Greetings, and welcome to The Lovesac Company Second Quarter Fiscal 2026 Earnings Call. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill, Investor Relations. Thank you. You may begin.

Thank you. Morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Mary Fox, President, 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 measure 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 of The Lovesac Company. Shawn?

Good morning, everyone, and thank you for joining us. I'll start today by sharing a high-level overview of our second quarter results, provide an update on our Design for Life product platforms, and touch on our views for the remainder of the year before passing the discussion over to Mary Fox, our President. Mary will discuss our tailored customer acquisition engine and key growth enablers. Finally, Keith Siegner, our CFO, will review our financial results and provide more detail on our Q3 and fiscal 2026 outlook. Turning to our second quarter. Overall, we are pleased to have delivered results in line with or slightly favorable to our expectations across all metrics, representing another quarter of top-line growth driven by our secular growth initiatives across Design for Life product platforms and efficient customer acquisition engines. For the second quarter, total net sales were $160.5 million, reflecting a year-over-year increase of 2.5%. These results reflect market share gains, despite the ongoing headwinds facing our category, which we estimate declined approximately 4% for the comparable period. Total omnichannel comparable net sales increased 0.9% for the quarter, with additional growth coming from new and non-comp touchpoint contributions. Our balance sheet remains very healthy, with inventory levels and net cash providing substantial flexibility to weather tariff distractions, accelerate growth, and enhance returns on capital. This is a very exciting time for The Lovesac Company. While the home category and high-ticket consumer goods in general have been under pressure for years now, with many in our industry waiting for an eventual recovery to the housing market and a normalized furniture replacement cycle, we've been both controlling expenses for efficiency and protecting significant investments in innovation to create meaningful long-term value for all stakeholders. And we've done this while maintaining annual profitability and a very strong balance…

Thank you, Sean, and good morning, everyone. Building on Sean's overview of our Design for Life and our strong results for quarter two, I'll now focus on our second superpower, our customer acquisition engines that are uniquely tailored to each of our Design for Life platforms as well as our growth enablers that are fueling our momentum. As a reminder, what makes our customer acquisition engines so powerful, a superpower in effect, is our ability to leverage different mixes of brand and performance marketing, digital configurations 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. Starting with brand and performance marketing, Sean shared some initial highlights of our brand evolution work and what's to come. And you'll see a lot more of this work cascade through marketing in coming quarters. That said, we are already beginning to optimize our marketing mix as we build awareness of our brand and excite our customers both with our core Design for Life platform and our new innovations. In quarter two, we leaned into mid-funnel tactics. Encouragingly, traffic and return on ad spend increased versus last year, driven by our refocus on CTV and YouTube, with plans to expand these partnerships in the second half of the year, as well as leveraging answer engine optimization with Google and Microsoft. Our social media and partnerships team did a stellar job in quarter two, keeping love on the forefront of culture spanning all of our product lines. We partnered with influencer and author Eli Rallo to host an on-trend book talk themed event at Bibliotech in New York City. Key editors and influencers attended to experience the Pillow Sac Chair…

Thanks, Mary. Let's jump right on into a quick review of the second quarter, followed by our outlook for the rest of the fiscal year. As we begin with performance metrics, please note that all references to the second quarter refer to fiscal 2026 unless otherwise noted. Net sales increased $3.9 million or 2.5% to $160.5 million in the second quarter compared to the prior year period. Showroom net sales increased $10.3 million or 10.4% to $109.1 million in the second quarter compared to the prior year period, driven by an increase of 0.9% in omnichannel comparable net sales and the net addition of 16 new showrooms. Internet net sales decreased $1.8 million or 4.1% to $42.5 million in the second quarter compared to the prior year period. Other net sales, which include pop-up shop sales, shop-in-shop sales, open box inventory transactions, and the Loved by Lovesac program, decreased $4.5 million or 33.6% to $9 million in the second quarter compared to the prior year period. The decrease was primarily attributable to the company's decision not to engage in any barter transactions during the current period. By product category, in the second quarter, our SAC net sales increased 4.6%. SAC net sales decreased 22.5%, and our other net sales, which includes decorative pillows, blankets, and accessories, increased 2% over the prior year. Gross margin decreased 260 basis points to 56.4% of net sales in 2026, versus 59% in the prior year period. Primarily driven by increases of 110 basis points in inbound transportation costs, 50 basis points in outbound transportation and warehousing costs, and a decrease of 100 basis points in product margin driven by higher promotional discounts. SG&A expense as a percent of net sales was 40.9% in 2026 versus 47% in the prior year period. The decreased percentage…

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you'd like to remove your question from the queue. It may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question.

Great. Good morning, and thanks for taking my questions. First, so as you undertake your brand evolution sort of refreshed, do you anticipate any changes to the customer acquisition approach or maybe marketing effectiveness here in the near term?

Yeah. We have so much happening on the brand and marketing front that, you know, that I think that's gonna be a major theme actually for the next few quarters. We have, as you know, this brand refresh just coming to prime time. We have the Snug campaign that launched this week. And we have a new CMO onboard who's insanely talented and really excited to, you know, be taking those controls. And so I think that you're going to see a lot change in the way that we go to market at The Lovesac Company and the way we deliver our advertising, in the way we communicate. And I think you can already see it reflected in this campaign with Snug, which is, you know, really unique. We've got one of the hottest celebrities out there right now representing this product, aligned with the brand. You know, you'll be seeing Britney Snow on all the social channels. You'll be seeing a lot of really it's not just exciting creative, but you know, a new aesthetic to it. And I guess the cool part is because of the timing of that particular launch, at least forced through a lot of the change in tone. In the way that we go to market and spend our money to reach prime time faster even with Heidi Cooley's, you know, more recent onboarding. So it's all coming together great. And, Mary, I don't know what you might add on customer acquisition and our spend.

No. I think, you know, Maria, you know, Sean said you you'll see it. Hopefully, you got to see the Snug campaign launched earlier this week, and, you know, it's just so critical for us in in terms of kind of the campaign is around showing the couch category that anything they can do we can do better. And I think we're just getting a lot more confident and clear in our messaging around our value proposition, and really how do we find the eyeballs that are, you know, considering, you know, a purchase in their home and and how we get them to see us as the right choice and and to be able to convert them. Meanwhile, we can continue to just build the full funnel as we always have, and you see that in our results in terms of the success of continually, you know, gaining market share. For everything. But every platform we have, we're just very targeted. In how we approach it. As Sean talked about, some of the work under BrandEVO, we, you know, we've built out a very clear product hierarchy. We'll share more with you over time. It's just gonna enable us to be a lot more targeted in terms of how do we maximize, you know, the potential for all of our products, whether it be in all of our showrooms or even honestly, getting a much greater level of velocity, you know, on our website. So it's just been really good work, to really help us be able to pull open the brand in this multifaceted strategy that we have for the home and and know, we'll be delivering over, you know, Sean said, the coming week with all the campaign and then, you know, months and years as we really are building this for the long term. So thank you for the question.

Got it. That's that's very helpful. And then I wanted to ask about Snug and sort of now that it's the product is launched in more than 100 showrooms, can you maybe help us think about sort of the type of partnerships or distribution partnerships that would would be sort of most complementary for this platform?

I think it's too early to speak to any specifics, but let's go to first principles. It's always where I like to start. You know, the reality of Sactionals is that it is a wildly it is the simplest wildly complex product platform you could imagine. Right? Just buy a bunch of seats, buy a bunch of sides, build anything you want. It could be deep. It could be long. You can deep pillows, and and all of a sudden, the platform, you know, has complexity. That is really of course, indicative of its design for of designed for life nature. This is the product to be with you the rest of your life. Snug is much simpler. You still get almost all of The Lovesac Company benefits you're used to. Right? It's washable. It's somewhat changeable. But it doesn't require the intricate demo in-person experience that, for instance, Sactionals has. And this product platform's ability, therefore, to appear perhaps in environments that aren't The Lovesac Company owned and operated and and staffed is apparent. And it's really influenced our thinking about, you know, future products as well. You know, you could imagine future products more analogous to Sactionals that deliver an extremely high design for life ranking that that that require some hand holding and some demonstration. And you can imagine, more products like Snug that represent the brand well, have the best quality, but don't require such intimate demonstration experiences. And so the first and most important channel for Snug is our website. You know, this is this is a beautiful sofa that sits amazingly well, has storage big enough to to fit Britney Snow in it. As you'll see, her climbing inside of it actually in some of the campaigns. Pretty funny. And, but but, represents the brand well, but doesn't you know, necessarily need as much demonstration and whatnot. And so I'm giving you a haphazard description of this product hierarchy that we are not haphazard about. We have now a much clearer picture of how we can deliver sales. And to that end, expand our channel strategy with these products that don't require in-person demos. That's the key to it. And so I'll just leave it at that because it's too soon to announce new partnerships. But we are excited about, both online and offline opportunities with products that can represent the brand in this way.

Got it. That's, that's very helpful. Thank you both.

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

Okay. Thanks. You talk about a little bit more detail on what has changed in terms of the EBITDA outlook versus a few months ago? You said tariffs, you said promotional activity. Is one of those bigger than the other? And and on tariffs, maybe don't if you can help us with a little more specificity. I thought, you know, sort of tariffs are coming in lower than expected. At one point, you know, we're expecting over a 100% in in China. So so what are the tariffs is worse than expected, and how much of the reduction in guidance is due to the promotional activity?

Hey, Mike. Look, I'll take the tariff piece and then I'll turn back to Keith in terms of the EBITDA outlook. So I think when we last reported back in June, you'll remember the reciprocal rates for many of the key countries that we source from, such as Vietnam, Malaysia, and The were actually sitting at 10%. And then, you know, more recently, they actually it pretty much doubled, with most of at 20 or 19. So I think that's has stepped up. From when we last reported. So that's built in to the guidance that, you know, obviously, Keith shared through. And in the meantime, you know, we just continue to work on moving more products, you know, out of China, which, you know, have the heaviest weight of tariffs, the team have done a good job on that. Some things are a little bit slower. To move out such as some of the technology and and if custom fabrics. So it's just put a bit more waiting for us. But Keith, I'll turn to you for Mike's question on the EBITDA outlook.

Yes. Thanks, Mary. So and thanks, Mike. It it really is a a gross margin topic, Mike, as you're aware. I think the as you could see through the other line items think we're doing it you know, we're doing a great job managing the controllable expenses, leveraging and gaining efficiencies through the marketing. So let's talk a little bit more about that gross margin piece and also as you look to the year over year deltas in the fourth quarter, we're closing that gap somewhere. We anticipate closing that gap somewhat. Let's talk about that for a second because the pressures are really twofold. It's sort of the perfect storm of the tariffs and to be frank, the requirement that we increase the promotional discounts that we're offering given the competitive backdrop. You know, those the combination of those two things were more punitive to the model in the near term than we had expected last quarter when we gave you the guidance. So let's talk about the fourth quarter step up for a second there in terms of the year over year delta. Look, it's important to note that the fourth quarter lap for us from a gross margin perspective is easier than it was in either the second or third quarter. That's because last year's fourth quarter saw a meaningful step up in our effective discount level we ramped promotions following that tough start to the holiday selling season. This is the largest single driver of the improved year over year delta in Q4 as it compares to Q2 and Q3. The other piece of this is is partially tied also not only just to the change that Mary mentioned in the the in the effective tariffs on a few of countries, but it has to do…

Okay. Thanks for that color. If I can ask one question of Sean. Sean, I think you had said new new maybe I don't know if you simply call it the new room, but but it sounded like a a big new launch new room potentially. You said at least a year away. That sounds like the end of calendar 2026. Is that I thought it was gonna be sort of earlier in 2026. Maybe maybe I misinterpreted that. But is that new launch, new room, that you have teased, is that being pushed out at all?

No. I mean, it's a general comment about these big changes coming in the future. I will say the idea that it would come early in calendar '26 is is not realistic. I think that we do have actually a lot of action between here and the new room if you can believe that. We have a lot of, really exciting things to be announcing over the next few quarters. But as it turn as as we me put it this way. As we look at advancing into the next room, we've been very clear that that's coming. We will be entering that realm in a fulsome way. And that I think is going to be really exciting and and pretty game changing for the brand. And it's not going to be a trickle. And so we still got a little bit of time between here and there. I think that's a decent breadcrumb. But, in the meantime, we also have, lot of really exciting products to launch in the living space that, you're familiar with. So it's a good call out.

Got it. Okay. One more if I could. Any change? I mean, I presume not. We haven't talked about it, but any change in that sort of long term outlook that you guys talked about at your Analyst Day, which which again, requires a pretty big ramp in in in terms of growth beyond 2025. So the 2025, a little bit of a off year and then and then growth in calendar 2026 and 2027. You know, and beyond, a much much greater ramp. Is that still the idea?

Yes, Mike. That's still the idea. Look. This year with all the tariffs stuff has been a little bit of a wonky year relative to that plan. Obviously, you know, there was no way to include that into that algorithm, and we're managing through it. And I think we've got good plans to to get through it and then get back on on track. So there's always gonna be a couple little things like that. You you know, it's interesting. When you're at the margin level, we are at particularly at the bottom. You know, little deltas and basis points can make a big big difference at the bottom line EPS. But that's the opportunity here too. And we get through this tariff stuff. We get back on the algorithm. There's tremendous upside at the bottom line with very small changes in basic points and flow through from the top line. So nothing fundamentally has changed on that. Little bit of noise this year because of the distractions, but still feel great about the the long term.

Right. Thank you for the call.

Our next question comes from the line of Eric DeLonier with Craig Hallum Capital Group. Please proceed with your question.

I appreciate the commentary you provided on sort of the the puts and takes on the EBITDA revision. Certainly sounds like it's mostly gross margin issue here. Could you expand on the levers you have to pull on expanding gross margins sort of midway through Q4 and into next year? It sounds like you're you're pretty confident, on your ability to do that and would love to just get some more color if you have it.

Yeah. Great question. So let's first step back for a minute and look at some historical context here because I think it's important for the overall conversation. For a number of years, The Lovesac Company reported gross margins in the low to mid fifties range. However, over the last couple years, we completely rebuilt the inbound logistics program. We implemented automated systems. We found other in operating procedures. In effect, we structurally reset gross margins to the high fifties, near 60 level. Right? And that's kind of what we were discussing in our investor day last year. While our latest full year guidance for this year reflects a range of 57 to 58, so still high in the historical context. It is below the high fifties near 60 level. We have identified measures to get us back on that path just like you talked about. So here's five I'll give you that we think can help. First, the outbound logistics opportunities still remain for us. We've made it through most of the inbound pieces, but now we can optimize warehousing. We can optimize last mile shipping. Test for these things are in the works, they're underway. That's number one. Number two, we continue to work on realignment of our countries of origins to minimize tariff and other costs. That's a much bigger conversation we're happy to get into. We are not done with that effort. There's a lot of opportunities still to work there. Some of which will take a couple years to put in place, but that that's a big part of this. And we're actively pursuing those levers. Number three, we're gonna implement new optional delivery service levels for payment. We also have new return policies and other things that can help us mitigate some of the gross margin pressures. Number four, as part of this brand evolution product hierarchy work, the Sean and Mary have talked about, we're gonna evolve our promotion strategy moving away, as Mary said, from sort of a broad based everything is included promotion, and more toward a variable strategy across products and channels. Right? We're we're this will be coming soon, and I think what that will do is help us in reducing aggregate discount levels, which puts pressure on the gross margin. And it's a big part of that change in EBITDA that I talked about a little while ago for this year. Look. In the last definitely not the least piece of this, is hopefully, when we come out of this you know, category decline and get back to growth or normalization even, the competitive promotional environment settles in and takes some of the pressure off the big tent pole moment. So, like, all of these things, we've got good you know, visibility into action plans that we're gonna be putting into place. So, you you you know, hopefully, that gives you some color.

Yeah. No. That that was that was very clear and helpful here. One one kind of follow-up here. You cited the product hierarchy. In that answer there. It was it was come up a couple times, previously in this call. Just just to make sure I understand that here, is is is that sort of the differences that between the Sactional and the Snug? Now, for example, you know, one is sort of a more, you know, complex hands on, requires a lot of demos. The other is is, you know, more simple and, you know, perhaps know, easier to sell online kind of thing. Is is that what you're referring to by product hierarchy, or is there, other aspects of it that I might be missing?

That is a I guess, front end outcome of the product hierarchy. We haven't revealed and discussed, like, this overall product hierarchy that I'm kinda talking about. But it's a good representation of of that kind of thinking, and it's been evolving in real time. You know, we we came up with the EverCouch invention in a approach to building beautiful super comfortable, sofas, armchairs, loveseats in a smaller package. You know, a a a while back as we've cooked up the product and whatnot, as the brand's been evolving, we've been going to this brand evo work with the with the outside agency. So as all of this has kinda converged, which you know, manifested itself, for instance, in the name change to Snug, which is a better name for that product line, and it fits within this product hierarchy I'm alluding to. You get that outcome. But the, so we'll we we have we'll have more to share, perhaps even next quarter. About this BrandEVO work what it, you know, what it implicates for the brand, the product hierarchy, etcetera. Again, you're gonna see us already living with it in real time as we launch now. You'll see this change in tone in the advertising and our approach to marketing in general. And it's a just a really, really exciting time for The Lovesac Company, and, frankly, I think it sets us up well further out for these bigger changes that are to come. But in the meantime, as I said, just a few minutes ago, you know, given this new point of view on on products for for new channels, products for the Internet especially, that just don't require so much handholding. You're gonna see a lot of action from The Lovesac Company over the next number of quarters that that we can be really excited about.

Great. I appreciate that, that color there, and we'll look forward to that. Last one for me here. Just on the, you know, overall sort of marketing shift here, you know, EverCouch to Snug. It sounds like you know, there'll there'll be some more, you know, overall Lovesac. You know, fully brand wide refreshments here. I'm just wondering, you know, how how long this has been in the works. You know, it seems like this this switch from EverCouch to Snug is somewhat more more recently. I'm wondering if there's any sort of increase in marketing expenses that that you're expecting, you know, over the next quarters or years here to kinda support this? And, I I guess just a bit more color overall on, some of the, timing around this this brand refresh and the overall strategy behind it? Thanks.

Yeah. Nothing meaningful in terms of marketing expenses. In fact, we should become more efficient with our marketing. You'll see a lot of tactical changes. Right? Like like, historically, you've seen The Lovesac Company. Evi on linear TV. It was a formula that worked really well for us. I think you'll see a pretty meaningful shift to digital. So it'll be a shift in dollars and whatnot, but nothing we're not, you know, we're not thinking about increases. We feel really good about our marketing spend levels. You can see us controlling our SG&A. And the good news is is that we've made this investment already. This brand refresh is now, you know, almost complete. And we've been absorbing those kinda hard costs. You know, with the agencies and everything required to do this. All along the way. And this is something I'm super proud of at The Lovesac Company. You know, as we've said, a number of times, the past three years have been brutal to the home category. You know, it's been a it's been a really tough time overall, and I think The Lovesac Company weathered it well, not just hunkering down. We are controlling SG&A and whatnot. That's pretty obvious. But we've been investing, and this is just one of. One of the many investments that we've made in you. So you're gonna see the fruits of those labors unfold in real time all the way, you know, through holiday season this year. Well into next year. And like I said, a continued, launch cadence of new products that you you you nailed it. Are really appropriate for online sales especially. And, you know, new representation in in the execution of those advertisements. And everything else.

Alright. And I appreciate that color. It's great to hear. Thanks for taking my questions.

Thank you. Our next question comes from the line of Thomas Forte with Maxim Group. Please proceed with your question.

Great, Shawn, Mary, and Keith. Thanks for taking my questions. One question and one follow-up from me. So, Shawn, as you know, I cover Apple and I had to think about the prospect of an iPhone made in the USA. So how should investors think about the potential for The Lovesac Company made in the USA?

Yeah. For anyone following, close enough, you know, this is a passion point for me. It has been for years. I'm sorry that we haven't delivered it sooner. It's but we have not stood still. And the answer is, we are running this down really hard. For for every obvious reason. But back to first principles, let's This is a brand that promotes sameness. In a way that no other brand does. A way that's good for consumers. Right? You buy into a Sactionals platform or even EverCouch. You'll be able to upgrade it, change it, even don't know, swap out the arms with the same fabric that you bought. Maybe four or five years ago. That will still match because that's the way not only we build the product, on a component basis, but we, you know, try not to drop our fabric so that you can do what I just described. That said, you're buying into a platform that, you know, demands us to maintain sameness. These same basic SKUs, the components that make up our designed for life clever products. Should be made closer to consumers delivered over shorter distances more sustainably, and, more readily. More ready more readily. And that's exactly what we're chasing down. On a first principles basis. We're closer to it than ever. So not ready to, you know, make any announcements yet. But I'm very confident that a significant portion of our manufacturing will be moving domestic over the next number of of quarters even. And and like any big shift, that will require a a lot of you know, it'll require a a folding in. It, you know, it won't be overnight, but within our grasp. And and and and I think we have a better path to that than almost anyone in our business because of the component basis of how we approach these inventions. It it really gives us a lot of economies of scale that others may not have. So we're excited about those prospects.

Great. Thank you for that. And then for my follow-up, to provide an update on your e-commerce efforts. Seems like that could be a great way for you to provide extra value consumers at a time they may be looking for it. And then also a way to mitigate the impact of tariffs.

Yeah. No. Thank you, Tom. It's a great question. And, yeah, we are thrilled. As, yeah, as you remember, we announced back in quarter one about launching Love by Love Sac. Which is our resale platform. And, you know, initially, we went live in one state in Texas. We've now added five more states. And you're gonna see a lot more states, being added, and and you're absolutely right. I think it helps build our value proposition. Because it really shows that you can have this product for the rest of your life if you choose to. Then if you change your mind, you want different covers because you just want a different aesthetic. Then, you know, we will be able to build out that trade in element that we've also talked about. We're doing a pilot at the end of this year and then we'll have that really rolled out you know, next year. And I think, you know, we've always talked about activating the right size of our flywheel, enabling that customer lifetime value. It's a huge advantage for us. No one else can do it. It's something that we can do very profitably and effectively. But then also build that loyalty for our customers. So, just very excited to start to see that building. And look forward to sharing more as we continue to expand the state. So thank you for the question, Tom.

Thanks, Mary. And thanks for taking my questions.

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

Yes. Thanks. Just wanted to touch on the progression of the quarter. You mentioned the category improved, I think, across the quarter, and sustained into July. And perhaps into August. But did you see a pickup that was kind of commensurate with that in your own comp performance during the quarter? And and how have you tracked sort of relative to the category, quarter to date?

Yeah. No. Thank you, Matt, for the for the question. So I think quarter to date, you know, we feel really good in terms of our underlying performance. Obviously, you know, having got through Labor Day events, you know, that's obviously a very key tempo moment for this quarter. And all of that is baked into our guidance and demonstrates continuing to gain share. Because while Sean talked about it at the beginning, the category showed a little bit more improvement. It's still down. You know, and as we've shown with our results, you know, we continue to gain that market share. I still see it being promotional, you know, and I think you're always very close to you know, tracking us and seeing what's happening in the category, and and it's just not stepping down from those holiday peaks, which is why Keith talked about that promotional pressure. So you know, for for us, it's it's really, you know, how do we continue to plan knowing that the macros are still challenging, customers are still a little bit more reserved around, you know, big purchases. So, you know, the tax around personalized offers and really driving them into the showroom. Is so important. But what's also really you know, positive for us is we're not seeing any trade down. So Lovesoft is actually at its highest level of penetration that we've seen for a long time. And you know that's a premium filter. Choice. Recliner is is the best innovation that we have launched, and it's you know, being factored into so many customers you know, purchased with us. So, you know, we just see a lot of of opportunity when we give them great product. Even though there are those pressures that, you know, we can win. So you know, we stay very close. We continue to test and learn through, you know, what continues to be challenging. As Keith touched on on the promotions. But, you know, very similar you know, through the quarter and and as we plan for the rest of the year.

Okay. Appreciate that, Mary. And then just curious the customer response, to some of the pricing actions you guys have taken on Sactionals, especially in the last few months. Has it changed conversion from the quotation pipeline in any way? Are you seeing sort of responses where folks trade into the, I guess, now Snug? What's what's the way to think about sort of the customer response to those pricing actions?

Yeah. I mean, I think the one I'll I can really talk to because it's been a market for longer is, you know, we did a price increase back in quarter two. But we did see a very clear in terms of kind of our value prop and and all our competitors have taken price for years and even at the beginning of this year. So, you know, we feel very, very good around where we're positioned. But, certainly, from that, we haven't seen any trade down, you know, which I think kind of you your question down to opening price point fabrics from some of the higher fabric choices. And not seeing any shift from that increase in terms of the units that people are collecting. So, you know, I think that one, we feel very good on. The second one, we just put in place, so it's very early days. So we're just gonna keep a read on it. Customers, you know, they expected increases because I think they hear about tariffs and price increases pretty much every day at the moment. And and certainly, as our team, one of the key superpowers we have is around just the direct communication with our teams and really giving them great tools, the value proposition work we've just done actually made us feel even more confident about how great our product is. And really, you know, no one else comes close to it. So we've equipped them with even more tools to be able to tell that story and, you know, and and not seeing any resistance to date. But, again, you know, we've gotta stay close to it. Certainly, as the tariffs will put more pressure more broadly on the customer.

Okay. I appreciate that, Mary. And then maybe just for Keith, the gross margin progression, I know it's been covered a little bit, but I just wanna make sure I understand clearly. Third quarter, the headwind is really we're we're still not lapping the heavier promotions from last year, so we have the the heavier promotion putting pressure. On product margins and then heavier tariff pressure as well in the third quarter. But then that slipped to the positive or, I guess, flattish to positive gross that's implied in the guide comes from basically just lapping promos from last year and maybe just help us on help me understand that a little bit more.

Yeah. So couple things there. Number one, generally speaking, you you're you're right there, which is we didn't really step up the pace of promotional offers until the Q4 after the initial start for the cyber five holiday came in below our expectations. That's when we dialed up the the promotional intensity with gift with purchase, surgical offers that, you know, that were that were available to our showroom folks to get conversion rates higher, all that kind of stuff. That started mid Q4 last year. It had a meaningful effect on that quarter. So we still have a lower promotional intensity lap in Q3, which is a meaningful headwind. That largely goes away in Q4. That that that's the biggest piece. The second piece is if you think about it from a tariff impact as a relationship to sales because the I can't use dollars because the sales volumes are so different by quarter. But if you think about it from a, like, a relationship to sales, it's several 100 basis points more impact in Q3 from China tariffs and others than it was in Q2. And that eases off quite a bit in Q4. Not quite to the Q2 levels, but well below Q3. You put those two things together, and the midpoint of the range is really more like a flat grow sort of like flattish gross margin year over year. If you think of it that way, we're not actually calling for expansion in gross margins in Q4 year over year. But those two pieces actually give you the vast majority of the, you know, of the answer right there.

Our final question this morning comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question.

Hi. This is Andrew Chasanoff on for Brian. Thanks for taking our questions. Just a few quick ones. In terms of just gross margin, are you guys thinking about what the unmitigated tariff cost for LOVE is right now? And does your guidance contemplate any further pricing actions in addition to what you already discussed?

I'm not sure about the first part of the question. We are not building in any incremental changes to the tariff regimes right now? So, for example, press that's been in place about additional considerations for furniture is a category that is not factored in. The guide. So we are we are using the current ineffect tariff rates as the basis for our outlook. There are many plans we have in place as I discussed that are gonna you know, some of which you know, take a little bit longer to put in place to get the gross margins back to the target low levels as I'd explained earlier. You know? And look. If the tariff regime changes again, all those plans will change again. Not just for us, but for competitors as well. So you you know, look, we as I said, we have lots of things we're working on in the background to improve the gross margins. We're not counting on those for the guide that you see in Q4. Right? That's more of a long term several quarters get us back there play. But, you know, we'll we'll continue to react accordingly as will most of the peer group. And, you know, if there is anything either know, materially negative or favorable that comes out of this, we you know, we're ready to adapt.

Awesome. And then I can just follow-up quickly on a expense side. Understand that you discussed kind of the marketing in detail, but is there any reason to think that the expense profile of the business is changing as we go into back half twenty five and into '26?

No. Nothing material. The only thing I would point out to remind everybody is in Q4 of last year, we had an unwind of incentive compensation given a the the weaker than expected performance within the Q4. So this year, as we've said all year, we expect to have higher SG&A as a percentage of sales in Q4 than we did in Q4 of last year because, again, as we've been planning, we're not planning for an unwind of previously accrued incentive compensation like we saw year. So that that's the only thing to call out. You'll see that when you back into what Q4 guidance is. It is a higher SG&A in Q4, but that's the reason why there's there's there's nothing else. Which you can get to pretty cleanly from the full year minus the Q3. More structurally, as the growth continued to hopefully pick up, and we get some category support, you know, that in effect will drive same store omnichannel comparable sales for us. Which has far greater flow through. Than than some of the other pieces. So, look, again, if the category bounces back, the you get a big acceleration and step up in the amount of top line that flows through to the bottom line. So that's what we're hoping for. We're not counting on it. But we'll take it.

Awesome. Really appreciate it. Thank you.

Thank you. This concludes our question and answer session. I'll turn the floor back to Mr. Nelson for any final comments.

Just a big thank you to the investors that support The Lovesac Company and our pursuit of building the most loved home brand in America and to all those sackers out there that have made this company so great, onto a bright future. Thank you.

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