Greetings. And welcome to the Lovesac Second Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Schacter with 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 second 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 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. We are pleased with our second quarter results and with top and bottom line performance that exceeded expectations against a still dynamic macro backdrop. After recognizing some pullback in consumer spending at the outset of the quarter, as we said on our last call, the pursuant attenuation was less dramatic than anticipated. This was up against last year's very strong Q2 when we achieved our highest quarterly growth rate ever as a public company. I'll also remind you that our results are perhaps one of the most recent and real time results in the home category because we typically ship out and deliver goods just days after order and do not carry much of a backlog ever. Now, let me review the highlights of our second quarter performance. Total sales were $148.5 million, up 45% versus the prior-year period. We delivered total comparable sales growth of 31% with broad-based strength from both new and existing customers. Adjusted EBITDA grew to $14.1 million from $12.4 million in the prior-year period despite expected supply chain driven gross margin pressure as we manage our expense structure with discipline. We continue to invest in high ROI marketing and advertising, which is a key contributor of the brand awareness…

Thank you, Sean. And good morning, everyone. Our quarter two results mark the record second quarter for our company. As Sean shared, it was an outstanding performance. And given these results, we have now achieved 17 consecutive quarters of greater than 25% growth. This represents a CAGR of 45.4% in the past four years, demonstrating significant market share gains over this course of time. Using fiscal 2020 as our baseline, our three-year comp growth stack is 215%, with a strong focus on profitability and an adjusted EBITDA margin dollar growth of over 500% in the same time period. We are also encouraged by the continued demand strength we are seeing this year, which is again in sharp contrast to what the category is experiencing, as Shawn shared. In quarter two, our estimates show that we continue to win with our customers, gaining significant market share as the strongest performing competitive brand in the seating category. The large and highly fragmented markets in which we operate presents significant share opportunity, even if macro conditions were to turn less favorable for our core demographic. This is due to the unique values that are built-to-last products offers, the strong word of mouth and relevancy, and the disciplined execution of our key strategic priorities, which I will provide a few updates on now. Starting with, one, product innovation. We continue to be pleased with the progress of StealthTech, which was a game changer for us and the category from an innovation standpoint. Here are some key highlights. We saw attachment rates increased significantly versus quarter one fiscal 2023 as adoption continues to grow on a sequential basis. This is meaningful as Sactionals that were sold with StealthTech had an AOV nearly three times that of those that did not. The initial success of the…

Thank you, Mary. And good morning, everyone. I will begin my remarks with a review of our second quarter results and then provide a framework for how we're approaching the remainder of fiscal 2023. Net sales increased $46.1 million or 45% to $148.5 million in the second quarter of fiscal 2023. The year-over-year net sales increase was driven by growth across all channels. Showroom net sales increased $29.8 million or 47.7% and $92.4 million in the second quarter of fiscal 2023. This increase was due in large part to a comparable sales increase of $19.9 million or 36.8% to $74 million in the second quarter of fiscal 2023, which is compared to $54.1 million in the prior-year period. This increase is principally related to higher point of sales transactions and slightly higher promotional discounting, strong promotional campaigns and the addition of 35 new showrooms, 14 kiosks and 2 mobile concierge as compared to the prior-year period. 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 that sales are recorded. Internet net sales, sales made directly to customers through our ecommerce channel, increased $6.1 million or 20.5% to $35.5 million in the second quarter of fiscal 2023 as compared to $29.5 million in the prior-year period, with the increase principally driven by the strong performance of our promotional campaigns. Other net sales, which principally includes pop-up shop, shop-in-shop and barter inventory transactions, increased $10.2 million or 98.3% to $20.6 million in the second quarter of fiscal 2023 as compared to $10.4 million in the prior-year period. The increase is primarily driven by a pull forward of planned openbox returned inventory transactions with Icon, our inventory barter partner. As a reminder, our…

[Operator Instructions]. Our first question comes from the line of Thomas Forte with D.A. Davidson.

First off, Sean, Mary, Donna, Jack, congrats on an amazing quarter once again. So my first question is, you mentioned a few times in your prepared remarks, Shawn, what does Designed for Life mean at Lovesac and why is it such a competitive differentiator?

Designed for Life is our design strategy. It's how we conceive of products and circle to consumer in a nutshell is how we conceive of services married to those products. And our focus is to develop long-term products, long-term services, programs, policies to develop long-term relationships with customers. So it has become our entire business strategy, to put it bluntly, and we see it as totally unique in the marketplace because so much of consumerism in any category is driven by temporized products meant to disintegrate and compel us to buy new ones. And so, while we do believe we have some razor/razorblade aspects of this business that we're very excited to exploit that drives repeat business, that drives loyalty, and you're seeing that unfold with Sactional, Sactional cover, Sactionals accessories, accoutrements, et cetera, et cetera, we will also utilize these philosophies to achieve the same kind of results in other adjacent categories throughout the home. We don't just throw ourselves into new categories rapidly because we try to do them – design them to this level. And that takes time. But the results are the kind of results that you've seen us now put up for years and years when you have dominant solutions. And so, to us, it really is everything. And we're proud of the results and we're proud to represent that ethos, which, of course, and the outcome, as we see it, is true sustainability.

For my follow-up, while it seems hard to believe you sell a product, it's even better than your Sactional, in my opinion, at least, the StealthTech sound system, how much revenue could you generate from that product at maturity? And how does its gross margin compare against Sactionals [indiscernible]?

I think the easiest way to characterize that because we have not broken out sales at StealthTech as its own product line is to say broadly, look, in just the next few years, we will do hundreds of millions of sales in StealthTech. Right? This is not just some little accessory, little add-on to make Sactionals cute. StealthTech, from our point of view, is the best home theater system in the marketplace today. And I'm very proud of it. I live with it myself. And I am blown away nightly by the experience I get to have on a StealthTech embedded Sactionals, which by the way are my 15-year-old Sactional pieces that I've added StealthTech to which is emblematic of our Designed for Life philosophy in action. Right? We aren't just make a new thing and then tell you should have waited and bought the newest thing. Right? It's so unique the way that we put things forward. And so, StealthTech is our most recent invention, the most recent embodiment of a Designed for Life product and it is so much fun. If you're following Lovesac and haven't experienced it, it's critical that you experience it. And that's why we have showrooms, by the way. It really pays off our whole business model. This is a product that cannot be understood, certainly not on this call, certainly not even from the website on its face. You really have to experience in person. So, grateful to see it off and running, grateful that we've had little to no warranty issues of any meaningful kind and we feel very proud of the launch and expecting things from it.

Our next question comes from line of Brian Nagel with Oppenheimer & Company.

Actually want to add my congrats for a nice quarter. I've got a couple of questions. And I apologize, I think they're going to both be a little shorter term in nature. But first off, Shawn, in your opening comments, you mentioned, I guess, the commentary you made last quarter about maybe some softness at the low end and that abating here a bit. So I was wondering if you can just add a little more color on there, so we can understand better that piece of your business and the trajectory of the business. Then my second question, Donna, with regard to the different the framework you outlined for the balance of the year, especially with the Q3 piece, is what you – the framework you outlined for Q3, is that consistent with what you're seeing now that we're, I guess, almost halfway through the quarter?

Often a quarter may begin – the timing of a quarter may begin with some kind of moments. Like, for instance, Q3 begins with Labor Day and we get a quick read on Labor Day, and that's all we have necessarily to shape the outlook for a quarter. Q2, similarly, just from a few weeks in, our read was soft, we were transparent about that. And then as you can see from results, it wasn't as soft as maybe we had feared it may become. I think, Mary, you may have – or Jack, you may have any other specific observations from the shape of the quarter, different promos within, but that's essentially what happened.

Just to add to Shawn's point, we had a really successful Father's Day through to July 4. So that's obviously what you see in the results, and obviously gave us continued confidence in how much the brand is resonating and the success that we see going forward. So, I think there's always the danger of kind of giving too much detail within a quarter and a week and a month because there's just always so much that we're moving around in programming and being very agile. But we were obviously very pleased with quarter two, and feel very confident going into quarter three. Donna can share a bit about some of the shifts that actually came into quarter two, which means that quarter three, obviously, we've given you that framework, but we feel very good about the balance of the year and actually feel great strength, particularly around StealthTech anniversarying and all the excitement that Shawn talked about. Hopefully, it's the gift of the season and so forth. So we're in great inventory position, great position with the field, hiring et cetera. We are set to go and feel good for the rest of the year. Donna, I don't know if there's anything you want to add on quarter three for Brian.

I think to what both Shawn and Mary had said, we have a very good line of sight, we believe, into how Q3 is going to shape up. And although it may look on the lower end at the guidance that I provided for Q3 at a 15% rate, I think it's important to note – Mary had just said too – we had a couple of things that we were able to pull forward, consciously pull forward into Q2. And if you take some of that into consideration, that $9.5 million between increased throughput and accelerating our open boxed transactions with Icon, you'd see that Q3 would be in line with what we're projecting for Q4 as well, closer to a 23% rate. But as you know, we try to bake in as much conservatism on the other side as well because you just never know, but right now we believe we have a pretty good line of sight into our Q3 performance.

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

Congratulations on another really strong quarter. I wanted to ask about the additional investments that you're making. And it sounds like that's the primary reason for EBITDA margin outlook being a little bit lower for this year. Can you talk a little bit about how much these projects are going to cost and what the timeframe is for them? I would imagine putting together a new distribution center is something that would likely go into next year, if not mostly next year. And I know it's obviously – you seem to be talking about numbers for next year, but just in terms of the impact that these investments are going to have on next year, should we continue to expect investment of some of your EBITDA margin in the first half of next year into these initiatives and just wondering kind of what the what the timing of some of these investments will be?

We're always focused, obviously, in two horizons, the year and then kind of our forward view in our strategic plan. And during the summer, as we were reviewing with all of our leaders, it became very clear to us that, based on our continued growth rate that we needed to accelerate the investments, obviously, that I had laid out. As you rightly said, for example, the additional DC, but also in terms of our talents and capabilities in critical infrastructure that really will help us to be able to drive the growth through FY 2024 and beyond. So, for us, making bold moves that we believe sets us up for that continued growth is something that we're aligned upon. As you said, obviously, some of the costs really bear in this year when it's around the DC, and frankly, also the heavy lift as you work to build, putting in systems in places, the processes that have to be done, there is more of a heavy lift there. When we kind of come to thinking through on the FY 2024 framework, obviously, we'll factor that in, but for us it is more of a heavier lift of the investment this year in order for us to be set up. So, we'll share more at the end of the year. But for us, we feel good based on taking that move now, and the teams are excited because we really do need to give them that infrastructural support.

Just a follow-up on the new distribution center. Obviously, you're taking your inventory up here and the business is growing very fast at the same time. Can you give us a sense of kind of what your peak ability to handle inventory is now, prior to this new distribution center? Is it something that you think you're going to be needing very quickly?

We have the ability still to deliver [indiscernible] this year. Part of bringing in the new DC is actually to be able to serve customers in the south at a faster speed. And as I shared with you before, we're so happy to see the fulfillment, customer satisfaction really jumped up this year. So it's as much around geographic proximity to customers, as well as the capacity that obviously I laid out before. So, we don't see any constraints for this year. But we certainly see that it's needed as we go into next year, and now is the time for us to start to build in that capacity. And frankly, DCs don't always come up so easily. So it was also important, it was perfect for us. Great for the model. So, it was also about being able to lock that in. So bit of both from that side, Alex.

Our next question comes from the line of Matt Koranda with ROTH Capital.

Just wanted to clarify the quarter-to-date trend that you guys had discussed earlier in the Q&A. Just wanted to put a finer point on it. Are we tracking quarter-to-date up 15% in line with the Q3 guidance. I'm just curious if you could maybe comment on how the consumer responded to the Labor Day sale and how you're factoring in the broader promotional environment in the industry into the Q3 and Q4 outlook.

Quarter-to-date, including Labor Day, we feel really good about the framework Donna shared and feel strong around our performance. We continue to grow and are well ahead of the category, taking market share. So as we saw through the quarter two, there's always ebbs and flows throughout, but we feel really good as to where we stand right now. And as Donna said, we always also manage our frameworks with conservatism baked in because, whilst we're full throttle on driving growth, there is obviously the macro dynamics that we all read and see all the time. And whilst we continue to grow, we have the best performance in the category. And actually, we're seeing a widening gap in our performance to the category that's just strengthening more and more. So we feel good. And even if you think of just quarter two, the three year geometric stack up, 215%, this just is continuing to build from that side. So, nothing other than confidence through quarter three and into quarter four and the rest of the year.

Just on StealthTech, wanted to see if we could get a little bit more detail on product adoption there. Any more quantifiable metrics you can share around attach rates to Sactionals. And I'm curious, maybe on Shawn's front, how is this helping with marketing efficiency because some of our checks seem to indicate word of mouth on Sactional is a pretty big driver of store traffic. And just wanted to see how that threads into sort of the marketing efficiency that you're seeing?

We have not broken out StealthTech and talked about attachment rates. Broadly, I'll just say that they're on target. They're moving according to plan. Given that it's been in market for less than a year and it's a huge leap from being seen – not anymore just being that company and not even as a couch company, but as a home electronics company, home electronics brand, with our brand on the side of these home electronics products, that's a huge brand lead for us. It's going to take years to come to maturity. The good news is it's off and running and making a meaningful impact on the performance of our marketing. I think the clearest example is any TV commercial, which is a massive portion of our advertising spend, shows StealthTech with Sactional. So, I think we've spent over $40 million already to date, roughly, on StealthTech-related commercials. This is something we are materially behind, and think we're seeing material success with it. In terms of word of mouth, no doubt about it. This is a product that is quite remarkable. And I think that's probably the most misunderstood and underappreciated aspect of Lovesac. Why are we winning? Why is word of mouth so strong for us? Why are our marketing ROIs so high quarter after quarter for years now? Because the product is remarkable. In a landscape where most products – there are good brands out there. There are beautiful designs, but they're not remarkable. They don't cause people to talk about it, to remark. And that's what's beautiful about StealthTech. And so, it absolutely is buoying up and improving our marketing ROIs, our word of mouth at a time when, of course, Sactionals were just coming into their own and finally becoming part of the mainstream, we hope, and being adopted at a broad rate. StealthTech has a long, long runway to come to maturity. We believe it is a big business line for us. We think of home audio as a category we're competing in. This is, again, not just icing on the cake for Sactionals. And by the way, we will leverage the StealthTech sub brand in other categories as we eventually expand the brand that way. So, sorry, not give more color, but given that it's a new category and we step into the granularization of our public data very carefully and thoughtfully, that is our approach thus far.

One thing to add to that, John, is I think with our – it's amazing to get that kind of word of mouth. And if you think about the funnel, a lot of that driving the top of the funnel and also making the middle and bottom of the funnel easier to convert. And I think as you see what Mary discussed and the marketing team is doing, there's a lot of hyperlocal targeting. That's the power of word of mouth and our advertising helping the top of funnel, enabling us to get really closer in and creating higher conversion rates, which is what we're seeing. The thing we're also seeing is our own ability to drive our own traffic outside of what we would call these classic holidays. So we're seeing the signs, we're more of a word of mouth driven destination brand, and we have a lot of control over our future. And we feel great about it.

Our next question comes from the line of Maria Ripps with Canaccord Genuity.

Just following up on the last question and sort of strong referrals driving incremental demand for you, can you just maybe talk about how you're thinking sort of about balancing that with marketing investments in the environment of broadly softening consumer demand versus the backdrop of you gaining share?

Obviously, our great success, as you talk about with strong referrals, word of mouth, and so forth, is just back to what Shawn's been talking around, just people love our products. Every one we talk about, it's not just that they like it, it's functional, they really love our products. So, I think as we look at everything we're doing around marketing, whether it be investing in TV or, as Jack said, much more kind of local, hyper targeted programs, all of it is really just continue to strengthen the funnel from the top to the bottom. As we look at the latest brand health update, we're just seeing conversions higher than ever, especially from consideration through to purchase and those ROIs are strong and it's all just a key rank for us around the brand stickiness. And it's just more and more people know us and as we put a showroom in their local area as well, you get that kind of double down in terms of just people starting to talk about us coming in and trying it. And frankly, StealthTech has created an amazing dynamic in the showrooms that really brings it beyond just thinking about coming in for furniture. It creates a whole family moment and a lot of excitement. So, we will continue to be very agile, adjusting. I think I talked a bit about test and learning in marketing around social media and so forth. The team do a great job. They're always adjusting real time in terms of where they're seeing the ROIs. And we have a very disciplined approach to every dollar we spend. So more to continue to build on as that brand stickiness continues to increase.

secondly, on StealthTech, can you maybe talk about if you're seeing more traction and conversion with StealthTech in your Best Buy shop-in-shop locations or other customer touchpoints?

I think part of, obviously, our excitement for our Best Buy partnership is the strength of StealthTech. And we're seeing double the rate of attachments in Best Buy shop-in-shop and that continues to build and accelerate. So for us, that's a lot of where consumers go into, look for home audio. So we are there front and center. And as I shared with you in the last quarter, for next year and beyond, we will continue to expand our partnership with Best Buy and play a very strong role in the home audio market, with what we see as the number one product for every family in America to be able to have access to.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Nelson for any final comments.

Thank you to all of the Lovesac family and all of our associates, partners and investors who continue to support the company, and we appreciate it. Look forward to speaking with you next time.

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