The Lovesac Company

Greetings and welcome to the Lovesac fourth quarter fiscal 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 zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Rachel Schachter with ICR. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Sean Nelson, Chief Executive Officer, Jack Krause, President and Chief Operating Officer, and Donna Delamo, 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 Sean Nelson, Chief Executive Officer of the Lovesack Company.

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. I will start by reviewing the highlights of our fourth quarter in fiscal 2021 financial and operational performance. Then, Jack Krause, our President and COO, will outline our key growth initiatives for fiscal 22. And finally, Donna Delamo, our CFO, will review our financial results on a few other items related to our outlook in more detail. Before turning to our results, I want to start by thanking the entire Lovesac team for their tireless efforts in what was an unprecedented year. Despite the challenging backdrop, fiscal 2021 was a landmark year for Lovesac, in which we delivered record financial performance and seamlessly pivoted our business to an all-digital model in the face of pandemic-driven showroom closures. We could not have achieved this without the grit and determination of our team. The COVID pandemic demonstrated even more clearly the strength of our people, our brand, business model, and operating platform, and just as vitally, yielded durable and value-enhancing lessons learned, new tools, and new customer insights that we will leverage in our decision-making as we look ahead. During the height of the pandemic, we established a crisis management process and team to facilitate rapid decision-making in a systematic manner. Our COVID response was centered around three key pillars, one, team health and safety, two, business strength, and three, financial resilience. To that end, as you recall, during March and April, we temporarily closed down all of our retail showrooms and began operating as a web-only business. To preserve and prioritize cash and financial health and liquidity, we pulled back on expenses and working capital. We remained agile and drove very strong results as we focused on meeting our customers' needs. We achieved many operational milestones in fiscal 2021. Key among these accomplishments were we leveraged the full strength of our omnichannel model with the quick expansion of our digital capabilities. We attracted many new customers to the Lovesac family, with growth in our customer base expected to yield benefits for years to come. We expanded our brand awareness and channel partnership to include Best Buy and BestBuy.com. We opened 19 showrooms this year, despite the challenging backdrop. We strengthened our financial position at the end of the year with a cash balance of $78 million, $30 million above last year. Even with the pandemic backdrop and while growing sales by nearly 40% year-on-year, we increased our post-purchase customer satisfaction scores significantly, resulting in happier customers and reduced friction. We delivered a record number of product demos, mostly via Facebook Live and FaceTime message, as most of our showrooms were closed for much of the year. We've launched an entirely new website at lovesac.com on a new, more robust, future-proof platform that will allow us to scale, improve operational costs, and be more agile in the future. We introduced seven new quick-ship fabrics, diversifying our core product offering to cover more aesthetic preferences while spreading risk across redundant vendors in multiple geographies. We've made dozens of internal process improvements, from shipping the most commonly purchased SAC covers inside of SAC duffels to save costs and reduce dislocation at delivery to the customer, to numerous supply chain processes aimed at reducing friction, reducing shrink, increasing accuracy, and driving operational efficiencies. Let me now review the highlights of our fourth quarter performance. For the quarter, total sales were 129.7 million, up 40.7% versus the prior year period, including 86.1% growth in e-commerce. We delivered total comparable sales growth of 45% and continue to be very encouraged by the broad-based strength in demand for our products across both new and existing customers. Adjusted EBITDA increased over 200% to $25.9 million, the highest profitability we've achieved in a fourth quarter. This strong end to the year is reflective of continued strength in the demand environment. Combined with our focus on improving our offering, customer experience, and go-to-market position, as we seek to expand our share in this heavily fragmented industry. Fiscal year 2021 was a meaningful turning point to profitability and positive cash flow on an annual basis for Lovesac. Working our way through the pandemic and all the challenges and tailwinds for our industry drove us to be thoughtful about our strategy, intentional and swift implementing tactical adjustments, and austere in our management of expenses as we braced for the unknown. The combination of all these factors led to a year that was, perhaps, more profitable than we would have intended in our long-term plans beforehand. We are happy to make this decisive leap in profitability on a percent basis, and we intend to continue to grow the business profitably. However, many investments in infrastructure and headcount were put off and will be made in fiscal year 2022 to support our outlook for long-term growth and goals to take meaningful market share in its very large categories. Even with our significant growth, we estimate we still have only captured approximately 2% of the couch market today. On a blended two-year basis, which is a more appropriate way to view our performance given the highly unusual FY21, a steady bottom line growth trajectory will be apparent, illustrating our ability to deliver profitable growth even as we continue to invest meaningfully in our infrastructure ongoing. Donna will elaborate more on our outlook and expectations in her comment. While we expect the elevated level of top-line growth we saw in fiscal 2021 to moderate and perhaps normalize in fiscal 2022, accelerated process on each of our strategic priorities is key to delivering growth and market share gains. Besides our much-anticipated major product innovation, which I'll provide an update on in a moment, we continue to make ongoing new product introductions and improvements to both our SAC and SACchanels product platforms. Each innovation is meant to increase these platforms' ability to attract, retain, and expand our customer base, driving up average order value as well as repeat business. A more recent example of this approach was evident in February when we launched an all-new guest rest kit that comes with unique mounting hardware for storage within a factional storage seat, further evidence of our commitment to reverse compatibility and our commitment to holistic, designed-for-life platforms, not just products. The guest rest kit includes a topper and a sheet set that is sized just right to quickly convert four adjacent factional seats into the coziest spot for overnight guests that is roughly the size of a queen bed. So far, the guest rest has exceeded our launch period internal sales expectations. Additionally, in FY21, we launched nearly seven new quick-ship fabrics, diversifying our core product offerings to cover more aesthetic preferences. In turn, driving margin expansion, while decreasing risk across redundant vendors in multiple geographies. We have also just resourced and relaunched our popular polylinen fabric, now utilizing fiber that is spun from recycled plastic in alignment with our Design for Life philosophy and commitment to sustainability. The product pipeline also includes exciting third-party brand collaborations and co-brands to announce over the course of the next few quarters. Each is meant to drive business across the SAC and Saxonals platforms, respectively. We continue to be excited about the development and consumer response gained through testing to our new major product innovation that is planned to launch this year. We fully expect this product to redefine expectations for our category, further strengthening our competitive advantage for products in the home while growing our total addressable market. However, due to the global disruption in the supply chain of key components, there is risk to our launch timeline now. We are focused on launching when we are in a good inventory position to meet expected demand, as we do expect this launch to be meaningful to future revenues. We may not be on track to launch in the first half of this year, as previously stated, but we hope to announce at some point in this fiscal year and we'll provide more information once we have some certainty. On the ESG front, Lovesac's commitment to sustainability has been central to our stated purpose and strategy for a long time now, horrified to learn that bulky furniture makes up almost a third of inorganic waste in landfills. Satchels were launched back in 2006 as a sustainable solution that could also be transported and delivered more efficiently, not to mention useful, over a long period of time, where so many other products these days frustrate consumers that they are made purposely obsolete or out of style after only a few years. Factionals are currently the best example of our design for life or DFL philosophy in action and are presently driving most of our rapid growth year upon year. This DFL philosophy calls for products that are built to last a lifetime and designed to evolve with the user's life as it changes. People like our products for this very practical reason and invest in them usually with a long-term point of view. It is a competitive advantage that has helped us establish a unique brand, a high-margin business, and a successful culture here at Lovesac. Our longstanding commitment to these sustainability principles is apparent not only in the durability of our products, but through our ongoing sourcing efforts as well. For instance, our somewhat recent transition to making 100% of our upholstery fabric from recycled plastic bottles. has already made Love Sack the highest volume consumer brand recycling plastic bottles into home decor fabric in the United States. Through these efforts, we've already repurposed more than 100 million bottles to date, and our impact is compounding with our rapid growth. We are excited to announce that we will soon be able to share more details supporting the results of our work in this realm with the release of our first industry standard sustainability report by Q4 of this year. With the collection and tracking of relevant data throughout our supply chain and operations, we will establish benchmarks against which we plan to deliver ongoing improvements. Furthermore, as an innovator in the home category, Lovesac intends to become the pioneer, advocate, and leader of what will be the next phase, going beyond the much-celebrated DTC business model, where we are already one of the recognized leaders in our space. We call it the CTC business model, Circle to Consumer, and we believe it will not only become a key differentiator for our brand, it will be good for the world too. CTC is a circular business model of our conception. CTC adopts elements from the broader circular economy movement where the company builds and maintains long-term lifespan products as it simultaneously develops services and policies meant to build and maintain long-term lifetime relationships with its customers. This direct sales model, combined with more direct operational programs and policies, can drive deeper customer connections. Under this CTC model, we plan to deliver more high-quality, sustainably manufactured product platforms in multiple categories across the home space. We will also surround these products with numerous innovative services, such as in-home consulting, setup, styling, customization, subscription, and maintenance services. peer-to-peer trading, resale, refurbishing, and remanufacturing programs that we believe will strengthen Love Sacks' relationships with customers, our brand equity, and support a circular industrial economy. We view this holistic virtuous cycle model as the only one capable of achieving true sustainability. While our ambitions are far-reaching, we are prepared to make progress slowly and invest prudently over a very long time, so that we can continue to scale rapidly and profitably as we work toward this vision. Leveraging Design for Life as our unique approach to product design and Circle to Consumer as our operational philosophy, we intend to achieve a 100% circular and sustainable business model, reaching targets of zero waste and zero emissions by 2040. We believe that this unique approach to doing business, coupled with these tangible goals, can make Love SAC even more differentiated, efficient, competitive, and profitable, thus helping us achieve our stated mission of becoming the most beloved home brand in the world. We will have much more to say regarding these goals and our CTC approach over the coming months and years. You will begin to see it reflected already in some of the new operational tactics we are pursuing even this year, some of which Jack will expound on today.