Greetings and welcome to The Lovesac Second Quarter Fiscal 2021 Earnings Conference 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. It is now my pleasure to introduce your host, Ms. Rachel Schacter of ICR. Thank you. Please go ahead.

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 results. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now, I would like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Good morning, everyone and thank you for joining us today. I will begin my remarks by providing an overview of our continued response to a dynamic operating environment, followed by a summary of our performance for the second quarter. Then Jack Krause, our President and COO will discuss our fiscal second quarter operational 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 relating to our fiscal 2021 outlook. While the operating environment in the second quarter continue to be challenging, I am very pleased with our team’s resiliency and ability to adapt as we continue to serve our customers. During the quarter, we began reopening showrooms through a measured and phased approach with our e-commerce platform continuing to serve as an important first step in a customer’s transaction path and in many cases, serving as the platform for their Lovesac purchase experience from start to finish. We ended the quarter with all showrooms open in some format, many still virtual or by appointment only, as we continue to prioritize the health and safety of our associates and customers and utilize our full-time associates as trade area representatives by also leveraging our enhanced technology capabilities. In terms of our shop-in-shops with Macy’s and Best Buy, 5 of our 7 were open as of the end of the quarter and the remaining 2 reopened in August post quarter end. We operated only 19 Costco in-store pop-up shops in Q2 as compared with 209 in the prior year period as Jack and Donna will discuss shortly. The strength in customer demand for our changeable, flexible, sustainable, upgradeable and shippable, design for live Sactional seats and sides, combined with our ability to successfully adapt to…

Thank you, Shawn and good morning everyone. I will begin my remarks by elaborating on our continued approach to managing the COVID-19 pandemic and then I will briefly discuss our plans for the remainder of fiscal 2021. Throughout the second quarter, we remained nimble and agile prioritizing the health and safety of our team members and customers. The successful operational pivot we discussed at length last quarter continued to serve us well as we reopened showrooms, in many cases in a very limited capacity, and our disciplined management of expenses, working capital and capital expenditures, all reinforced our financial resilience. The healthy demand environment and our execution is evident in our top line growth of 28.7% during the quarter and our new customer metrics. We attracted 50% more customers than last year and had an almost 70% increase in Sactionals platform new customers. Let me start with an update on our showroom operations. We launched a phased approach to reopening showrooms beginning in mid-May. With the safety of our customers and our employees in mind, we implemented three unique showroom operating models, virtual, appointment, and walk-in. These three operating models allowed us to safely reopen in many trade areas while providing the continued ability to easily flex between models as pandemic conditions worsened or improved. Currently, all Lovesac brick-and-mortar showrooms as well as 7 shop-in-shops with Macy’s and Best Buy are open in one of these three phases. During the period of time where showrooms were temporarily closed, we have learned a great deal about how the lovesac.com customer engages with our showroom teams and as a result we have leaned into offering this type of sales and service as part of our go-forward strategy. As mentioned in our quarter one earnings call, the podium platform continues to be a…

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our second quarter results and then provide a framework for how we are approaching the remainder of fiscal 2021. The 28.7% increase in net sales, the $61.9 million was driven by triple-digit growth in our internet channel. This was partially offset by a decrease in showroom sales of 58.9% due to the impact of showroom closures related to COVID-19 and a decrease of 69.3% in other sales related entirely the Costco in-store pop-up shops that Shawn and Jack discussed. Total comparable sales increased 72.4% in the quarter. The higher comparable sales growth relative to total sales growth is due to the decrease in our other channel and non-comparable showroom sales. Our other channels sales decreased 59.3% or $4.4 million, principally related to a significant decrease in Costco in-store pop-up shops related to COVID-19. In addition, there was a decrease in our non-comparable showroom sales of 63.3% or $3.7 million related to COVID-19 showroom closures. Please refer to our earnings press release for all of the details on comparable sales performance. By product category, our Sactionals sales increased 39.7% our Sacs sales decreased 18.3% and our other category sales which includes decorative pillows, blankets and other accessories increased 188.5%. The decrease in Sacs cells is related to the decline in Costco pop-up shops as Sacs index higher within this channel coupled with promotional activity, heavily weighted towards Sactionals in our showroom and internet channel. The 30 basis points year-over-year decrease in our gross margin was primarily driven by 198 basis point increase in distribution and tariff related expenses, partially offset by 167 basis points of improvements in product loss as a result of vendor negotiations associated with tariff mitigation, and continued shift of product sourcing from…

Thank you. [Operator Instructions] Our first question is coming from Camilo Lyon of BTIG. Please go ahead.

Thanks. Good morning, everyone. Congrats on a very strong quarter here. I wanted to focus on your inventory position and some of the supply chain comments that you made, Shawn. We have been hearing more and more of supply constraints from some of your competitors and wondered how do you feel about your inventory position today as it stands given the robust demand that you are seeing and what’s your ability to continue meeting that accelerating demand and are you seeing any pressures within any parts of your supply chain?

Yes, thanks for the question, Camilo and I will say a couple of things and turn to Jack. We have no inventory concerns. We have very carefully managed through the COVID crisis making decisions for the business throughout the shape of our sales really fit the business through the worst of what we think is the COVID crisis to-date. And in terms of managing our marketing spend and as you can see from the results allowing the business to flourish through this time, but we look forward to a second half where we can be aggressive and focused on driving sales and have no inventory concerns. But I will let Jack add to that.

Yes, thanks. I think what we saw, there was two things going on. So they are in the short-term obviously with the second quarter sort of initiative, the beginning of the second quarter really beginning to slowdown than a speed-up in business, a rapid speed up, there was a little bit of whiplash in the supply chain. So, what I would call there may have been some very short-term pressures from a strategic point of view in terms of building our network or diversifying our network, adding warehouses etcetera, we are exactly where we need to be. So, while there was a little whiplash due to COVID strategically, we are exactly where we need to be in terms of continuing to grow our capability to deliver a lot of products with a high level of customer satisfaction.

Great. And then if we can just focus on this pretty remarkable and continued online digital acceleration, maybe if you can just help us understand how that sales growth progressed to the quarter and how your online demand changed at all the trajectory amd maybe throughout the quarter as those stores have reopened in here into the early start of Q3?

Yes, it’s hard to, Camilo, to say that overall in terms of timeframes, because the country was I’d say operating in different timeframes and different levels of opening. And what we are seeing is sort of micro environments. We can tell you this is in environments where showrooms were completely shutdown, we saw extreme increases in e-commerce, however and environments or trade areas where showrooms start to open up again, we see, still see very good increases in e-commerce but greater total trade area growth. So I think what we have learned so much about it is our customer will shop in multiple ways. And if we can combine the way our teams work between really being agnostic about what channel the customer starting in, by getting to them in a good place, we are very successful. So in a nutshell, what I can tell you is this we saw probably extreme accelerations. We obviously saw extreme accelerations in the e-com business, probably something that would as many people have said COVID has advanced some areas of our thinking by two to three years, I think we will go back to a more moderate percentage of the business being e-com, but I don’t think we will ever be back to where we were before. And also by defining our business in a different way, I am not even sure in the future, what’s going to be an e-com business versus a trade area business.

Got it. And then just finally for Donna, if you could just help us understand is that deferral of $5 million going to be solely accounted for in the third quarter, or will there be some split of that between Q3 and Q4?

Yes, it’s the majority of it. It will be in the third quarter. But there is some shifts going into the fourth quarter as well. But if you want to think about the majority is going in the third quarter

Got it. Very helpful. Thanks.

Principally around marketing

Perfect. Thanks guys for the continued success.

Thanks, Camilo.

Thank you.

Thank you. Our next question is coming from Brian Nagel of Oppenheimer. Please go ahead.

Hi, good morning. I also would like to add my congratulations for doing that in a tough environment. The question I have just and it’s a bit of a follow-up to the prior question, but with regard to real estate, you talked in your prepared comments about continuing, opening at a nice clip showrooms if given what you have seen, with regard to the flex, the significant flex hiring in online sales or maybe even you are seeing some of the performance of these units or trademark trade areas as you reopen your showrooms. Has your philosophy towards openings changed, are you getting – are you leverage – are you negotiating more with landlords on rents or even shifted where you would be opening these showrooms?

Yes, there is a lot packed into that. And what I can say we are in the middle of a very dramatic we are looking at it, what we are calling now, as opposed to thinking of it as a real estate strategy. It’s the touch point strategy. And the background behind that is that we have already in stage one disaggregated, the need for inventory to be part of a retail operation, which obviously makes us super efficient and works in our shop and shops and everything else. What we have really learned in the last 60 to 90 days is that we can start to also in many cases, do the same separation of the need for touch points to actually generate traffic on their own because we can drive our own traffic. So when we are in a condition like this, it does two things. One, it allows us to look at real estate in a completely different way, much more asset, light, much shorter arrangements. And obviously it also gives us a very strong point of view to go back and renegotiate So I think what you will see is an acceleration of touch points with significantly less capital than what we would have previously planned as we as we go out in the next couple years, but a lot more to come on that.

Got it. Thanks. And then the second question I have not related, but we have discussed previously additions to the product lineup. Given obviously very fluid, a lot going on here. But any more comments on when we should be thinking of the timing of that?

Yes, we are all planning at this point, a Q2 launch in next fiscal year. And we are very excited about it. I don’t know, if Shawn, if you have any additional comments.

Yes, we have kept it pretty close to the west and we will continue to do so, but we look forward to it. Everything is on track moving forward and we think it will be meaningful.

Thank you.

Thank you.

Thank you. Our next question is coming from Maria Ripps of Canaccord Genuity. Please go ahead.

Good morning and thanks for taking my question you highlighted very strongly the base sales this quarter can you talk about your marketing strategy around Labor Day this year? And what are you seeing in terms of cost of media, sort of more recently? And are there any changes to your broader advertising strategy heading into holiday season this year?

Okay. Well, I will give you what I know right now, but not too much into the future. I think overall, we certainly expect to see total end of year spending on marketing consistent with what we have discussed earlier, ending at around 12% to 13%. So any fluctuations you see in the short run will be smoothed out. I think what we can tell you about Labor Day is we have been – we were extraordinarily pleased with our ability to leverage marketing. We saw ROIs going into Labor Day and through what I – through the demand cycle so far as high as we have seen this year. So things are working very well. That’s obviously part of the reason we feel comfortable about what Donna has mentioned earlier. So ROI continue to raise, we are being very conservative, our expectations are actually built a lot more conservatively on ROI’s, because we are a little bit concerned about what happens with media effectiveness as you get into an election year. So we have got an election year, which we are very concerned about, as well as, potential new COVID disruptions. But in terms of what we are seeing right now, we are seeing higher ROI’s. And we are able to deliver the business on a higher quality basis, meaning overall, we are starting to see our ability to achieve goals with lower discounts, and more to come on that as we continue a series of tests and learns.

Great, thank you. And secondly, have you seen any changes to your target demographic, either in terms of age or household income, or in terms of how consumers maybe engaged with your product?

In the short what I would say is COVID has created a lot of dynamics that are pretty interesting, as everybody knows, but I would say, as we entered into the year, we are seeing an expanding of our customer base to be not only young customers, but more mature customers. I think, through this year, what we have seen is an expansion through even more and more younger customers engaging and I think that has to do with the disruption of brick and mortar, and us having to operate primarily as an online company for a number of months. So it will be really interesting what we are all trying to figure out is, what is the customer shape? What is the shape of the customer look like in the next couple of years? But I would say with that, one thing to think about is one of the dynamics we are really sort of – I think positive for us is, as these millennial start to move to the suburbs, which we began earlier this is a tale a long-term tailwind. And are making life changing decisions, this is very positive for the way we are positioned. So we are very positive about that at this point.

That’s very helpful. Thanks for the color.

Thank you. Our next question is coming from that Matt Koranda of ROTH Capital Partners, please go ahead.

Hey, guys. Thanks. So I wanted to spend a little time focusing on the third quarter guidance. So revenue growth, it sounds like got off to a good start. And you guys mentioned a strong labor day. But I am just curious in terms of the revenue guide, for 3Q, what are we counting on for the rest of the quarter in terms of growth? Are we counting on sort of similar cadence to what you guys have experienced quarter to-date?

The guidance that we gave was just overall quarter, I am not quite sure we are providing any type of cadence during the quarter. And Shawn had mentioned in his script that we would we are expecting going into Q3. A growth rate year-over-year similar to what we saw in Q2, but we are not discussing the cadence during the quarter.

I mean, what we can say is we typically with our cadence, our biggest volume events typically are around the furniture, buying events around Memorial Day, Labor Day, there are minor events as well. So what we can say is, really, if you look at Labor Day as basically through today, 40% of the quarter is in and we have pretty good confidence. Obviously, our strategies will change the second half because we don’t have another major market share event. So what this does do is give us a high level of confidence going into the fourth quarter that our targeting is right, our media plan is right and that we are capturing customers the way we expect to.

Okay, that’s helpful. And then on the gross margin guide, I mean higher revenue, but it sounds like we are still facing some gross margin with the guidance for down 200 bps year-over-year. And I know you guys called out maybe a little bit of de-leverage from sort of ramp up of the third party logistics facilities. But what are the kind of the other big items that you put in the headwind category that are offsetting sort of the product cost savings that you guys have achieved so far?

Yes, the probably the biggest this too right. So one, we had mentioned that our vendor discounts which in the third quarter of last year was approximately $1.2 million. We had achieved the vendor discount levels by the end of Q3 of last year. We are expecting to receive discounts of that amount, if not more, but the achievement of those vendor discount levels will be recognized. This year in Q4, so that’s the shift. The other big item relates to the infrastructure investments that we are making into the Northeast warehouse. Those would probably be those are the two largest items that are netting up against reduced product discounts and reduced product costs from our overseas vendors.

Okay, got it. And then if I look at the sort of adjusted EBITDA guidance and what it implies for OpEx I guess I am getting to a number that’s more in the $45 million range for overall OpEx. And so sequentially if I take the $5 million of deferred expense that sort of spilled over from 2Q that might get me into the high 30s, but what are some of the other items that I guess you are expecting to spend more robustly on in Q3 that drive that EBITDA guys?

The biggest one is probably the marketing as Jack had mentioned right. So we had a we actually, I would say we leveraged nicely on the marketing but that was strategic in Q3, we will start to see that investment going back in pretty heavily going. I mean, in Q2 they will start to see that investment going back heavily into in Q3. The other thing is, we have reinstated we will be reinstating some pay cuts that we have already announced to the team. We have started the new hire, process, again to strategically help us with the volume of growth, although many of the things that we had mentioned back in Q1 that were put on hold as we manage through our liquidity. What we thought we are at were we managed to the COVID-19 liquidity obstacles that we felt that we would be faced But we feel we are in a very strong position, we are happy with the performance of the business or our financial position, our liquidity is strong. So we are going to start reinvesting in the items that we put on hold technology people, as that 3PL the additional 3PL has been put on hold, now we are opening that up the marketing initiatives. So there is a host of things that we discussed early on in the year that we put on hold that we feel that we are in a very strong position that we can start reinvesting back into.

Yes, just to add some flavor to that. I think Donna had said something to me earlier. But if you think about the year, the second quarter is on, it’s such an anomaly. It doesn’t even It doesn’t make sense to look at it alone. So if you add the second and third quarter together, we are really exactly where everybody expected us to be. And what we decided as a team is not to take all that to the bank and reinvest because we have got a strategic plan that’s a lot bigger than maximizing, short term profits. So anything that we could reinvest, we have done to get us back to the strategic plan, which is all about where we are going to be in 12 months from now and 18 months from now, we are very comfortable with our progress in terms of getting back to that plan as well as delivering the year.

Very helpful, guys. I will jump back in queue. Thank you.

Thank you. Our next question is coming from Alex Fuhrman of Craig-Hallum. Please go ahead.

Great. Thanks very much for taking my question. It seems like you’ve had a lot of success these last couple months with customers bundling the storage seat and the power hub with really strong rates is that mostly been driven by new customers or do you also had fire customers coming back to upgrade their Sactionals and just more broadly, if you could comment on the rate of repeat purchasing you have seen over the last couple of years has that changed it all over the last 6 months? Thank you.

Yes, I think this is Jack, I think that we have seen I think I think the storage see surprised that I think what surprised us the most was the significant attachment rate on new customers we certainly have a nice penetration. And it’s certainly adding to our repeat rates with our current installed base. But I think the biggest surprise, or the most positive part is that new customers really adding to AOV, is adding to pieces purchased as well. So we are very happy with that. And the second part of your question, I am sorry, what was that again Craig?

Yes, just the percentage of revenue or transaction from repeat customers has that changed at all this year?

It is – what I would say is we can't really look at it in a quarter by quarter basis because we had such high, rapid new customer growth during the COVID disruption that it would naturally show during that quarter, we just had a lot more new customers in terms of relative to repeat, because the repeats, were sort of going on hesitation, what I can tell you is in the very large context of all of our cohorts year-over-year, we are seeing very consistent growth of our repeat rate between from customers year-over-year. So a new customer in ‘15, what their value became in 2020, was at a very consistent rate, first year and second year repeat as it would be in a new customer that we acquired in 2019. So we are not seeing any change on a long-term basis. We are just – it’s just to close in for us to tell you what we think is happening this year.

Great. That's really helpful. Thank you.

Thank you.

Now what we are saying yet just to make sure I am being clear on that, now what we are seeing when we acquire customers, we are acquiring them at a significantly higher AOV, and we are expecting the new products that we have talked about, as well as the products we have launched in the last six months continued to add to that growth so our new customers are more valuable on day one than we previously say.

Thank you. Our next question is coming from Alex Arnold of Odeon Capital, please go ahead.

Hey guys, great work on the continued successful pivoting. Two quick things. One, it sounds like the thinking on Costco ramping back up in the back half is shifting a little. So if we could get some perspective on how to think about contribution last year or drag this year, it would be helpful. And the other thing is, if you could quantify at all the positive comments around Labor Day, compartmentalize it and give us some year-over-year views as to how that played out this year.

Okay. Yes, so I will start with Costco. I think the first thing when we – the Costco relationship and Costco has been a great partner and obviously, Costco as a company has a lot of good target customers that we would share an interest in I think, the challenge with Costco really is the history of Costco is that this was an agreement we signed three years ago prior to really having the kind of handle we have on today in terms of driving our own demand and primary reason of that relationship. And the way we worked it out was because we wanted the awareness levels and the demand that they could help us develop. As time is going on we are in more control of our demand and want our partnerships to be profitable as well or more profitable. And I think it's really, the delay in Costco was our awareness – the delay first of all was caused by COVID. But it came at a time when we were renegotiating future contracts. And given our ability to pivot so quickly, and drive profit and other areas, we decided we need to relook at in terms of making it a win-win situation for us. And this does is not a strategic issue with us. It's really an agreement on how to operate the business that we need to work through with them it's win-win with both of us. So for example, in terms of the Best Buy relationship and the Macy's relationship, we see those as big opportunities as well as other relationships in the future where we have a win-win relationship in terms of driving profitability and sharing and the growth.

And then, any quantification of the drag for the back half that we could tag to that and also any quantification around just this Labor Day versus last?

Yes I think what we are seeing, I think what Donna discussed earlier, as we don't see any negative drag to the total company in the second half because of what we are seeing in terms of returns on our direct businesses being higher than initially expected, our ROI’s has been very strong. So this year, we don't see any material drag on the business. In terms of more insight on Labor Day, what I could just tell you is we are very pleased with the way that business progressed not only on a top line but our ability to manage discounts and I am very comfortable with the guidance that Donna has provided.

Great, keep up the good work. Congratulations.

Thank you. At this time, I would like to turn the floor back over to Mr. Nelson for closing comments.

Yes, we want to thank you so much for joining us especially to our incredibly capable and diverse Lovesac family of associates across the nation. Our appreciation goes out to you. You continue to show grit and passion everyday. These individuals are the driving force that continue to make our organization thrive. At Lovesac, we begin – we believe that the couch is the new kitchen table. It’s our mission to see our products in the heart of every home on the planet. We invite all to join our extended Hashtag Lovesac Family on social media and at lovesac.com. Thanks again and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time and have a wonderful day.