Greetings, and welcome to the Lovesac Fourth Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce Caitlin Churchill with Investor Relations. Caitlin, 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 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 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 would like to turn the call over to Shawn Nelson, Chief Executive Officer of the Lovesac Company. Shawn?

Good morning, everyone, and thank you for joining us. I'll start by sharing a high-level overview of our fourth quarter and full year fiscal 2025 results, provide an update on our Designed for Life product platforms, and share some exciting news about an amazing new addition to our leadership team. Then Mary Fox, our President, will discuss our tailored customer acquisition engines. And finally, Keith Siegner, our CFO, will review our financial results and provide more detail on our fiscal 2026 outlook. Before getting into details, I'd like to take a moment to reflect on milestone achievements for Lovesac in fiscal 2025. First, we had our most prolific year ever for new product launches, having gained significant momentum, innovation and commercialization of platform extensions, including major successes like the PillowSac Accent Chair and the early launch of the Reclining Seat. Second, we codified our long-term strategy and value creation model, which we delivered at our first ever Investor Day, and unveiled the first of three completely new product platforms that we plan to launch over the next three years, the EverCouch. Third, we strengthened the foundations of our business, having reinvented our supply chain, and dramatically enhanced our CRM tools, to deepen and broaden the moat around our unique omnichannel business model. Last, we have a very healthy balance sheet, which gives us substantial flexibility to weather tariff distractions, accelerate growth and enhance returns on capital, for years to come. Moving to results, it was a solid end to fiscal 2025 with fourth quarter earnings results that came in toward the high end of our outlook provided in December, with strong quote conversion in the second half of the quarter, sell slightly outpaced the high end of our guidance range. This helped close out another fiscal year of market share…

Thank you, Shawn, and good morning everyone. We detailed our long-term strategy, and value creation model at our recent Investor Day, which is centered on our two superpowers. Shawn just shared an update on the first of these, our Design for Life product platform, and how we believe Lovesac's secular growth potential is massive, thereby positioning us, to continue to take market share for years to come. I'll now focus on our customer acquisition engines that, are uniquely tailored to each of these Design for Life platforms, as well as on our growth enablers, especially our advantaged supply chain. Beginning with customer acquisition engines, our superpower really lies in our ability, to leverage different mixes of brand and performance marketing, digital configuration through lovesac.com, incredible showroom experiences and efficient partnerships, to optimally affect by product platform. Done wisely, we can efficiently generate customer awareness, convert that awareness into customers, and ultimately build long-term relationships and brand love. Let's spend a few moments on each, starting with our brand performance marketing. We had shared back in December that, we were encouraged by the strong double-digit quote growth, we had seen through Black Friday, but were cautious given the lower than expected quote conversion to sales, we're experiencing along with the compressed holiday selling season. We are pleased to share that, we saw significantly higher quote conversion, during the late December and January periods, leveraging personalized offers as customers focused on their homes, after the compressed holiday season. While we did selectively increase discounts above recent levels, we were able to avoid resorting to the extraordinary discounting levels at many of our competitors, as you see in our gross margin. As Shawn shared earlier, we have tremendous momentum with our newest innovation, the Reclining Seat. It surpassed all our expectations, achieving the…

Thanks, Mary. Before we begin, I want to thank everyone who attended our inaugural Investor Day, whether in-person, virtually, or even after the fact through the presentation, which remains available on our website. We hope it was clear how unique Lovesac is, unique in brand, unique in business model, and unique in secular growth opportunity, powered by continued market share gains in our existing categories, as well as expansion into new product platforms, which begins next quarter with EverCouch. Shawn and Mary, already discussed factors that made fiscal '25, such an important year for Lovesac, so let's jump right into a quick review of the numbers and our outlook. As a reminder, the fourth quarter of fiscal '24 included a 14th week, representing the 53rd week in the prior year. Revenues were $680.6 million for the year, which were down from $700.3 million the prior year, owing to category headwinds of approximately 9% for the year, but were slightly above the latest range of guidance we provided in December. Gross margin was nearly 59%, a solid level that provides options for navigating the current macro conditions. Net income of $11.6 million was down from fiscal '24, owing to the lower revenues, but still supported positive free cash flow for the year, and a healthy cash balance that I'll speak more about in a couple minutes. Moving on to the fourth quarter, please note that all performance metric references to the fourth quarter refer to fiscal '25, unless otherwise noted. Net sales decreased $9 million, or 3.6% to $241.5 million in the fourth quarter, compared to the prior year. Showroom net sales decreased $2.4 million, or 1.6% to $154.5 million in the fourth quarter, compared to the prior year period, driven by a decrease of 9.4% in omnichannel comparable net sales,…

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

Great. Good morning, and thanks for taking my questions. First, sort of understanding the situation is very fluid here, but is there any color maybe you can share, around how you're thinking through your inventory strategy here, given sort of the 90-day tariff delay? I know you brought your inventory levels up in the end of the quarter, but how much of sort of inventory you're planning to pull forward from sort of countries outside of China maybe over the next couple of months?

Hi, good morning. Thank you for the question. Yes, so obviously we had built up from our industry across all of our product lines. So we feel very good in our position. The teams are actively working right now and since last week [technical difficulty] countries and I think one of the great advantages of our supply chain, is we have full redundancy of all of our products. So they are working that through and, we feel good in terms of where the plans are. And obviously with the news yesterday, we're really pushing through on obviously the most dominant countries that we source from, which are Malaysia and Vietnam as an example to ensure that we continue to send stock. We have great inventory levels, but also obviously managing the headwinds that, just recently came into bear from last week.

Got it. That's very helpful, Mary. And then secondly, is there anything you can share around consumer behavior here from more recently, maybe in February and more so in March, Just given all the macro data points that we've been getting, like are you seeing any maybe softening in consumer spending here in the near term I guess?

Yes. No, thank you [technical difficulty] of on the guidance, we feel good in terms of performance quarter to-date, strong February that continued through to today. So we see pretty much stable performance, from our customers in terms of whether it be piece count in terms of, whether they're trading up. We have seen a little bit quieter between key promotions, and then being stronger during events. And then obviously, we continue to see the quote conversion progress that we made through quarter four as well. So too early to say in terms of even just some of the more recent news and any changes, but really nothing that has changed to call out Maria.

That's helpful. Thank you very much for the color.

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

Hi guys, good morning. Just wanted to see if maybe you could confirm for me, it looks like the midpoint of the Q1 range, might incorporate the assumption of positive omnichannel comps. So just wanted to see if Keith could maybe unpack that. And then just quarter-to-date it sounded like Mary, you said February was strong, but I think that's against a relatively easy comp from last year. So maybe just talk about the trends you saw into March and April. And then lastly, just if you could maybe talk about sort of. I know it's really early and the sample size is small, but any consumer reaction function, to sort of the Liberation Day announcements, in terms of trends you saw over the last week?

Sure thanks. I'll start off with the first two parts of that Matt. And then, and then kick it over to Mary. So if you look back to recent trends, you can see pretty clearly that we've been doing between 500 and 600 basis points of growth coming from the non, new and non-comp. So one thing that's a little different is in fiscal '25. So last year, we had a heavily first quarter weighted, new showroom opening cadence. This year, we're going to be a little bit more balanced through the year, a little less weight on Q1. So we might be slightly below that 5% to 6% contribution, from new and non-comp. So when you think about, the growth rate that we're applying for the first quarter, I think your assumption for flat to slightly positive, depending on where we are in that range is definitely a possibility. One thing I'm going to talk about, just a little bit with the quarter and the progress to-date that does make this a little bit noisy and why, I'd really like urge you to focus on the quarter in entirety, is if you recall in the first month of fiscal '25 we had some volatility related to a promotional strategy miss, and dislocations from switching media agencies. So there's a lot of noise in our year-over-year growth rates in the first month. And then there's noise in the second and third, because Easter moved from month three to month two for us. So put that all together, and we're really encouraged to be, at the levels of growth that we're talking about for Q1. So hopefully that gives you a little bit of context.

Yes. And I think Matt, just to add to your other question, I think Keith covered kind of quarter-to-date. I think in terms of any consumer reactions, last week's a quieter week for us. So I think we really need to hold, as we build through to the Easter event, as we close out the quarter, really to be able to learn anything more, but certainly not really seen any kind of change, of any kind of materiality. So looking forward to Easter, and closing out the quarter.

Okay. I appreciate that. And then, maybe just wanted to see about, the way that we should think about pricing in reaction to some of the tariffs. If they do end up sticking after the 90 days. How should we think about Lovesac's ability to take price increases? What would those come in the form of, would that come in the form of a list price increase? And we should expect the same sort of steady promotional cadence that you guys have been on. Just wanted to hear sort of your latest thoughts about how you sort of mitigate some of the tariff risks, beyond just the change in vendor sourcing?

Yes, no, thank you for the question. I think, obviously the team are working very hard [technical difficulty] on concessions, because that's a key element that can really help us in terms of sustaining some of the impact. I think the second piece, obviously Keith shared with our structurally higher gross margins than many other competitors, it really means that the effective surgical price increases, we'd need to take are much smaller. So as we really work through, we've taken price before one in '23, and seen a lot of success with that, without any impact around demand. So we're working actively, through with the scenarios. We need to see where everything closes out, because it is changing by the day. But we have good plans around those surgical changes that, we can make in the kind of mid singles level. And I think what's interesting, we track pricing competitively in the category, and we saw many competitors taking price on MSRP between 5% and 10% just in February and early March. And this is obviously done, well in advance of the latest news on the tariff increases from last week. So we see opportunity, they've already risen, that we can actually be able to execute effectively, not impact demand and continue to stay very strong to our customer value. I think one of the other last pieces, Matt, we've shared with you in the past that nearly 40% of our customers, don't even cross shop us with anyone else. So we'll stay very close to it, be very meaningful in it, but obviously really need to let the full understanding of the impacts be finalized, before we execute anything.

Okay. Appreciate it. I'll turn it over, guys. Thanks.

Our next questions come from the line of Thomas Forte with Maxim Group. Please proceed with your questions.

Great. Thanks for taking my questions. So I have one question on tariffs, and one question not on tariffs. And I acknowledge it was hard to come up with a non-tariff question. All right, so it sounds like 13% of your sourcing is from China, and you're aiming to move it below 10%, if you wanted to. How quickly could you move it all out of China?

Shawn's on mute.

Yes, I'll take - I'll jump in on this one. I'm in China right now. Taking this call from China, and actively moving plenty of production out of here in real time with the team. It's really exciting. As I think the thing that differentiates Lovesac from a lot - and really all of our key competitors, is while I think every serious furniture company operates in all of these geographies in the East. Lovesac operates redundantly. So there are almost no critical products that are solely sourced in China. And we're able to move production, lean further on these other geographies that have now seen some abatement already. And we do see a path to getting down below 10% this year. And that's what we're actively doing. So, ultimately it'll probably force us completely out of China, and that's fine as well. So we're excited about the headway we're making. It's happening so fast, in days really, and already in motion. And of course our Q1, is all spoken for inventory wise. So we're talking about a very finite batch of inventory that, will even have an effect on this year, in terms of the biggest tariffs so far. Yes, so feeling really good about our position.

Thank you, Shawn. I appreciate that. All right, so for my non-tariff question. So in thinking about potential catalysts for home-related merchandise sales such as furniture, how should investors think about the potential, for lower interest rates unlocking the housing market resulting in more consumers moving? So recognizing its fluid situation, one silver lining from the market turmoil, is that at times interest rates have been lower. We've read stories about large increases in mortgage demand. Seems like there's a lot of pent-up demand to move, which may be unlocked by lower rates. I would love your thoughts on this?

Yes, I'll start off first, and then I'll let Shawn step in. I mean, I'll take it. We'll take it. We would love to see it. We don't even care about what drives the interest rates lower, to some extent, if it's a geopolitical play on a macro basis, as long as there's not a big recession underlying, it's the lower interest rates will be wonderfully accepted I think, by everybody in our category, including us. And really what I want to impress upon this is we're controlling our own destiny here. We are and have already built a pipeline of truly differentiated products that, should enable us to continue to take market share like we've talked about in our existing categories, where we only are present in 1 million households in the U.S., which is shocking to us. With our existing platforms, there's no reason we shouldn't be in many millions of households. With the addition of all of the new products last year and the EverCouch, which is our entrance into chairs, loveseats and sofas with an appropriate style, forward price competitive, wonderful product that's launching in second quarter. We think we have a really compelling case, to buck those trends and to drive growth for our business, and to translate that top line growth to bottom line growth. But because of the uniqueness of our model, and because of the inventory position, as we've been talking about, as soon as that lower interest rate unlocks housing turnover, we're ready to go and we'll participate real time. We can ship in one to two weeks. We don't have to place an order for a green roll arm couch that's, going to take nine months to get here, and then hope that it's on style and we can sell it. We can sell you whatever you want, within one to two weeks whenever you're ready. And I think that's a, it's a super compelling element to our model. But Shawn, if you want to talk more about the big picture.

Well, I'll just add that the - other trend that overlays this hopeful one is couches, especially not ours, wear out. And we're coming up on that big COVID pull forward, renewing of people's couches as people in a lot of ways have spent more time at home than ever over these past, this past half a decade. So we're really excited about, the natural turnover and the categories that we focus on the most. And now with the EverCouch coming on, helping us address whole new opportunities in urban markets and smaller rooms and other things, we think that there's a lot of trends that are going to really play to Lovesac's favor. Finally, from an inventory perspective, we're going to no matter what, as we proved through the last both tariff cycle back in 2018, as well as through COVID, we will not run out of stock. We never did. It's a strength of ours. And I can almost guarantee that that won't be the story for some of the, some of the other players in our category. And that will be a major opportunity for us, to gain market share over these next years as all of this changes. So we're, we look forward to that.

Great. Thanks for taking my questions.

Our next questions come from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your questions.

Hi, guys, thanks very much for taking my question. You've had a lot more products now than you've ever had, and it sounds like there's a lot more to come over the next couple of years. How does that impact, how you think about your showroom strategy? Do you need to start opening larger showrooms, or maybe start leaning on different distribution partners, to market a wider range of products?

Oh, man, we are so excited to talk about this one. Just probably not on this call. We have plenty of room for EverCouch in our life. Our showrooms were really built to sell couches. We just haven't been selling many. We've been selling all sactionals. And so we're really excited how EverCouch, is going to play into our strengths. We've established a brand that people think of as those clever couches. They've seen on TV, online, social media influencers. And then in some cases, we just don't fit their lifestyle. So we're very comfortable introducing EverCouch. We're not concerned at all about space. And I think you're going to really see, how that folds into the batter of our current showroom footprint seamlessly. As we move into next year, we have all kinds of really clever and exciting solutions. For how we will show up in our omnichannel way, and in a way that's true to Lovesac's nature in a way that really plays to our strengths. And of course, I'm being cryptic, because we're super cryptic about, the biggest platform introduction until we're ready to announce them. But it's going to come probably a lot, at least the news of it. And some of the explanation will, I think you're going to, we're going to be, prepared to be talking about that even as this year continues. And so for now, our showrooms are small and tight and efficient, and we will continue to open, as we've said, another 30-ish this year. And we're really excited about being able to grow this way, and being able to adapt as we get into these other categories, in what we think is a truly strategic and artful way that will be innovative in retail and omni-channel execution, so more to come.

Great, that's really helpful, Shawn. Thanks. And looking forward to seeing some of those innovations, as they happen.

Thank you.

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

Hi, good morning. This is [William Dawson] on for Brian. Congratulations on a nice quarter.

Thank you.

Yes, so my first question was on just tariff mitigation efforts. I wanted to get clarification. So you mentioned that given - higher structurally higher margins at Love, the price increases need to offset tariffs may be smaller. Can you elaborate on that? And then, also I guess related competitors have taken 5% to 10% off of MSRP recently. How has your promotional strategy changed in recent months, if at all?

Sure, thanks. I'll take the first one. What we were implying with the lower required price increases is take the math of what our gross profits are. Our gross profit margin of near 60% when you back out inbound freight, warehousing, last mile and other costs and things like that that flow through there, you actually get to a strict product margin that's quite a bit higher. Substantially higher actually even than where we're running on a full year gross profit basis. So when you think about what that COGS actually is as a percentage of sales, you do the math as to what type of total net sales price increase would be required to offset the strict product cost. That's how you get to what we were, even in some of the really draconian tariff outlooks could probably be covered with a single-digit, high single-digit price increase. And that's clearly doesn't look like it's going to be the case already. But look, we have options. We can take those price increases, we can shift the intensity of our promotional strategy. We can play around with what our finance offers are through our financing program. All of these are different ways that we can help to offset that, let alone on the cost side the initiatives that Mary talked about before. But hopefully that gives a little context. Thanks.

Yes. And I think William, just to add your other part of the question, so as we tracked with our competitors and saw them taking their MSRP up by 5% to 10% in February and March, they've also continued to be at record high levels on promotions. So that has continued for us as we went through President's Day and through this quarter-to-date. We've continued with our flash events, the typical handle of a 30 off, and even with some reduced financing that, we've seen success with. So, we continue to drive that. We do continue also to have some pocket offers in the showroom sometimes, particularly for the larger setup, but certainly feel good in the algorithm of how we're working through in our promotions that are planned. But the team are always testing, so we're always learning and we will continue to adjust as the year plays out, and obviously to ensure that we stay very relevant and continue to gain market share.

Okay, I appreciate that. And so I may have misspoken that competitors have taken their MSRP up by 5% to 10% in recent weeks?

Yes, yes, that's correct. So they up in February and March, 5% to 10% up in MSRP, correct.

Okay. And another question that I wanted to touch on would be product launches, which are fiscal '26 guide for growth of 3% to 10%. How much of this may be from product launch versus market share gains amid broader category declines? And specifically just wanted to ask about how the recliner has performed versus your expectations?

Sure thanks. I'll take the first part, and then maybe kick it over to Shawn to talk about the recliner. But as I mentioned earlier, we're approaching this year from the perspective of prudent, and realistic management around the macro conditions. So we've been floating around plus or minus, some months better, some months worse. But the category has sort of been in this down mid-single-digits for the last five or six months as I mentioned. That's the scenario, we're building our plan for this year off of more of the same. So in order for us to get to the total growth rates against that backdrop, we do need these new products. The physical showroom expansion, enhancements in our marketing strategy. All of these different things that I was talking about, we think can generate better than category performance. And so there's a whole number of different scenarios that could come together. We're not relying on every single one of these to hit 100% by any means. Not at all. We can have some of them hit and some of them miss, and still hit our guidance. That's kind of the approach we took to this. So, we're really encouraged about the new showrooms that we're opening. We're very excited about the potential that those can contribute. We think the new products can be fantastic. We think we could sharpen our message, all of these things. I know I'm getting a little redundant and repetitive, but I just really wanted to hammer home the point that, we've got multiple paths, we think to achieve the top line aspirations that we set out for this year.

Yes, as far as the recliner goes, I think it's been our most successful product launch maybe ever, at least in our modern history, maybe since StealthTech. And in many ways even more impactful than that, and that was massive for us. So it's exceeded our expectations, it's outstripped the initial supply, and we quickly were able to recover from that as you've seen. We've really haven't had any egregious waiting periods for recliner. They're in stock now. So we've been able to demonstrate, this extreme flexibility we have. And you have to appreciate that the recliner has, it's a powered recliner. If you understand sactionals, you understand that these rectangles can be used the long ways, or the deep ways, which is one of the most remarkable things about the sactionals platform, right. If you're tall, you want it deep. If you're shorter, you want it wide, or if you want to adjust the room and how it fits between two windows. This one recliner SKU works in either, direction and - the consumer can adjust it on the fly. It's hard to describe over - a call, but the reason I'm mentioning it, is because to do all of this and do it elegantly, safely, reliably with electronics required 650 individual parts. This is by far the most complex product we've ever produced. And the fact that we've been able to do it, at our high margins right at initial launch, without any significant quality issues at all, and been able to replenish our stock when it far outstripped our expectations. As we've mentioned, we sold over 18,500 units and that's just over the first few number of months, right. This is not even six months. So we're really excited about that, and especially excited to see that,…

Thank you so much. Look forward to connecting more offline.

Thank you. At this time, this will conclude our question-and-answer session, and we'll also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.