The Lovesac Company

Greetings and welcome to the Lovesac third quarter fiscal 2022 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 would now like to turn the conference over to your host, Ms. Rachel Schachter of ICR. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Jack Krause, Chief Strategy Officer, Mary Fox, 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 a supplemental financial information in our press release. Now, I'd like to turn the call over to Sean Nelson, Chief Executive Officer of the Lovesac Company.

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. I will begin by reviewing the highlights of our third quarter financial and operational performance before Jack outlines our third 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 related to our outlook. Also joining us on the call today is Mary Fox, who, as you know, was appointed president and chief operating officer at Lovesac on November 15th, assuming the same role that Jack filled before. As you are aware, Mary had been serving on our board of directors since February 2020. She brings a strong digital and brand building background to Lovesac that spans a 25-year career in the consumer goods sector. significant experience in scaling businesses, and extensive supply chain and operational expertise as well. Along with her keen and prescient adoption of ESG principles, she has an expansive knowledge of Lovesac's unique business model. And all of these attributes make Mary a particularly great fit, especially given Lovesac's growth trajectory. We're thrilled to have her as part of the leadership team and equally excited that Jack will be serving in the newly created role of chief strategy officer, as well as having recently been appointed to join the board of directors. We are very pleased with our third quarter results, delivering growth of 56.1%, while improving net income by 11% for the quarter, even in the context of making significant investments in our infrastructure. This sales growth is on top of last year's 43.5% growth, so our continued and widening growth this year is a testament to the strong demand for our product, growth in brand awareness and conversion, even as we are actively managing the tight supply chain environment. We experienced growth across all sales channels, including, most notably, an increase in showroom sales of nearly 70% and a nearly 40% increase for internet sales. This marks 14 consecutive quarters of greater than 25% growth with continued improvement overall in our ability to generate cash and profits. One of our major competitive advantages is that we are generally totally in stock and expect to be in stock delivering nearly all orders direct to consumer in just days amidst a challenging supply chain backdrop. Customers are continuing to recognize the strength as reflected in our Q3 results. and consistently strong customer satisfaction scores throughout this tumultuous time. This has always been something that distinguishes Lovesac, and in this environment, where industry lead times can stretch into months, it is particularly advantageous. Our ability to maintain stock levels is rooted in our product design and business model. Factionals drive more than 80% of our sales, but more than half of those dollars are supported by just two SKUs, seats and sides. What's more, We manufacture those two SKUs redundantly with no variation in quality across diversified manufacturers in three different countries, allowing us to better manage unplanned events like disruptions from COVID flare-ups, et cetera. This inventory is not seasonal and does not go bad or become irrelevant with time. So investment in this type of inventory is lower risk than most. Our core products are packed and shipped in very unique ways that allow for extreme efficiency inside of ocean containers and via FedEx direct to the consumer's home. While we are not immune to the currently elevated container and inbound freight costs, our packaging and shipping solution helps to partially offset these costs and risks. Our growth and in stock position is also a testament to the incredible job our teams are doing across the organization. Adjusted EBITDA of 5.8 million exceeded our outlook of a loss of negative 3 to negative 4 million as we beat our sales goals and absorbed expected freight headwinds, while simultaneously making important people and infrastructure investments in support of our growth. While we expect some gross margins headwinds to persist in the near term, which Jack and Donna will expand on, in the long term, We remain committed to a mid-50s gross margin rate as the environment normalizes, and we continue to scale the business. We have raised prices at MSRP some already, and we are discounting less to counteract gross margin headwinds. We will continue to move the business in this direction and believe we can continue to generate very strong gross margins relative to this category, even in this challenging environment. Operationally, a key highlight of the quarter was the much-anticipated launch of the Saxional Stealth Tech Sound Plus Charge product. This is the first of its kind innovation, which leverages new Lovesac patents to deliver an immersive surround sound system developed in partnership with Harman Kardon and convenient wireless charging, all seamlessly embedded and hidden inside the endlessly adaptable Saxional's platform. It is the only home theater system that is hidden in plain sight. From the business perspective, this launch accomplishes many goals. Not only does it increase our relevancy with our existing consumers and with new consumers, it also expands our competitive differentiation by creating an even deeper moat, given there is no one else that offers this unique product. Initial customer response has been extremely positive so far. And with the base price of the Stealth Tech portion of the system at about $3,000, that has the potential to nearly double the average order value of transactions it is included in on top of the typical sectional AOV of $3,400. Like sectional sofas, the TAM or total addressable market for home audio equipment is very large in terms of categories to compete in within the home segment. But as home audio is a completely different category to upholstered furniture, Stealth Tech's introduction presents little to no threat of cannibalization to our current business. Furthermore, a stealth tech ad on TV or digital is the same ad as that for Saxional. They are rolled into one and therefore essentially cost no more than we were paying before to advertise Saxional. As surprising as it may sound, Lovesac intend to compete in home audio and win. Our system is unlike any other. And in many ways, we believe it is the best one available in the market today. Turning to our ESG efforts, we are on track to publish our inaugural ESG report later this month. This fiscal year 2021 inaugural report that aligns with the Sustainability Accounting Standard Board's SASB, Building Products and Furnishings Sector Standard, sets the benchmark for Lovesac's ESG journey, supporting our commitment to achieving a 100% circular and sustainable business model, reaching targets of zero waste and zero emissions by 2040. In the coming years, we plan to focus on measuring emissions across our value chain. Future reporting will align with the Greenhouse Gas Protocol corporate accounting and reporting standard, which provides requirements and guidance for companies. And Jack will discuss in detail our progress on other growth strategies, including our marketing and merchandising strategies, showroom operations, expanding other channel presence, and making disciplined investments. As we look to the final quarter of the year, we are well positioned for the upcoming holiday season. We expect the operating and supply chain environment to remain dynamic, but as described above, we believe Lovesac is better suited than most in our categories to remain in stock and successful throughout. The fourth quarter is always a heavily weighted time period for us. We operate more than 120 high traffic showrooms located mostly in the highest traffic malls across the United States. We believe that Saks and now Stealth Tech products represent one of the coolest holiday gifts any family could hope for. And post-holiday is a strong month for all of home decor naturally. And because our fiscal year cutoff is at the end of January, this adds to our fourth quarter waiting. Now on the other side of Black Friday and Cyber Monday, as a brand that garners 100% of its sales by direct consumer and digital means and has immediate access to all sales and customer data, we can confidently say that we can expect continued strong growth for the quarter, and we look forward to driving more market share gains. Looking ahead, we intend to just keep doing what we've done for almost four years straight now, generate high sales growth while increasing EBITDA margins on an annual basis. Were it not for the huge leap we made at the EBITDA line last year in the context of significantly holding back on spending during the early parts of the COVID pandemic, we would be increasing EBITDA and EBITDA margins this year. But looking at fiscal year 22 this year, on a two-year basis, we expect a trajectory of increasing profitability. We also expect to continue to manage this business in a way that will allow us to stay on the course to lift annual EBITDA margins through next year, despite pressures at the gross margin line in the near term due to macro forces. We believe this will allow us to emerge someday as a dominant player in our categories and become the most beloved brand in the home category, which is our stated mission, and maximize value to our shareholders over the long run. With that, I will hand it over to Jack to cover our strategic priorities and progress. Jack?