The Lovesac Company

Greetings and welcome to the love sack 3rd quarter 2021 earnings call at this time. All participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host. Mr. Rachel chapter of. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Jack Krause, President and Chief Operating Officer, and Donna Delmo, 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 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'd like to turn the call over to Shawn Nelson Chief Executive Officer of the Lovesac Company.

Good morning, everyone, and thank you for joining us today. I will begin my remarks by discussing the overall highlights of our third quarter performance. Then Jack will discuss the operational highlights of the quarter and progress being made on our key initiatives against what continues to be a dynamic backdrop. Donna will then review our financial results and a few other items related to our outlook. During the quarter, we continued to successfully navigate amidst the challenging backdrop as demonstrated by our financial performance as well as our progress on the operational front. Strong top line growth of 43.5% exceeded our expectations and is a testament to the exceptional job our team has done to meet customer demand amid a pandemic impacted environment. I continue to be very proud and grateful for their efforts. We saw extremely high levels of profit flow through on this sales increase given our swift moves to cut costs and overhead and tightly manage inventory during the pandemic. Of course, as sales have returned, so also will cost, as Donna will discuss in more detail. Now let me speak to some highlights on our operations. We are pleased with our showroom performance despite the pandemic environment as we operated showrooms in a variety of formats, including walk-in, appointment only, and virtual. The strength of our showroom performance is reflected in Q3's 25.5% comparable showroom sales increase. All seven of our shop and shops with Macy's and Best Buy were open during the quarter, which Jack will discuss in more detail. The big news released prior to quarter end is that we launched a robust product offering on BestBuy.com just in time for the holiday. We're very excited about this expanded partnership, which will allow us to reach a broader audience and accelerate adoption of this actionable platform. we continue to be excited by the alignment of the Best Buy customer demographic with our own, especially in terms of their intent to buy within the home category when shopping at Best Buy, often during a relocation or remodel. As you're aware, there are widely recognized headwinds we are navigating in the supply chain landscape, including a general shortage of ocean containers and equipment. But overall, we have been able to maintain excellent inventory positions and are currently delivering the majority of orders to consumers within a week to 10 days as expected. Moving to our financial highlights, we continue to see very strong demand for our products in Q3, resulting in 74.7 million in sales, or a 43.5% sales increase, including 125% e-commerce growth. In addition, we had revenue contribution from two Costco temporary online pop-ups, which lasted about four weeks each, ending in September and October, that were not reflected in the expectations we shared with you on our Q2 call. We had a strong start to the quarter with positive momentum from our Labor Day campaign, which performed very well with media ROIs above our expectations. From a profitability perspective, our results came in well ahead of our expectations due to higher margin product mix and more effective price promotions combined with some timing shifts and expense deferrals, as Donna will discuss in just a moment. As a result, adjusted EBITDA was $6 million for the quarter. And we ended the quarter with a cash balance of $47.7 million, up over 70% from last year in a debt-free balance sheet. While the environment remains uncertain, we continue to focus on improving our capabilities, our offering, our customer experience, and really our entire go-to-market position as we seek to expand our market share of the heavily fragmented industry. The attributes of our brand and product that resonated with consumers pre-pandemic, namely the convenience of researching, and transacting online and receiving the product via FedEx directly to their door were only magnified during the pandemic as increased time at home led to increased spend on the home. With the swift pivot to entirely digital when showrooms were closed, followed by a return to our omnichannel model, we have garnered tremendous learnings. We have very current market research that helps us understand the subtle differences between our millennial and post-millennial customers and how they are spending during the pandemic. We are tweaking our messaging and marketing tactics to fit these learnings. We've also proven out numerous digital first tactics from one-on-one FaceTime product demos to mass viewership Facebook live events and many others as well. We estimate to have made over 2 million digital factional demos over the past six months. Nearly all of these new tactics we have teased out during this time will persist even after the shopping landscape returns back to normal. And we are very confident in our ability to maintain high growth even post-pandemic. Perhaps most importantly, over the course of the pandemic, we have attracted many new customers to the LoveSac family. This growth in our customer file will yield benefits for years to come, and we will make sure we are using our sophisticated marketing approach to build engagement and drive attachment rates and lifetime value of these new customers. We also still have less than 2% unaided brand awareness with significant market share opportunities. So, we'll build on these new customer gains as we lean into marketing, supported by the very, very strong ROIs, as Jack will discuss. Despite the pandemic, we remain focused on the long-term potential of the company and making progress on the strategic initiatives we have in place to drive long-term growth and market share gains. We continue to make investments in support of our expected growth while remaining agile and disciplined. These include Making the investments in infrastructure, like our warehouse in California and our new East Coast warehouse opening in Q4. Continuing to bring back expenses that had been temporarily halted or reduced particularly on the marketing front to drive even more growth. Innovating on the product front. We continue to work and continue to target early next year for an exciting new product launch that will allow us to expand into a tangential category in the home. Elevating the omni-channel customer experience. As previously discussed, we rolled out our new e-commerce platform in mid-August, and we are seeing a very positive response to the improved user experience and functionality with new features such as appointment scheduling for showrooms, faster load time of configurator pages, cave configuration functionality, and additional customer experience improvement. We have experienced improved conversion driven both by mobile and desktop, in addition to an increase in attachment rate. On the sustainability ESG front, we believe that Lovesac leads the DTC and furniture categories in its commitment to sustainability and ESG initiatives, building sustainable products and contributing to a reduction of furniture waste and landfills. This is an endeavor that has been core to our DNA since the inception of our company, guided by our Design for Life philosophy, with substantial progress to date, including sourcing all of our thick upholstery fabric from 100% recycled plastic. and repurposing over 20 million plastic bottles in last year alone. Our products are built to last a lifetime and designed to evolve. And next year, we will be improving our communication on our tracking impact. Adherence to our high bar for innovation and sustainability will, we believe, fuel market share gains in the current and even new categories in which we will compete over time as we make operating decisions in support of our purpose, which is to inspire humankind to actually buy less, but buy better. As we enter the final quarter of the year, we feel good about our business fundamentals and positioning. We are pleased with our strong start to the fourth quarter, but are mindful about COVID uncertainty, especially with the high volume shopping days that lie ahead and the possibility of holiday shopping shifting earlier in the season. So overall, we are pleased with our third quarter results, which exceeded our expectations from the top and bottom line. Against a pandemic-impacted environment, we generated a positive adjusted EBITDA of $6 million, which is the first time we've achieved profitability in the third quarter. We have been very disciplined in operating the business by stringently controlling expenses, inventory, and working capital, some of which we recognize as temporary as sales return so also will cost, including marketing overhead and headcount. As we begin the fourth quarter, We believe we are very well positioned to continue to drive demand as well as capitalize on the demand we have seen year to date for our unique products that are resonating with the consumer. And we look forward to building on our success to date as we close out the fiscal year. Before turning the call over to Jack, I just want to thank all of our associates for their hard work and dedication to our customers during these difficult times. And with that, I will turn the call over to Jack to provide you an operational update and discuss the progress being made on our key strategic priorities.