Greetings. Welcome to The Lovesac First Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. At I would now like to turn the conference over to your host, Ms. Rachel Schacter with ICR. Thank you. You may now 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 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. 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 measures should be considered in addition to, and not as a substitute for, or in isolation from our GAAP measures. 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 Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thanks, Rachel. Good morning, everybody. And thanks for joining us today. I will begin my remarks by providing an overview of the company's continued response to COVID-19 followed by a summary of our performance for the first quarter. Then Jack Krause, our President and COO, will discuss the operational highlights of our fiscal 2021 first quarter performance and progress being made on our key initiatives against the current backdrop. Donna Dellomo, our CFO, will then review our financial results and a few other items related to our outlook. I want to offer some quick thoughts on the ongoing tumultuous events in our country. Of course, we have previously addressed the COVID-19 pandemic on both a human level and in terms of the impact on our business. We are so grateful for the first responders, healthcare workers, and essential workers who are on the frontlines of this battle. We' love and appreciate you and are committed to doing all we can to continue to lend our support. Secondly, but no less importantly, the health and safety of our associates and customers continues to be our number one priority. To that end, all of our showrooms remained closed for approximately half of the quarter beginning March 17 through the end of the first quarter. As customers spent more time at home, we responded with a rapid and successful pivot to a web-only model resulting in very strong e-commerce performance in the face of showroom closures. More recently, of course, the nationwide civil unrest in the wake of the appalling Minneapolis event that tragically is not an isolated incident has caused further dislocation. Let me just say this, from the boardroom to the break room, we are heartbroken that the country continues to endure the painful legacy of racism, and we are eager…

Thank you, Shawn. And good morning, everybody. I'll begin my remarks by elaborating on our continued approach to managing the COVID-19 pandemic. And then I'll briefly discuss our plans for fiscal 2021. As Shawn said, the strength of our multi-channel model is illustrated in the 255% ecommerce increase in Q1 that enabled us to preserve more than all of our prior-period sales in a post-COVID closed showroom environment. We're pleased to have seen continued strength in our ecommerce channel performance so far in fiscal Q2, and with approximately 89 of our 91 showrooms open as of today, June 9. We're also very encouraged by the initial performance of showrooms in these early days of reopening. Our very effective Heroes campaign that kicked off in late March and ended a few days ago was a significant contributor in these strong results. Moving to our response to COVID-19, our efforts have remained centered around the three pillars that I outlined last quarter, and executed by cross functional teams across the organization, which allowed us to develop plans on a parallel path, ensuring an effective and rapid response. These pillars are, one, team health and safety; two, business strength; and third, financial resilience. The health and safety of our associates and customers remain our number one priority. Our headquarter staff continues to work from home, and we are currently in the process of opening showrooms at a very measured pace and adhering to local and government regulation. We are implementing a three-phased approach to showroom openings. Phase one will be opening in a virtual environment in which associates operate from showrooms without customer traffic. In this phase, they respond to phone calls, chat online, and fulfill swatch requests as well as provide virtual demos to our customers. Phase two begins after two weeks…

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our first quarter results and then provide a framework for how we're approaching the remainder of fiscal 2021. The 32.8% increase in net sales to $54.4 million was driven by triple-digit growth in our Internet channel, along with an 11% increase in our other channel related to our shop in shop locations. This was partially offset by showroom revenue decrease due entirely to COVID-19 related temporary showroom closures. Please refer to our press release for details on our comparable sales performance. Looking at our results by channel for the first quarter, showroom sales decreased 32.7% to $18.1 million due to COVID-19 related temporary showroom closures, Internet sales increased 255.4% to $30.1 million as a result of the successful pivot we made to focus on our ecommerce channel in a closed showroom environment. Our other channel, which includes our pop-up shops in Costco locations and shop in shops in four Macy's and three Best Buy locations, increased 11% to $6.2 million. This year-over-year increase was driven by Macy's and Best Buy shop in shops, partially offset by a slight decrease in our Costco business as a result of the COVID-19 driven temporary fall to pop-up shop activities at Costco. By product category, our Sactionals sales increased 33.4%, our Sacs sales increased 63.3%, and our other category sales which includes decorative pillows, blankets and other accessories decreased 58.7% due to a decrease in sales related to certain Sactionals accessories and new platform product introductions, like the Power Hub are now being captured in their respective Sactional and Sac platform net sales figures. The 110 basis point decrease in our gross margin was principally driven by the impact of tariffs, an increase in promotional activity, specifically related to…

Thank you. [Operator Instructions]. Our first question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

Great. Thanks for taking my question. Two questions and I'll get back in the queue. So, the first one is, I wanted to know if you can give some additional thoughts on the new tools in your tool shed you've learned during the pandemic, such as essentially your tele sales effort, and how you may employ them in the future when your showrooms are fully reopened.

Hey, Tom. Thanks for the question. I'll take that. This is Jack. I think it's definitely changed our perspective on the way we look at our showrooms, and in fact the nomenclature really inside the company really is in terms of moving from showroom employees to trade area employees. I think it has a dramatic impact on the way we think about a lot of things. So, I think it has an incredible ability to make us more efficient as a company as we think about utilizing our largest pool of employees to flex up and down between service and sales and other activities. So, it's really been an eye opener for us. The other thing, I think that's been really an eye opener for us is how quickly we can transform from sort of a traffic-dependent company to a destination company. And when you do that, that opens all kinds of opportunities. So, a lot of things we're analyzing. Obviously, there's so many dynamics changing, but we see a lot of opportunities to continue to pursue in terms of changing the way we market and really leveraging our associates.

Great. That's wonderful news. And then, my second question, and then I'll get back in line is, can you talk about the financial state of your core consumer given we have 13.3% unemployment and your bad debt expense, in particular – or bad debt exposure in particular?

Yeah, I think we don't have a lot of insights right now, things have been changing so much. We obviously feel that within the context of our business we know we have an affluent customer who does not appear to be in the immediate danger of being impacted by what's happened in the last couple of months. However, it's very unpredictable in the long run. But we feel we have the right target customer. We're a premium brand. And so as much as that can help to insulate us, I think we feel good, but there are so many unknowns out there in terms of what's going to happen in the next six months.

Good. I have some more, but I'll get back in the line.

Hello, Tom. And as far as bad debt, we have minimal, if any, exposure. The majority of our sales are done through credit cards, even our Synchrony Financial credit card, which is about 40% of our volume is the financial -- we'll say, the financial burden is on Synchrony. We do not bear that burden. And our wholesale receivables are principally Costco. So, we don't feel that there's any risk there at all either.

Great.

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

Hi. Good morning. Very nice quarter. Congratulations on managing a tough environment really well. The first question I want to ask is, if we look at this continued surge in online sales, and I know it's hard to break it out, you mentioned in the prepared comments the positive impact of the Heroes campaign. So, maybe you could – one question would be to size that, if you can, better. Because also, as we look at – is there any way to know how the portion of customers that are coming new to the Lovesac brand? And then, as you think about that, is that more the split between just kind of the overall shifting dynamic within retail with more people spending time at home versus some of the changes you've made to your own marketing going more digital?

I think there's a lot of – I'll try to answer that question. And Shawn and Donna, you guys [Technical Difficulty]. I think there's a lot of – number one, our new customer count was pretty dramatic in the first quarter. So, we saw the highest level of new customer in terms of increase quarter-over-quarter that we've seen since we've been recording it. So, we saw almost a 60% increase in new customers. So, clearly, I think that indicates that, during the disruption of the brick and mortar environment, we became a real go-to, and I think, obviously, that disruption will be reduced in the next couple of months, but I think there are some lasting effects that will stay on it forever. So, that happened now. So, we really have two groups of customers we're talking about. We're talking about new customers coming into us through disruption. And then we have groups of customers that we know put off purchases due to showrooms being closed. And as they open, we're seeing those trade areas open as well. I think what this tells us is the way we're thinking about this is that showrooms are always going to be important as well. Let me put it this way, touch, feel points will be important for people who buy $4,000 to $6,000 products. Knowing now that we can drive our business as a destination business redefines what a touch, feel field point is, whether it's a shop in shop, whether it's a strip location, whether it's even a person who does a demo at somebody's house. We’re really opening our minds up in terms of what does it look like in terms of creating the touch feel points that we need to have in an effective way and mix them with a marketing plan now that we know we can drive our business as a destination business. So, there's a lot out there and there's a lot of tailwinds we've had too. So, quite frankly, in the last couple of months, we've had lowered ad rates and increased interest, obviously, in nesting and increased returns on our e-com business. We don't know what's going to happen in the next couple of months in terms of the short-term dynamics, but we do believe the trends we're seeing allow us to really be smarter as we go forward and think about our real estate strategy. We will continue to have shop in shops and showrooms, but I think we'll be very aggressive in the way we think about negotiating in the future.

And then, the follow-up question I had, Jack [indiscernible]. And again, I know it's early. But as you're starting to reopen your showrooms and considering some of the adjustments you have to make now for sort of, say, a post-COVID world, should we think – could there be any type of significant shift in the expensive infrastructure of the showrooms?

I don't think there's anything that I could say at this point. I think the answer is no. I think what we'll do is – in the way we're thinking about our business and our service model and our showroom model, we will get an increased ability to leverage our expenses and to grow without raising the rate of labor as we go forward. So, I think we'll become more efficient as we grow. But other than that, nothing dramatic.

Appreciate all the color. Thank you.

Thank you.

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

Great. Thanks for taking my question. I just wanted to ask about your advertising and marketing spend. And so, can you just maybe update us on your thoughts around brand spending in general? Do you still see that as a big opportunity for the company? And how should we think about the level and progression of ad spend as we move through the year? And then, I have a follow-up.

Thanks. In general, a couple of things, and I think Donna mentioned in her script. There was a pretty big increase in spend over prior year in the first quarter and a lot of that had to do with prepaids moving out of the last year into this year. So, as we're currently looking at spend, we're still looking at a normalization around marketing spend to be anywhere between 10% to 13% of the total business. We're not seeing a need for a dramatic change. In fact, ROIs are actually going up right now. So, we're in a real good place where we're able to manage our spends very efficiently and getting higher ROIs actually in the first quarter than we have seen to date. So, I think that bodes well as we go forward and see our business accelerating, but not having to depend on outside marketing growth.

Got it. And secondly, did you have any online Costco events in Q1? And are there any sort of expectations for the rest of the year?

I think we had one event. Donna? We will have online events with Costco. We are working with Costco in terms of our roadshow. Obviously, with the pandemic, all kinds of organizations have changed their priorities. So, Costco has changed some of their priorities. And obviously, their mixes and merchandising mixes have changed. So, we've been put on hold with them. But in terms of the performance prior to the pandemic, and our expectation go forward is that, we will likely be reengaging and getting that business going in the second half of the year, but I can't give you any insights, specifically.

Great, thank you.

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

Hey, guys. Good morning. Thanks for taking the question. Just wanted to see if I could follow-up on some earlier questions. How important was the Heroes campaign in terms of sales mix after your Q1? And as that rolls off, do we replace that campaign with something else heading into Q2? And would the benefit from an additional campaign sort of accrue to the showroom or online side of the business?

The Heroes campaign – so the Heroes campaign was very important. As we look at May, it ramped up to becoming over 50% of sales for the high volume weeks prior to Memorial Day. So, we do expect obviously to lose a percentage of that momentum as we come out of Memorial Day. We've reflected that in our internal plans and our spending, but we don't foresee ourselves needing to depend on events like the Heroes event throughout the year. It may be something we do based on market conditions, but the one thing I would say is we don't see a need to – we don't see discounts increasing in the second half of the year at any rate that would be any different than what you've seen thus far.

Okay. Then on the showroom or online front in terms of accrual to the benefit of the wood side of the business, where did you see, I guess, the biggest benefit? Obviously, I guess it would have come from ecom this last quarter.

And I think a couple things, I think. Yeah, online is definitely where the impact came in, I think, because there was obviously marketing focused on those target groups. And the access online was dramatically higher than obviously showroom. So, I think proportionate to everything that happened in the quarter, that was dramatically driven by online.

Got it. And then, just on the showroom front, I know it's sort of a choppy environment, but any help in terms of trying to triangulate how to model Q2 on showroom? And then, maybe you can help us understand traffic trends, conversion at the showrooms that have been opened. Are we comping up year-on-year for the showrooms that have been open thus far? Any help on that front, that'd be helpful.

Yeah, it's super. This is like – we laugh internally, this is almost like business at the speed of gaming. So, a week and a half ago, we had 40 something showrooms open and up to what we had – on June 9, 89. And within those openings, there are a series of – remember, they're all in three phases. So, there's some that aren't even taking in traffic. So, we can't really measure traffic right now on half the showrooms. We can tell you this, the ones that are taking appointments, we're seeing some really interesting things going back along with our learning. So, the appointments – the showrooms that have gone into appointments have jumped up to having positive comps immediately and all showrooms that have opened have taken the trade area trends significantly up. So, it certainly goes back to say, look, showrooms are really, really important. They drive the trade area, they drive interest in the brand. And we'll just have to see what happens in the next couple of months.

All right, thanks. I'll jump back in queue, guys.

Thank you. Our next question comes from line of Camilo Lyon with BTIG. Please proceed with your question.

Thanks, everyone. Good morning. Shawn, I wanted to go back to some of the gross margin comments that you laid out in your prepared remarks. I think you talked about – or you talked about a lot of puts and takes to the gross margin component and culminating in what looks to be a little bit of a delay in the resumption of mid-50s gross margin target by the end of next year. Could you just provide a little bit more detail around the influencers to that? And maybe where in this two year process do you see that delay occurring? Is it in this year, the back half of the year? Is it into next year? I'm just trying to get a little bit more precision around the comments that were made.

Yeah, good question. As mentioned, I guess, in our scripts, we aren't traveling abroad. And so, that combined with other delays that were kind of obvious in terms of what's been going on in the world as we were opening, for instance, our second warehouse on the distribution front domestically, we ran into the COVID-19 pullbacks and delays there. And so, all of these things combined have just sort of kicked the can down the road a little bit for us. And so, rather than commit to – especially right now, while it continues to be so messy in general, rather than commit to a number of quarters in terms of what that recovery looks like, we've chosen to just put out there that we still expect the same kind of recovery. It'll just continue to be prolonged because of these sort of disruptions that are beyond our control. And, frankly, beyond our ability to predict totally what's around the next corner. But our first costs continue to improve on a continued basis. This is due to our resourcing efforts that haven't been sorted, just sort of slowed down in certain aspects and in certain pockets. And so, as I mentioned, most of our Sactionals now, which represent most of our sales, are made outside of China. And we continue to make moves on the sewn goods in real time. So, all these things are still happening. Certain pockets just continue to get pushed back. So, sorry to be vague, but it's impossible for us to, at this point, with everything as disrupted as it has been and unpredictable, give much better guidance than we had put out there before.

If I can just ask a follow-up on that, are you saying that just the progression of sequential improvement is less than what you had anticipated before? Or there'll be some moments in the go-forward period where gross margins could actually kind of revert back and take some side steps before starting to get to that sequential improvement line?

Hi, Camilo. It's Donna. I'll take the part on, I guess, you want to use the term step back a little bit on gross margin improvement. Relative to building inventory, the investments that we're making into additional space, I think Jack had mentioned, by the time August rolls around, we'll have 150,000 square feet of additional space we need to take. We will see that impact on gross margin in the second quarter. So, quarter-over-quarter, we're projecting a decrease, maybe double what we saw – or right around double what we saw in the first quarter. So, in contemplating and building and looking at your models, you probably want to take that into consideration. So, on a step back, we'll call it out there. And in our internal models, again, we're not giving guidance, but second quarter will be the quarter where we see the biggest year-over-year decreasing gross margin impact.

That's perfect. Thank you for that color. And then, just a follow-up I had – the second question I had was, you talked about your cadence of showroom openings of 15 to 18. Donna, is there anything you can provide from a cadence throughout the quarters as to how we should model the openings? And are you getting any rent concessions? It looks like you're having very good negotiations with those landlords on these new openings.

Yeah. Obviously, they didn't happen – they're not happening where we thought that they would originally happen in our model. We thought that they wouldn't be happening first, second, third quarter. So, they are later in the year as far as how we built our CapEx spend on that 15 to 18 showrooms. So, taking that into consideration and looking at your models, you'd see the CapEx spend now – not spend, which happens after opening – well, it happens before, during and after opening, right? So, when building your models – but that was all contemplated in the limited information I provided on liquidity and our cash usage in Q2 and Q3 being slightly less than last year's cash usage from operations. Jack, do you want to mention something about rent concessions?

Yeah, we've been fortunate. I think we decided to take a look. We believe in the value of our showrooms and the value of our relationships, obviously, with the landlord. So, we have basically, at this point, I would say, without getting into details, had concessions in about 60% to 75% of our landlords impacting 65% to 70% of the fleet. And it's really worked out. In addition to that, in terms of new openings, yes, we have worked through concessions that help us open in a less predictable environment that are win-win, but they're different in different cases. So, I just keep it a little bit general that we've been very aggressive in being proactive and keeping our relationship positive with these landlords. And I think that's what's helped us to be able to say we'll be opening a fairly heavy amount of showrooms in the second half of the year.

Fantastic. Good luck, guys. Thank you very much.

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

Hi, guys. Thanks for taking my question. And congratulations on such a strong quarter during these difficult times. One thing I wanted to follow-up on is – I think, Jack, you mentioned during the Q&A that your showrooms that have now reopened for appointments – and I know it's so early and it's only such a small number of showrooms, but considering showrooms were the majority of your revenue last year, I feel like it is important to kind of drill into whatever it is that you are seeing now. Are you seeing that as your showrooms reopen, at least on an appointment basis, is the lift you're seeing – has it been pretty uniform across the country? Are there certain regions or certain impacts, perhaps places that have been impacted more or less by the virus that have come back quicker? Just curious what you're seeing and what we could perhaps expect to see as more of your showrooms start to move through the three phases of reopening that you've laid out?

I think pretty good. What I'll say, and it's – sample sizes and the timeframes are so strange and dynamic. It's literally the amount of showrooms that were open to appointments doubled in three days. So, we've got to be really careful about how we talk about it. But what we are seeing is the showrooms that have been open to appointments the longest and have started to engage are basically filling out their appointment books to the maximum level and are seeing conversion rates that are three to four times what we've seen in the past. And obviously, when you do appointments, that's what happens. But I think it's starting to enlighten us back to the idea of the showroom as a place to engage and convert and feel the product, not necessarily a source of awareness in the future. And I think what we are seeing and getting amazing feedback from our associates with the one-on-one engagement is creating possibly a better brand experience. So, there are a lot of silver linings we're trying to work out through this process. We don't know what the new normal will be with traffic relative to conversion, but our – I think the high side of that is that we don't believe the new normal – the way we operate, we will be disadvantaged at all because we do believe people will go to showrooms and continue to go to showrooms, but that showroom may be one out of three visits and two out of three may be online. And that's just fine for us.

Great. That's really helpful. And then, just a quick follow-up, if I could. I'm curious where all of the leads for these appointments have been coming from? Is it mostly people that have been interacting with your customer service online? I noticed that you're not exactly hanging big grand opening banners of 'we're back open, come to the store,' which certainly seems smart, though. Just curious where you've been getting this pipeline of appointments coming from and if you think that can last through the year?

Yeah, I think it's two areas. I think one is obviously – there will be a boost in the short run of pent-up demand by people who had been engaged with the showroom employees, and basically put off their decision. And we know, at some point, roughly six weeks ago, 30% to 40% of – we had 30% to 40% of our people who had been in showrooms are holding off a purchase because they wanted to come back. So, we know we're going to get that lift. However, we are seeing significant increases in our ability to use the Podium and the digital chatting to talk to our customers. So, literally, what I think – I described it last time, but literally, it enables a customer or someone's going online in their area to talk to the showroom leader and that showroom leader can set up an appointment with them through a chat and then basically start the relationship there and bring them into the showroom. So, I think the power of the chat has really surprised us in the way it synergizes with ecommerce as well as just even making appointments has continued to please us. So, a lot of positives out of it, but we just don't know how it's going to work as things start to settle down with the post-COVID economy.

Sure, that makes sense. Thank you very much.

Thank you. Our next question is a follow-up from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

Great. So, two quick follow-up questions and then, everyone, please stay well. So, for my two follow-ups, I want to know if your new product roadmap is still too big innovations a year, if that's the pace. And then second, on by appointment retail, you already have a pretty light labor model, but will that change your labor model at your showrooms?

So, on the innovation front, the cadence that we have been trying to set internally was a couple of small innovations per year and hopefully a bigger innovation every year or so that will take us into an either new – expand our total available market as we see it or expand into a demographic or customer base that's new to us. And so, we are still working on how the balance of this year shakes out. We have teased for a long time that we expected to launch what we think of as one of our more important innovations later this year. And for us, that's kind of still on the bubble based on what's happening in the world. And the good news is, as I said before, we're not too concerned about ultimately whether – the timing of that specifically because we had, in our own plans, no revenue associated with the new product launch for this year. It was more about being a soft launch and getting it out there and really becoming part of the sales mix for the balance of this year. And I'll let Jack answer your second question.

The labor model question is an interesting question. I can't give you a lot of detail on other than to say, with that change from a showroom perspective and employ to a trade area, it makes us think a lot more I think creatively in terms of applying our associates to – and having full-time associates that can flex to do chats when traffic in showrooms is low or do other things to counterbalance what they've experienced within the foot traffic driven environment, allows us to think about things incredibly differently. So, we're still trying to understand how to maximize our employees as we go forward.

Great, thank you.

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.

Thank you to all of our shareholders and especially to our incredibly capable and diverse Lovesac family of associates across the nation who continue to show grit and passion every day as we navigate through this time period. This is the driving force that continues to enable our organization to thrive even in these turbulent times. At Lovesac, our essence of our five guiding principles is love matters. Love is in our name. It's painted over our doorways and we wear it on our T-shirts. Love does not discriminate. We invite everyone to join our extended #lovesac family on social media and on our website, and we thank you for your support and look forward to chatting with you next quarter.

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