Greetings and welcome to The Lovesac Third 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, Ms. 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. I will start by reviewing the highlights of our third 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 have 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. During the third quarter, the industry backdrop remained challenging. Given the significant inflationary pressures that U.S. consumer is facing we observed that the furniture category overall is down off late in the mid-teens percent wise versus last year. Despite this operating environment, we again delivered strong results against tough comparisons from a record set in Q3 last year. And remember, our performance represents a real time pulse on demand Sactionals, Saks, and StealthTech products almost always ship out just days from order placement via FedEx or common carrier, as opposed to long unwinding backlogs that sometimes bolster other home furnishing competitors' sales. With more than two ten physical locations, mostly in shopping malls, we are currently in the midst of our largest quarter from a sales and profitability and cash flow perspective. We are projecting to end this fiscal year with over 75 million in total liquidity, which includes cash, cash equivalents, and availability under our line of credit. We have a strong debt free balance sheet that is fit to whether any further macro disruptions that may arise into next year. Our continued outperformance and market share gains are a testament to our differentiated business model, including our value proposition and patented innovation,…

Thank you, Shawn, and good morning, everyone. Our quarter three results marked a record third quarter for our company and our demand growth of 22% outpaced our revenue growth, which is in sharp contrast to the category decline that Shawn shared. Our performance was significantly stronger than any of our key competitors' results, which were primarily driven by back order delayed shipments from previous quarters. We are extremely proud of the outstanding performance and using fiscal 2020 as our baseline, our three year comp growth stats is 146%. This demonstrates the significant market share gains we have experienced over the last three years and more. And we estimate that no other brands with a significant market share in the category has kept pace with our growth. Through that same time period, our position in the market has grown from a challenger to being a market share leader in the categories we compete in. The ability to be the market share leader across our categories is testament to our focus on inventing and designing a product platform with products that will best deliver value for our consumer and creating an experience and ecosystem around that platform. Our evergreen inventory position and operational focus has driven our customer satisfaction scores to record levels as our brand experience continues to delight our customers, which in-turn accelerates our flywheel of demand with word-of-mouth being our number one awareness driver. We are uniquely positioned to continue to profitably take share even through the current market dynamics. I will now provide key highlights on our strategic initiatives. Starting with one, products and innovation. We continue to be pleased with the progress with StealthTech, which was a game changer for us and the category from an innovation standpoint. The brand continues to gain share and we believe…

Thank you, Mary, and good morning, everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the remainder of fiscal 2023. We are pleased with our third quarter results. Net sales increased 18.1 million or 15.5% to 134.8 million in the third quarter of fiscal 2023 with the year-over-year increase driven by growth in the retail and other channels. Showroom net sales increased 13.3 million or 19% to $83 million in the third quarter of fiscal 2023. This increase was due in large part to a comparable net sales increase of 10.4 million or 18.5% to 66.4 million in the third quarter of fiscal 2023, compared to 56.1 million in the prior year period related to higher point of sales transactions, driven by strong promotional campaigns and the addition of 41 new showrooms and 13 new kiosks. As a reminder, point of sale transactions represents orders placed through our showrooms, which does not always reflect a point at which control transfers to the customer and [when] [ph] net sales are recorded. Other net sales, which include pop up shop, shop-in-shop and barter inventory transactions increased 7.1 million or 61.8% to 18.5 million in the third quarter of fiscal 2023 as compared to 11.4 million in the prior year period. The increase was driven largely by continued planned open box returned inventory transactions with Icon, our inventory barter partner, the reintroduction of Costco physical top of shops that were put on hold during fiscal 2021 because of COVID shutdowns and the addition of 17 new Best Buy shop-in-shops. We now operate 22 Best Buy shop-in-shops locations. As a reminder, our inventory transactions with Icon are part of our CTC, DFL, and ESG initiatives. We repurpose returned open box inventory in exchange for…

Thank you. [Operator Instructions] Our first question comes from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question.

Good morning and thanks for taking my questions. So, you talked about the category being down, and it seems like the Q4 guide is a little bit softer versus your prior outlook. Is there anything you can maybe share about, sort of consumer sentiment today? Are you seeing any customers sort of deferring a purchase decision? And then maybe more broadly, how are you thinking about the impact of higher interest rates and sort of a tight housing market on demand? And then I have a quick follow-up.

Good morning, Maria. Thank you for your question. So, I think, obviously, as we see for – as you talked about the category down, that started earlier this year. We've continued to outperform the category. And actually, based on our latest numbers, we're seeing a wider gap to our performance. And as you can see, as you look at, [so Donna shared] [ph], we're tracking at the higher-end of our guidance and have obviously factored in some variability. In terms of what we're seeing for consumer shifts or some changes, I think as everybody has reported, we're seeing more promotions in the category. So, we've responded to that, which is all [planned in] [ph], but they are much more benign to the pre-pandemic levels. Demand is a bit choppier. So, for us, as an example, Black Friday was super strong. And then Saturday and Sunday is okay, and then Cyber Monday was really strong. As we see the, you know shoppers are holding out thinking that there'll be stronger promotions from that side. So, the shape and the timing of fourth quarter, we've planned for, we feel very good based on where we're tracking at the high-end of our guidance. We have record ‘pipelines’. We're just looking at the teams even this morning. It's so strong. And with the strong promotion of [indiscernible], you know the marketing investments that Shawn talked about, we feel very good to deliver, as Donna shared, with our guidance. I think in terms of any other shift within consumers, which is the second part of your question. In general, we're seeing obviously a little bit of a mix shift, but that truly is up against the channel mix shift as a bit of movement back to touch points versus last year, but as you know, last year was really driven in quarter three by some broader post-COVID dynamics. Within the consumer purchasing, the mid-to-large purchase sizes, and obviously, also StealthTech, we see that being very strong. A little bit of shift to financing, but really nothing around sensitivity to discount. On the lower-end, we are seeing some trends with smaller purchases that they are having a high conversion when on promotion. So, very similar, Maria, to obviously what everyone else is seeing, but no other shifts we see. But obviously, the good news is our core consumer is very affluent, and we have a great plan that we will continue to foster through for quarter four.

Got it. That's very helpful. And then, Mary, you touched on this a little bit, but maybe can you expand a little bit on the extent of your promotional efforts this holiday season relative to competitors and maybe the broader retail environment, or even prior holiday periods?

Yes. I mean, I think for us, as we look at the promotions that we've planned, we have a little bit more frequency and a little bit more depth through the Black Friday and the Cyber Monday, but less deep than we're seeing with other competitors because frankly, our brand strength is so good. And as we think about just the growth that we've had and the brand stickiness, we don't need to extend that. And I think, as Shawn talked about, I think [it’s 38%] [ph] of our most recent customers, they don't even cross shop with anybody. They just want to come to us and they come and build out, obviously, their quotes with us. And then as we think about our marketing investments that Shawn shared, we've got great alignment around the key big weeks through the rest of this year. Very efficient and effective, and I think I shared a couple of with you around SMS as an example, but just others. And the team are very agile and they keep on adjusting, so we actually feel very good about what is planned through the rest of the quarter.

Great. Thanks a lot. And good luck with the holiday season.

Yes. thank you, Maria.

Thank you. Our next question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

Great. So, first off, congrats on the quarter. Second, for my first question, Shawn, you've been very thoughtful and very experienced when it comes to supply chain. And I'm very interested right now in the role of China not just for Lovesac, but for the industry, and I'd love to hear your thoughts on what you're thinking about for the next five years on how China will play a role in your supply chain? How rest of world will play a role? And how much progress do you intend to make on shortening the distance between where your product is made and where your product is consumed?

Yes, Tom, thanks for the question. We, as you know, have been very vigilant in trying to diversify our supply chain. It's been a strength of the company. It continues to underpin our success in different ways and manifest itself in different ways as the world evolves. At this moment, China's, you know so, let's rewind three years ago, maybe China was nearly 100% of our – represented 100% of our overseas production and probably 90% of our overall production. And today, that's down somewhere below 30%, and we have redundancy for almost all the products that we make there. So, we make like-for-like Sactionals in Vietnam, in Indonesia, sorry, in – yes, and Malaysia. And our point of view is that the world and the global supply chains continue to become more fructuous, and we want to have more diversity. So, we're pursuing, again, redundant supply chain manufacturing opportunities in North America, in Mexico, actively. And we're focused on the longer-term of being more vertical, even if not owned, and more sustainable, you know manufacturing stuff, using more sustainable inputs, closer to the consumer, delivering over shorter distances, lower carbon footprint with, of course, the caveat that we believe that point of view can be done less expensively and bring our gross margins up over time. I mean, that – we not only believe that, but we have reason to believe that that will be the outcome. So, we view all of these as just a step to that end. All these moves that we're making as a step in that direction. And we think that as much as China has been a great supply chain for – in many realms, we're all watching the same news. We all believe that there can be risk there. And we've seen…

Excellent. And then for my follow-up question, you talked about the opportunity for gross margin improvement next fiscal year on better freight. So, at a high level, how should we think about your planned use of the higher gross profits to the extent that you may engage in more promotional activity or more marketing, or to the extent you let more flow through to the bottom line? Just – can you talk about it at a high level?

Good morning. So, yes. So yes, we are planning to see some gross margin expansion out of lower freight rates next year. There's a couple of things that we're looking at, although we're not going to guide to next year where we – there is – a part of it is going to be used to mitigate some of the higher outbound freight costs that everybody is experiencing through the FedEx and the [UPS] [ph] of the world. We are projecting to see some higher warehousing costs just as relative to the increase in labor cost at our [three PL] [ph], so a piece of that will be used to mitigate that. And we will be investing a portion back into the business next year as we continue to say that we still have some foundational infrastructure investments we need. And we do anticipate a portion of that gross margin expansion to flow through to the bottom line, but we're going to navigate that. You know us. We're extremely agile, and we're going to navigate that and allow as much as we think we can flow to the bottom line next year as we navigate through the year. So, we have – there is use of that gross margin expansion, but we will continue to operate the way that we always are and very fiscally responsible and agile, and we believe we have a lot of opportunity next year.

Great. Thanks for taking my questions.

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

This is Andrew [indiscernible] on for Brian Nagel. I just want to start off by congratulating you guys on another great quarter. My first question is in regards to just the sales in the period. On the Q2 call, you discussed the potential [pull-forward] [ph] for about $9.5 million in sales. Can you discuss any other drivers to the Q3 sales slowdown? And then my follow-up question will just be a follow-up to the first question on the outlook for the balance of the year. Can you discuss some of the drivers, the expected slowdowns and any dynamics that may have changed since you laid out prior guidance for low 20% growth for Q4? Thank you.

Hi, good morning Andrew, it's Mary. Thank you for your question. I'll take the first part. So, in terms of sales, as you referenced, we have discussed last quarter, there was [about 9.5 million] [ph] of revenue that was pulled forward, some was increased throughput and some was the open-box inventory that we talked about. And then obviously, as I said in my remarks for quarter three, whilst our revenue was up 15.5%, if you factored in for that pull-forward, our revenue really is at 24%. And slightly ahead of, obviously, the strength that we saw in our total demand for the quarter at 22%, which we see as being the strongest growth in revenue, compared to anyone else that has recently reported from that side. So, you see that continuation in performance growth, and then obviously, one of the key benefits for us is our omnichannel model. So, we really are able to respond to where our customers want to go for sales. So, whether it be more in person or whether it be online, we're agnostic to where the sales will be from that side. And then I think, Donna, do you want to talk through on quarter four in terms of the guidance and a bit of that profile?

Yes. Sure. So, the guidance that we're providing for Q4 as far as being high single digits, mid-teens range, is that growth is coming out of the comp showroom sales, non-comp showroom sales. We're adding Costco pop-up shops, which we didn't have this time last year. We're adding the Costco roadshow perform at the – that comp show performance is coming through stronger than we've seen in prior periods, and we do have the addition of the additional Best Buy shop-in-shops that we did not have this year. As far as the decrease in the guidance that we provided for the year on our second quarter earnings call, we are experienced, but at a lot lesser impact you see other retailers are. So, again, what Mary said, what Shawn had said, we are very, very happy with the performance of our net sales volume, our associates and – still coming through. Even if you use the midrange of the high-single-digits to mid-teens, that indicates approximately a 26% year-over-year growth rate, which is very, very strong for our category this year.

Thank you so much.

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

Hi guys. Good morning. Just really quickly on the fourth quarter trends that you mentioned. I think you said, you're tracking toward the higher-end of the fourth quarter guidance on the top line. So, just wanted to confirm that that's what we've seen specifically quarter-to-date in terms of year-over-year growth? And then just any spikes or trends within the Black Friday, Cyber Monday period to call out?

Hey, good morning Matt. Thank you for the question. So yes, as we shared, we are tracking at the high-end of the range and have seen really good strength as we think about, for example, Black Friday that you’ve asked about, very strong. The weekend was a little bit softer, but still growing, and then Cyber Monday was strong. And actually, what's really been good is the, kind of the days following Cyber Monday have also been really strong. So, I think similar to what you've heard from others, I think comparing to last year is not a great comparison because everybody bought earlier because they were concerned about inventory shortages, so they're just – the whole shape of the quarter was a little bit different, and we're seeing strengthening demand that just keeps on coming. And I think on top of promotional cadence, strength that we have, some softer comparisons in December, for example, and even a bit into January, plus very strong marketing campaigns, we feel good for where we're going to land and obviously continue to lead the category in our performance map.

Okay. Very helpful, Mary. And then I guess [takes a] [ph] follow-up, which is, why have a, sort of on the low-end, a mid-single-digit guide for the top line for the quarter, just given that you've tracked towards the mid-teens quarter-to-date and then comparisons seem to get easier as we move through the quarter, just given the cadence that you mentioned, I guess? Just curious like, sort of why, what would drive you guys down towards that lower-end of the guide or does that assume some, sort of significant macro deterioration? What are the assumptions have been in the lower-end of the guide? That would be helpful.

It's the conservatism, right. I think everybody knows us to be extremely conservative. But – and that's why we called out that although we are providing that range, we are trending quarter-to-date even through yesterday, absolutely to the higher range. But you never know what could happen macro-wise, right. So, we thought it'd be very prudent to build a range in there, although, again, we're trending to the higher side. And you know us always build some type of conservatism into our modeling, and that's why we elected to provide that range. There's no indicators to us right now that we should be coming in at that lower-end. And again, our performance is extremely strong and it continues to be every single day as we monitor our demand volume. So, again, it's purely baked out of conservatism and some variability as to what macro impacts could happen as we finish up the fourth quarter. That's the only reason we provided that low end of the guidance.

Okay, very helpful. Thanks for that Donna. I’ll jump back in queue.

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

Hi guys. Thanks very much for taking my question. I wanted to ask about StealthTech. That was a very impressive number you gave about the initial purchase price being about 3x what you see for a typical first time Sactional purchase. Can you give us a little bit more insight as to how those transactions are stacking up? Are they typically more pieces than you would see bought in initial Sactional purchase or more premium covers? And then just as you're, kind of looking at what you've seen in the last couple of months and the overall category slowing down, I'm curious if you've seen any sort of resistance to StealthTech as well, or if that's been more immune given the high price points?

Great. Thank you, Alex, and a good question. You know our passion for StealthTech, and obviously, you heard earlier just the continued momentum. So, I think in terms of your first question around the average order value, and obviously, being so much higher to transactions without StealthTech. We see that both in terms of – consumers just love the experience. I mean, you know. You've been to a showroom. You've sat and experienced and heard of StealthTech. It's amazing. So, the showrooms are doing an incredible job of demoing it, and that's one of the great successes of our business model, and consumers are loving and buying into it. And actually, as I shared, we continue to see StealthTech build month-over-month and are very happy to see the performance. And even, for example, Best Buy, we are significantly advantaged with StealthTech performance there, more than double what we see for the rest of the fleet. So, it just shows us the potential as well from that side. In terms of what else are we seeing in the dynamics of the purchase, we're seeing big setup purchases. Not really seeing any shift in terms of what people are buying around covers. We are seeing a bit of a trend up in terms of the more premium sale. As you know, Lovesoft, which was contrary to where we were early in the year where we saw a bit more of a shift to standard. So, everything really continues to show us with our affluent customer base, they come to Lovesac to buy our product because they love it. Not generally, 4 in 10 are not even cross-shopping because they just buy into the Designed for Life product platform and the ability to flex and change to your life. So, we continue to feel very good about how StealthTech will build, and it's only a year. We should have actually sung happy birthday to it. It's a year for the build, a lot of campaigns success, and we will continue to build, as Shawn always talks about, for many years, in what we see as a market-leading innovation.

Great. That’s really helpful. Thank you very much.

My pleasure. Thank you, Alex.

Thank you. Our final question this morning comes from the line of Lamont Williams with Stifel. Please proceed with your question.

Hi, good morning. Just, kind of in general, how are you thinking about the promotional cadence that you're going to basically employ going forward as we've seen the promotional landscape get more intense with inventory levels coming back? How do you anticipate offering promotions? You looked like you picked up a little bit in terms of the level of discount, but how do you, kind of view that going forward at a high level? And secondly, how are you thinking about, kind of the number of distribution openings for next fiscal year? Thank you.

Yes, Lamont. I'll take the first question on promo cadence, and then we can talk a bit about your question for next year. So, obviously, as everybody has reported, there has been an uptick in promotions, but obviously, that was up against last year where it was incredibly benign. And even for this year, it is very benign to pre-pandemic levels, so we feel good in terms of what we have seen. And as we have been testing with the [teams agility], sometimes our customers are responding as much to financing as they are to [depths] [ph] of promotions. So, everything that we're seeing is that we won't need to be more aggressive with everything we know today. We've got strong promotional campaigns, but also coupled with the marketing campaigns that we are driving, I talked about SMS as an example, just a great conversion tactic that really enables us to be top of mind for our customers. So, it plans in. We've planned it into our guidance, and obviously feel good to adjust if we need to, but everything we see today, we think that we have the right plan to close out the quarter and have a very strong year. I don't know, Donna, if you want to talk about FY 2024?

As far as promotional cadence, we're not planning to be any more promotional or have any more promotional activity, any specific promotional activity. And what we're looking at next year, again, we're not providing any type of formal guidance for next year. I can just tell you on the plans that we're building internally, we have a lot of opportunity next year, which will not require us to be any more promotional between the add-on of additional showrooms, the expansion of Best Buy shop-in-shops, the expansion of Costco in-person, pop-up shops, and some other really exciting things we have next – going on next year that I believe Shawn briefly alluded to, but not really in his script earlier today. So, a lot of opportunity next year, which will – we don't plan to have to be any more promotional to still drive some very strong top line growth next year.

Okay, great. Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments.

Yes. Just want to say thank you so much to the amazing Lovesac team that has built a company, putting up some of the highest growth in the category for the year as we round out the year in this critical fourth quarter. I appreciate all of the hard work and effort. I appreciate our investors for continuing to support us. And looking forward to a bright New Year as we get through the fourth quarter.

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