Greetings. Welcome to The Lovesac's Fourth Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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, our 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 to review our record results for fiscal 2023 and to discuss our outlook and plans for fiscal year 2024, which is already underway. I will begin by sharing a high-level overview of both. Then Mary Fox, our President and COO will discuss our key growth initiatives for fiscal 2024. Finally, Donna Dellomo, our CFO, will review our financial results and a few other items related to our outlook in more detail. Starting with our fourth quarter and fiscal 2023 performance. We put up a record results for the fourth quarter and for the full year building on our long track record of outperforming the industry and driving share gains. For the quarter, we delivered sales growth of 21.7% and adjusted EBITDA growth of 51% both ahead of the outlook we shared on our Q3 call. For the year, we generated a total annual net sales increase of 30.8% to $651.5 million. Total, omnicomp sales growth of 21.9% and an adjusted EBITDA earnings increase of 8.7% to $60.4 million. We ended the year with total liquidity of $79.5 million, which includes cash of $43.5 million and availability on our line of credit, notably, our strong debt free balance sheet positions us well to navigate a difficult macro backdrop. Put perspective on the significance of these results, fiscal 2023 was a challenging year for the furniture industry, given the macro pressures facing the consumer. As of year-end, our data sources showed the home category overall to be down 16% versus the prior year. In contrast, our full year sales increased 30.8% indicating meaningful market share gains. More importantly, these industry leading sales results were achieved by converting real-time demand as we typically ship just days after an order is placed.…

Thank you, Shawn, and good morning, everyone. We are pleased with our strong end to the fiscal year as we delivered record results in fiscal '23. Even in a difficult operating environment. As Shawn shared, our net sales growth in fiscal '23 was 30.8%. And using fiscal '29 as a baseline, our 4-year demand comp stack is up 293%. Every year, then we have delivered profitable growth with a 4-year net sales CAGR of 40.8%. And a 4-year adjusted EBITDA CAGR of 105.5%. This consistent financial outperformance every year is ahead of any other brand in our category, underpinned by our customer and product centric focus, and our unique omni-channel business model with an infinity flywheel unlike anyone else. A few highlights of our unique infinity flywheel include: firstly, we compete in a large addressable market of over $46 billion. With 48% of households having an annual income of over $75,000 per year, we have the number one best selling couch in America. We continue to take market share every year, and yet we barely scratched the surface of this huge and fragmented category. Customers love our Designed For Life brand and product platform. And they tell their friends and family this which has resulted in word of mouth becoming our number one awareness driver. 38% of our customers report that they don't even cross shop with any other brand. That can highlight our brand health is stronger than ever, with innovation that is changing the landscape of the home. This is exemplified by our marketing ROI, which continued to be very strong. In addition, the innovation of self Tech has helped us to continue to have incredibly efficient marketing with a customer lifetime value, customer acquisition cost ratio of over five that is unsurpassed. This in turn enables us…

Thank you, Mary and good morning, everyone. I will begin my remarks with a review of our fourth quarter results and then discuss our outlook for fiscal 2024. Net sales increased $42.6 million or 21.7% to $238.8 million in the fourth quarter of fiscal 2023. With the year-over-year increase driven by growth in all channels. This increase was stronger than what we had originally projected for the quarter, primarily driven by higher than planned internet net sales. Showroom net sales increased $24.1 million or 20.5% to $141.9 million in the fourth quarter of fiscal 2023 as compared to $117.8 million in the prior year period. The increase in showroom net sales was driven by an increase of 10.2% in comparable showroom sales related to strong holiday promotional campaigns, and the net addition of 44 new showrooms and five kiosks compared to the prior year period. As a reminder point-of-sale transactions that we reflect in our comparable sales metrics, represents 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 increased $60 million, or 26.5% to $76.4 million in the fourth quarter of fiscal 2023 as compared to $60.4 million in the prior year period, driven by a strong holiday promotional campaign. Other net sales which includes pop-up-shops, shop-in-shop and barter inventory transactions increased $2.4 million, or 13.3% to $20.5 million in the fourth quarter of fiscal 2023 as compared to $18.1 million in the prior year period. The increase was largely driven by continued planned open box returned inventory transactions with icon our inventory border partner. We hosted an additional 33 New Costco in-store pop up shops and we continue to operate 22 Best Buy shop-in-shops. As a reminder, our inventory transactions…

[Operator Instructions] Our first question is from Brian Nagel with Oppenheimer. Please proceed.

Hi. Good morning. Nice quarter, congratulations.

Thank you.

So the question I have -- and I will kind of merge two questions together. First off, with regard to gross margins, and Shawn and Donna, you both mentioned, I guess, improving dynamics as the year progresses, and particularly in Q2. The question I have is could you help us better size how much that the kind of magnitude of that headwind to tailwind dynamic for Lovesac? And then philosophically, I know we've discussed it in the past, but as these costs begin to moderate, is there any -- will there be some type of reinvestment in that? Or would you allow to kind of renormalize? And then the second question I have, just on sales, and you mentioned a number of times, just the overall more challenging backdrop. If I look at the growth rates, recognizing there's some noise here. But the growth rates in Q4 were better than what they were in Q3. Did something from a macro perspective ease up or improve at all for you?

Can I have the speakers please check to see if there lines are muted.

No, we can't hear. One minute.

Brian, it's Mary. I think Donna is having an issue with her phone. So apologies for that delay. So let me take the second question while Donna get back on. So in terms of your point in terms of sales for Q4, obviously, we were thrilled to see the improvements. When we talked to you at the beginning of December, at that point, we were tracking -- I think we shared with you the high-end of our guidance. December and January were stronger than we had expected. And in particular, it's actually driven by our e-commerce business that I think Donna has called out. So with that -- plus also we saw a good uptick. We had a New Year's Eve flash sale and a couple of other promotional cadences [ph], which really did deliver the outperformance that we saw. So very happy to see the performance kind of translate through to that quarter 4 results that you saw. And I think particularly like e-commerce, we outperformed the industry by over 4,600 basis points. We've just relaunched our configurator for e-commerce with an amazing digital experience. We are seeing conversion up, traffic up. So just all of the fundamentals as well as everything else that we saw in the business in our touchpoints, et cetera, really drove great performance. I think then in terms of the question that you had in terms of on gross margin. So in Q2 onwards, we do see, I think, just over 240 basis points improvement from inbound freight. And then, Donna, I think you can touch on. We have a little bit of a headwind, Brian, with outbound freight, but Donna, maybe I will hand it you for that.

Yes. Hopefully. Brian, can you hear me?

Yes, I can hear you fine.

Okay. Good. I don't know. Technology. Well, good morning. So, yes, so as Mary mentioned, we do see -- we do plan in all the guidance that we provided earlier about 340 basis point leverage or tailwind on inbound freight costs. But there's about 100 basis points of headwind that's netting up against that, that related to increase in outbound and warehousing, which would be everything around warehousing labor just operating costs in total. As I said, we are going to use this year specifically that net gain of about 240 basis points is going to help mitigate some of the investments in our future -- continued investments in our future that you see in some of the deleverage around SG&A. So this year, it's helping mitigate some of those investments. And we would hope as we go into future years out as we continue to grow and get the continued deleverage, which we will probably see a little bit more or the leverage, I should say, on inbound freight costs we will see going into fiscal '25 as well. But right now, there's about 340 basis points of leveraging related to inbound freight in the guidance that we've provided.

Great. That’s all very helpful. I appreciate it. Thank you.

Our next question is from Thomas Forte with D.A. Davidson. Please proceed.

Great. Thanks. Shawn, Mary, Donna, Jack, a great quarter, great year. So for my one question, Shawn, I'm going to use my [indiscernible] question for your current thoughts on international expansion.

Yes. We are very excited by the prospects of international expansion. We hold our patents and trademarks all over the world, and we intend to get there. But likely not this year, we are very focused on the opportunity domestically. We've done a fair amount of research to understand the opportunity internationally, understand the size of the prize. And frankly, we have barely scratched the surface in terms of what we think we can do against the total available market just in the United States just in the categories we compete in now, and that's definitely the best use of investment dollars in the near-term. And so we will continue to focus on the U.S. We will continue to gain market share, we believe. And -- but we do look forward to international expansion sometime in the future.

Great. Thank you.

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

Great. Good morning and congrats on strong results. So it seems like your guidance factors in some level of conservatism. Are you noticing any changes in consumer trends or purchase behavior sort of over the past few months as inflation has been decelerating, but the broader sort of macro environment remains highly uncertain? And maybe related to that, given that your products carry a higher price point, how has your Designed For Life philosophy been resonating with consumers in this macro environment?

Okay. Good morning, Maria. Hi and thank you for your questions. I will take the first one and then I think Shawn will talk a bit more around Designed For Life. So I think as we've shared before, we do see varying shifts in how our customers are transacting, how they're experiencing our brands. But actually, of late, we are seeing more stabilization. So the high-end continues to be strong. AOV has been strong. At the low end, we sometimes see a little bit of shift in terms of configuration size and so forth. I would say the one clear trend that we are seeing is a little bit more of an uptick on Lovesac credit card, why we factored in fully for the year. So you know that. And then I think -- our customer traffic continues to be very strong. And I think we saw that in quarter 4. And I think that just bodes well to the strength of our flywheel because whether it be 38% of our customers aren't even cross-shopping with anyone, it just goes back to the strength of the brand continuing. So as you called out, we've baked in the conservatism for this year, but as we have a strong line of sight for the year from the very exciting innovation that we talked about that's launching halfway through this year. That really will cause us to widen significantly our aperture to gain even more share through to the touchpoint expansions that continue to over perform pro forma with amazing economics and then the marketing machine that we have around just the share gains of customer lifetime value with incredible CAC ratio, performances that you just don't see anywhere else. So all baked in, but obviously with pragmatism to the macros and the team's agility, will continue to reflect in how we think about everything. And then I think, Shawn, do you want to answer the first -- the second question Maria had as well?

Yes. I think that in this environment, we feel really confident based on what we are seeing. Clearly, we are already into the first quarter of our new year. And we are all watching the same news and we recognize that the consumer is under pressure in many respects. But our Designed For Life products and business model, we think, has resilience that others don't. So while we are not seeing the 50% and 60% kind of growth we saw for a few years past. We are seeing stronger growth in the rest of the category. This has been a trend in the entire time, before the pandemic, through the pandemic, post-pandemic, and here we are today. And we feel really good about that. And I think that many onlookers question why that is. And I think the biggest, most glaring answer to that is our product. We have a very different product and the rest of the category. It's Designed For Life, built to last a lifetime, designed to evolve. This resonates with people who have a brain, who can do the math and understand that they are investing in something that can be with them the rest of their lives, and we are very proud of that. With that said, the evidence, I think is apparent not just in our results -- financial results, but we’ve experienced recently the highest rate of customer satisfaction we've seen. And this is through all of this choppiness and through all of the supply chain choppiness and here we are on the other side of that. And I think it shows our investments that we've made in the infrastructure of the business and our team bearing fruit. And that will, again, further strengthen the flywheel of people spreading the word of mouth about the Lovesac brand, about our Designed For Life products. And we intend to continue to take massive market share, particularly in this environment when others are beleaguered [ph] in various ways. And so we feel really confident about our product, about our brand, the way that we've wrapped it around the Designed For Life ethos, what, of course, it means for the environment and everything that we stand for.

Great. Thank you so much.

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

Hey, guys. Good morning and nice job on the quarter. Just wanted to see if you could provide any commentary on growth by channel that's embedded in the fiscal '24 outlook. Just for example, in terms of showroom comps versus location expansion that's embedded in the outlook? And then curious if you're going to grow across online and the other channels as well? And then how are you factoring in StealthTech attach rates? I noticed the data point you shared suggest that StealthTech rates are probably in the high teens plus this last year. There's probably maybe some improvement there, but just curious if you're factoring that into the fiscal '24 outlook.

Yes. Good morning, Matt and thank you for your questions. I will take the StealthTech one and then Donna can talk a little bit about the mix for the year. So, yes, obviously, StealthTech, we've had in market for just over a year. And whilst we always are very excited about the performance I shared earlier in terms of the growth and particularly where we see the long-term runway and all of the success that we've had, we have built in for continued growth, both in terms of just overall AUV in the business as well as also attracting new customers because one of the great advantages we saw last year, and I think in quarter 4 our customer traffic was up nearly 18%. It was really driven, as new customers came in to drive to test this new technology, this new experience and really to hear and feel it. So we're continuing to plan for that to grow. I think I shared earlier that we expect it to be over $100 million as the brand continues to build out in our flywheel. And I think one of the great successes is the marketing strength. And if you look at the customer acquisition costs, just the ratio just continues to improve, it just really does enable us to be able to continue to share the message about what we see as the best home audio system in the market with an amazing experience coupled with our Sactionals. And then Donna, I think do you want to touch on the channel mix for the year?

Yes. So for the channel mix, we are projecting both Internet and showrooms to increase year-over-year relative to all the things we discussed to showrooms, product innovation. The one channel, which I specifically called out is the other channel, which right now, we are not projecting because of the returned box inventory transactions. That was about $22 million that we are not -- today has not been built into being repeated in any of our guidance. So that's the one channel just by removing the inventory to those barter inventory transactions that in our current projections is not projected to increase. But the other -- the Costco and the Best Buy within the other channel is -- in total, the other channel is not projecting to increase just because of the extraction of those inventory -- barter inventory transactions. So showroom increasing, Internet increasing. Obviously, we look at it all as omni-channel. So, it's increasing in total and it's increasing separately as well. And the other channels just as a highlight, because of the return boxed inventory transactions not currently being reprojected to happen again [indiscernible] Q2 through Q4, that is coming down slightly. But Costco and Best Buy increasing year-over-year within that channel. Hopefully, that helps.

Very helpful. I will get back in queue. Thanks, guys.

Okay.

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

Hey, guys. Thanks for taking my question. I wanted to ask about the increasing lifetime value to customer acquisition cost ratios, which is really impressive and counterintuitive, I think, given everything going on with the economy and high inflation and interest rates. So curious what's been driving that? Has it been more about more efficient customer acquisition? Or is it more as you add more product that you're seeing more of an increase in the lifetime value over time? Or maybe you're seeing it from both sides of it. But any color you can give us there would be very helpful. Thanks.

Yes, great. Thank you, Alex. And, yes, equally, we are very thrilled to see results that we just don't see from anyone else. And I think what's really also exciting is that you get full payback just from the first transaction or more. And we only use, I think, as we talk, the first fiscal year of purchases. And we know they come back to us for decades. And I think as I shared our repeat business is actually up to 38% of our transactions, so we are getting much more efficient in terms of customer acquisition. The team do a great job, whether it be hyper local marketing through to just the optimization of search along the year and even just sharing out the awareness of the brand all the way through to acquisition. I think the second piece that we really have seen a benefit is as we advance into other categories, expand our total addressable market. As you know, StealthTech is part of our effort and the creative that we do alongside Sactional. Just think of that, you literally get the advertising for free. So as we continue in our flywheel expansion, going into new categories over time and everything that we've shared, you can just start to see even more of the efficiency opportunities that will continue. And the team has done a great job. There's been some inflation, but they continue to optimize, shift and really manage the mix incredibly well. And we are very proud of all of their hard work because we really do see that big industry leading.

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

Yes, 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 Nelson for closing comments.

Yes. We would like to thank all of the amazing Lovesac associates who have made these results come to pass and thank our investors as well for supporting the company, and we are off to another great year at Lovesac.

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