Greetings. Welcome to The Lovesac Company Third Quarter Fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and one follow-up question. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill, Relations. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Mary Fox, President, and 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 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 third-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 engines and key growth enablers. Finally, Keith Siegner, our CFO, will review our financial results and provide more detail on our Q4 and fiscal 2026 outlook. Beginning with our third quarter, macro conditions proved a little more challenging than we anticipated, with consumer uncertainty leading to meaningful choppiness week to week, particularly in our lower dollar volume transactions. As a result, third-quarter net sales were $150.2 million, about $1 million below our guidance range. While we are not happy with this outcome, it's important to note that our focus on secular growth initiatives such as new products and the beginnings of a major evolution in our marketing tactics enabled a slight year-over-year growth in net sales. Reflecting market share gains as compared to our category, which we estimate declined approximately 2% for the comparable quarter and 4% year to date. Adjusted EBITDA and net loss for the third quarter were within our guidance ranges. Pressured by a 240 basis point decrease in gross margin resulting from increases in tariffs and transportation costs as well as increased promotional intensity, offset by price increases, cost savings, and vendor concessions. Total omnichannel comparable net sales decreased 1.2% for the quarter offset by contributions from new and non-comp touch points. Our balance sheet remains strong with inventory and net cash at healthy levels. And as Keith will outline later, we remain on track to end the fiscal year with a more optimized inventory carry versus the…

Thank you, Shawn, and good morning, everyone. Building on Shawn's overview of our Design for Life platforms, I'll now focus on our second superpower, our customer acquisition engine, as well as our growth enablers that are fueling our momentum. As a reminder, what makes our customer acquisition engine so powerful a superpower and effect, is our ability to leverage different mixes of brand and performance marketing, digital configuration through lovesac.com, incredible showroom experiences, and efficient partnerships to optimal effect 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. So let's start with brand and performance marketing. Quarter three was only the beginning of an evolution in our marketing and media strategy. The first step was to modernize our go-to-market approach and media mix to drive more personalized messaging that better meets consumers where they are meaningfully consuming content. We were pleased with the initial impact, and some highlights worth mentioning include culturally relevant campaigns with celebrities like Britney Snow and Bethany Frankel. Seasonal campaigns like Sack to School, exciting campaigns like our NFL season kickoff featuring New York Giants superstars Jackson Dart and Cam Scatterbook. The tale was long with activations with CBS, NCIS, and nostalgic collab with the Twilight movie saga and more. That said, as Shawn mentioned, in quarter three, we saw more pressure in our smaller and mid-range setups. Following recent price increases taken to offset the tariff impact. These configuration types tend to track more closely with the middle-income consumer. And what we saw was consistent with broader category behaviors of less trading up and some trading down. This is good timing in that we were able to implement the second step of our marketing evolution in time to address this…

Thanks, Mary. Let's jump right into a quick review of third quarter followed by our outlook for the rest of fiscal 2026. As we begin with performance metrics, please note that all references the third quarter refer to fiscal 2026 unless otherwise noted. Net sales increased $300,000 or 0.2% to $150.2 million in the third quarter compared to the prior year period. Showroom net sales increased $11.7 million or 12.8% to $102.7 million in the third quarter compared to the prior year period. Driven by the net addition of 17 new showrooms partially offset by a decrease of 1.2% in omnichannel comparable net sales. Internet net sales decreased $7.6 million or 16.9% to $37.3 million in the third quarter compared to the prior year period. Other net sales, which include pop-up shop sales, shop-in-shop sales, open box inventory transactions, the Love by Lovesac program, decreased $3.8 million or 27.3% to $10.2 million in the third 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 and the closure of the company's Best Buy shop-in-shop locations as a result of the discontinuation of our partnership with Best Buy. By product category in the third quarter our Sactional net sales decreased 1% SACS net sales decreased by 9% and our other net sales which includes our new snug platform, decorative pillows, blankets, accessories, increased 126.3% over the prior year. Gross margin decreased two forty basis points to 56.1% of net sales in the 2026 versus 58.5% in the prior year period. Primarily driven by increases of 320 basis points in inbound transportation and tariff costs, 20 basis points in outbound transportation and warehousing costs, partially offset by an increase of 100 basis points in product…

Thank you. We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. One moment while we poll for questions. Our first question is from Thomas Forte with Maxim Group. Please proceed.

Great. Thanks. So one question, one follow-up for me. And best of luck in navigating a challenging environment. On the Love by Lovesac ecommerce efforts, can you talk about what is the discount to the consumer? So how much are they able to save versus buying the product brand new? And then what's the gross margin to Lovesac on the ecommerce sale?

Tom, good morning. Thank you for the question. So yes, so the Love by Lovesac, the way we price positioning, it's around about a 20 to 25% discount level to what you'd typically be able to see achieve if you were buying at full price, or at a discount level. We have two grades for Loved by Lovesac, so it is basically practically new. And then good in terms of the condition. So there are two different tiers in terms of the pricing. And I think, you know, for us, as we've kind of rolling it out, we're now in 27 states and we're really starting to see the interest build of obviously know that our product lasts for a lifetime. I think the second piece that we're excited about is obviously rolling out this part in terms of being able to do resale was really just building the processes so that we can unlock trade-ins. Next year We believe that will be incredibly powerful as people want to change covers. Buy into some of the new innovations such as recliner and so forth. So look forward sharing more, of that from next year.

Just to add one thing. This year has largely been about building the infrastructure and capabilities to get the program to a broad base of folks and to test all of the elements of it for proper functionality. Now that we're in 27 states with a few more still to come, but, you know, the lessons, we'll be able to really lean into this effort and expand it. We've got some other things we're considering to drive this piece of our business even further and put ourselves into great position. To move meaningful volumes through this, especially, right ahead of us launching the trade-in program to the

Our next question is from Michael Baker with D. A. Davidson. Please proceed.

Thanks. And I think Tom didn't get to ask his follow-up. But anyway, I will let me ask for I know you're not giving guidance for next year, but a lot of changes for fiscal twenty twenty-seven versus what we were previously thinking. You're pushing out the lawn to the new room. You're cutting back on showrooms. But you're launching a new sofa. It sounds like you're gonna be a little bit more promotional. Can you just help us with some of the p and l impacts we should expect next year in terms of how that all impacts sales, comps, margins, etcetera? More domestic manufacturing. Again, a lot of changes for next year. Give us some help. Please.

So I'll I'll I'll kick this off, and then I'll pass it over to Shawn to talk a little more qualitative. Look. Mike, very fair questions. We're we're really in the midst of landing the fourth quarter and ending up this fiscal year and in the process of our formal AOP planning for fiscal twenty-seven at this point. Give us a couple months, and we'll give you a lot more details. Like Shawn and Mary both mentioned earlier, we're very pleased with the initial progress that what we've seen from these adjustments that we've seen in the fourth quarter. But we need a little bit more time know, Shawn will get into some of the the the qualitative stuff, but the the the key principle, I think, to this is we believe that during a protracted period of uncertainty in the macro by the on harvesting the brand, we can make more money off of the existing infrastructure and products that we have and launching new products that are quick to market and less costly to launch given their proximity to our existing estate. That that seems to be the more prudent way for us. And, like Shawn said, it gives us even more time to transition into a big splash for the new room launching in early. You know, calendar twenty-seven, in in a material way, so that drives awareness and appreciation right off the bat for that. But, Shawn, what what else do you have to add?

Yes. Thank you. Given given some of the success we've been seeing with Snug and the refresh. As our marketing team is really getting their feet beneath them. With a lot of the change that's been we've been living over the past few months and and really seeing green shoots from we see a path to, just build a more robust financial situation and cash position leading up to the launch of that new room, which is to get which is the kind of position we wanna be in when we're really going to, you know, swing about hard and and and, launch with great gusto. So it's it's really just a shift of a few months in in practicality, and this new sectional sofa platform that we are so excited to reveal Maybe the next time we speak is something that will fill a hole a different hole in our offering than SNUG has already begun to fill with its introduction, and there's more to come on the SNUG platform as well. So just as Keith said, a way to build more profitability and strength in our biz in our core business as we prepare for that new launch and you know, we're we're actually really grateful to see the results from Snug and and also the marketing engine that's been performing quite well over the last little bit. With some new tactics that gives us a lot of confidence that this is the right strategy for the business in the near to medium term.

Fair enough. If I could ask a follow-up I understand the desire to be prudent for the fourth quarter outlook, but the industry seems like it's better than it was. You're seeing a lot of momentum. Strong Black Friday, etcetera. I get that there's more difficult comparisons. But you knew that. So, why why the lower fourth quarter outlook today than what was implied in your guidance that you gave three months ago. Again, if the industry seems to be getting better, you have some momentum, is it that the industry improvement isn't as it's better but not quite what you thought it would be? Just just trying to square that circle.

Yeah. So the industry has lots of different nodes, and certainly some would say it's getting a little bit better. But at the high end, which is really where we compete, it's worse than the industry on balance. And so you know, it's it's choppy. It's messy. But and look. We did have a very strong Black Friday. Through Cyber Monday record Cyber Monday for us. It's an abundance of caution. We have tough compares. Coming over the New Year. You know, back to the industry, you know, for November, it was down 3%. But the high end was down 11% just to make that real for you. Right? So that's the backdrop we're operating in. And out of an abundance of caution, knowing that there's some tough compares, particularly through New Year, just wanna be prudent. We certainly you know, we recognize, like, very slight miss on the quarter. And that's beyond frustrating. You know, for a team that prides themselves on performing and meeting expectations. So that's what it's about for us right now.

Fair enough. Thank you.

Our next question is from Eric DeLonier with Craig Hallum Capital Group. Please proceed.

Great. Thanks for taking my questions. First, I was wondering if you could just provide a bit more color on where the revenue weakness in the quarter is coming from. You mentioned weakness in items under $6,000 Just wondering if you add a bit more color to that. Is that mostly sacks or smaller components of the Sactionals? And should this have sort of naturally a greater impact on Internet sales versus showroom? Can you just provide a bit more color on sort of where the revenue weakness is coming from? That'd be helpful. Thanks.

Yes. Hey, good morning, Eric. Thank you for the question. Yes. So we've seen definitely, I think, Shawn referenced earlier the adjustments we made coming out of Q3 into Q4. So seeing a big step up of improvement in the lower end transaction sizes which is primarily the small setup factional. So big step up from obviously the decline and the challenge that we faced in quarter three. I think the second piece is we are continuing to see at the high end, just as premiumization, that really is driving, you know, a higher AOV. So they're buying more recliners. More add ons in terms of storage, and even more premium in terms of fabrics as well. And then I think the last piece, and I think I touched on it earlier, Heidi has been leading a lot of transformation in the marketing team, putting new leaders in place and in two areas. One is around on the website, and they've been doing a huge amount of work really overhauling, the configuration experience to really be able to drive much better excitement around the holiday gift guide, and the web is performing at a much higher growth rate to the total company in quarter four. So you're seeing a lot of that benefit that's that's coming through. And then I think, you know, Shawn talked about of the new innovations, whether it be Pillow Sac Jr, accent chair and the the swept arm and various other things. That four helping to bring some more energy to our growth. So, you know, we're gonna continue to be able to drive our platforms with the innovation and the excitement. You know, we've brought in some great new covers, for example, and the colors that are new are on fire. So, you know, as we continue to drive that excitement and then obviously get the website really to be able to acquire customers at a faster rate because it is our most efficient store. That's really what we've seen the strength through, you know, December. For this quarter.

Alright. That's helpful. I appreciate that color. And then just a follow on for me. When when you look at the marketing overhaul here, could you just kinda give us a sense of you know, how long you sort of expect this to to take? How long you expect to sort of wait to see the the impacts of this? Presumably, you're already seeing some impacts on digital, but just wondering what other time lines you're thinking about and we should be thinking about as it relates to this marketing shift and and the ultimate success there? Thanks.

Yeah. I think yes. Thank you, Eric. I think it's thinking two parts. I think first is real time and near time. It's happening right now. So as we talked in terms of shifting out of traditional media formats, even more aggressively than ever before, such as linear TV, moving a lot more to heavier paid influencers. We did a lot of that towards the end of quarter three and quarter four, a lot more around pragmatic digital channels. That's all real time. That's happening right now, and and we contribute the quarter four performance to, obviously, you know, a lot of those shifts. So that's really been happening real time. Then in in addition, you know, as I touched on the website before, performance, that that really was turning in a matter of hours and days as the team kind of pivoted and made some of those adjustments. So that is all kind of in Q4. I think the second horizon as Shawn has talked about the brand evolution, and really how do we bring the brand to life, in in terms of the storytelling about the value, the versatility of the brand, and then how do you drop down into the platform. You're gonna continue to see more from Heidi and the team as we get into quarter one and quarter two next year. As we really bolster up that storytelling and really claim the territory that is uniquely love backed that no one else has. You're just going to continue to see us driving all of those opportunities. And then I think, Shawn, you know, maybe you wanna touch about, you know, our focus on winning in the living room, and particularly Snug's performance in on ecommerce, which has been super strong.

Yeah. No doubt. As as as we've referenced, we think of ourselves as having these two superpowers designed for life products paired with tailored customer acquisition engines, And you know, on the design for life product side, the snug is becoming a really important part of our portfolio. Think they're they're while it is still ramping, we believe that it will as the platform evolves even over this coming year, help us fill in some of that weakness that we're seeing at the the low $6,000 transaction realm. You know? So even though, you know, we're we're we're calling out this weakness at the low end, Simultaneous snug is ramping. But like any new product, it just takes time. And so, we're really pleased with with the results we're seeing. It tells us that, the Lovesac customer wants products from Lovesac. It's not just the specific attributes of Sactionals, and that's led us to, yet another innovation in the SOFA sectional realm that we think again, will help us fill in the assortment and compete more fully against those incumbents who many of them have dozens and dozens of self sectional lines. So we while we have no intention of going that broadly, we are starting to really understand the opportunities we have in that realm. On the on the marketing side, as Mary said, we're seeing just some really exciting performance in on new tactics that we have not exploited before. We had a marketing playbook on these, you know, speaking of these customer acquisition engines, that got us to where we are. And it's certainly and we're certainly grateful to have experienced all the growth that we've experienced over this last decade. But, needless to say, the world has evolved a ton Our new CMO is, more than capable And you know, so those those are the two realms that we're focused on. Those two superpowers will continue to drive the business but it's a time of great innovation at Lovesac, both on the product side and on the marketing side. And, thankfully, we're seeing those green shoots in the business And I think it was evidenced by our performance over Black Friday and Cyber Monday. So, you know, it's a it's a mixed bag at this very moment given the macro, but we'll continue to look forward to a really exciting year at Lovesac. Next year, we'll be by far, the most prolific year of innovation launches ever. And, we're excited about it.

Appreciate the color. Thank you.

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

Hey, guys. Good morning. Just wanted to make sure I understood the cadence of demand during the quarter and then in the fourth quarter here. So just at what point in the third quarter did demand get worse? It sounded like the middle point of the quarter. There any regions where you saw concentrated weakness? And then drivers of improvement into the fourth quarter, it sounds like promotions and sharper on marketing, but maybe just correct me if I'm wrong there. And then our comps actually positive quarter to date. Just wanna make sure that, I mean, I'm getting the sense that I guess, Black Friday and Cyber Monday were strong. But is the the full quarter to date comp positive, quarter to date here?

Matt, thank you for the question. Let me start with the second one, and then I'll come to kind of the cadence in Q3. So yes, the comps are positive for this quarter, and we actually had a strong start for quarter that has continued all the way through to today. So I feel very good as, we've all shared in terms of the adjustments that were made in driving the performance, quarter four. To your question, kind of going back to quarter three, we had to we'd shared with you Labor Day was good. And then coming out of Labor Day, we've really started to see that pressure. You know, we'd obviously taken a second price increase. And that really impacted the smaller sized orders at under $6,000. At the same time, customers are facing uncertainty more broadly, and we really saw that shift down with that impact. I think then, you know, as we saw that drop down, we then made some adjustments. So it's our cadence started to improve. Towards the '3, but obviously not enough to be able to make up that loss in the middle part of the quarter. To your question, did we see any impact regionally? We see a little bit more a challenge in performance in a few states such as Florida and Texas. But honestly, it really is more broadly lashly as we look across the whole, you know, pet place. Think. So then as we moved into Porta 4, you know, the adjustments we made both in terms of promo cadence, you know, we simplified, we were bolder, but clearer, but instead of having some of the more discreet personalized offers, we just went, you know, full throttle with a winning promotion. And, you know, there were many other companies that were promoting up to 80% off. So we knew we needed to be strong. We wanted to win, and we did win. Based on the November results that just came out yesterday from Bank of America. And then the second point, your you know, what else shifted was just the optimization of the media strategy, trying to really focus also on that middle income consumer to be able to get them to convert. Again, just pleased to see the step up of that 6,000 and under order performance really moved back up, from where we were in quarter three.

Okay. Very clear. Thanks, Mary. And then on the gross margin outlook, I guess, what's driving the softer outlook in the fourth quarter that's implied here? Is that incremental pressure from promotions that you're needing to run to induce conversion? What's the tariff pressure also that that's factored into the end of the year here?

Yeah, Matt. It's, it's actually quite straightforward versus our prior expectations. It's the incremental need for a step up in promotions to remain competitive. Particularly as we target that below $6,000 transaction as well as you know, you know, some deleverage against fixed costs like warehousing and things like that given a lower absolute level of sales that that really is the difference between our prior expectations. Hopefully, that's that's helpful.

Yep. Pull it up there, guys. Thanks.

Our next question is from Brian Nagel with Oppenheimer and Company. Please proceed.

Hey, good morning. First question I want to ask, is with with regard to the reshoring comments. Know, I know and and, Shawn, we've we've talked about this for a while now. Plans for Lovesac to bring more menu back to United States. And we think the conversation suggested, you know, it's it's happening, happening aggressively. So I the question I wanna ask is, Steve, we're thinking about the model for Lovesac. And the common say suggested, you know, it should be kinda neutral ish. Know, to, I I guess, gross margins or gross profits. How should what would be the, you know, longer term benefits to the to the LuvSec model of bringing manufacturing back to The U. S?

Yes. Great question. Thank you. To be honest, this is the initiative that perhaps we're we're most excited about. We've believed for a long time that the unique nature of our products and the demand that we've created. You know, we're doing better than $600 million a year in seats and sides. Those should be manufactured, more automatedly closer to consumer, shipped over shorter distances, both for efficiency, and for you know, to drive sustainability, which we're passionate about. We're making that real this summer. And, it's been a long project, a difficult project. It's required heavy engineering, reengineering of a product from a materials standpoint. So the long term benefits are myriad. Yes. When we say neutral, we're targeting Sactionals cost. We're targeting we're trying to beat at least meat, but even beat Sactionals cost on an apples to apples basis pre tariff. Is our goal. Now we won't promise that at this moment, but that is our internal mandate. And, think we're gonna get there. So the long term benefit is more stable pricing better product, again, more efficient supply chain, shipping over shorter distances, more reliable, not subject to everything from pirates to hurricanes, to, you know, shipping container space, what have you. Particularly in the over this past decade. Since the tariffs began to throw everything up in the air in 2018. Know, which is the better part of his decade now. It's been an extremely volatile international landscape. And rather than wait to be kicked out of the nest again, you know, we're completely out of China. At this point pretty much, and, we took that note pretty early compared to some. Rather than play this hopscotch game around the around the globe, this is the path that we've taken, and, thankfully, it's working out.…

Our final question is a follow-up from Thomas Forte with Maxim Group. Please proceed.

Great. Thanks for taking my follow-up real quick. Can you talk about your gross margin strategy on entering new rooms? Meaning, the new product should be comparable to products to date from a gross margin standpoint. Or there may be a situation where you promote heavily initially or any other reason why the initial gross margin would be lower than ramp over time?

Yeah. I think, Tom, thank you for the question. So, you know, our targets, everything that we've been working internally is that we do want to maintain the gross margins that we've been proud to achieve. As we enter into the new room. The team have been very hard at work We've been looking at a lot of product and reviewing and challenging both in terms of the customer attributes, but also the manufacturing efficiencies. Leaning in in terms of also production in The US. Which also will obviously give us some benefits. So you know, for us, we see this as being able to maintain at the the gross margin levels that, we've seen and and actually Shawn talked about the excitement as we think about reimagining the inserts there is gonna be so much benefit in the new room in terms of just having that domestic product, being manufactured, getting it to customers even quicker. And managing our inventory, let alone just the awesome product that we're getting to see with the teams. Shawn, I don't know. Anything else you want to add on The New Room?

No. Look. Our goal is to continue to target these high fifties gross margins. You've seen us fluctuate. Over the past number of years, that you've been tracking us, you know, between all all really always between fifty five and sixty. So that's the place we think this business should be at. It puts us definitely at the high end in our industry. Of course, we we speaking really candidly, we don't believe that going much higher than that is prudent for this category. It leaves us further open to competition, copycats, who knows, leaving too much meat on that bone. Right? So it's a delicate balance, but our point of view has not changed, and and the new room doesn't change it for us. And look, we expect to compete at the higher end of things with very practical product. That can do all the things that you have have grown to, expect that consumers have grown to expect from ac and perform the same way from a quality standpoint. You know, features and adaptability standpoint, everything designed for life represents. But great question. And of course, we're we're we're super excited to get there. But we just have so much opportunity in this in this coming year to lean into the core and the strength that this brand already has and really harvest some of that value. Look. We're the most prolific advertiser of couches on the planet. Delivering the best, most versatile couches on the planet. That's what we're known for. And so this is a really, we think, safe approach to the coming year in this choppy environment while you know, giving us opportunities to drive revenue, drive growth, and and protect that gross margin. And so that's the that's the foundation we wanna be on when we launch that new room. That's what all of this is about. Excellent.

Thanks, Shawn. Thanks, Mary. Thanks, Keith. This will end our question and answer session. I would like to turn the floor back over to Shawn for closing remarks.

Yes. Thank you so much to all of those shareholders, stakeholders who supported Lovesac and of course to our tireless Lovesac team. Who continues to fight to this crazy macro environment to deliver great results We're looking forward to the coming year.

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