Greetings. Welcome to Lovesac's Fourth Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] 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. 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 today by sharing a high-level overview of our fourth quarter and full year fiscal 2026 results, provide an update on our Design for Life product platforms and strategic priorities for the year ahead 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 detail on our fiscal 2027 outlook. Before getting into the details, I wanted to capture the bigger picture strategic accomplishments from fiscal 2026 that could be easily overlooked. These accomplishments support our evolution from a product-driven company into a multi-platform, multi-room lifestyle brand, a brand that we believe can be the most loved home brand in America in short order and in one day, the most loved brand in America full stop. That's our ambition. We build our strategies to that end. These accomplishments recognize the economic landscape and competitive realities of a time such as tariffs, with some reorganization of priorities to better optimize the opportunity to create value for stakeholders over the long term. First, we reinforced our already strong position in the living room with a focus on harvesting the strong brand equity we have, earned over our now 27 years of history. We launched a new seating platform called Snugg that will expand further in the coming months into a full sectional entry-level platform with new accessories, including the swivel armchair that we previewed at ICR. We reengineered our Sactionals platform and accelerated plans to onshore the manufacturing of the most core pieces beginning this summer. Mary will share more about this exciting initiative later. And we developed and consumer tested a new high-end sectional-sofa platform that we…

Thank you, Shawn. Building on Shawn's overview of our Design for Life platforms, I'll now focus on our customer acquisition engines as well as our growth enablers that are fueling our momentum. Before diving into the specifics, I wanted to take a step back to reiterate how we think of the unique intersection of our product platforms and customer acquisition engines. We say platforms instead of products very deliberately. Lovesac competes in an industry in which customers choose a product, some for aesthetics, others for comfort, or maybe even just for its dimensions, but then they're largely married to that product for 7 to 10 years. Our platform model is very different because nothing about a Lovesac purchase forces the customer to stop iterating on what's possible within the platform. 85% of our customers evolve, add on to, or complement the Sactional they initially purchased with further purchases. We know from our research that 7 in 10 customers rearrange their Sactionals, and more than 4 in 10 add seats or change fabrics. This is a fundamentally different paradigm, closer to Apple than traditional furniture, in that the platform only becomes more valuable over time and as it expands. As evidenced, nearly half of all Lovesac transactions are from existing customers because they recognize the inherent value and the ability to continue to personalize and evolve their Sactional as life and their needs change. This is the heart of what we call our customer acquisition engine superpower. In essence, it's a compounding blend of brand and performance marketing, omnichannel retail presence and customer relationship investments, which yields efficient awareness, customer conversion and long-term brand loyalty. This model is why we fully recoup our customer acquisition cost on the first purchase, and why our lifetime value, as measured by gross profit is…

Thanks, Mary. Let's jump right into a quick review of the numbers and our outlook. Revenues were $697.1 million for the year, which were up from $680.6 million in the prior year, owing to new showroom openings and an increase in omnichannel comparable net sales. Gross margin was 56.4%, a solid level, especially considering tariff impacts. Net income of $4.1 million was down from fiscal '25 owing to higher tariff, freight and operating costs, but still supported positive free cash flow for the year and a healthy cash balance that I'll speak more about in a couple of minutes. Moving on to the fourth quarter. Please note that all performance metric references to the fourth quarter refer to fiscal '26 unless otherwise noted. Net sales increased $6.6 million or 2.7% to $248 million in the fourth quarter compared to the prior year, reflecting an increase of 0.6% in omnichannel comparable net sales. Showroom net sales increased $5.3 million or 3.5% to $159.8 million in the fourth quarter compared to the prior year period, driven by the net addition of 21 new showrooms period-over-period. Internet net sales increased $8.7 million or 12.3% to $79.2 million in the fourth quarter compared to the prior year period. Other net sales, which include pop-up-shop, shop-in-shop, open-box inventory transactions and the Loved by Lovesac Program, decreased $7.5 million or 45.4% to $9.0 million in the fourth quarter compared to the prior year period. The largest contributor to the decrease was the closure of the company's Best Buy shop-in-shop locations as a result of the discontinuation of its partnership with Best Buy. By product category in the fourth quarter, our Sactionals net sales increased 1%, Sacs net sales decreased 18.2% and our other net sales, which includes our new Snugg platform, decorative pillows, blankets and accessories,…

[Operator Instructions] Our first question is from Brian Nagel with Oppenheimer & Company.

Congrats on the ongoing progress here. So the first question I want to ask, just with regard to the, I guess, the sales outlook for the current fiscal year that you provided today. I mean, clearly, you're making clear that you don't expect the macro environment to turn into any type of tailwind. But I guess as you look at the range from the bottom to the top, what are the key factors that will determine where sales ultimately fall within that?

Brian, thank you for the question, and good to hear from you. So yes, I think as you called out, we don't see and haven't factored in any macro environment improvement. So we really are focused on what we can control. The first thing that we look at obviously, we have a clear path to knowing around our product innovation launches that are yet to annualize the new ones to come in their respective timing. So we're very clear on that part. We're very clear in terms of our showroom expansion as well as, as I touched on earlier, the next phase of the marketing and e-commerce transformation. The third is around our delivery services expansion and the expected incremental revenue is the kind of first time this year of rolling that out. So we've done some testing to that, but obviously, there will be variability. We know that's been a high friction point for our customers to convert, where they wanted to have the assembly capabilities provided by us. So the great news is that we are going to be rolling that out. The timing and then the take-up of that does have some variability for that. So we assume similar competitive environment as well. So it really is around that range of that very new revenue driver that will shift the difference between what we anticipate in the range. And obviously, our intent always is to continue to gain strong market share as we demonstrated just last year and accelerate it. So looking forward to the year. The team are pumped actually in terms of all the opportunities ahead for us.

Mary, that's very helpful. And then my follow-up question, I guess, on the gross margin. Again, lots of moving pieces here. We started talking things last quarter about the reshoring, if you will, bringing manufacturing back to the United States. So the question is we're looking at gross margins now and recognizing the ongoing tariff impacts, I mean, how should we think about over any length of time, the trajectory from here? Will the reshoring effort, will those -- will that ultimately be a positive for gross margin? I mean, do you expect to mitigate some of these tariff costs in other ways going forward?

Thanks, Brian. It's a good question. I'll kick this off. When we think about the gross margins, there's a couple of things to keep in mind with the onshoring program, which is it will take us some time, number one, to scale that production up and to flow it through our inventory. So when you think about things like tariffs, it's important to realize like when we pay those tariffs, what we do is we actually capitalize it and attach it to the inventory, which goes into our balance sheet, and then as we sell through, it flows through into our P&L. So we're really excited about what this potential is, and I'll get to that long-term opportunity in a second. But as you think about the course of this year, by the time we get that inventory really flowing through the P&L as the production ramps, et cetera, et cetera, we're not going to get to see much of that benefit for this year. So like just to stick on this year for a second, what we're thinking about from a tariff perspective is all of the existing tariffs that are in place, we are no longer exposed to China-specific tariffs, which we're excited about, but we still have Section 122 and others. What we've built in for now is upon expiration of the 122 tariffs, we've made the assumption that there will be something else that will come in its place and approximate those rates for the second half of the year. So -- and we still have an annualization of the impact because it didn't hit the entire year last year, right? So put all those factors together, also some wiggle room around potential volatility in shipping rates. We've built in some impact from that as well.…

Our next question is from Thomas Forte with Maxim Group.

One question and one follow-up. So can you talk about the relative gross margin and contribution margin for your e-commerce efforts Love by Lovesac versus sales of new merchandise?

Yes. Tom, thank you for the question. As you know, with us, Loved by Lovesac, we just started launching last year and rolling out on the resale side. And for us, we're now, I think, with 29 states, we're actually opening Arizona up next week. So then to your question in terms of -- from a gross margin perspective, compared to how we were managing open-box inventory before, we have significant points upside in the benefit of being able to turn that inventory back around and be able to sell it at a higher rate of value than we were previously achieving. So still a lot to learn in terms of customers' velocity around kind of pricing, which obviously drives from a gross margin perspective, and then also scaling it up. So it's not material today, but we do see that gross margin benefit over time, so excited. And then the second piece that we will be unlocking, which actually is really what we're excited about and we're starting that pilot this year is trade-in because we really see a huge amount of strength in terms of trading in the product and obviously being able to sell that product once it's cleaned and sanitized for a gross margin. But more importantly, then you give the customer a credit and then they trade up and buy even more from us. And that's just really the power of our platform. So whether they're buying an extra recliner chair, new covers and all the things that Shawn talked about that's to come, just the acquisition cost and therefore, the gross margin benefit that we're going to get through tapping into that opportunity is going to be very significant. But again, as we build this up, then we'll share more as this becomes more material.

And then for my follow-up, how should we think about your free cash flow conversion on your adjusted EBITDA?

Sure. So for free cash flow conversion, I think there's going to be a little less volatility than maybe you've seen in the last couple of years. We've got the inventory in a really solid position. Our processes are already lined up really nicely and in place this year. I think what I mentioned earlier remains the case, which is a slight inventory build year-over-year, but I don't anticipate a whole lot of other drivers of variance between, let's call it, our EBITDA and our free cash flow. You'll notice that on the balance sheet here at quarter end, we have substantially lower accrued expenses and accounts payable than we did last year. So just to remind everybody, we built that inventory in Q4, a year ago. We paid for it in Q1, right? The cash flow for those bills came due in Q1. This year, we have lower inventory. We have substantially lower accrued expenses and accounts payable. So there will be less cash allocated to paying off those bills in Q1 of this year. But those are really the only nuances. Everything else should be far less of drivers of variance.

Our next question is from Maria Ripps with Canaccord Genuity.

First, I just wanted to ask about Snugg. Now that the product has been in the market for more than 6 months, is there anything you can share in terms of sort of incrementality of Snugg customers on the platform? Are these mostly new customers or existing Sactionals buyers? And are you seeing any differences in engagement with the broader Lovesac platform between the Snugg and Sactionals customers?

Yes. Thanks, Maria. Great question. Snugg is off and ripping. We're so excited to have it in the portfolio. It's part of a bigger strategy to take more of the living room and to win the living room. You're going to see us on a number of products that will continue to layer on to help us achieve those ends. As it pertains to Snugg specifically, we're not ready to break it out as a business yet, but it is now more and more being -- you're going to see it more and more be positioned to be our entry-level platform. And in fact, as we've spoken about, it's going to be expanded on very, very soon here to become a full sectional platform. It won't have the same flexibility that Sactionals does intentionally, but does offer some unique characteristics like a solid rail. It's not split up into individual seats like most sectional furniture. It's a really unique platform in the landscape unlike any other sectional platform, has some really unique attributes. So it's helping us already capture back some of that smaller ticket business that we spoke on earlier calls that we were struggling with in this current environment. And I think we believe once it's expanded into a more fulsome platform, it will help us mitigate those headwinds even more impactfully. On top of that, in terms of what you're asking about the customer, we're seeing success with Snugg, both with repeat and new customers. On the new customer side, we're seeing upside in urban markets where spaces are tighter. We're seeing upside with young families where not ready to make the commitment to Sactionals. And again, we're not breaking out that incrementality, but it's definitely meaningful to us and is here to stay. And on the repeat business side, Snugg is so useful in other rooms of the home, in even in context with Sactionals, especially as an Accent Chair. We're really excited about the oncoming swivel for that Accent Chair, we think that's going to be a huge unlock for that business. And that's all incremental because right now, when a customer is buying even a large Sactionals, there's often that nice space for an Accent Chair facing back, facing on a 45-degree angle, et cetera. And the Swivel really helps unlock that business for us. So we're really proud of the Snugg platform. We're even more excited about its future as a couple of these key product introductions unfold this year. And we'll round it out with another platform introduction, remember, at the high end and even bigger footprint than Sactionals. And we think that this at least 3-tiered strategy will really help us compete for more business in the living room as we continue to layer on even a few accessory products to help us win there as well. So I appreciate the question and looking forward to more Snugg business very soon.

That's very helpful. And maybe related to that, sort of as your portfolio of products sort of expands from the core Sactionals to now 3 products, right? Can you maybe just talk about how that's impacting your marketing message? And just sort of how do you communicate with your customers about now these 3 different options that will be available on the platform sort of in the middle of this year?

Yes. Thank you. I mean you're witnessing Lovesac undergo a metamorphosis where we are brand focused, and we need to be brand focused. We've done very well with focused message around Sactionals. Buy a bunch of seats, buy a bunch of sides, build anything you want, and that will continue to be a powerful marketing tactic for us, but it's no longer the strategy. As a tactic, something like Sactionals that plays well on TV, amazing video, has all these features and benefits will always be a powerful tool, and you'll see us use this tactic as we expand into other categories and even rooms. But our overall goal for this brand is to evolve into a lifestyle brand. If we're going to do that, our advertising communications need to become more emotional, more brand-focused overall and built around a strategy to achieve those ends. And so as it pertains to Snugg and these other platforms, we certainly will lower funnel where the focus is not establishing the brand and driving awareness for the brand, mid- and lower funnel, you will see Snugg ads, you will see new platform ads, and they will be product-focused with the point being conversion. And the opportunity there for us that we see as real upside is at the moment, so much of our communications because we are spending a significant amount of money on marketing, right? We are not a retailing merchant with a tiny ad budget. We are a marketing-driven engine. And so much of our communication is around a discount. It's around a sale. And it's around one product, just being frank. And so having this multi-tiered product strata now allows us instead of offering, for instance, as you've witnessed, 30% off or it's up to 40% off. It now can be an up to message, and you're starting to see that fold in. It will allow us to offer discounts on certain products and not discount some products that we know, the higher-end consumer is willing to pay full price for or closer to full price for on holidays. And so we've really lacked for dynamism in our marketing messaging because of our focused catalog. And while we, on principal, will never become unfocused, we got to remember that we're still generating a sectional-sofa business, Snugg and Sactionals combined that eclipses most of our largest competitors' entire upholstery businesses. And so to get that from 2 and then maybe even 3 platforms is still pales in comparison to the who knows, 20, 30, 40, 50 sofa sectional designs that some of our competitors offer. So we'll stay focused overall, but we are diversifying and it really will make the business more dynamic, we feel going forward.

Our next question is from Eric Des Lauriers with Craig-Hallum Capital Group.

Congrats on the continued progress here. So overall, it seems like the reorganized marketing teams and e-commerce teams and then the enhanced field incentives and the showrooms that you touched on, on the call, it seems like those are really having a material impact, helping you gain share, drive positive comps. Could you just kind of help frame where we're at with both of those in terms of how much further impact you expect from these initiatives? Are they sort of fully rolled out? Or do they have more room to scale?

Eric, thank you. Yes, great questions and connecting them all together. So let me start actually kind of with the field incentives, and then I'll come back to the reference around the marketing team overall, including e-com. So as I referenced earlier, we started testing in quarter 4 with a sharpened incentive program. Everything 100% is driven around the showroom performance. So it's a team effort in the showroom, and we want to maintain that, but it is all about their performance where prior to that, it was a lot more around total business performance with some blend of individual showrooms. So 100% around that, but with a much higher upside based on over performance. So we saw a great performance in quarter 4, that was a pilot to help us inform us for our strategy for this year. And actually, we've risen up in terms of the overall cap in terms of their performance. And just talking to the field, they love it. They feel very motivated and they see a very linear path around how much more they can earn based directly related to their performance. So I think I would say that we're receiving some of that impact of that program, but you will see more to come as we kind of transition, I would say, over the next couple of quarters to really see the full momentum. And the second part that kind of dovetails into it is also just our ability to hire the best salespeople out there in the market. And I think this is highly attractive to those that really do overperform. And we want them and welcome them all to Lovesac. So we're coupled with some training programs, we see a lot of potential. And then I think back to your question on marketing, obviously, I think we announced before Heidi and the team had undergone a reorganization back in September last year. And that was really about bringing marketing all together under Heidi's leadership, including e-commerce, bringing all of media collectively under one leader as well. And we're really starting to see that total view around the customer acquisition optimization coming into force. But I would say anything such as this does take time. So we have baked in upside through this year. We're already seeing that through the marketing performances at the beginning of this year in Q1, and we continue to expect that to build out. So more to come, but really appreciate that team's leadership. The modernization of what they're doing is really good. But I think even just some of the brand storytelling, connected to a tentpole moment and being very relevant to our customers, just really shows the sweet spot that Lovesac can play in. So we look forward to sharing more with you as we report next quarter. Thanks for the question, Eric.

That's very helpful. And then just a kind of high-level level-setting question for my follow-up. On the showroom expansions, you previously guided to 10 net new in fiscal '27, now 8, obviously materially down from previous quarters. How much of this is sort of a temporary strategy around macro headwinds that will reaccelerate in future years? And how much of this is just kind of reaching saturation or critical mass and in which case, we should expect kind of a lower range to be the new normal going forward?

Yes, great question. So just to address the second part of the question first, it is not a saturation issue. It is really an offensive move to think about what the optimal showroom or store of the future might look like that best represents our ambitions in this metamorphosis as Shawn talked about, transitioning from a product company to a brand. We finished the brand evolution work. We're now rolling it into all the other things that you've heard throughout this whole call. So we're taking a minute here to redesign a flexible suite of asset options that include various elements that can be pieced together in different ways, whether it includes heavier focus on, let's call it, Sactionals or Snugg or Sacs or the new room that's coming next year. We're already working on elements of that. And I think what we want to do is to let the data drive it. We're going to open some different kinds and different formats and different expressions, maybe some flagships, maybe some stand-alone and maybe some hybrids, and we're going to let the data tell us. But I think what I would kind of ground you in is this principle that Mary mentioned, which is we look at everything from a market share perspective. What market share do we think we can take? Then the second question is what's the most efficient way to take it? If the most efficient way to take it, is through a different type of expression than what you see right now, a blend of these asset options, great. If it becomes a lot of showrooms substantially more, great. We'll do that. But we're going to let the data drive us. And I think, again, we go through our customer acquisition engines are put in order on purpose, right? First things first, biggest, baddest store, 365 days a year, 24 hours a day, most of our customers go there, lovesac.com. That's got to be amazing. But we know some of our customers need to touch it, see it, feel it, just experience it. So we'll have these really amazing customer experience centers in our stores. And then we'll compound all of that through highly efficient partner channels as well. That's kind of the mindset we go through. So we think this is a great approach for now while we get all our ducks in a row as part of this transition. And then we're going to let the data drive what the optimal execution is to take that market share most efficiently.

Our final question is from Matt Koranda with ROTH Capital Partners.

I guess just wanted to fit the first quarter sales guide into the full year. So curious what you've seen maybe in February and March on traffic and conversion to date? And then presumably, I guess, the implication of the full year guide would be you get back to growth later in the year to hit the midpoint of the full year sales growth guidance. I guess why are we confident in assuming improvement later this year? Just talk about the drivers that give you confidence in the return to growth.

Yes. Just to start with the quarter, sort of to date, just to give you some perspective, because I think sometimes we do vary a little bit differently from the category given the timing of our tentpole promotions and things along those lines. Look, we had good strong performance around President's Day. It outperformed our expectations. It's a great first month to our quarter. This was offset a little by a weaker second month. We had this valley sort of between the President's Day holiday of the first month and then Easter coming in the third. But we've got a really good strong pipeline of quotes that we are going to activate against as we enter into the Easter selling season. So what we've done, good strong first month, a little bit weaker valley in between the promotions, but a lot of confidence as to how we're approaching things. Look, I do want to highlight one quick thing that does make the Q1 look a little bit different maybe, than it would appear at first glance. We're going to have a little bit of a onetime shift between demand and revenue in Q1 based on our rollout of these new delivery service options that Mary mentioned, the rule of choice and white glove. The reason is because we expect that some of our customers or even many of our customers, they schedule the delivery further out than our normal fast and free, which is about a week. What this means is we're preparing for a little bit of an increase in our order backlog at first quarter end. But it's just timing, not demand. These are in the backlog and are expected to convert soon after. The impact gets exaggerated a little bit in Q1, given it's our lowest quarter from a seasonality perspective. And look, we don't expect a material impact on the full year. So just to summarize that Q1 demand sales, if you think about it from our guidance, are projected to be flat to growing versus Q1 last year with revenue slightly lower than demand owing to this matter. So it maybe exaggerates the quarterly cadence a little bit, but we do think net-net and over the course of the long term and the year, it's a positive development.

Okay. That's helpful. And then do you want to talk about later this year just in terms of the assumptions, maybe new product launches and whatnot that factors into the return to growth?

Yes. I think Mary talked about this earlier, and I think she covered it really well. It's the product innovation timing. It's the marketing and e-commerce, transformation and the benefits we get from that. It's the ramp-up of the delivery services and the whole related halo effect that, that can drive. And then the quarterly cadence issue I just talked about with the shift between demand and revenues on this timing shift for the delivery service options. I mean, honestly, really, that's it. The only other wildcard that comes into play here is a little bit of the promotional variance that can have an impact outside of core category growth. But I think those are really the items.

Yes. And I'll just jump in and add a little qualitative piece. I think that as the year wraps up, Matt, if we could fast forward 3 quarters, 4 quarters, you will have seen this coming year as the most prolific year in Lovesac product launches in our history. And the reason for that is we're gearing up to propel ourselves into this new room that we've talked a lot about. That's a multi, multiyear investment. It -- and we expect it to be quite consuming and a major leap forward for the business a year away. As we prepare for that, there are a number of moves that we feel necessary to really shore up our position in the living room, compete stronger, and really solidify that base before that new room takes so much of our focus and energy. And so it's really driving us to push a lot of things over the finish line that we're very proud of actually and been thinking about for a long time. And it's just going to be a really exciting year, we think. So while no doubt, we've been under pressure as a stock for a long time, we've definitely been cooking in the back room for a long time, spending a lot of money on innovation and not just in the product realm, in the services realm, all these things will really start to culminate towards the end of the year. And I think that, that gives us great confidence in this plan that it's essentially not a ton of growth by Lovesac standards. But in this environment, if we can pull that off, we'll feel like it's a good foundation to build on for all the even more exciting stuff to follow after that. So we appreciate your patience, and that's a great question.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Yes. Thanks so much to all of our investors that continue to support this brand, keep us energized, challenge us. Thanks so much to the #LovesacFamily that is our lifeblood and so much energy and confidence and expertise going into building our future together. Have a great day.

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