Greetings, welcome to Lovesac's Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please not this conference is being recorded. At this time I’ll turn the conference over to Elizabeth Schnoerr. Ms. Schnoerr, you may now 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 Keith Siegner, 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 financial 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, Liz. Good morning, everyone, and thank you for joining us today. I'll start this call off by reviewing the highlights of our third quarter fiscal 2024, briefly providing an update on our operational accomplishments and finishing up with our outlook. Then Mary Fox, our President and COO, will update you on the progress we made against our strategic initiatives. And finally, Keith Siegner, our CFO who will review our financial results and a few other items related to our outlook in more detail. Turning to the highlights of our results. Not a lot has changed since we spoke with you four weeks ago. Lovesac continues to deliver strong financial results and category outperformance, backed by a very strong balance sheet. For third quarter, we're pleased to confirm top and bottom line results that were in line with the outlook provided on our second quarter call on November 3. The headline is that third quarter net sales grew double-digits in a double-digit negative category. To be clear, the macro backdrop largely remains the same as last month. Lingering macro uncertainty leads to consumer caution and pressure on the furniture category, which we estimate was down mid to high-teens in the third quarter. However, our playbook also remains largely unchanged and continues to deliver. Our disruptive, design for life platforms, impactful product innovation, compelling marketing, and highly productive omni-channel footprint continue to distinguish our unique brand and engender customer love and loyalty. More specifically, for the third quarter, total net sales were $154 million, up 14.3% versus the prior year period and 32% on a two-year basis. Omni-channel comparable net sales growth was 2% for the quarter, a key metric for how we evaluate and manage our unique omni-channel business. We delivered gross margin expansion and substantial abatement in SG&A…

Thank you, Shawn, and good morning everyone. As Shawn discussed, with sales growth of 14.3% our quarter three results again reflected industry-leading growth driven by our unique omni-channel business model. Importantly, on a four-year basis, our sales dropped 196% from pre-pandemic levels. And our adjusted EBITDA margin has increased 880 basis points over the same time period. Category outperformance has continued this quarter with strength and demand versus last year during Cyber 5, from Black Friday through Cyber Monday. And we are very pleased with our early results. Some highlights from Cyber 5 include having our two largest sales days and the largest week in our history. We believe this peak in sales that is unique to our business within our category is due in part to our investment in building a brand that is unmatched in the furniture category, coupled with delivery to customers' homes in just a few days. Our clear strategy for growth and the team's consistent execution against our growth strategies allows us to continue to fuel our flywheel and drive operational excellence across the business. I will now share the highlights of our operational progress in quarter three. Firstly, starting with product innovation. During quarter three, we expanded distribution of our newly launched Angled Side, which is now available across our showroom base, as well as our e-comm platform. And we're very happy with the impact and feedback. Angled Side performance is even above our original expectations, which were ambitious, emphasizing how it is a meaningful driver of our overall continued growth and category out performance. As I shared before, we partnered with Architectural Digest to launch Angled Side to the consumer and designer world. The event was well attended by influencers, as well as media outlets such as Vogue and Glamour, and of course,…

Thanks, Mary. Let's jump right into a quick review of the third quarter followed by our outlook for the rest of fiscal ‘24. Net sales increased $19.2 million or 14.3% to $154 million in the third quarter of fiscal ‘24, with the year-over-year increase being driven by web and showrooms. This was in line with what we projected for the quarter, driven by our 25th anniversary celebration and the launch of Angled Side. Showroom net sales increased $15.7 million or 18.9% to $98.7 million in the third quarter, as compared to $83 million in the prior year period. The increase in showroom sales was driven by an increase of 2% in omnichannel comparable net sales growth related to higher point of sale transactions with higher promotional discounting than the prior year, as well as the net addition of 41 net new showrooms, compared to the prior year period. You'll notice that beginning this quarter, we've replaced previously provided comparable sales growth metrics with a new metric omnichannel comparable net sales growth. This is the metric most closely aligned with how we evaluate and manage the financial performance of our omnichannel business. It also eliminates noise caused through the inclusion of demand-based metrics in the past, such as orders placed, but that have not been shipped, and should therefore be far more useful for your models. Internet net sales increased $6.7 million or 20.1% to $40 million in the third quarter of fiscal ‘24, as compared to $33.3 million in the prior year period. Other net sales, which include pop-up shop, shop-in shop and open box inventory transactions, decreased $3.1 million or 17.1% to $15.4 million in the third quarter of fiscal ‘24. The decrease was principally due to a lower open box inventory transaction level, only $2.5 million, compared to…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question Today is from the line of Maria Ripps with Canaccord Genuity. Pleased proceed with your questions.

Good morning and thanks for taking my questions. First, recognizing that it's still pretty early and you're not guiding to next year, but maybe can you talk about sort of your current expectations for the category growth and consumer demand next year? And what kind of macro assumptions are embedded in your sort of internal forecast for next year?

Hey, Maria, lovely to hear from you. Thank you for the question. Yes, as obviously we're fully focused on quarter four and this all-important holiday season, we'll share more when we come through to our earnings for quarter four. In terms of our plans for next year, we still anticipate the macro environment will be choppy and the category will be remaining challenging. And we have planned that way. But as we've demonstrated with our results, this year, last year, we continue to obviously really outperform the category, really driving tremendous growth. And I think just so much of that goes back to the fact our brand's strengths continue to just really grow. I think our customers, even just being out in the showroom last week, they just love the brand, they believe in design for life. So we're planned to continue to be pragmatic, prudent in terms of our investments with obviously a deep focus on ROI. But obviously as soon as things turn, we hope it will as the categories start to improve, then we'll be the ones that will be the fastest to be able to chase into that growth. We saw it through COVID, so we feel good. And obviously, that's the advantage of our supply chain.

Yes, just Maria, this is Keith. Just to add to that a little bit, I mean, that's one of the really, really alluring aspects of this business model to me. Because of our approach not being merchandise led, but primarily selling seats and sides and sacks with the various covers, our ability to scale up with upside surprises to the macro is really advantageous. Starting from a position of shipping in less than two weeks, even if we needed to potentially extend that a tiny bit in order to, if it was a really material upside macro surprise, we could do so. So we sort of retain the ability to participate in upside macro surprises in a way that I think is sort of unmatched.

Got it. That's helpful. And then secondly, sort of, you've made a lot of progress on gross margin expansion over the past couple of quarters. Can you maybe talk about your philosophy around preserving that margin versus maybe passing on some of the savings to the consumer to drive volume, especially kind of here in the near-term in this macro environment?

Sure. I'll start off on this one. So, yes, we've been really pleased with this, and there's a whole host of factors behind it that we walked through on the call -- that I walk through on the call earlier. And you can see as we get into fourth quarter with the guidance that we gave, that we're looking for continued gross margin expansion through the fourth quarter. Let's call it heavily rounded half the benefit year-over-year that we saw here in the third quarter. But I think I would say this, we've sort of settled into where we think is a healthy range for us. It -- barring any material shocks, whether it's on inbound freight or outbound freight, you know, there's always potential for some type of systemic shock, but barring anything like that, I think we feel pretty good about this. Then what it becomes for us is a balancing act across pricing, across promotions, across managing all of those inbound and outbound freight cross, plus how we leverage our marketing and our ineffective promotions we offer through the financing through the Lovesac credit card. So put it all together, I think these feel like pretty sustainable and healthy levels for us, again, barring any systemic shock.

Got it. Thank you for the color.

Our next question is from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.

Hi, good morning. Nice quarter. Nice start to the holiday season. Congrats.

Thank you.

Thanks. The first question I want to ask, and I think it's a bit of a follow-up just to that prior gross margin question. You mentioned in the comments, and we've heard this elsewhere too, that it's more promotional out there. It's more of a promotional backdrop. So I guess the question I have with regard to gross margin, as we look at the results we've put up today for Q3 and the guidance for Q4. To what degree your consumers react more favorably to price promotions? And how much of a driver is you to that strategically? How much of a driver of the business has that become?

Yes, look, I think promotions are the very powerful tool in our arsenal, especially given our high growth margins to begin with and the competitive nature of our unique products. We try to be very strategic with them. As you know, we are trying to build a business that’s here forever for 50-years. We are trying to build a generational brand, and a brand that means something. And so we have long leveraged promotions at fairly healthy levels, because in this industry in particular, it's a considered purchase. And so people spend quite a long time researching products, researching competitors, researching our product before they make the decision to purchase. And what we found, especially during the holidays, is while our business spikes, as we all know during Q4, kind of, uniquely in our category. Lovesac and sometimes we look at that, you know, is that a blessing or a curse? But we enjoy the extra business that comes by the exposure being out there in shopping centers during this time of year when there's foot traffic, et cetera. But actually most of those sales as we observe them and as I observe them in the wilds, you know, in -- on the front lines and showrooms come from these considered processes where customers are weighing the value. And then frankly, they leverage the holiday season to push them over the edge and make that purchase finally for themselves. It actually most of the time is not a gift or even related to gifting. It's just kind of a psychological excuse to purchase. And so during this time of year in particular, the way that we manage promotions is really critical, because we have people that have been shopping us, maybe throughout the entire year and finally pulled the trigger and are waiting to see if they might get better, et cetera. So we've exercised, I think, a pretty disciplined hand this season, particularly, because it's maybe the most promotional season it's ever been, at least in recent history, given the industry right now. And so our promotions are lower than what we observe by really any of our competitors. And as you can see by the numbers we are competing very robustly. I think we probably have the strongest growth in the category. And so we think we have that right balance of promotion and that healthy fundamentals in the business for the category right now. And the nice thing is, should things in the category get worse or just continue to languish, we have a strong opportunity to leverage promotions further to drive the business if necessary. But we are not chasing business to chase business. Again, we're trying to balance building a brand that people can love and trust and have consistency, as well as, of course, compete in real time and generate cash and generate profits, returns for investors.

I think Shawn, just maybe Brian to add a little bit more. I mean, what we see as well is consumers, they love the deal and the excitement of that deal, but it doesn't mean about the lowest price. And we've shared with you before nearly 40% of consumers that come into our brand. They don't even crop up with anyone else. So we feel very good in terms of gross margin and of being maintained. We have been doing some selective price increases in places as we've [Technical Difficulty] particularly on our more premium fills, and we've seen great performance from that. So we're constantly adjusting the leases that we have available. And as you can see from our results, gaining huge market shares, outperforming everyone else, then this algorithm has been working for us. We saw from the Goldman Sachs report yesterday, the promotional level was high through quarter three at about 40% and at a similar level through November, and we are substantially lower. So I think, again, just [Technical Difficulty] we do feel good on the gross margins.

That's very helpful. That's very helpful. My follow-up question, a different topic. So I think it was Mary, I think you were talking, your comments is about the -- or highlighting, I guess, the ongoing success of the relationship with Best Buy. So the question I have is, I know you're always here as a company very guarded by your future plans. But should we expect additional newer distribution type partnerships with companies like Best Buy to help basically get the Lovesac products out there?

Yes, no. Before I think, where we always want to be is best-in-class partners where, you know, consumers, it's really on their minds we make [Technical Difficulty] purchase. So Costco's obviously been an incredible partner for us [Technical Difficulty] particularly as we advance. We're home meets tech, there's no one better to partner within Best Buy. We want to be with [Technical Difficulty]. So yes, we've continued to expand the relationship with Best Buy and more to come. And we'll share more, obviously, the end of this year. So we're gaining share. They're very happy in terms of relationships and want to continue to advance it. And then we're always considering, Brian, in terms of any other best-in-class partners that we should be partnering with as you consider the whole ecosystem whether it be showrooms, whether it be Costco, Best Buy, you know, our own e-com platform just where should we be and where are those footsteps that are either always on our minds strategically, but very thoughtful how we do it to ensure that we really try [Technical Difficulty] way that we believe and consumers expect to find us.

Very helpful. Congrats again, happy holidays. Thanks.

Yes, thank you, Brian. Thank you.

The next question is coming from the line of Matt Koranda with ROTH MKM. Please proceed with your questions.

Hey, guys. Good morning. Thanks for taking the questions. Just wanted to spin back to the Black Friday, Cyber Monday commentary, the holiday commentary in general that you had. Just wondering if you could maybe speak to sort of consumer behavior that you're observing. One of the things we've seen sort of quarter-to-date from a number of folks is that consumers seem to be responding to promotions, but then kind of sitting on their hands in between those promotional periods? So I'm just curious if that's the trend that you're seeing? And then any willingness to sort of quantify the Black Friday, Cyber Monday growth that you said, I know you mentioned two record days and a record week, but any further quantification would be appreciated there?

Yes, no. Thank you for the question, Matt. So I think first thing, we were incredibly happy with our performance of Cyber 5, as you mentioned. And from all industry reports, we know we outperformed the category significantly upon a lot of market share. I think in terms of dynamics all of our channels contribute to this strong performance. It really felt like we were back to 2019, strong traffic showrooms, e-commerce growth well into the late evening and it was great being back in the front line. I think we saw consumers coming in that had done their research, were very focused in what they wanted to buy. And as we said with you back in the last call a month ago, we're not seeing anything in terms of trade down or some trade up, particularly in the fill, but also just storage [Technical Difficulty] seats and other things that really drive up AOV. So that continued financing. Trust that's all continued. I think as you talked about, you know, were people waiting for sure? And we saw that across the industry with others coming out with deals even earlier than Halloween. So we were a little bit later. We promised that we gave them the best deal, and we were holding to that, and we did. So you can see a little bit more of that pent-up demand coming, which is obviously the results that we've had. So super happy from obviously everything we've done and we've baked all of that performance into our guidance for this year. We're a third of the way [Technical Difficulty] taught us a lot to come, but it was obviously amazing to see the performance and just really reinforcing the brand's presence and just great job to our teams. I mean managing those record days is our little showroom with incredible productivity. It was great to sit in and they did an amazing job.

Okay, very helpful Mary, and thank you. And then maybe for Keith, just on the gross margin, I want to do a tagger from a different angle. So in the third quarter, you had an upside surprise versus sort of the commentary that you had last call. Just wondering what drove the upside and then for the fourth quarter in terms of product margin are we baking in a deeper headwind in that sub-60 outlook that you talked about just maybe talk about the bridge especially as it pertains to product margin in the fourth quarter? Thank you.

Yes, sure. So starting with the third quarter and where maybe some of that upside came from, I think it gets back to what Mary was just saying, which is we've been seeing some decent premium upgrades, things like Lovesoft, things like storage seats and add-ons along those lines, as well as a little bit more shift towards Sactionals within the mix of product versus where we might have been. The surgical price increases we've been taking on certain of those products has also been beneficial. It's not been broad-based or materially large in terms of price increase, but put the whole package together and that got us a little upside on the quarter. When you're thinking about fourth quarter, really what's happening is we're lapping some of the abatement of the inbound freight costs that we're really pressuring last year. That's why we're seeing less of a year-over-year benefit in the Q4. It's more the easing of the tailwind on a year-over-year basis that's causing that deceleration and expansion. You'll notice that, like we do get a higher absolute gross margin in Q4 than Q3, because we do get some leverage. The higher sales gives us some leverage over things like warehouse costs and so on and so forth. But that's why what I was saying earlier was when we think about holistically where we are in gross margins here in these high-50s, This feels like a good level for a full-year basis for us and barring any systemic shocks. I think the way the business is trending, we feel good here.

Okay, much appreciated and best of luck for holiday guys. Thanks.

Thank you.

Our next question is from the line of Alex Fuhrman with Craig-Hallum Capital. Please Proceed with your questions.

Hey guys, thanks very much for taking my question and congratulations on a really strong year. You know, Mary, I think you mentioned a couple times and Shawn, you know, touched on as well that you set new records for peak days and weeks here during the holiday season so far. You know, you guys have done a really good job historically over the last couple of years of being able to handle those volumes without any, kind of, shipping delays or anything like that. But can you talk about the profitability of those orders on peak days? Are there any incremental costs that you start to incur when you're operating near your peak capacity and, you know, would it be more profitable if there were ways to smooth out demand a little bit more?

Yes, no, thank you, Alex. Great question. And yes, it was phenomenal thing those record performances. I think, you know, the team had planned for everything and as we go through different scenarios and working with our last marketing partners, you know, we'd come to that capacity. So therefore there wasn't any incremental cost, you know, that really came in. So, from that side, certainly, you know, to what we planned for, and the team did a great job smoothing that through. I think the second piece, you know, as we think about [Technical Difficulty] we talked about predict spring, we completed that full rollout, and that's significantly improving the speed of transaction. So when you have five or six customers in a showroom on those peak days or even more, just having that speed and the technology to be able to transact has really, really helped. You know, web performance, you know, customers often choose to then, you know, convert at home and close the sale. So again, just back to the reinforcement of the omni-Chanel model, but nothing that we see in terms of any profitability impact. It was as we planned.

Okay, that's really helpful. Thank you, Mary.

Thank you, Alex. Operator The next question is from Thomas Forte. Please proceed with your question.

Great, thanks. So, Shawn, Mary, and Keith, congrats on the quarter and strong start to the fourth quarter. So two questions, the first one is, can you give your updated thoughts on your ability to generate free cash flow and your thoughts on what you intend to do with the free cash flow as you advance the model?

Absolutely. So and I appreciate the question, thanks. So we're looking to provide more details about this with Q4 earnings when we get into the outlook for next year. But I think little bits and pieces of everything we've been talking about are sort of starting to lay the foundations for how we're going to approach this on a go-forward basis, which is as we transition into generating more substantial free cash flow off of seats and sides and sacks, it's how do we appropriately balance the reinvestment in the future sales growth drivers with other options for that cash flow. So we fully anticipate ending this year having been in a cash generative position. New systems and other tools and optimization programs are being put in place all the time. We are going to balance that, as Shawn has said, as Mary has said, and I have said, against those future sales drivers. Our goal is to translate more of the top line growth to bottom line growth going forward and that should create more cash flow out of the business, which we can use strategically along those balance lines I was just talking about.

Great. Thanks, Keith. And then you've pretty consistently generated a lot of market share gains. Shawn, you've talked in the past about your ability to consistently outperform the market at high-teens, perhaps low-20 percentage point rate. I wanted to talk about the source of the market share. Do you feel like you're getting market share from the same players or do you think it's changed over time?

Yes, that's a great question. It's hard for us to know for sure, but our observation from the category, and we try very hard to stay abreast of every player who sells couches. You know, that's our core business. And therefore, any firm that sells couches, we consider a competitor. And we track them all. I think that, I think there's, kind of, in our world, there are two main buckets of competition. And remember, of course, we are operating at a certain price point, but this brand, Lovesac stretches across, I think fairly broad demographics, because we can sell to the very high-end customer, who has a massive home and is excited to put a 20 seat Sactionals with Stealth Tech in their basement or entertainment room. And we can sell to Middle America where this is their main piece of furniture and we pull them up to our price point through the real value that Sactionals create. And so we compete with all of the established brands in home that we maybe be in the mall with or otherwise, we compete with brand new startups to kind of copycat the Sactionals format, modularity, et cetera, and try to mimic that value prop. And so I think that in this environment, we're taking market share from all of them. And as you can see with most of our competitors, negative growth and obviously our positive growth, we are certainly taking market share. So I think that it ebbs and flows based on the health of that marketplace. And for instance, I think that in startup land, capital is much more dear than it was over the last number of years. And so they're not spending in necessarily the same ways across the board, just chasing growth. And I think…

Great, Thanks for taking my questions.

Great to hear from you.

Thank you. We've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.

Yes, thank you so much for joining The Lovesac 3Q conference call for fiscal 2024. We look forward to reporting again at the wrap up of our fiscal year and we want to just thank investors and all of the #LovesacFamily for building this brand that we hope so [Indiscernible].

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