The Lovesac Company (NASDAQ:LOVE) Q3 2024 Earnings Call Transcript

The Lovesac Company (NASDAQ:LOVE) Q3 2024 Earnings Call Transcript December 6, 2023

The Lovesac Company beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.31.

Operator: Greetings, welcome to Lovesac’s Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please not this conference is being recorded. At this time I’ll turn the conference over to Elizabeth Schnoerr. Ms. Schnoerr, you may now begin.

Elizabeth Schnoerr: Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Mary Fox, President and Chief Operating Officer; and Keith Siegner, Chief Financial Officer. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company’s filings with the SEC, which includes today’s press release. You should not rely on our forward-looking statements as predictions of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now, I’d like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Shawn Nelson: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I’ll start this call off by reviewing the highlights of our third quarter fiscal 2024, briefly providing an update on our operational accomplishments and finishing up with our outlook. Then Mary Fox, our President and COO, will update you on the progress we made against our strategic initiatives. And finally, Keith Siegner, our CFO who will review our financial results and a few other items related to our outlook in more detail. Turning to the highlights of our results. Not a lot has changed since we spoke with you four weeks ago. Lovesac continues to deliver strong financial results and category outperformance, backed by a very strong balance sheet.

For third quarter, we’re pleased to confirm top and bottom line results that were in line with the outlook provided on our second quarter call on November 3. The headline is that third quarter net sales grew double-digits in a double-digit negative category. To be clear, the macro backdrop largely remains the same as last month. Lingering macro uncertainty leads to consumer caution and pressure on the furniture category, which we estimate was down mid to high-teens in the third quarter. However, our playbook also remains largely unchanged and continues to deliver. Our disruptive, design for life platforms, impactful product innovation, compelling marketing, and highly productive omni-channel footprint continue to distinguish our unique brand and engender customer love and loyalty.

More specifically, for the third quarter, total net sales were $154 million, up 14.3% versus the prior year period and 32% on a two-year basis. Omni-channel comparable net sales growth was 2% for the quarter, a key metric for how we evaluate and manage our unique omni-channel business. We delivered gross margin expansion and substantial abatement in SG&A deleverage as expected, which led to materially improved profitability, compared to the third quarter of fiscal 2023. Adjusted EBITDA reached a positive $2.5 million, compared to a negative $6.9 million in the prior year period. Net loss is also improved to $2 million, compared to a net loss of $7 million in Q3 last year. And that’s despite non-recurring expenses related to the restatement that are called out in our press release.

The Lovesac team continues to execute across all our priorities, including our innovation agenda, physical footprint expansion, omni-channel experience from order to delivery, and marketing efficiencies. Mary will discuss in more detail the progress of these growth strategies in a moment. As we look to the final quarter of the year, which includes the all-important holiday selling weeks. I’d like to note the following: the macro environment and in turn the discretionary home category has remained challenging. As we said on our last call, we are not planning for any meaningful recovery and category growth in the near-term. And yes, as expected, the promotional environment was more competitive over the Black Friday and Cyber Monday periods than last year.

But as we discussed with you last month, we adapted our plans, increasing the discount slightly and delivering relevant and distinctive marketing with strong gross margins to boot. Taking all that into account and with the Black Friday and Cyber Week events behind us, I’m happy to say that Lovesac has continued to grow and outperform the category. As a result, we are further tightening our full-year net sales guidance range now $710 million to $720 million, which represents high-single to nearly double-digit growth even excluding the impact of the 53rd week this year a truly standout performance. We are not ready to provide guidance for fiscal 2025 today. However, we will prudently control expenses and with a focus on efficiency, balanced against proactive investments in new products to drive profitable growth.

In summary, we are pleased to deliver third quarter results that were in line with our expectations and which, once again, are ahead of the competition. The operational progress we are making against our growth strategies, along with disciplined investments in key foundational areas like technology, new product innovation, and insights continue to fortify our flywheel, thereby driving consumer demand and expanding our market leadership, which we believe can last well into the future. Finally, I want to thank the entire Lovesac team for their tireless execution of our strategies and delivery of our goals, especially during this critical time of year. Our disruptive model enables us to continue to grow, thrive, innovate and invest in this business.

But it is our people, who ensure an outstanding customer experience and are the reason that our Lovesac family is growing so steadily as we enjoy a great holiday season together. With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail. Mary?

Mary Fox: Thank you, Shawn, and good morning everyone. As Shawn discussed, with sales growth of 14.3% our quarter three results again reflected industry-leading growth driven by our unique omni-channel business model. Importantly, on a four-year basis, our sales dropped 196% from pre-pandemic levels. And our adjusted EBITDA margin has increased 880 basis points over the same time period. Category outperformance has continued this quarter with strength and demand versus last year during Cyber 5, from Black Friday through Cyber Monday. And we are very pleased with our early results. Some highlights from Cyber 5 include having our two largest sales days and the largest week in our history. We believe this peak in sales that is unique to our business within our category is due in part to our investment in building a brand that is unmatched in the furniture category, coupled with delivery to customers’ homes in just a few days.

Our clear strategy for growth and the team’s consistent execution against our growth strategies allows us to continue to fuel our flywheel and drive operational excellence across the business. I will now share the highlights of our operational progress in quarter three. Firstly, starting with product innovation. During quarter three, we expanded distribution of our newly launched Angled Side, which is now available across our showroom base, as well as our e-comm platform. And we’re very happy with the impact and feedback. Angled Side performance is even above our original expectations, which were ambitious, emphasizing how it is a meaningful driver of our overall continued growth and category out performance. As I shared before, we partnered with Architectural Digest to launch Angled Side to the consumer and designer world.

The event was well attended by influencers, as well as media outlets such as Vogue and Glamour, and of course, Architectural Digest. In addition to generating over 1 billion impressions, the event was surrounded by Architectural Digest paid media, further empowering the success we’ve seen since launch. In short, we’re very happy with the early performance of Angled Side as it’s approaching becoming Lovesac’s number one style choice after only a few months. We’re also launching some strong collaborations into the holidays, including a partnership with Nordstrom and Swarovski to develop a foot sack that will be featured within Nordstrom and on nordstrom.com this holiday. We continue to demonstrate that we will gain market share through our new product introductions and brand collaborations.

As awareness and appreciation continue to grow, all of which reinforce the strength of our customer-centric business model. Our Omnichannel experience, this model is driven by a combination of our physical touchpoints in our digital platform. During third quarter, we opened 10 showrooms and 16 Best Buy, shop-in-shop. With regards to our Best Buy partnership, sales were up 42.8% in quarter three, driven by increased shop-in-shop presence versus last year. Our e-commerce channel performance continued to show strong growth and increased 20% for last year, and contributing meaningfully to our category outperformance. Our omnichannel model and investments into touchpoint and website to technology continues to drive improved customer satisfaction scores as we continuously monitor feedback and improve the overall customer shopping experience.

We made significant improvements to the website shopping experience before entering our holiday code freeze, including new configurators to ease the customer rebuy journey, updates to post purchase experience, and platform security enhancement. Strong collaboration across touch points and e-commerce enable us to continuously improve the omnichannel experience. Third is our brand ecosystem. At the center of our ecosystem lies our efficient marketing and effective rival brand awareness, familiarity, love, and ultimately customer acquisition, which supports our strong customer lifetime values to customer acquisition cost ratio. Overall, we continue to be agile with our marketing mix as the backdrop for customers interaction with our category continues to change.

Let me share a few highlights of what we’ve been working on. For awareness more broadly, increasing efficiency in achieving reach enabled us to drive reach and also improve targeting simultaneously. Live sports up front are a key example of this improvement. While on this subject, hopefully you all have seen our newest commercial that tested very strongly across all metrics. We continue to closely scrutinize digital marketing program optimizations to our SEM and social programs, which have driven improvements in our overall ad exposure and cost metrics, along with improving conversion rates and ROI. We’ve had strong success with some social partnerships that reinforce the resonance of our brand with culture. Charli D’Amelio posted from her new home on Lovesac products she’d requested and as you know, she has more than 151 million followers on TikTok and over 9 million YouTube subscribers.

We collaborated with Justin Pugh on a special sack when his Saturday Night Football intro referenced straight off the couch. And these two collaborations garnered over 35 million impressions and are just a few examples of the work our team are doing building brand love and stickiness. And not to be forgotten, direct mail campaigns once again delivered strong ROI’s for us and not only drove customer acquisition, but aided increasing lifetime value of our customers. Lastly, we were really excited to see that Esquire named Feltech one of its best 37 gadgets for 2023. Yes, that is right, a couch made the best gadgets list, reinforcing the strength of design for life products powered by technology. And finally, disciplined infrastructure investments and efficiencies.

During quarter three, we continued to make investments in technology and research and development as we scale our business for the long-term. We completed the national rollout of PredictSpring, our new POS system, in all of our touchpoints. This rollout enhances the customer experience through speed of transactions and unlocks new and modern payment options like pay-by-link capability. Our quick delivery continues to drive customer satisfaction and our investments in supply chain, which we remain on track to deliver by the end of this year are expected to help drive inventory productivity improvements of 20%, as we have previously stated. As mentioned last quarter, we continue to make progress on our circular operations and open box inventory as we focus on improving the executional effectiveness and brand experience.

And we are seeing over 48% improvement in units back to stock versus last year. As a result of these initiatives, we expect to see improvements in working capital, as well as associated cost reductions across inbound freight and warehousing, which we saw in quarter three and will continue to realize in quarter four. Investments in Gladly, our customer service platform, has allowed us to better serve customers as part of our sales and service strategy, driving over 8 points of increase in C-LOG customer satisfaction scores in quarter three over the same quarter last year, and an impressive increase in service performance versus last year during Cyber 5. We are laser focused on operational excellence and we will continue to manage our cost structure and capital allocation as we deliver operational performance ahead of our competitors.

In summary, we are pleased with our results for the third quarter and our continued and consistent track record of market share gains. I want to echo Shawn’s gratitude to our amazing team members for helping drive these financial and operational outcomes. For the big holiday weeks that we just covered and the ones to come, one thing that is certain is that we are ready for them and look forward to closing out our fiscal year having built on our market share gains, expanded our physical footprints with highly productive locations, improved our digital go-to-market position, made important infrastructure investments, and doing all of this while advancing our innovation agenda. I will now pass the call over to Keith to review our third quarter results and our outlook for the fourth quarter.

Keith?

Keith Siegner: Thanks, Mary. Let’s jump right into a quick review of the third quarter followed by our outlook for the rest of fiscal ‘24. Net sales increased $19.2 million or 14.3% to $154 million in the third quarter of fiscal ‘24, with the year-over-year increase being driven by web and showrooms. This was in line with what we projected for the quarter, driven by our 25th anniversary celebration and the launch of Angled Side. Showroom net sales increased $15.7 million or 18.9% to $98.7 million in the third quarter, as compared to $83 million in the prior year period. The increase in showroom sales was driven by an increase of 2% in omnichannel comparable net sales growth related to higher point of sale transactions with higher promotional discounting than the prior year, as well as the net addition of 41 net new showrooms, compared to the prior year period.

You’ll notice that beginning this quarter, we’ve replaced previously provided comparable sales growth metrics with a new metric omnichannel comparable net sales growth. This is the metric most closely aligned with how we evaluate and manage the financial performance of our omnichannel business. It also eliminates noise caused through the inclusion of demand-based metrics in the past, such as orders placed, but that have not been shipped, and should therefore be far more useful for your models. Internet net sales increased $6.7 million or 20.1% to $40 million in the third quarter of fiscal ‘24, as compared to $33.3 million in the prior year period. Other net sales, which include pop-up shop, shop-in shop and open box inventory transactions, decreased $3.1 million or 17.1% to $15.4 million in the third quarter of fiscal ‘24.

The decrease was principally due to a lower open box inventory transaction level, only $2.5 million, compared to $4.2 million in the third quarter fiscal ‘23. Our open-box inventory transactions with ICON are a part of our circular operations, design for life, and ESG initiatives. As we discussed last quarter, these transactions are waning in materiality as our initiatives to optimize our process for return product kick in. This better aligns with our sustainability goals and should retain more profits for Lovesac at the same time. We may engage in limited open-box inventory transactions with ICON going forward to ensure that our warehouses are operating as efficiently as possible. By product category, in the third quarter, our Sactional net sales increased 18%.

SAC net sales decreased 10% and our other net sales, which includes decorative pillows, blankets, and accessories, decreased 15% over the prior year. Gross margin increased 920 basis points to 57.4% of net sales in the third quarter versus 48.2% in the prior year quarter, primarily driven by a decrease of 1,070 basis points in total distribution and related tariff expenses. This was offset partially by 150 basis points of pressure from higher promotional discounting. The decrease in total distribution and related tariff expenses over the prior year is principally related to the positive impact of 1,160 basis points decrease in inbound transportation costs, partially offset by 90 basis points in higher outbound transportation and warehousing costs.

SG&A expense as a percent of net sales increased by 420 basis points in the third quarter or half the deleverage seen in the second quarter. The deleverage was primarily due to deleverage within employment costs, selling related expenses tied to the Lovesac credit card, continued investments to support current and future growth, and also professional fees. In dollars, overhead expenses increased $10 million, consisting mainly of increases of $6.3 million in professional fees and $3.7 million in infrastructure investments in other miscellaneous items. Employment costs increased by $2.9 million, primarily driven by an increase in new hires in fiscal ‘24. Selling related expenses increased $1.5 million, principally due to credit card fees related to the increase in net sales and an increase in credit card rates.

We estimate non-recurring incremental fees associated with the restatement of prior period financials was approximately $1.7 million in the third quarter. Advertising and marketing expenses increased $2 million, or 10.8%, to $21.1 million for the third quarter of fiscal ‘24, compared to $19.1 million in the prior year period. Advertising and marketing expenses were 13.7% of net sales in the third quarter, as compared to 14.1% of net sales in the prior year period. Operating loss for the quarter was $3.6 million, compared to operating loss of $10.1 million in the third quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss per diluted share, and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier this morning.

Net loss for the quarter was $2.3 million or negative $0.15 per diluted share, compared to a net loss of $7.4 million or negative $0.48 per diluted share in the prior year period. During the third quarter of fiscal ‘24, we recorded an income tax benefit of $1 million, as compared to $2.8 million for the third quarter of fiscal ‘23. The change in benefit is primarily driven by the reduction in net loss for the quarter. Adjusted EBITDA for the quarter was an income of $2.5 million, as compared to adjusted EBITDA loss of $6.9 million in the prior year period. Adjusted EBITDA for the third quarter was ahead of our expectations, principally driven by the upside to gross margins. Turning to our balance sheet, our total merchandise inventory levels are in line with our projections and have leveled out as we discussed on our prior call.

This is despite the addition of Angled Side skews, and we believe this is a clear highlight of the uniqueness of our business model. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times. We ended the third quarter with a very healthy balance sheet inclusive of $37.7 million in cash and cash equivalents, as well as $36 million in availability on our evolving line of credit with no borrowings. Please refer to our earnings press release for other details on our third quarter financial performance. So now our outlook and let’s start with the fiscal fourth quarter. We estimate net sales of $260 million to 270 million. We expect adjusted EBITDA between $48 million to $56 million.

This includes gross margins just under 60%, merchandising and advertising of 10.5% to 11% as a percentage of net sales, and SG&A of 31% to 32% as a percent of net sales. We estimate net income to be $29 million to $33 million. This includes approximately $1.5 million of non-recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per share is expected to be $1.77 to $2.02 with $16.6 million diluted weighted average shares outstanding. Now for the full-year fiscal 2024. We are tightening the range of our full-year outlook for net sales to $710 million to $720 million. We expect adjusted EBITDA between $54 million and $62 million. This includes gross margins of $57 million to $57.5 million, merchandising and advertising of approximately 13% as a percentage of net sales, and SG&A of approximately 38% as a percentage of net sales.

We estimate net income to be between $22 million and $26 million. These fiscal 2024 estimates include $4.5 million to $5 million of non-recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income for common share in the range of $1.35 to $1.60, and approximately $16.5 million estimated diluted weighted average shares outstanding. As a reminder, the 53rd week in the fourth quarter is expected to contribute approximately $6 million in net sales. Quickly on our cash balance outlook, we were very pleased to have reported such a strong cash position for the third quarter, which is typically our lowest quarter-ending cash balance of the year, given the inventory build ahead of the strong holiday sales period.

As we monetize inventory through the busy season, we continue to estimate we will end fiscal ‘24 with a higher net cash balance than we ended fiscal ‘23. So in conclusion, we’re pleased with our third quarter results and how early holiday sales have supported the continuation of competitively superior results as is reflected in our outlook. Market share gains, strengthening foundations, exciting new growth drivers, and a healthy balance sheet put Lovesac in an enviable position. The more I get to know the teams, the more excited I get about our collective commitment to optimizing the opportunity ahead of us. With a strong focus on growth underpinned by an ROI-based approach to measured reinvestment, I’m confident in the outlook. Now, I’ll turn the call back to the operator to start our Q&A session.

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

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Q&A Session

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

Mary Fox: Hey, Maria, lovely to hear from you. Thank you for the question. Yes, as obviously we’re fully focused on quarter four and this all-important holiday season, we’ll share more when we come through to our earnings for quarter four. In terms of our plans for next year, we still anticipate the macro environment will be choppy and the category will be remaining challenging. And we have planned that way. But as we’ve demonstrated with our results, this year, last year, we continue to obviously really outperform the category, really driving tremendous growth. And I think just so much of that goes back to the fact our brand’s strengths continue to just really grow. I think our customers, even just being out in the showroom last week, they just love the brand, they believe in design for life.

So we’re planned to continue to be pragmatic, prudent in terms of our investments with obviously a deep focus on ROI. But obviously as soon as things turn, we hope it will as the categories start to improve, then we’ll be the ones that will be the fastest to be able to chase into that growth. We saw it through COVID, so we feel good. And obviously, that’s the advantage of our supply chain.

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

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

Keith Siegner: Sure. I’ll start off on this one. So, yes, we’ve been really pleased with this, and there’s a whole host of factors behind it that we walked through on the call — that I walk through on the call earlier. And you can see as we get into fourth quarter with the guidance that we gave, that we’re looking for continued gross margin expansion through the fourth quarter. Let’s call it heavily rounded half the benefit year-over-year that we saw here in the third quarter. But I think I would say this, we’ve sort of settled into where we think is a healthy range for us. It — barring any material shocks, whether it’s on inbound freight or outbound freight, you know, there’s always potential for some type of systemic shock, but barring anything like that, I think we feel pretty good about this.

Then what it becomes for us is a balancing act across pricing, across promotions, across managing all of those inbound and outbound freight cross, plus how we leverage our marketing and our ineffective promotions we offer through the financing through the Lovesac credit card. So put it all together, I think these feel like pretty sustainable and healthy levels for us, again, barring any systemic shock.

Maria Ripps: Got it. Thank you for the color.

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

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

Shawn Nelson: Thank you.

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

Shawn Nelson: Yes, look, I think promotions are the very powerful tool in our arsenal, especially given our high growth margins to begin with and the competitive nature of our unique products. We try to be very strategic with them. As you know, we are trying to build a business that’s here forever for 50-years. We are trying to build a generational brand, and a brand that means something. And so we have long leveraged promotions at fairly healthy levels, because in this industry in particular, it’s a considered purchase. And so people spend quite a long time researching products, researching competitors, researching our product before they make the decision to purchase. And what we found, especially during the holidays, is while our business spikes, as we all know during Q4, kind of, uniquely in our category.