Greetings. Welcome to Lovesac First Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to 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; Mary Fox, 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'd like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. Today, we will start by reviewing the highlights of our first quarter fiscal 2023 performance and then discuss Lovesac's strong positioning within the industry. Then Mary Fox, our President and COO, will update you on the progress we made against our strategic initiatives this quarter. And finally, Donna Dellomo, our CFO, will review our financial results and a few other items related to our outlook in more detail. Jack Krause, Chief Strategy Officer, is also in the room to participate in the Q&A session. Let me now review some key highlights of our first quarter financial performance. We are very pleased with our first quarter results with top and bottom line performance that exceeded expectation despite a dynamic macro backdrop. Total sales were $129.4 million, up 56% versus the prior year period. We delivered total comparable sales growth of 42.2% and continue to be very encouraged by the broad-based strength from both new and existing customers. We again saw strong growth across our showroom, Internet and other channels. Notably, we grew adjusted EBITDA to $6.4 million from $5.3 million in the prior year period despite gross margin pressure of 450 basis points, driven by supply chain headwinds, which Mary and Donna will share more details around. I want to take a moment to share why we believe we have and will continue to deliver higher growth at a more consistent rate than much of our category. Lovesac is not a furniture retailer. Lovesac is not just a direct-to-consumer marketing engine, selling clever seating solutions in a sea of comparable furniture. At our core, Lovesac is a branded consumer products company. We sell proprietary home furnishing inventions that are more useful, longer-lasting and more sustainable than all comparable…

Thank you, Shawn, and good morning, everyone. Our first quarter results marked a record first quarter for our company. As Shawn said, it was an outstanding first quarter. And given these results, we have now achieved 16 consecutive quarters of greater than 25% growth and a CAGR of 48.7% in the past four years, gaining significant market share every quarter. In the last two years alone, our comparative sales have doubled and almost tripled on a three-year stack basis. This growth has all been achieved with a strong focus on profitability, with our adjusted EBITDA margin increasing by 440% in the past four years. As our home category has seen many ebbs and flows over the past three years with brick-and-mortar heavy brands suffering significantly during the early stages of COVID as consumers shifted to e-commerce, and recently our e-commerce heavy competitors suffering from channel shift back to brick-and-mortar, our consistent overperformance in the past four years is the scorecard we look to as we gain market share every quarter and deliver our financial commitments. This is the result of Lovesac's strong word-of-mouth and relevancy, our best-in-class omnichannel go-to-market level and our first-to-market innovation. And we believe these market share gains and brand awareness will continue. As we consider our unique omnichannel go-to-market strategy, I'm very excited to share an update today on our strategic retailer partnerships with Costco and Best Buy. Our advantaged product and selling space productivity allows us to develop partnerships with other best-in-class retailers to further grow our distribution in smart ways to meet and expand our consumer base in the places where they frequently shop for other larger ticket purchases, but do not conventionally expect to find furniture. We are very pleased with the strength of our Costco business, hosting roadshows directly on costco.com for…

Thank you, Mary, and good morning, everyone. I will begin my remarks with a review of our first quarter results and then provide a framework for how we are approaching the remainder of fiscal 2023. Net sales increased $46.5 million or 56% to $129.4 million in the first quarter of fiscal 2023. The year-over-year net sales increase was driven by growth across all channels. Overall, comparable sales increased 42.2% due to the success of our Easter holiday campaign for both showrooms and the Internet and the year-over-year increase in our touch points to include 31 showrooms, 13 kiosks, two mobile concierge and 18 Best Buy shop-in shops. Additionally, we had higher productivity in our online pop-up shops on costco.com, which included one additional event over the prior year. Showroom net sales increased $32.3 million or 65.9% to $81.3 million in the first quarter of fiscal 2023. This increase was due primarily to a $22 million increase in comparable showroom point-of-sales transactions to $63.3 million in the first quarter of fiscal 2023 as compared to $41.3 million in the prior year period, principally driven by a very strong Easter campaign. As a reminder, point-of-sale transactions represent orders placed through our showrooms, which does not always reflect the point at which control transfers to the customer and when net sales are recorded. Internet net sales, which are sales made directly to customers through our e-commerce channel increased $6.1 million or 24.1% to $31.3 million in the first quarter of fiscal 2023 as compared to $25.2 million in the prior year period, principally driven by the performance of our Easter campaign. Other net sales, which principally include pop-up shop and shop-in shop net sales, increased $8.1 million or 92.7% to $16.9 million in the first quarter of fiscal 2023 as compared to $8.8…

Thank you. [Operator Instructions] Our first question is from Tom Forte with D.A. Davidson. Please proceed.

Great. Thanks. Shawn Mary, Donna and a tremendous quarter. The first question I had and then one follow-up. So Shawn, you sort of talked about this in your prepared remarks, and I never want to ask for -- call for a recession for anyone. But it seems to me that you could really take advantage of recession in the following ways: with lower container costs, lower freight costs, lower component costs that give you an opportunity to add prime real estate attractive rates and then also, two, advertising costs. So am I thinking about the right way? And what, if anything, am I missing?

Yes. Thanks, Tom. There are many ways that Lovesac has resiliency through pullbacks. And we've lived through these in our past. We are not a young company, even though we may appear to be given our meteoric growth rate. And when you -- let's begin by just the sheer momentum of our growth rate can carry a company like this through various kinds of pullbacks in headwinds because a headwind versus momentum that's strong, while it may moderate, certainly won't stop growth. and that's heartening to us. And then all the things that you mentioned from back -- way back in 2008 when Lovesac only had a few dozen locations, we were able to scoop up locations with much more favorable lease rates, our negotiating power with vendors, across supply, of course, increased because with so many companies flattening out, growth becomes dear to both suppliers who made you into the shipping companies eventually, hopefully. And companies like ours will really reap the rewards that come from having the momentum going in and also having so much headroom in our category even as we become really, in a lot of ways, the apex predator of couches as we view it, the disruptor with the best product in the category. And so -- yes, all the things that you mentioned are accurate, and we look forward to being able to take advantage of those things if there were to be some major market pullback. In the meantime, out of an abundance of caution, we've reiterated guidance as opposed to, say, taking it up because it is a crazy world out there, and we just want to be super conservative and careful with what the expectation is, but we continue to grow and grow at a rapid pace and do it profitably, and we're really happy with that.

Excellent. All right. So for my follow-up -- so I've got to mention Jack, congrats to Jack on the great quarter as well. All right. So I don't think I've asked this in a long time, but what is your M&A strategy? I'm imagining that there's lots of opportunities right now to buy assets at cheaper valuations. And then how do you feel about running a multi-branded strategy, either from M&A or launching a second brand?

Yes, I'll make a few remarks, and Jack can weigh in as he comes after me. Just to build on what was just covered, assets become cheaper during uncertain times. And our M&A strategy is not part of our core outlook. We have been growing through organic growth, as you know, for a long time and have a very bullish outlook on how we can continue to grow organically at very high rates. However, on the front end, as there are other direct consumer brands out there that have not achieved our strength and profitability and the reliable business model. There are always opportunities that we are at least looking at and thinking about. And more importantly, though, we have great ambition for what we can do on the manufacturing side in terms of cutting costs and becoming more capable on that front. We've created a product that has the most potential for cost savings. It's a low SKU count unchanging at its core uniform product line. And what we can do through manufacturing prowess also gives us lots of opportunities, as we see it, to consider M&A as an opportunity to hit the ground running from a manufacturing standpoint. But again, trying not to be distracted given our major growth rate. So we continue to be opportunistic -- and we'll continue to be very prudent on that front. We have a lot of cash overall compared to our size. And I think that it continues to be something we can contemplate in terms of multi-brand. I'll let Jack weigh in, but we believe that there are so many opportunities within the home, right? We view our territory as from your mailbox to the back wall or fence of your property. And everything in that realm is ours to disrupt.…

Thanks. And I did get off mute. Thank you. I guess two, Shawn, you're summarizing it in two ways. And one, I think, for the next three to five years, we clearly have plenty of runway organically with Lovesac, and we know that based on our consumer insights, our research, our new product pipeline. And I think the way we look at my position in the short run is working with Mary and the team is how do we strengthen our process, our structure and governance to get the most out of the ideas that are going through the pipeline. And then I think the second phase has been -- beyond three to five years is what are the opportunities that DFL creates for us and the affinities with future customers. And we have a great deal of opportunities we're looking at because of the -- how strong DFL rings true with our core customers. And I think as time goes on, we'll be able to talk more about the filters we're looking at. But great question.

Thank you.

Our next question is from Maria Ripps with Canaccord. Please proceed.

Good morning. And thanks so much for taking my questions. And congrats on very strong results here. So you mentioned several factors that have contributed to the strength in Q1, including your Easter campaign. I guess, anything else you'd highlight here again from maybe competitive positioning or consumer behavior that may have sort of added to revenue or performance in the quarter? And then my second question is, as it relates to your outlook. So you mentioned some sort of moderation in demand in the last few weeks. Any way maybe you'd be able to quantify that relative to sort of -- to the 56% growth rate in Q1?

Yes. Good morning, Maria, I will take that question. So thank you. In terms of quarter one, obviously, we were thrilled with the performance, as you highlighted. And what we saw was particularly the great success of our Easter campaign. And I think that's really building on word-of-mouth strength that Shawn had mentioned earlier and just the continuation of the brand stickiness that continues to build. I think one of the other highlights I mentioned about the Google Local that we launched in quarter one and particularly around the Easter campaign and we just saw the traffic really built into showrooms as well as converted online. That really is just helping us be very prominent as customers are thinking about purchasing that we are very much top of mind. So that momentum really continued. And I think -- we've seen StealthTech really continue to build, and just great excitement. Even I think if you look at the results in other channels for quarter one at 92%, so you just see that continued demand really grow. I'll start in terms of your question then on quarter two. I think a couple of points of context that we should always consider is quarter two for this year, we're up against our biggest comps versus the last two year stack, and it's the biggest quarter of the year. And I think when you then consider that we see softer comparables as we go into the second half of the year, so we're really against that -- just that higher number. So some of the moderation a large amount, can really be contributed to that comparable and you know, we still continue to see very strong demand that kind of continued as we've opened up in Q2. But we're also obviously really listening and seeing all of the macro dynamics in the market and just being very thoughtful in terms of for our guidance to make sure, as always, that we deliver and perform to the highest standards that we've done for the last four years. I don't know, Donna, anything else that you want to add on Q2?

No. Mary, you did great.

Great. That's very helpful. Thank you very much.

Thank you, Mary.

Our next question is from Brian Nagel with Oppenheimer. Please proceed.

Hi, good morning. Also I'd like to add my congrats on a nice Q1. So my first question, and it's going to be a bit of a follow-up to just the prior question with regard to the commentary about slower down here in Q2. So you mentioned it would seem to be focused more on the kind of the lower end of the product continuum. Is there any other color you can give us with what you're seeing? Kind of when it started to the extent -- I guess, obviously the depth, if you will, to slow down? And then I guess the question on that would -- to the extent this persists, are there levers you would pull to try to offset levers from within the Lovesac model to try to offset that? Then I have a follow-up.

Yes. Great. I'll take that and then Shawn, anyone else can add in. So I think the first thing, Brian, is obviously, we came off a very strong quarter one, including April that was very strong for us. And compared to anyone else in the market, we have the best results and really continue to gain share. So I think we need to be careful as we talk about that moderation that we've highlighted that it's only for part of -- as we started the quarter. And as I shared earlier, we're up against our toughest comps on two years on that basis. And that significantly starts to step down in comparable into the second half. So -- how much of that moderation is up against that comp versus some of the dynamics others are seeing, we will obviously see how that comes through. But we feel very good in terms of the continued growth across all of our channels. You see the growth rates being quoted as customers are coming in highly engaged with the brand. So I think we recognize the dynamics. We just need to learn and go through it, which is why, as Shawn said, we're not raising guidance we're holding to guidance. And then as we look to your second question around if that was to persist, we've looked at every way in every scenario in terms of landing to the guidance and more. And we feel very confident on that even baking in what happened as we see a bit of moderation, just at the low end, because I think it's important to remember at the high end, we're actually seeing acceleration and continued growth there, including the sales tax. So we baked and reviewed it in every way. But I think also what's important, Q1 performance came without us using all of our levers to the degree that we have done in the past. Our discount level was at the lowest rate that we've seen over the last few years. There's opportunities, I think Tom you mentioned earlier. We can buy marketing at lower rates, which we're also starting to see moderate and many other levers to be able to drive the business forward. So we were considering discussions today, we feel very good as we go through the rest of the year. Our in-stocks are even better than they were this time last year. Our touch points are performing, obviously, at a very high rate. So I think from that side, as we stand everything we know today, we feel very confident for the year to go.

Got it. Then maybe my follow-up, just on the gross margin side. So I know we talked a lot about gross margins for the last several quarters. You mentioned a lot in your prepared comments here. But as you see the, so to say, the supply chain dynamics continuing to unfold, how should we, as we're looking at our models, how should we think about that path back to kind of historical levels for gross margins at Lovesac?

Yes. I think -- look, first of all, to build on what Mary said, Lovesac will continue to do what it's been doing. High growth rate at the top line continue to pursue leverage at the bottom line, continue to -- our North Star is to grow EBITDA even as we are scaling rapidly. And so we're very confident in that outlook. And if that continues, through the strengthening of the dollar in many respects versus foreign currency through back. Right now, you have a lot of companies with too much inventory and their inventory is not like ours. It's not evergreen. It's not the same as ours, right? Our inventory is highly concentrated on just a few key SKUs that will be relevant 15 years from now. So it creates no pressure on us to make radical moves and start discounting and dumping. And then you get -- you pair that with the basic economic outlook that's out there, and you have a recipe where a lot of companies will be struggling to achieve the kind of reliable profitable growth that we believe we can achieve. And as that happens, our strength with our suppliers, our strength on the world team from a sourcing perspective as well as our efforts in manufacturing will drive this right back to where we want to be on a gross margin basis, which has always been, again, our North Star, the mid-50s range outside of the turbulence that has been kind of undeniably swirling for the last couple of years in the supply chain realm, whether it be the raw cost of goods, the times or whether it be just availability of containers and cost of shipping containers, all of that. And so our path back is continued growth and that buys us the leverage versus all of these factors that are swirling. I think as other companies normalize their inventories and pull back on the inflow that they had to deal with because there's so much pent-up -- there's so much demand that is already on its way. In many cases, it's created hamburgers out of customer relationships with those brands, and we'll continue to be steady. And so we view a lot of these negative forces on our gross margin of late as temporized. And we do believe that many of them will subside over time even as we still have levers to pull on price. A lot of our -- a lot of the competition has been -- was very aggressive to take price way up at the outset of this. And now you could see some of these same brands potentially sighing with prices needing to come down with over inventory positions and things like that. And so our key is steadiness, and that will bring us back to the gross margins that we believe continue to be our guiding North Star and that we will be able to deliver against.

Got it. Thank you.

Our next question is from Camilo Lyon with BTIG. Please proceed.

Thanks, and good morning, everyone. Very nice job in Q1. Just going back to the commentary around the moderating trends you're seeing here in Q2. So you talked about softening from that lower income consumer. Can you just tell us how that actually manifests in the new business? Is it smaller couch Sactional purchases? Is it an increase in credit applications? Just curious how that's manifesting. And then the second component of that question is a higher-income consumer more than making up for that moderation by the low end? And then I have a follow-up.

Yes, good morning, Camilo. Thank you for the question. So I think in the moderation, again, as I shared earlier, it's only a few weeks, and I think when we look on the two years back, basis, we have to kind of be careful because some of the lower end actually when we run the numbers, they were very strong a couple of years ago. But what we're seeing is just more of the standard fill, which is that opening price point is still growing and still good, but just slightly softening to where we were, obviously, of an incredibly successful quarter one. But what we do continue to see is that the other sales that we continue to have great growth and in some places actually accelerating, and we continue to see StealthTech building in its growth. So even that continued drive in AOV and all that we can drive as we think about bringing traffic into the showrooms that we go to the year-end as well as into other channels and online. There's plenty of room for us to be able to drive that traffic and the acquisition of customers as we kind of see through. So I think it's just -- we're obviously giving you full transparency as we see the early part, but I really do believe, as we look at comparables, it's a toughest quarter on that two year stack comparable. It really starts to scale down in the second half. And that's why we still feel very confident as we look to our guidance for the year. And I think when you come off an industry-leading, great quarter, great year, great four years, all the things that we shared earlier. And we see the customers very satisfied with our performance. We're in stocks as ever Shawn said and great ways to connect with the customer. We feel very confident as we go through the rest of the year.

Great. And then just following up from that line of questioning, does this moderation, even though it seems like it's very, it's more comp-driven, comparison driven, does it change your view on your promotional strategies? That's been a tailwind for you guys now for well over a year. So I'm curious, is this altering how you're going to view your promotional cadence with respect to distributors that you have for units bought and what that triggers from a discount perspective?

Yes, you're right. Absolutely because in the last year and more, we've seen very benign promotional environment and our discount rates have still continued to be lower. But like anything, we're very agile business. We're always looking in terms of where there might be opportunities. And how do we think in with when our customers are thinking that they want to buy with Lovesac and making sure that we really do consider the promotional level. It may not be for everything. It may be on certain product sites as we've been testing, and we've seen great success with that in the Easter campaign. So, like everything, and we've always done, we'll continue to be agile, respond where it's needed. All of that is factored in to our guidance, allowing for room if we need to drive higher traffic acquisition, et cetera, through promotions, and we'll continue to respond accordingly.

Yes. And I would just add, our point of view, our overall point of view on what this company can and will deliver even throughout these turbulent times is very high growth in a category that is a match right now in many respects. And that high growth comes from organic word-of-mouth affinity for our totally proprietary products that continues. Even though there are headwinds against maybe the home category in general and consumer in general, what have you, those headwinds cannot mitigate the raw momentum that we've built into this brand. And so our moderation statement in terms of just, let's say, reiterating our framework for the year is out of an abundance of caution. This is a very turbulent time with all kinds of macro craziness. And we're just going to be very cautious, even as we still experience probably leading growth in the category, coupled with a path to continued expansion of profitability. And so quarter-by-quarter, maybe lumpy. There are some comp issues that we'll have to face in terms of just tough comps coming up and whatnot. But the overall delivery of this business will continue to be what it's been, and we're very proud of that.

Prudent conservatism is definitely appreciated in this environment. Good luck, guys.

Our next question is from Matt Koranda with ROTH Capital. Please proceed.

Hi guys. It's been covered quite a bit, but I just wanted to see if you could put a finer comment on your second quarter finer point on the second quarter commentary. So -- maybe could you just confirm that you've been tracking within the guidance range of 25% to 30% quarter-to-date? Or are you assuming things get worse incrementally for the rest of the quarter to get to that guide?

I think, Matt, when we look at the whole quarter, we feel very good in terms of where we're tracking -- and that's exactly as we said, whether it be thinking through with Memorial Day all the way through July 4. So we feel very good, and we certainly, at this stage, would not be giving guidance for the quarter if we didn't have the utmost confidence. And I think as Camilo said, we've been prudent understanding all of the rhetoric out there, and what everyone is saying, but we certainly feel very good. And as we shared earlier, we haven't even really utilized many of our levers that are in our toolkit that we can do and power up accordingly. And we're very agile and very fast and we can respond accordingly. So we feel good, Matt.

Okay, great. And then just on the inventory growth front, you guys called out that some of the growth was due to sort of increases in inbound freight. But curious if you could maybe speak to unit growth within your inventory on a year-over-year basis? And then maybe also how much StealthTech just kind of directionally is embedded in that inventory growth as well to kind of support the higher attach rates that you guys are seeing.

Matt, it's Donna. So I would -- I guess, I can share with -- about half of the inventory increase is related to items that are not comping over prior year, so for example, StealthTech and [free]. StealthTech, obviously, is the smaller part of the non-comp piece of it, but there's millions of dollars in self-inventory that we did not have this time last year because it was only launched end of third quarter of fiscal 2022. But -- yes, half of our inventory growth is in pure, we'll call it, typical seat size in stock covers which we had absolutely planned related to just supporting the increase in sales volume. And the other half is related to the increase in freight-in costs. I think the important thing to note there is that, that was all planned, right? It's inventories where I had mentioned that we are not at risk, it's evergreen. We don't have seasonal inventory. It's just we thought in planning, again, planning at the beginning of the year. we'd be very prudent to have the inventory on hand to maintain our in-stock inventory positions. So I hope -- does that answer your question?

Yes, very helpful, Donna. Best of luck. See you guys, thanks.

Our next question is from Alex Fuhrman with Craig-Hallum Capital Group. Please proceed.

Hi guys, thanks for taking my question, and congratulations on the really strong quarter. I wanted to ask about the return to Costco. That used to be a really big part of your business. Now it looks like you're going to be going back to their stores for the first time in a couple of years. I think if I remember correctly in the past, that, that partnership was dilutive to your margin rate but it was great exposure, got the product in front of a lot of people at the time when your awareness was very, very low. Now that you're a much bigger company, can you talk about what that partnership is going to look like now that you're back in the stores and how the margin of that might compare to your Lovesac showrooms as well as the showrooms that you're starting to operate now within Best Buy.

Yes. Great. Thank you for the question, Alex. So yes, we're excited equally in terms of the return to the Costco physical roadshows -- and obviously, as you rightly remember, that we stopped those just as COVID hit. So also mentally, it's great because it feels like we're all getting back into retail. So those will start and we take the numbers into our framework for the rest of the year. But I think one thing that's a real advantage this time is we're going to be staffing all of the road shows with our own team, which is an elevation to the model before we really believe will drive stronger conversion. So from that side, it's still very good. I think in terms of your question, we look at the full P&L, yes, the product margins is a little bit dilutive, but EBITDA impact is positive. So we really look across the P&L. And as we consider all of our decisions because clearly, we have very strong momentum across all of our channels. We see this as being additive from the top line and then from even EBITDA line. So we're very positive there.

Okay. That's very helpful. Thank you very much.

Thank you, Alex.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Shawn for closing comments.

Yes. Thank you to all of our investors and supporters who continue to watch our company grow. We're especially grateful to our entire Lovesac family. The team that has built this company continues to put up amazing growth, even as we continue to disrupt this category that we operate in. Appreciate you being with us this morning.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.