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spk09: Greetings. Welcome to Lovesac's first quarter fiscal 2022 earnings conference 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 today's conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to Rachel Schachter of ICR. Rachel, you may now begin.
spk04: 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 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. I'd now like to turn the call over to Sean Nelson, Chief Executive Officer of the Lovesac Company.
spk02: Thank you, Rachel. Good morning, everyone, and thank you for joining us today. It was just eight weeks ago that we were on our year-end call where I discussed our fiscal 2021 accomplishments, our CTC operating philosophy, and Lovesac's go-forward strategy in a fair amount of detail. So I will keep my remarks brief today by reviewing the highlights of our first quarter financials and operational performance before Jack outlines the our first quarter progress on our key growth initiatives. Donna will wrap up our prepared remarks with a review of our financial results and a few other items relating to our outlook. We are overall very pleased with our first quarter results as we continue to build on our momentum from last year. As a reminder, we anniversary the onset of the pandemic and subsequent showroom closures late in Q1. Even on a two-year basis, Business performance was very strong relative to the first quarter of fiscal 2021, with two-year combined comps at 98.9%. Now let me review the highlights of our first quarter performance. For the quarter, total net sales were 82.9 million, up 52.5% versus the prior year period. We delivered total comparable sales growth of 48.8%. and continue to be very encouraged by the broad-based strength and demand for our products across both new and existing customers. We saw strong growth across showroom and other, partially offset by a decrease in internet sales, reflecting the channel shift back to our showrooms that are now fully open. Adjusted EBITDA increased 193.7% to 5.3 million and marks the first time we've achieved profitability in Q1. This strong start 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 market share of this heavily fragmented industry. We continue to advance our strategic priorities during the quarter, which Jack will discuss in detail. A few notable call-outs. Starting with our brand presence across showrooms and channel partners, our comp performance speaks for itself. But we are also seeing strength in the performance of our Best Buy Shop and Shops. We are pleased to have all of our showroom leases meant to open for the balance of the year already signed and moving toward opening. Our innovation agenda and engine is humming. Besides the planned launches on track already slated for later this year, we are quickly adding talented engineers and designers to our team to allow us to scale even faster in the future. As it relates to the broadly discussed supply chain backdrop, I want to first recognize our team and the great work they have done and continue to do navigating what remains a tight supply chain environment. The diversification of our supply chain around our few core products and the international redundancies created has helped us stay in stock and meet demand in Q1. As we look ahead, we will have to manage this carefully through the year. On the ESG front, we continue to develop our circle to consumer or CTC philosophy. which continues to drive our operations. Under the CTC model, we plan to deliver more high quality, sustainable long-term product platforms in multiple categories across the home space and pair them with services meant to create raving fans and build long-term relationships with them. A long-term focus on all things is at the heart of the circle to consumer philosophy. Additionally, as part of our continued ESG focus, In addition to the work we are doing on the environmental and sustainability side, we are making strides on the governance front. Just this week, we announced the appointment of Sharon Lighty as a new member of our board of directors. Sharon currently serves as CEO of The Vitamin Shop and has extensive and diverse experience in consumer-facing businesses across areas including product innovation, channel distribution and loyalty, and personalization. Her perspective will be very valuable as we continue to build and scale the Lovesac brand. Sharon is filling Bill Phoenix's position, and we want to thank Bill for all of his contributions as a board member over the last four years. So in summary, we are very pleased with our first quarter results and the continued execution across our strategic priorities. As we look to the remainder of the year against a dynamic operating environment, we will stay focused on expanding our brand, continuing to elevate our customer experience, and strengthening our foundation to support the considerable growth that lies ahead. With that, I'll hand it over to Jack to cover our strategic priorities and progress. Jack?
spk03: Thank you, Sean, and good morning, everyone. We are very pleased with our first quarter performance and the strong progress our team continues to make on our key strategic priorities, which I will now review. First, efficient marketing and merchandising strategies. We are leveraging our learnings from the second half of fiscal 21 and are continuing to drive more efficiencies and high returns from our marketing spend. Tactics contributing to these increases include extension of media flights to run through key events, driving reach in our target customer through ramping up nonlinear buys like Hulu and OTT. We are also targeting our linear buy to drive higher reach. We're also increasing our digital spends as we know customers spend more time digitally researching their home furnishing purchases. The increases include both spending more on existing platforms, but also introducing new channels such as TikTok, which we have seen success in. Second, showroom operation. We opened eight showrooms in Q1 and remain on track to open approximately 25 this year. Our showrooms continue to be an important component of our omnichannel model, and importantly, added capabilities like mobile concierge, appointments, on-the-spot scheduling, and showroom post-purchase specialists are further enhancing the Lovesac shopping experience. To that end, in the first quarter, approximately 25% of our showroom business was generated from appointments, driving strong productivity. We also plan to test a new consumer touchpoint in the second half by incorporating up to 10 branded kiosks in our real estate strategy. These locations will be initially focused on trade areas where our core consumers live, but our brand is not yet represented by a physical touchpoint. We believe that they will also serve as additional touchpoints in trade areas where we have an opportunity to gain incremental business in an asset light manner. Third initiative. expanding our other channel presence. We continue to be excited about our partnership with Best Buy and our expansion plans to open more shop and shops for the second half of this year and early next year, with preliminary plans to open over 15 additional shop and shops. We're very pleased with the strength of the Costco business, which we're executing with our online roadshows, And Costco and our team are very pleased with the relationship and have plans to expand our presence digitally and are exploring potential physical touchpoints in the future as well. We will also continue to pursue opportunities with other partners, and we will provide updates when there is news of note. In addition to the just discussed kiosk test, we'll be launching a larger mobile concierge pilot in the second half of this year as we continue to test touchpoints and seek to physically expand our brand while maximizing returns on our capital. And fourth, making disciplined infrastructure investments. A brand is in its infancy, and we're building a platform with the necessary infrastructure and capabilities to support the long and attractive runway for growth that lies ahead. As we've mentioned previously, we're focusing on the product configurator and post-purchase aspects of the customer journey as customers are getting more comfortable with shopping online for premium price products. We continue to see success from our combined sales and service strategy, including the continued evolution of the post-purchase specials program that we piloted this past winter. These associates reach out to post-purchase customers and take a proactive approach to guiding the customer through their post-purchase journey, including confirmation of the customer's order, providing shipping details, and follow-ups during setup and installation. These associates are all cross-trained in other showroom sales and customer service activities, but have played a critical role in our post-purchase experience as global supply chains continue to rebound from the pandemic. We are seeing continued success with our new e-commerce platform with traffic up 65% and conversion up 55% in the quarter versus two years ago. Additionally, as we mentioned, the make an appointment feature has been particularly important software launch. Appointments in Q1 accounted for 25% of the demand sales in showrooms and helped drive a 163% increase in average order value over the same two-year comparable period. In terms of supply chain, we continue to make improvements across areas including delivery, reducing costs, increasing efficiencies, and mitigating risk. As Sean said, we're so proud of our team's agility that it's helped us to manage the industry supply chain pressures to date. As others in the industry have discussed, there are raw material shortages, freight cost pressures, and port delays that we are contending with. To date, we have utilized a reduction in promotions to offset these pressures, which in large part has been enabled by the benign promotional environment. We are increasing and continue to diversify our global production capacity in Vietnam, Malaysia, Indonesia, China, and the United States, and we'll be implementing our new supply chain ERP system by the end of this year to help us scale and continue to drive optimal end stocks with our customers. We'll continue to use all levers to navigate what we expect will remain a tight supply chain environment. So in summary, we're very pleased with our strong start to the year. The pandemic tailwinds continue within the home furnishings category and all the work that our teams are doing is serving to strengthen the Lovesac brand and value proposition. As we look to the remainder of the year, we recognize the environment remains dynamic and we'll continue to execute our vision and strategy with discipline as we focus on driving long-term value to all of our stakeholders. I will now turn the call over to Donna to review our first quarter financials. Donna?
spk04: Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our first quarter results and then an update on the framework I shared with you last quarter as it relates to how we are approaching fiscal 2022. Net sales increased $28.5 million, or 52.5%, to $82.9 million in the first quarter of fiscal 2022, as compared to $54.4 million in the prior year period, driven by our showroom sales and other channel sales. The increase in these channels was partially offset by a decrease in our internet sales against the period of elevated digital sales last year, given the pandemic-related showroom closures. Showrooms net sales increased 30.9 million or 170.4% to $49 million in the first quarter of fiscal 2022 as compared to 18.1 million in the prior year period. This increase was due principally to a $26.7 million increase in comparable showroom sales to 41.3 million in the first quarter of fiscal 2022 as compared to $14.6 million in the prior year period due to the temporary closures of all of our showroom locations. As a reminder, point of sales transactions represent orders placed through our showrooms, which does not always reflect the point at which control transfers to the customer. When control transfers, net sales are recorded. Other sales, which include pop-up shop sales and shop-and-shop sales, increased $2.6 million, or 41.4%, to $8.8 million in the first quarter of fiscal 2022, as compared to $6.2 million in the prior year period, with the increase related to the closures of all pop-up shop and shop-and-shop locations due to COVID-19 in the prior year period. Internet sales, sales made directly to customers through our e-commerce channel, decreased 4.9 million, or 16.3%, to 25.2 million in the first quarter of fiscal 2022, as compared to 30.1 million in the prior year period, driven by the comparisons against elevated digital sales in the prior year period I just mentioned. By product category, our factional sales increased 68.9%, and our other category sales which includes decorative pillows, blankets, and other accessories, also increased 94.3%. Our SAC sales decreased 26.1% from the prior year period due to less promotional activity in fiscal 2022 as compared to the first quarter of last year. Turning to our gross margin, the 540 basis point increase over the prior year period was driven by a 400 basis point improvement due to a reduction in promotional discounts higher overall factional product category and premium cover mix impact, and lower product costs related to vendor negotiated tariff mitigation initiatives due to higher volume. Distribution expenses improved by 140 basis points over the prior year period due to higher leverage of 490 basis points in warehousing and distribution costs, partially offset by the increase in inbound and outbound freight costs, of approximately 350 basis points. We exceeded the first quarter net sales and gross margin expectations we shared with you on our last call, primarily driven by higher than estimated warehouse throughput of order shipped and a reduction in planned promotional activity the last few weeks of the quarter. In addition, we also realized benefits of higher leverage on warehousing and distribution costs due to higher net sales volume. The 18.9% year-over-year increase in SG&A was driven largely by an increase in employment costs, rent, and overhead expenses, partially offset by a decrease in selling-related expenses. The increase in employment costs was primarily due to additional hirings in both headquarters and our showrooms that were put on hold in the prior year period due to COVID-19 related financial resilience measures. The increase in rent was related to the increase in our showroom count. Overhead expenses increased due to infrastructure investments and insurance expense related to the growth of the company, partially offset by a decrease in equity-based compensation and travel-related expenses related to COVID-19 restrictions. Selling-related expenses decreased due to lower in-store pop-up shop fees, partially offset by an increase in credit card fees related to the increase in net sales. SG&A expenses of percent of net sales decreased 10.5% due to the expense leverage in multiple areas, such as infrastructure investments, selling related expenses, employment costs, rent, equity-based compensation, travel, and insurance. SG&A expense was lower than our expectations in the first quarter, principally related to the shift in our infrastructure investments and hiring to the level that was anticipated in both our headquarters and showroom locations. We anticipate that these expenses will be higher in the second half of the fiscal year. Our investments in advertising and marketing expenses increased $2.5 million or 30.3% to 10.7 million in the first quarter of fiscal 2022 as compared to 8.2 million in the prior year period due to the reinstatement of marketing spends to support sales growth as showroom locations are now fully opened. Advertising and marketing expenses were 12.9% of net sales in the first quarter of fiscal 2022, as compared to 15.1% of net sales in the prior year period. The 220 basis point decrease was due to leverage on the increase in net sales. Depreciation and amortization increased $800,000 from the prior year period to $2.4 million, principally related to the capital investments for new showrooms. In the first quarter of fiscal 2022, operating income was $2.3 million compared to an operating loss of $8.4 million in the first quarter of last year, with the increase driven by the net sales and gross margin increase, as well as SG&A leverage I just discussed. Net interest expense for the first quarter was approximately $44,000, principally related to unused line fees on our revolving line of credit. Tax expense in the first quarter of fiscal 2022 was $153,000 as compared to $25,000 in the prior year period related to minimum state income tax liabilities. Before we turn our attention to net income, net income per share, adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable gap measurements in our earnings release issued earlier today. Net income was $2.1 million or 13 cents per diluted share in the first quarter of fiscal 2022 compared to a net loss of $8.3 million or 58 cents per diluted share in the prior year period. We generated positive adjusted EBITDA of $5.3 million in the first quarter of fiscal 2022 as compared to an adjusted EBITDA loss of $5.7 million in the prior year period. Turning to our balance sheet, our liquidity continues to remain strong as we ended the first quarter of fiscal 2022 with $65.7 million in cash and cash equivalents and $18.1 million in availability on our revolving line of credit, with $42,000 of outstanding debt on the revolver related to the timing of the ABL fees being charged to the revolver. Please refer to our earnings press release for other details on our first quarter 2022 fiscal performance. Regarding our outlook, as we said during our Q4 earnings call, we are still operating in a pandemic environment with a wider range of potential outcomes as it relates to fiscal 2022. Given this, we're not providing formal guidance for the full year but we will share an update on the framework that we provided during that call that will be helpful as you are updating your model. We are targeting another year of strong sales growth with approximately 25 showroom openings, and we expect to restore expenses that were pulled back in fiscal 2021 due to the pandemic. We will continue to strategically make infrastructure investments to support the substantial multi-year growth opportunity that lies ahead. With the additional showroom openings, in a scenario where sales growth is in the mid-30% range, we would expect adjusted EBITDA margins in the mid-single-digit range with a year-over-year margin decline driven by both gross margin pressure as well as the expense and investment dynamics I just discussed. We, like others in the industry, are facing intensifying freight headwinds, which our teams are working hard to mitigate. We will be very disciplined on the expense side to help offset these inflationary pressures and therefore still believe adjusted EBITDA margins in the mid single digits are a reasonable outcome in a scenario where sales increases in the mid 30% range. For our fiscal second quarter, we expect sales growth in the high 40% range with positive adjusted EBITDA dollars slightly less than the same quarter last year. This slight reduction in projected adjusted EBITDA dollars is being driven by the efforts being placed on strategic expense reinstatements and infrastructure investments needed to support the growth of the company that were put on hold in fiscal 2021 as part of our COVID-19 financial resilience measures. We are still expecting to generate cash from working capital in fiscal 2022 and CapEx to be in the $15 million to $18 million range. So, in conclusion, we had a very strong first quarter from both a net sales and profitability perspective. We are focused on disciplined execution as we navigate a dynamic operating environment and position Lovesex for sustainable long-term growth. With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?
spk09: Thank you. At this time, we'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And once again, that's star one. Thank you. And our first question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.
spk07: Thank you. Good morning and great start to the year. Congrats on the momentum. Don, I just wanted to ask firstly on the guidance that you just provided. So you talked about mid-single-digit EBITDA range if you achieve mid-30s sales growth. You talked about gross margin pressures ensuing from freight, yet you just put up a quarter where you had about 500 basis points, little 500 basis points of margin expansion. Could you just articulate what you see coming down the pipe that would suggest that there's incremental amount of gross margin pressure aside from the freight expense that you've been experiencing already that would substantially decelerate the margin profile into the back half of the year? Is it promotions? Is it something else that we're not contemplating? And then I have a follow-up, please.
spk04: Good morning. I think we're similar to a lot of other people out there that the freight headwinds just keep compounding. So where we had originally projected our inbound freight rates, and it's specifically on the inbound side as port congestion, container availability, it's making it more and more difficult, although inventory is a really good position for us. It's just costing us a lot more to bring it in. and get ahead of some of the other people that need to get inventory in. So it's principally that. It's not related to discounting at all. We have very strong discounting or reduction in discounting. We're still planning to do that, but it's 100% related to the headwinds on the inbound freight. I will tell you that it will impact more in Q4. It will be most meaningful in Q4 than in Q3. when you're doing your modeling. But I think the real positive takeaway is that even with those headwinds, we do have more levers to pull to make sure that we can still generate adjusted EBITDA margins in the mid-single-digit range. So the teams are working really, really hard to mitigate from top line all the way through to SG&A.
spk03: Yeah, thank you for that. To add to that, I think what you saw in the quarter and the last couple of quarters are really leveraging systemically from the way the company is growing. And we expected to get those. And we're seeing a lot of strength as well on the brand and stickiness, which we believe will continue to enable us to sell at decreased discounts. However, and the team has been really great at bringing in inventory in order to mitigate the potential Trade costs we'll be seeing later in the second half. So really what we're seeing is a lack of impact in the first half of some of these headwinds people have been talking about and starting to get those headwinds in the second half. But the first half growth and margin is really related to just the scaling of the business and strengthening of the brand. So there's definitely two different trends going there. One is long-term, and I think the other one we would all agree is is a transitory situation in terms of freight headwinds.
spk04: Camilo, one other thing I will throw in there, too. If you recall from our fourth quarter earnings call, even third and fourth quarter, we had some substantial things that also impacted gross margin, vendor discounting. We were able to bring down our inventory reserves. So what we've done is we've started working with our vendors to not necessarily give it to us in rebates. So the impact on the first quarter of those one-time rebates are going to be less impactful, and we're actually getting it in pricing. So that reduction in pricing is helping us throughout the year versus the one time. So there is that that we're, you know, we still have one vendor that we work with that gives us rebates. It just won't be as impactful, the rebate number, as it was in the prior years, because, again, we're seeing it in the discounting on the product. And also, we do not anticipate any, we'll call benefit from reduction in inventory reserves. So that's something else as well.
spk07: Got it. Great color. And then just my second question is really reflective of what you're seeing from the consumer perspective. If I heard some of the prepared remarks correctly, it sounded like you have consumers coming to you demanding more product, more innovation from you. So the question is, is that true? Are you getting a pull sort of request from the consumers now that there's been a step function change in awareness of the brand? And how does that coincide with the expected next innovation launch, and what's the update on the timing of that? Thank you.
spk03: I'll start it and then hand it off to Sean because I can tell you a little bit about what we're seeing with customers. I think internal research shows us that our customers value our brand more than they ever had. So at the same time, while we're discounting less, we're perceived as a higher value, which I think is a really – a result of the team really working to create a great product and a great program and great customer service. So that's certainly taking place right now. We're also seeing, interestingly enough, the more we advertise, we're also seeing stronger word-of-mouth advertising start to happen. So we've seen that significantly increase as a percentage of our new customers, which is telling us we are starting to get some of that brand traction that we've been looking for. So we're very pleased with that. On the innovation side, I'll defer to Sean on any comments on that.
spk02: Yeah, nothing new to add on the innovation side. We believe that things are on track. We look forward to our new product launch later this year, and we're excited about the future. Lots more to come.
spk10: All right. Thanks very much, guys. Good luck.
spk09: Thank you. Thank you.
spk10: Thank you.
spk09: Our next question comes from the line of Maria Rips with Canaccord. Pleased to see you with your questions.
spk05: Good morning, and congrats on very strong numbers. I just wanted to get a little bit more color on trends that you sort of saw in the later part of April that sort of drove this strong performance relative to your outlook. And I think, Donna, you mentioned that it was largely related to the warehouse throughput. Was there anything else that sort of drove this outperformance? And maybe sort of what drove this warehouse efficiency and does it create any sort of revenue recognition pull forward for you going forward? And then I have a quick follow-up.
spk04: Good morning. So the warehouse throughput is something that, you know, the finance team has to estimate in looking at what we think the capacity is and, you know, the warehouse really rallied. We did not have them work any extra hours or anything else. It's just that they were able to get more inventory out that we had estimated. Again, we do a very conservative estimate because we don't want throughput to be the thing that drives our revenue. So what we do is we do very conservative estimates on what the warehouse capacity is coming in at the end of a quarter. And the teams did a great job in accelerating without working any extra time. So that's really what that is. And do we feel that we pulled any revenue forward? No, based on what we're seeing. For the guidance we provided on Q2, you can see that we do not feel that we pulled any revenue forward into Q1.
spk05: Oh, got it. That's very helpful. And secondly, obviously very impressive showroom growth this quarter. Sort of how are you thinking about the dynamic between showrooms and internet sales as the reopening continues?
spk03: Yeah, look, we're being very consistent where we've been historically, which is we know in trade areas where we create physical touch points and showrooms are our primary focus. a source of touchpoints right now, we see a dynamic that strengthens the brand and is synergistic between e-comm and showrooms. So we will continue to grow showrooms and we'll continue to penetrate a lot of trade areas with asset-light execution, such as the concierges. We've discussed things like the potential of kiosk tests as well, and as well as the potential for Best Buy in the future. So strengthening our touchpoint, our ability to touch as many customers as possible will continue to be something we'll do aggressively, but we'll do it in a way that really looks at the highest potential return on capital while delivering the best brand experience. So there will be a continued development of a strong touchpoint strategy over the next three to four years.
spk10: Got it. Thank you both. Thank you.
spk09: The next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.
spk08: Good morning. I, too, want to add my congratulations on a great quarter, great start to the year. Thanks. So my first question, just with regard to sales, and clearly sales strong in Q1, and then as the guidance suggests, continued strength there in Q2, but Are you seeing any regional differences as the economy now is reopening, you know, different places, different places? Are your showrooms performing differently in different parts of the country given reopening activity?
spk03: Not anything of particular note. I would say that our showrooms have been performing during the pandemic period in relationship to how open the markets were. And I think what we're seeing now is As we're getting back to a, I guess it's called a new normal, we're seeing strength across the whole business, nothing in particular to note right now.
spk08: Well, then the second question I have, I think, Jack, I think you in the prepared comments, you talked about TikTok and some new marketing efforts. How do you look at the overall market? efficiency of your market at this point? I mean, clearly there were some cross-currents with the pandemic that probably exist now, but is there overall marketing efficiency of what Lovesac is doing, and how should we think about that going forward?
spk03: Yeah, we continue, you know, we continue to look at, really, I think the ultimate way of looking at it is in a, you know, again, a CAC to CLV ratio in a trade area, which includes showrooms as well as e-com. And they're so interconnected, it's hard for us to separate the businesses. But we're certainly looking at them that way. So we look at them including the – and then those costs are unlike, I think, what a classical direct-to-consumer company would do. We include the incremental – either brick-and-mortar or capital touchpoint – capital and the touchpoint costs. in order to do it. And that's what I think is going to allow us to continue to be very efficient. But if you look at it at traditional measures, we're seeing efficiency at a classic sales per square foot as high as it's ever been. What we're seeing is conversion rates in our showrooms as high as they've ever been because they're being driven by a lot of pre-shopping online. So, The historical ways, if you looked at the business, are as efficient as they've ever been, but that's just, you know, we're getting more and more away from that and getting to more of a trade area evaluation of the businesses as we go forward, which is much closer to, I think, a lot of the commentary that Sean has alluded to about CTC being closer to the customer, really thinking about these trade areas as total deployment of company assets in order to create a strong brand at the local level.
spk10: Thank you very much. I appreciate it. Congrats again. Thank you.
spk09: Our next question comes from the line of Thomas Forte with DA Davidson. Please receive your question.
spk00: Great, thanks. So two questions for me. The first question is, Sean, I feel like we're in the middle of a home super cycle, meaning that if you think about calendar 20, 21, 22, 23, you're going to have a period of very strong sales growth in the home category. not just because of the pandemic, but also because of economic stimulus, a large amount of money that's tied up in savings right now, and the move from consumers to suburban locations from urban. So I wanted to get your thoughts on that. And then number two, Sean and Jack, you've talked about historically how because Lusak is a relatively young company, historically you've grown through periods of economic weakness. How should we conversely think about your ability to grow over the next couple of years during a period of at the minimum elevated interest in the home if it's not a home super cycle? Thank you.
spk02: Yes, thanks, Tom. You know, I would agree. There are many trends afoot that are good for the home. And, you know, we believe that we are good for the home. We will continue to innovate on things in our own unique way, our design for life way. And that continues to be extremely rare in the landscape. And so the trends you mentioned, I think, are all spot on. There is a lot of money washing around. There is a lot of savings, as we all know now. that have accumulated throughout the pandemic. Clearly, people will go out and revenge spend and get back to their normal lives. We accept that. At the same time, if Lovesac is a microcosm of some kind of typical American company, we are now primarily remote. And in fact, much of our headquarters staff has chosen to relocate some some far some close some just you know a little closer to maybe grandma's house um not across the street from the office necessarily and as that movement happens not of course amongst our own uh crew but much more broadly and it may be a few more years of those kind of policies unfolding as some companies choose to be more advanced in their reaction to this change and some choose to be slower market forces will drive it there because people will want to live where they want to live and and work for companies they want to work for and so we believe that that is extremely positive particularly as we know for the couch category the number one driver the number one outside driver of couch purchases is people moving and that's going to be going on for years as we've acknowledged before And so I, you know, we would agree with you. We're, we're, we're very optimistic and bullish on our own prospects. Um, let's call it a super cycle. I think that's a nice, nice characterization. And if we're wrong, that's okay too, because the other side of the coin is what you mentioned in your question. Um, love sack, I believe can continue to grow and grow rapidly. Uh, again, in part due to its state stage and state in the world. We are still a small company. We have captured a very small piece of market share in a category that has no dominant leader. And so couches are sold at every home furnishings retailer. Most of our competitors, as it were, operate from the same playbook. It's a merchandising model, new collections, new seasons, vast collections, you know, 16 different couch profiles. And while that may sound on its face like an advantage, if you look at what's happening through the pandemic, if you look at what's happening on the supply chain side, while we're facing headwinds and sheer costs, we're in stock now. And we can ship in just days, and we intend to be on the long term because of how we are able to operate from this Design for Life playbook, which the selling proposition is just very different. It's not about merchandising as much as it's about putting better products into the world that are built last lifetime, designed to evolve, and compel people to buy them. That said, we've got a lot more market share to capture. By the way, we have other products that will come out and allow us to compete in other categories. And because we're so small, there's a lot of growth in market share to be gained ahead, whether or not we're in some kind of super cycle. And so we're grateful for the tailwinds, if you want to call them that. We're grateful. I think it shows in our marketing and advertising spend, which you know, has come down a bit, but sales have been stronger than ever. Our sales growth, you know, this is growth on top of growth, you know, dating three, four years back. And I think it exhibits the traction that our brand is gaining in this age and stage that we're at. And so I think we have the right product at the right time and, you know, we can call it luck, but We've been building the company to get to this point for a lot of years, and we're going to hopefully be able to enjoy that ride and continue to drive growth.
spk00: Great. Thank you, Sean. Thank you, Jack. Thank you, Donna. Great quarter.
spk09: Thank you.
spk10: Thank you.
spk09: Our next question is from the line of Matt Corenda with Roth Capital. Please proceed with your question.
spk01: Hey, guys. Thanks. Just two questions. First one on SG&A. It just seems like headcount costs aren't coming back as telegraphed each quarter. And, yeah, it sounds like they may still come sort of later this fiscal year. But maybe I just wanted to see if you could highlight, is there a dynamic happening where you're having trouble filling roles, or are we just sort of kicking the can a little bit each quarter on hires? Maybe just talk a little bit about that dynamic, please.
spk04: there's no kicking, yeah, there's no kicking the can. I think it's just we may have been a little bit more positive in how quickly we thought we could recruit or bring in people, but there's no intentional moving anything down. So we still intend to hire um from the original plan it's just shifting a little bit to later in the year we have quite a few hires that need to be made and we want to make sure we're making the right hire so the process may be taking a little longer than what we had anticipated hopefully that's helpful yeah and just to add a little bit of color i think it it there is obviously i know there's a tight labor market and everybody's thinking about it from that perspective i can tell you that
spk03: Actually, quantitatively, we're seeing more responses to any of our recruiting ads than we've ever seen. So we're seeing the same type of stickiness with the brand as a recruiter, which is resulting in really great talent coming in. I think our appetite was probably bigger than our ability to digest as many hires, and part of that is also because we've incorporated a really good onboarding process, which has been – really great for our associates and may have reduced our throughput, but it's increasing the quality and the stickiness, I think, of our internal associates as well. So we're going to continue to go towards the investment levels we've always talked about. It just may not come in the constant rate that we'd like it to.
spk01: Okay, that's helpful. And then just on the high 40% revenue growth guidance for next quarter, I wanted to see if maybe you could talk about the breakdown as to how we see it playing out between showroom, internet, and other. And is any of that outlook, I guess, predicated on a ramp up of shop and shops or additional sort of other revenue coming back online from Costco or whatnot? It would be helpful to get your thoughts there.
spk03: I think that the business has been coming in consistently with what we've been expecting. And what I would do, I think, is the best way to look at it is, and I think you saw it as we quoted a lot of our numbers, we look at two-year comps to even out things because of the dynamics of the pandemic. And I think if you look at a two-year comp basis, other than some dramatic changes during the immediate post-pandemic period, you'll start to see trends that are more easily trackable across the different segments of our business.
spk10: Okay. That's helpful. I'll jump back in, too. Thanks, guys. Thank you.
spk09: Our next question is from the line of Alex Furman with Craig Helm.
spk06: Please proceed with your question. Great. Thanks very much for taking my question and congratulations on a great start to the year. You know, wanted to ask about the promotional activity and just how you think about pricing and just thinking from a big picture perspective here. I mean, it sounds like you've been kind of cutting back on discounting and promotions in response to supply chain constraints, but, you know, great problem to have. Your sales growth has actually been accelerating. you know, as you kind of think about that and look at what you experienced in Q1, is it possible that your product has just been underpriced historically and going forward, there's an opportunity to be less promotional or think about pricing a little bit differently?
spk03: Good question. I think that the, I would say the, our product hasn't been underpriced historically relative to the brand that we've had, but as we've really started to execute In the last couple of years, what we have seen is a significant increase in the value of the brand in the minds of our customers. And so I think in terms of the service improvements, delivery improvements, quality of the way we package the product, the products themselves, we're seeing a higher customer that expects and is getting a lot more value for the product they pay. So I think that we certainly, and our desire would be to continue to grow dramatically and invest the dollars historically invested in discounting and product innovation and marketing and expansion. So as we see these opportunities, we will take them. I think historically we've been pretty conservative, and we also know that right now we're in a benign environment, which because of our, I think, agile execution last year has given us an opportunity. And we want to make sure as we look forward strategically in terms of price-value relationship, we don't get too focused on what's happening right now because I think it's a very dynamic environment. We're seeing great trends. We're seeing things happening that really show traction on the brand, as we've discussed, not only increasing ROIs and advertising, increasing word of mouth, but increasing value relative to a product that's actually being discounted less. All good signs, and we intend to operate the brand as a premium brand. and really win through stickiness of the brand and surprise and delight to the customer. So strategically, we'll pursue that. But we're also very aware that in the past 12 months, we've seen some dynamics that may be, again, transitory. We want to make sure before we make any long-term decisions, we know exactly the right way to go.
spk06: Great. That's really helpful. Thanks, Jack.
spk09: Thank you. At this time, we've reached the end of our question and answer session, and I'll hand the call back to management for closing remarks.
spk02: Yes, thank you so much for joining us for our fiscal 22 Q1 earnings call. We appreciate everybody's support. We are very appreciative of our entire hashtag lovesack family team who continues to deliver tremendous results, and we look forward to continuing the conversation with you.
spk09: Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
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