results.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.