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spk09: Greetings and welcome to the Lovesac Fourth Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Rachel Schachter of ICR. Thank you, Rachel. You may begin.
spk13: Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive 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 included 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.
spk05: Thank you, Rachel. Good morning, everyone, and thank you for joining us today. I will start by reviewing the highlights of our fourth quarter and fiscal 2022 financial and operational performance. Then Mary Fox, our President and COO, will outline our key growth initiatives for 2023. And finally, Donna Delamont, our CFO, will review our financial results and a few other items related to our outlook in more detail. Before turning to our results, let me first say that our heart goes out to all those affected by the war in Ukraine. Our ultimate guiding principle at Lovesac is, of course, love, and it breaks our hearts to see the human tragedy. While we have no business operations in the Ukraine region, we know our servicemen and women are certainly on alert and our thoughts are with them and their families. As for our fiscal 2022 performance, fiscal 2022 was another record year for Lovesac, with business continuing to perform extremely well, despite the challenging and volatile backdrop. Our strong financial and operational results for the year are reflective of our unique competitive advantages across our people, brand, business model, and operating platform. For the year, we delivered a total annual net sales increase of 55.3%, total comp sales growth of 46.9%, and adjusted EBITDA of $55.1 million, a 96.1% increase. This incredible growth is stacked on a four-year CAGR of 48.7% growth and comps versus prior year comps of 53%. So this is not just a prior year COVID down period easy beat. We achieved many operational accomplishments in fiscal 22. Key among these were we opened 28 Lovesac branded showrooms, two mobile concierge trucks, and eight kiosks, 18 new Best Buy shop and shops, which we operate directly for a total of 21. We now operate a total of 167 physical touch points that help our customers on their digital journey. We believe we best represent what a successful digital model should look like. We launched the much-anticipated Saxional Stealth Tech Sound Plus Charge product in partnership with Harman Kardon, which is a first-of-its-kind innovation, leveraging new Lovesac technology patents to deliver an immersive surround sound system and convenient wireless charging completely out of sight in the living room. We maintained in-stock levels throughout the year, shipping the vast majority of orders to customers in just days, despite the challenging supply chain environment. This is enabled by our unique product design and business model, including redundant manufacturing of key factional SKUs in four different countries, allowing us to better manage unplanned supply chain challenges. We continue to grow our customer file and drive loyalty with existing customers, showing new customer growth of 14.3%. We saw a lift in our CSAT scores, that's customer satisfaction, as customers are appreciating more than ever our best-in-class service levels and in-stock positioning, while others in the industry are reporting long delays given supply chain challenges. We made critical investments in people and infrastructure in support of our growth, including our e-commerce platform that will allow us to continue to scale rapidly without sacrificing the customer experience. We remain focused on our ESG efforts with the publication of our inaugural ESG report in December that sets the benchmark for Love Sock's ongoing ESG journey, supporting our commitment to achieving a 100% circular and sustainable business model, reaching targets of zero waste and zero emissions by 2040. Last year, we diverted more than 50 million plastic bottles from the waste stream, upcycling them into home decor fabric. More than any other firm we're aware of, Since we transitioned to manufacturing all of our gray upholstery fabric for sectionals to 100% recycled plastic bottles, we estimate to have diverted well over 100 million bottles from the waste stream overall and counting. Now let me discuss the key highlights of our fourth quarter performance. We are very pleased with our fourth quarter performance that well exceeded expectations with broad-based strength across channels as we continue to drive market share gains. For the quarter, we delivered top line results of 51.3% to 196.2 million, on top of last year's 40.7% growth, with total comparable sales growth of 50% and internet growth of 22.8%. This marks 15 consecutive quarters of greater than 25% growth. Net income increased by 50.4% to 32.6 million. and we reported an increase in adjusted EBITDA of 23.6% to $32 million for the quarter. As we've said before, excluding shorter-term supply chain disruptions, gross margins and adjusted EBITDA for the company would be tracking at historical highs. We remain confident in our ability to deliver gross margins in the mid-50s range once some of these disruptions abate. In the meantime, we have taken price increases on our core seats and sides and could also look at price increases on a lot of our cover business as well. But we want to be really careful because in this environment, we believe LoveSac is gaining significant market share, while surprising and delighting customers with our speed to delivery and stock levels throughout these uncertain times. Importantly, we are seeing no resistance. So in the short run, we are being very strategic. In regards to managing margin beyond price increases, we have multiple levers still available to us. We will continue to adjust promotion, mix, and merchandising both online and in showrooms, which the team has done really well as evidenced by our beats to expectations in this realm. Now turning to our outlook for fiscal 23. Demand is strong and we feel confident about our momentum in the coming year. We do expect and have planned for supply chain headwinds to persist through FY23. To that end, we will leverage our tremendous growth as we work with our manufacturing partners to mostly stem inflation at the raw goods and label input levels, and we will use our pricing power judiciously. We expect to be able to largely mitigate these pressures in the short term while we strengthen our core for the long term, including sourcing, supply chain, and our digital capabilities. Pursuant to our goals of zero waste and zero emissions by 2040, Design for Life is how we innovate at Lovesac. making things that are built to last a lifetime and designed to evolve for true sustainability. Circle to Consumer is how we operate, pairing our long-life products with long-term policies and programs that breed lasting and long-term relationships with consumers. We believe website can become authentically synonymous with sustainability over time. Over the long term, we intend to just keep doing what we've been doing for more than four years straight now, generate continued high net sales growth while increasing adjusted EBITDA margins on an annual basis by driving margin leverage at various points in the P&L structure where we see increasing efficiencies even with our growth. As long as we can do that, we are less concerned about quarterly movements at the gross margin line or other temporized shifts within the P&L. So in summary, Our confidence continues to grow by the resiliency of our performance throughout such a tumultuous macro backdrop. Our team is strong. Our strategy is sound. The best way to understand why Lovesat can continue to perform at high levels and remain somewhat insulated from industry swings is to understand how our design for life philosophy delivers true innovation. Our primary product, sectionals, looks like other sectional furniture. but it has many advantages to the consumer, like modularity, decoupling of the fashion elements from the core elements, compressed packaging for shipping, et cetera. These provide major advantages to our supply chain and business operating model in general. Even more importantly, we are not a retailer. We are also not just a direct consumer business model. Our actual products are proprietary, protected by many patents, and deliver heightened utility, durability, and sustainability versus the competition. As these products are adopted now, more broadly, word of mouth increases, which drives great efficiency in our marketing spend and creates a virtuous cycle of growth. The more product we sell, the more we will sell, more efficiently. Combine this fact, which we have demonstrated for many quarters now, with our ongoing innovation pipeline and continued growth is possible. Factionals are now a few years into this product adoption curve, otherwise known as the diffusion of innovation curve. Perhaps we're moving past those early adopters who took the risk on our heretofore obscure brand and unique offering and into that early majority of consumers where the real volumes lie. We are not concerned about saturation or diminishing returns yet because our share of the now $40-plus billion highly fragmented couch category is is still only about 1%. Meanwhile, Stealth Tech, another fantastic and proprietary innovation from Lovesac, has only just begun its journey toward acceptance beyond the early adopters on this curve. It may be years before our brand Lovesac has gained the credibility in the consumer electronics space to reach into a meaningful number of consumer homes with word of mouth as the driver, like Saxionals have started to do. enjoying the growth that comes at the steeper portion of that curve. We look forward to that. Finally, we will remain differentiated as we continue to innovate into new categories, as we've proven we can do, and take advantage of this product adoption curve as a core driver for our business into the future. We are inventors, coupled with a totally direct-to-consumer omnichannel business model, not interrupted by wholesale resellers, where we capture all the data, and focus on building long-term relationships with each of our customers in order to remarket to them our future inventions. This model is gaining in strength and we believe we can continue to disrupt. Before turning the call over to Mary, I want to thank the entire Lovesac team for all they accomplished in fiscal 2022 while navigating an uncertain environment. We are so thankful for the dedication and relentless efforts and we are looking forward to building on our successes in fiscal 2023. With that, I will hand it over to Mary to cover our strategic priorities and progress. Mary?
spk14: Thank you, Sean, and good morning, everyone. Our strong fourth quarter and record full-year performance are a testament to the strength of our business model and the agility of our team. As Sean shared with you, our highly differentiated business is benefiting from a growing product adoption curve as a result of strong relevancy and innovation. In the four months since I joined Lovesac as president and COO, I have really appreciated spending time in our showrooms as well as getting to know all of our associates in all functions and the strategic priorities they are all driving. What stands out to me the most is the passion and commitment of everyone at Lovesac and the consistency of the performance they drive. with 15 consecutive quarters of greater than 25% growth and a CAGR of 48.7% in the past four years. In the last two years alone, our comparative sales have doubled and almost tripled on a three-year stacked basis. We are very pleased with these record results and the strides we have made against our five strategic growth initiatives, which I will now review. starting with one, product innovation, of which the key highlight was our Stealth Tech launch in the middle of October in 21. We continue to be very pleased with the launch of Stealth Tech, and it is meeting our internal expectations. The only element that has been different to our plan is the customer demand on satellite size per transaction is higher than we had anticipated, and we are actively getting back in stock on this item. The launch generated activity of over 1 billion impressions and was a great jumpstart to the product launch. Since launch, Stealth Tech has demonstrated the ability to accelerate factionals AOV by over 700 basis points, as well as overall brand preference, even for those who are not buying Stealth Tech. Our priority in fiscal 23 will be continuing to drive awareness through media and PR, while leveraging experiential marketing and our touch points to drive demo and conversion. We expect performance to build sequentially as this year progresses, and we will continue to drive awareness of this strong innovation. Two, efficient marketing and merchandising strategies. In fiscal 22, our customer lifetime value was $2,840. And our customer acquisition cost was $548.74, delivering a ratio of 5.17, which was our highest level yet, and up 10% year over year. This ratio improved despite significant media cost headwinds versus last year, as our innovation and assortment mix drove margin performance that provided an offset for these headwinds. Broadcast indication was rolled out for the holidays after successful local testing during Memorial Day and Labor Day, which resulted in a 25% increase in overall TV reach. In addition, we have expanded into TikTok and Snapchat, which has resulted in more efficient CPMs that we continue to expect through fiscal 23. Lastly, we ran a premium placement for the first time. This placement was around the NFC and ASC championship games, and we saw significant performance that drove over 30 million impressions that translated into traffic to the Lovesac website. Year to date, overall media ROI continues to perform above our benchmark. And while we expect overall media in fiscal 23 to continue to see cost pressures, we anticipate offsetting this by higher conversion, increased AOV and margin improvements, and expanding segmentation capabilities utilizing our customer data platform. We will also continue to invest in fiscal 23 focused on driving spend to high ROI performing programs such as Search and continuing to grow these programs with hyperlocal marketing and geolocation to drive relevant traffic into our touchpoints. We are also very encouraged that word of mouth is now the number one driver of our brand awareness and share gains. We expect this to continue to be a tailwind for our growth as we continue to drive brand awareness and perception. Our customers and prospects are proving to be very effective brand ambassadors, with nearly one in four customers who purchase Lovesac having experienced our products at a family or friend's house. Overall, our brand and business experience significant strengthening year over year in fiscal 22, with our customer count up 14.3%, and overall customer satisfaction scores were up 250 basis points versus fiscal 21. Our brand perception and positioning in the market has significantly improved year over year, and this strength has allowed us to drive down discounting across all channels, while taking limited price increases to offset increased costs and improve our margins. Number three, touchpoint operations. We are continuing to see synergies across our various touchpoints. Customers can now experience sacks and sectionals with the addition of stealth tech in all of our locations, enabling them to now see and hear the product offerings before making their final decision. Our showrooms continue to be an important part of our omnichannel touchpoint strategy and continue to deliver strong results as reflected in our quarter four showroom comp of plus 72.6% or plus 95.1% on a two-year comp basis. With the launch of four new showrooms in quarter four, we met our target to open 28 new showrooms this fiscal year. In addition, in quarter four, we opened seven kiosks, as well as 16 Best Buy shopping shops in markets with and without a showroom presence. Appointments continue to play an important role in our Touchpoint shopping experience. And during quarter four, we conducted more than 3,200 appointments, which was a 25% increase over quarter three. These appointments represent nearly 8% of total touchpoint business and quarter four was our highest converting quarter at a 50% conversion rate. Throughout the fourth quarter, the post-purchase specialist team continued to expand their reach across both physical touchpoints and e-commerce. In quarter four, our post-purchase specialists communicated with more than 89% of Lovesac customers, whose purchases met the predetermined dollar threshold for their service. Post-purchase CFAP for customers that engage with a post-purchase specialist was 3.4 points higher than those that did not. As planned, we expanded our sales and service strategy to all touch points throughout quarter four. This rollout leverages talent across trade areas to support customers in their shopping journey, both pre- and post-purchase with a goal of enhancing the customer experience and further increasing customer satisfaction. As we look forward to the year ahead, we continue to leverage our strong traffic-driving ability to expand our real estate in off-mall locations, with 75% of our currently planned touchpoint growth being focused on off-mall locations and therefore driving our four-wall contribution up. We have been investing in additional recruiting resources focused specifically on the rapid expansion of our field organization. This investment allows us to continue to scale talent with our growth plan. Four, expanding other channel presence. We're very pleased with the strength of the Costco business where we're hosting our online roadshows directly on Costco.com. We have seen productivity increases year over year driven by an expanding premium cover and love soft offering that have also significantly expanded product margin year over year. We continue to be excited about the partnership with Best Buy, and we opened 16 additional shopping shops in quarter four. We've also seen our bestbuy.com business increase at a strong rate this year, which we attribute to the improvements to our customer experience on bestbuy.com, the launch of Stealth Tech, as well as the marketing tests in support of Stealth Tech and the holiday sales period. We look forward to continued expansion of this partnership. In fiscal 23, we will also continue to pursue opportunities with other partners as our other channel presence continues to be an effective way of expanding our brand awareness and reach. And then five, making disciplined infrastructure investments. Starting with e-commerce, we continue to see strong year-over-year results throughout the holiday season as we make key investments to enhance our e-commerce platform throughout the quarter. With the launch of our new customer data platform in September, in quarter four, we began to utilize our first-party data to heighten targeting and segmentation in all of our marketing efforts. We are excited to harness the power of this tool this year as we continue to enhance and improve our omnichannel customer journeys, and it positions us strongly for a cookie-less world that is approaching. As we look to this year, we are obsessed about improving the customer experience on lovesac.com. with research projects underway to understand improvements needed in our customer journey. We'll also be investing in a new omnichannel customer service platform, providing customers with the right support for both reactive and proactive needs. This solution will enhance our already connected omnichannel experience by providing valuable business intelligence and positively impacting customer satisfaction and employee engagement. And then finally, regarding supply chain updates, in quarter four, we continue to benefit from our supply chain and inventory strategies, which enabled us to not only over-deliver sales in quarter four, but also close the year in a great position with year-ending in stocks in the high 90s and substantial inventory quantities on the water ahead of the Chinese New Year shutdown. Our delivery time to customers continues to be best in class in our category and we remain committed to this performance. As we look forward, we took bold action back in quarter three to address the anticipated rough restart from Chinese New Year and the ongoing pressures on cost and inventory flow over at least the first half of fiscal 23. Executing plans to ensure product flow from which we're now benefiting. Our diversified sourcing base on key categories has helped us to support our strong and consistent supply performance, but we do expect some logistic cost pressure in the form of fuel surcharges that Donna will cover further. Into fiscal 23, we will continue to focus on the customer experience from order to delivery, increasing our efficiencies, reducing costs, and mitigating risks in our supply chain. We will continue to drive our supply chain capabilities and discipline systems and people investments to improve the performance of our inventory, our largest asset. So in summary, we are very pleased with our financial and operational performance in fiscal 22 and continue to be very excited about the opportunities this year as we drive our strategic growth initiatives. We are very proud that our overall customer satisfaction scores ended the year significantly higher than when we started fiscal 22. As we have seen, our customers can really drive awareness and perception of our brand, and we want to make sure that we're servicing them better and building closer, longer-lasting relationships with them. Our commitment to Circle to Consumer will help us to continue to drive our feedback and impact the future growth of our business. Our strong results reflect exceptional execution by the entire LoveSac team as we continue to navigate a dynamic operating environment. We feel good about the underlying momentum and trajectory of the business as we start fiscal 23. And we really appreciate all of the team's commitment and passion to driving our business. We are very well positioned to continue to gain market share and benefit from the broader trend of consumers who value purpose-driven brands founded on sustainability. I will now pass the call over to Donna to review our quarter four results, full year financials, and a few details relating to our fiscal 23 outlook. Donna.
spk12: Thank you, Mary. Good morning, everyone. I will begin my remarks with a review of our fourth quarter results and then provide a framework for how we're approaching fiscal 2023. Net sales increased $66.5 million, or 51.3%, to $196.2 million in the fourth quarter of fiscal 2022. The year-over-year net sales increase was driven by growth across all channels with an overall comparable sales increase of 50%, which was due to the success of our holiday campaign, ending showroom count increase of 28 year-on-year, the introduction of eight kiosks and two mobile concierge touchpoints, higher productivity of our online pop-up shops on Costco.com with one additional event over the prior year, and an additional 18 Best Buy shop and shop locations as compared to the prior year. Showroom net sales increased $44.1 million, or 59.8%, to $117.7 million for the fourth quarter of fiscal 2022. This increase was due primarily to a $43.1 million increase in comparable showroom point of sales transactions to $102.6 million in the fourth quarter of fiscal 2022, as compared to 59.4 million in the prior year period. As a reminder, point-of-sale transactions represents orders placed through our showrooms, which does not always reflect the point at which control transfers to the customer and when net sales are recorded. In Q4, while comps or orders increased 50%, at fiscal year-end 2022, approximately 13 million of this increase is waiting to be shipped to our customers, principally related to the timing of customers' orders. We also opened additional Love Shack showrooms, kiosks, and mobile concierge since the fourth quarter of last year, as I just mentioned, which was a meaningful driver of the non-com showroom sales increase. Internet net sales, which are sales made directly to customers through our e-commerce channel, increased 11.2 million, or 22.8%, to 60.4 million in the fourth quarter of fiscal 2022, as compared to 49.2 million in the prior year period, principally driven by the performance of our fiscal 2022 holiday campaigns. Other net sales, which principally include pop-up shop and shop-in-shop net sales, increased $11.2 million, or 164.9%, to $18 million in the fourth quarter of fiscal 2022, as compared to $6.8 million in the prior year period, given the higher productivity of our Costco.com pop-ups, in addition to the one additional pop-up shop during the fourth quarter of fiscal 2022. and the increase in Best Buy Shop and Shops just discussed. By product category, our sacks and all net sales increased 56.8%, sacks net sales increased 12.6%, and our other category net sales, which includes decorative pillows, blankets, and other accessories, increased 81.5% over the prior year period. The decrease in gross margin percentage of 200 basis points over the prior year period was primarily driven by an increase of approximately 480 basis points in total freight costs, which includes inbound and outbound freight, tariff expenses, and warehousing costs. These costs were partially offset by an improvement of 280 basis points in product margin, principally driven by lower promotional discounting and continuing vendor negotiations to assist with the mitigation of tariffs. The increase in total freight costs over prior year was principally related to the negative impact of 590 basis points increase in inbound container freight costs and increased tariffs related to higher product sourcing from China, partially offset by 110 basis point improvement due to higher leverage of warehousing and outbound freight costs on higher net sales. We exceeded the fourth quarter net sales guidance we shared with you on our last call, primarily driven by the success of our holiday campaigns. Our gross margin percentage in the fourth quarter of fiscal 2022 exceeded our guidance of approximately 760 basis points, driven primarily by lower inbound freight costs than we had projected. These freight costs are a function of freight rate as well as volume and the expected arrival of those containers. While the rate component was in line with expectations, there were some delays with timing on containers arrivals due to the broadly reported supply chain headwinds and port congestion in Q4 that caused the delta. Importantly, we expect these deliveries to arrive in Q1, and the good news is that with the redundancies in our supply chain and distribution network, we had no degradation in CSAT scores or customer delivery times. In addition, we saw a higher product margin as a result of less promotions, better leveraging of our warehousing, and outbound freight costs than projected. The 59.6 year-over-year increase in SG&A was driven largely by higher employment costs due to an increase in new hires and variable compensation. We also had higher rent expense from the additional 28 showrooms and 8 kiosks, plus higher percentage rent from the increase in net sales. Overhead expenses increased due to infrastructure investments, equity-based compensation, travel expense, and insurance. Selling-related expenses also increased primarily due to credit card fees related to the increase in net sales and a one-time settlement fee to terminate an existing agreement with a vendor partner. SG&A expense is a percentage of net sales increased by 154 basis points due to deleverage within selling-related expenses from sales agent fees employment costs, travel, rent, infrastructure investments, and insurance, which were partially offset by a leverage on credit card fees and equity-based compensation. The increase in sales agent fees is related to a one-time settlement payment I just discussed. The deleverage in other expenses relates to the investments we are making in the business that were put on hold in the prior year period due to COVID-19 financial resilience measures. Advertising and marketing expenses increased $9.9 million or 63.8% to $25.5 million in the fourth quarter of fiscal 2022 as compared to $15.6 million in the prior year period, resulting from continued investments in marketing spend and awareness campaigns to support our sales growth. Advertising and marketing expenses were 13% of net sales in the fourth quarter of fiscal 2022 as compared to 12% of net sales in the prior year period. The 99 basis point increase was due to media activities which are expected to drive revenues into future periods. Depreciation and amortization increased approximately $500,000 from the prior period to $2.1 million, principally related to current year capital investments to the new and remodeled showrooms. Operating income was $24.2 million compared to operating income of $21.8 million in the fourth quarter of last year driven by the factors just discussed. Net interest expense of $44,000 for the fourth quarter was in line with the prior year's fourth quarter expense. Interest expense principally relates to unused line fees on a revolving line of credit. In the fourth quarter of fiscal 2022, We reversed the full valuation allowance we had against our deferred tax assets, resulting in a net tax benefit of $8.5 million as compared to tax expense of $16,000 relating to minimum state income tax liabilities in the prior year period. Before we turn our attention to net income, net income per diluted share and 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 $32.6 million or $2.03 per diluted share in the fourth quarter of fiscal 2022 compared to net income of $21.7 million or $1.37 per diluted share in the prior year period. The increase in net income per diluted share in the fourth quarter of fiscal 2022 was significantly impacted by the one-time tax benefit of $8.5 million, which equates to 53 cents per share, as I just discussed. We generated adjusted EBITDA of $32 million in the fourth quarter of fiscal 2022 as compared to adjusted EBITDA of $25.9 million in the prior year period. Turning to our balance sheet, Our liquidity continues to remain strong as we ended the fourth quarter with $92.4 million in cash and cash equivalents and $22.5 million in availability on our revolving line of credit. Please refer to our earnings press release for other details on our fourth quarter and fiscal year 2022 financial performance. Regarding our outlook. We are still operating in a dynamic environment with wider range of potential outcomes as it relates to fiscal 23. Given this, we are not providing formal outlook for the full year, but we'll share a framework that will be helpful as you are updating your models. We are targeting another year of strong net sales growth, which will include more than 25 showroom openings. We are also continuing to make infrastructure investments to support the substantial multi-year growth opportunity that lies ahead. In a scenario where net sales growth is in the low 30% range, we expect growth margin rate to be approximately 300 basis points below fiscal 2022 levels, driven by the continuation of higher inbound and outbound freight costs. Adjusted EBITDA margin rate in this scenario is projected to be slightly above fiscal 2022 levels despite increased rate costs and infrastructure investments as we expect to leverage operating expenses with a net sales increase in the low 30% range. For our fiscal first quarter of 2023, we expect next sales growth of approximately 39% and break-even adjusted EBITDA compared to positive adjusted EBITDA of $5.3 million in the same quarter last year. Adjusted EBITDA is primarily being impacted by expected lowest gross margin of approximately 700 basis points year-over-year related to higher inbound ocean freight rates and higher outbound transportation costs resulting from higher fuel surcharges. We expect to generate cash from working capital in fiscal 2023 And we expect CapEx to be in the $20 to $22 million range. Before I wrap it up, I want to mention that in the upcoming fiscal 2022 Form 10-K, you will see mention of a material weakness in internal control related to certain technology controls in the areas of user access rights and the monitoring of such rights for systems that support our financial reporting processes. Remediation efforts are in process and we fully expect that the remediation of this material weakness will be completed prior to the end of fiscal 2023. Most important, this has no impact on our cybersecurity controls, financial statements, or the timing of our 10-K filing as a large accelerated filer. So in conclusion, we are pleased to close out fiscal 2022 with strong fourth quarter results that exceeded our expectations on both the top and bottom line. Our performance continues to serve as a testament to the caliber of the entire Love SAC team, and we are grateful for their contributions. We look forward to building on this performance in fiscal 2023 and beyond. 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would 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.
spk11: Thank you.
spk09: Our first question comes from Thomas Forte with DA Davidson. Please proceed with your question.
spk01: Great. Thank you. So first off, Sean, Mary, and Donna, bravo. Excellent year. Look forward to this year. So you sort of touched on this in your prepared remarks, but I want to talk about unaided awareness. So you had a television ad during the NFC title game. Sounds like you also had one during the AFC title game. And then last night I saw a product reference for your original Love Sack product in the Renee Zellweger TV show. So, Sean, I'm curious on your thoughts on how increasing unaided awareness can drive sales for Love Sack, even as we're seeing signs that the home category overall is slowing.
spk05: Yeah, you know, as I mentioned, I think that we are, thankfully, a big portion of our continued success has to do with timing. You know, not to say that the team hasn't done a fantastic job. That's exactly what they've done. But Love SAC just happens to be at this moment of inflection where we are still small and with tons of headroom as a brand, as, you know, a product adoption, as a moment in that curve where sactionals have penetrated enough and word of mouth has really kicked in and driving unaided awareness. for us, but we're still small. And so for us, at this moment where the world is in great tumult, where the home category has gone through an obvious cycle that was unpredictable, driven probably by COVID and people remaining at home and all of these factors, we emerged from that in a better place than we went into it. And by the way, we did pretty well through that cycle. And so For us, it's just a confluence of great timing, great execution, and great marketing decisions. You know, we are being very judicious in our marketing spend while taking risks and balancing those factors. And with that, our unaided awareness is growing. But the category has grown just as much. And so... we continue to have the headroom that we have. And I'm sure that Jack, who, by the way, is also available on these Q&A, might have some comments on this.
spk02: Absolutely. Thanks. Hey, Tom, I'm still here, at least for a couple quarters, right? Anyway, I think the key is unaided awareness is absolutely critical because we win at conversion. So if you start to get people into the funnel and they funnel down, we know we crush it in the conversion funnel. So it is absolutely important, unaided awareness, because it allows us be a comparable to the other critical products. And when our products are compared, we win every time. So it's critical. And that's why we're disrupting. We're not only fighting for overall awareness, but we're disrupting at the point of consideration. And that's what causes the brand to have the trajectory that's well above any of the category trends.
spk11: Great. Thank you, Sean. Thank you, Jackson. Thank you. Our next question comes from Maria Rips with Canaccord.
spk09: Please proceed with your question.
spk08: Good morning and congrats on a very strong result here. First, you mentioned the success of your holiday campaign, but sort of in addition to that, how much of the top line outperformance would you attribute to having inventory in stock and being able to get it to consumer quickly versus sort of all the new touch points added in the past year between showrooms, kiosks, and mobile concierge, etc.? ?
spk11: Yeah, sorry, just deciding who would jump in.
spk05: There are so many factors to separate out in the business, obviously, over the last couple of years. It's very difficult for us to strip out what growth is coming because of what factor, right? And the main reason for that is the sheer volume of growth. Obviously, it's massive for us. And so any kind of industry movement, any kind of, let's call it a tailwind from some of the factors you mentioned, whether it's just as simple as being in stock, is extremely hard for us to separate out when the growth is greater than 50%, especially. But we'll take it. We think that, for instance, the element of being in stock, over the past, well, over the past many, many years, but over the past year in particular, has been a huge advantage for us. And it's evidence, not just of like, oh, we bought plenty of inventory and we prepared well and the management team is sharp or whatever, which I hope is all true, but it really is rooted in the fundamentals of our product and our business. And we've been pounding the table on that for a long time. And frankly, the tumultuous process environment that we've been operating in has been proven ground for the things that we've been saying for years. You know, you got to remember that while sectionals look like sectional furniture, they pack very, very differently on container ships. They pack very, very differently for last mile delivery. And through COVID, touchless delivery, you know, no appointments possible in people's homes for all of our competitors, that sort of thing. We rode through with all of these attributes and just continued to sell at a healthy clip because of these attributes. And so I wish that we had the data to strip that out. We don't. I think that as long as we're operating in tumult, we will continue to be a winner. And I think when we operate in peacetimes, I think we can be a winner as well, partly because of what I mentioned before. We are really growing into our a formidable size at the right time. Still small enough to have plenty of headroom, but big enough to matter and get into the forefront of the consumer mindset. It will be no less volatile in the next few years based on the many insights that we're obviously seeing. So our supply chain will continue to add stability to And you couple that, just as you mentioned, Maria, with the business model on the front end, a truly direct consumer model that we are in control of. We're not reliant on wholesale relationships. We're not collecting receivables. We're not separated from our consumer by a middleman. We have all of the data to those consumers, and we're able to market and remarket to them. and build those relationships that we talk about through our CTC, our circle to consumer efforts that are, by the way, very fledgling and just beginning. But the bigger that our customer base grows, the more useful that will be to us to mine and to leverage and to cultivate. And so we're very, listen, we feel very blessed to be in a situation where we can continue to win And I think based on all these attributes and others that we don't even have time to get into, I think Lovesac can continue to win in these ways and demonstrate how these fundamentally different aspects of our product and business model deliver advantages.
spk08: Got it. That's very helpful, Sean. And then secondly, appreciate all the call around stealth tech. But is there any way you could maybe describe the contribution from StealthTech to your Q4 results and any updates on the attach rate? I believe last quarter you mentioned that it was around 15% or so. And then can you share sort of any color on how this product compares to sectionals from the gross margin standpoint?
spk14: Yes, let Maria, hi, it's Mary. I'll start and then... Donna may want to kick in in terms of overall contributions. So obviously in terms of stealth tech, as I shared, you've seen that we are very happy with the performance and it's in line with our expectations. And that looks at multiple data points that we are looking for us to achieve in our KPIs. And I think for us, It was what we planned for quarter four as we had seen that initial launch at the middle of October through to quarter four. So we're very happy with that. I think also another point, Maria, is that we're always trying to balance demand with having in-stocks. And you know with many competitors out there, they're not able to deliver on in-stocks. And that's a foundation of everything that Lovesat does. and that we will never let go of. So managing that in stock to service ratio with demand has always been key. I don't know, Donna, anything else that you want to comment in terms of the overall contribution for Q4?
spk12: Not specifically for Q4, and I won't give stats for the year, and I know, Maria, you like the numbers, but We were really pleased with the attachment rate as we ended fiscal 2022, and we expect it to be as strong going into fiscal 2023. So, again, very, very pleased overall.
spk14: Yeah, and I think, Marie, you asked about margins as well. That's in line with our overall margins, so that is continuing to perform. So contribution rates, everything is strong. So, yeah, we're very excited. But as Sean said before, it's in the early stage of adoption, and we will continue to put a lot of emphasis around driving awareness, but also, honestly, demos in the showrooms, because what we've seen to be proven is that once consumers see and hear our product, they love it. They think it's remarkable.
spk10: So we feel very good about the forward momentum.
spk11: Thank you. Our next question comes from Brian Nagel with Oppenheimer.
spk09: Please proceed with your question.
spk04: Hi, good morning. First off, I too would like to add my congratulations and another nice quarter. Congrats. So the question I have, my first question, just with regards, I know you spent time in the prepared comments talking about the supply chain and the issues you continue to deal with. But I guess the question I have is, we look at the gross margin performance in in the fourth quarter. You know, traps significantly better than, you know, I think most estimates out there, significantly better than the guidance you provided. And really, you know, not that far off of, you know, kind of like what I would say historic highs. But the initial, I guess, not guidance, but necessarily framework for Q1 would suggest more pressures here, you know, in the current quarter. So the question is this, and maybe I'll go back to kind of the puts and takes. And is there any reason why, from a gross margin sourcing perspective, shipping, whatever, it should be more challenging here in Q1 than it was in Q4?
spk12: Hi, Brian. It's Donna. So really, as I outlined in my script, the rates are where we thought they would come in. So they're as high as where we thought they would come in. It's based on volume as well, because as the freight comes in, it sits in our inventory and we amortize it out off the P&L. But the other contributing factor going into Q1 is outbound freight, right? The outbound freight costs for us to last mile to the customer is seeing some significant impacts as well, more than what we thought last year, but what 100% covered in all of our models. So not only are we seeing the inbound freight from overseas at accelerated costs, we're starting to see the outbound freight build as well. But again, covered all of those increased freight rates are covered in all the models that I, you know, all the, I'll call guidance for Q1 and framework for the year. But that's why you see specifically for Q1, It's the timing of the containers. We're getting a lot more containers coming in in Q1, and then it's the outbound freight.
spk04: Okay. That's helpful, Donna. Then my second question, I guess a little bit bigger picture, but, you know, Sean, you talked about the continued initial success here of StealthTech and that product launch. You know, on the heels of that, and I know we've discussed this in the past, but any update as to how we should be thinking about additional products, you know, newer products from BlupSec, either timing or maybe even idea of what these could be?
spk05: Yeah, as we've said, we'll continue to put out new products at a trickle constantly. And what I mean by that is we're a platform-based business. Sactionals is a very powerful platform, been driving most of our sales. But the SAC platform continues to have opportunity to grow. We have a number of projects brewing in that realm. The Sactionals platform has all kinds of accessories and add-ons that will be meaningful. that will move the needle for us and continue to make that platform even more competitive than it has been heretofore. There are many people who, you know, the style, the shape, whatever it is, doesn't work for them aesthetically or even comfort-wise. And we're making all kinds of innovations in that realm that will launch quarter on quarter over the next number of years. There's probably a decade less still of factional innovations And then, you know, Stealth Tech is our first toe into a completely new category, home audio, right? You look around your home, what are the categories that we could innovate in? I don't think people expected us to innovate into home audio, but we've done it. And I think that Stealth Tech is absolutely a newborn. I can't emphasize that enough. Like you will be asking me, and it's fair, I'll take the question anytime and pontificate on all of our, you know, exciting new product to come, but recognize that like an invisible home theater system that's shrouded underneath foam and upholstery and then a removable cover, but tuned to be music to your ears with no sound quality loss at all because of our patented technology. That is a far-fetched crazy idea coming to you from a beanbag company. not one of the big names in home audio. It's going to take years before stealth tech has matured to the place where sectionals have matured to. And even sectionals are still a toddler. Sectionals are still a toddler in the category. And I say that with lots of love for our own products and for the team, but I don't know how to communicate that enough. So look, it'll be a couple years before we make another major launch into a new category because we don't spew out a merchant's beautiful, aesthetically pleasing idea on a commodity. We invent things. We solve problems you didn't know you had. Like a home theater system that perhaps your partner didn't even really care about because the last thing they wanted was speakers cut into their ceiling or wires strewn across the floor, whatever, right? There's not a problem that a lot of people necessarily contemplated. But I think we solved that elegantly. We'll continue to solve problems like that throughout the home elegantly. Those things take time. They take a lot of invention, a lot of work to bring to market. And meanwhile, we'll drive awareness of these remarkable products that we have launched to the point where they're beyond newbornness a newborn, you know, the newborn stage beyond the toddler stage and hopefully get into some more meaningful growth that comes with adolescence. So we'll see. But that really is our point of view every couple of years on a, every, you know, two or three years on a major product launch and, and, and in between we'll grow the platforms. And by the way, stealth tech's another platform. We'll continue to grow that platform. And so I'm really excited about the future, but that will be my answer to that question for a long time to come.
spk09: Thank you. Our next question comes from Camillo Lyon with BTIG. Please proceed with your question.
spk07: Thank you. Good morning, everyone, and congrats also on a very strong close to the year. To that point, you know, there's a lot that's changed from a macro perspective since the end of your fourth quarter. And I'm curious if you could give us some details on the health of the consumer. You clearly alluded to a very strong continuing momentum in this first quarter sales framework you provided, but I'm just trying to parse out the components of that as it relates to price increases, expectations on stealth tech, adding to that is that the doubling of the average ticket that you usually enjoy, and really trying to parse out the health of the consumer in a world where inflationary pressures are mounting, rates are rising, and
spk14: the Russian invasion is creating some consternation around sentiment yeah hi Camila great question thank you so I think the first thing is as we shared in our outlook we feel very confident around demand and particularly also confident around our ability to supply to our customers in a matter of days so I think you know, that will continue and we feel very strongly about that. And I think also then as you talk around disruption, we're not yet seeing anything in terms of any dynamics that are really impacting demand or, you know, traffic into showrooms or on the web. We're really continuing to see great strength from our consumers as they buy into whether it be sectionals or as you said around the adopting early on stealth tech. So from that side, as we look at, you know, whether it be AOVs, we look at basket spend, we really continue to see great strength. So for that side, we feel that disruptions that you mentioned that, you know, we're so small in the category and with everybody else unable to deliver. with so many delays and so many other things that we truly are winning, you know, each and every day because of that formula of success. So obviously, we'll always be very mindful, continue to watch and adjust as we see anything. But today, we feel very good as we look forward into fiscal 23.
spk07: That's great to hear. And Donna.
spk02: Just to add to that.
spk07: Oh, sure. Yeah, sorry.
spk02: Go ahead. How are you doing? A couple things. One is our target customer is, we think, a little bit more protected from some of the dynamics in the short run than the total population. And on top of that, I think something really important to add to Mary's points is that despite promoting significantly less last year, despite taking price increases, we've seen the value of the brand as determined by our own customers, go up. And so they're valuing our brand more and more as they get to know it. And the disruption, I think, and getting back to the whole conversion, that's why we're seeing this significant conversion. And that conversion is really important to talk about because we're disrupting by converting in the category while everybody else is trying to figure out how to play with the small hits or misses within the category growth. We're just plain disrupting, and that conversion rate is what's doing it for us.
spk07: Got it. That's excellent to hear. Thanks for that color, Jack. Donna, if I could ask you, when you think about the guidance, the margin guidance that you provided, the framework you provided, can you just tell us the expectations on freight costs and if you're embedding a relief in those pressures this year or if you expect those to persist throughout the year at the current rate?
spk12: Hi, yeah, so consistent with what we said at the end of the third quarter when we had provided an outlook or a framework, we are still building the higher freight rates from a conservative standpoint as if they will persist throughout the remainder of this year. Also, just remember, you know, we maintain, because of our strong inventory position in Evergreen Inventory, we maintain a healthy in stock position. So even if those were inbound or outbound free costs started to drop throughout the year, we would still have the inventory that would be impacted by the higher freight. So in any of the guidance or the outlook that we've provided, we've assumed higher freight rates throughout the full fiscal year.
spk11: Thank you.
spk09: Our next question comes from Alex Furman with Craig Hallam Capital Group. Please proceed with your question.
spk03: Great. Thanks very much for taking my question. I wanted to ask about your inventory. It looks like you have a pretty huge war chest to begin this year with. Can you tell us a little bit of what that consists of? Is it basically just your regular assortment but just more of it? I'm curious to just how you're managing your big inventory in anticipation of, you know, not knowing, I guess, what the supply chain could bring this year.
spk10: Yes. Hi, Alex. Thank you for the question.
spk14: I think, you know, as we look, I think I mentioned this earlier. In quarter three, we made a big bet around continuing to build up our inventory levels. Firstly, as we saw, demand continued to be very strong. But secondly, also in the anticipation of the Chinese New Year impacts that obviously we're starting to see also. That was really put into our top selling skews and continuing to drive out just on our core business on seats and sides. So you'll see, you know, across the board, it's just a continuation of us always trying to deliver products. Within days to our consumers, you know, I touched on earlier also the CSAT improvement. You know, that's just really a reflection of how our customers are feeling, you know, every day as Lovesac is able to deliver to them in such a short time when the rest of the industry is really struggling and continually delaying. So we feel really good we were bullish because it's certainly going to help us. go through and the start of this year, we actually are at the best in stock levels that we've ever been in. So, you know, congratulations to the team for anticipating that. And we will continue to always invest and manage forward so that we make sure that we always deliver to our customers.
spk12: I just want to add to that too. There is a piece of that inventory, as I say, about the inbound freight that sits on the balance sheet. So there's an increased year-over-year of about $20 million. So when you look at that in prepaid freight that sits on the balance sheet as well. So it's our tangible inventory plus the freight that follows the inventory sitting on our balance sheet, which is what I talk about. We'll go through the P&L as that inventory is sold. So just want to make sure that you focus on there's a tangible piece of that inventory growth, and then there's the freight associated with it.
spk09: Thank you. Our next question comes from Matt Karanda with Roth Capital. Please proceed with your question.
spk15: Hey, guys. Thanks, and congrats on a great quarter. Just wanted to attack the stealth tech question maybe from a different angle here. Can you provide any commentary on sort of the lift to average order values either in the fourth quarter or full year 22 and how those benefited from stealth tech? And then just you mentioned in your commentary that customer demand on satellite sides was higher than expected. Should we be interpreting that as sort of customers are choosing larger systems than the base suggested configuration that you guys have put out there, and what are the implications for AOVs?
spk14: Yeah, I'll start, and then I think Jack can also add on. And nice to hear from you, Matt. Thank you for the question. So obviously from a stealth tech point of view, we're seeing AOVs for just the stealth tech alone of just over $3,000. And it's lifting our overall AOV by just over 700 basis points, so just over $207 per transaction. So we've been very pleased to see where that lift has come from. And to your point around the satellite side overselling, to where we'd initially forecasted, which we feel great about. It is a little bit around the fact that we're seeing the larger configurations being purchased. So it's not just, you know, as you go through kind of the six through to the eight to the ten seat size, we're actually seeing the larger configurations being bought into. So again, you know, that gives us great confidence, you know, going forward that people really want to have a great experience with self-tech. You know, from that side, we are in stock. We just want to build back the inventory on those satellite sides so that we deliver every day. And then, Jack, I don't know if there's anything else you want to add to that.
spk11: We've covered it all. Thanks.
spk10: Great. Thank you, Matt.
spk09: Thank you. Our next question comes from Lamont Williams with Stifel. Please proceed with your question.
spk06: How are you doing, guys? And congrats. Just wanted to ask where you are in your hiring plans and where you can expect, you know, investing in people for next year. And then secondly, just a quick follow-up on your style tag, how is it the product working to bring in new customers and are the initial sales going? What's the breakdown between new and existing sectional customers? Thanks.
spk14: Thanks. Thank you, Lamont, for the question. So I think the first one you talked in terms of on hiring, I think from the first point, we feel good about the progress of hiring as we're entering into fiscal 23. We did make some adjustments in the field, whether it be around base pay, but we also rolled out our sales and service strategy, which includes the great incentive program. And I think coupled with the purpose-driven brands You know, we're seeing great, you know, hiring and really filling in the roles as well as honestly building the expansion that we have in touch points that Donna shared for fiscal 23. So feel good there. I think also in the head office, the hub, we also see, you know, great abilities to hire talent and we feel very good in terms of, you know, where that builds out. So today we feel from the fiscal 23 very strong there. I think then in terms of your question around stealth tech, yes, we are seeing predominantly new consumers to LoveSac that are being attracted to us via stealth tech, which we're very excited about. But we're also seeing current consumers coming back and adding, you know, stealth tech to their sectionals in their home, because that's a wonderful thing that there's so much flexibility, whether you bought a sectional 12 years ago, you can add stealth tech and And that strength of the new technology to your current product is phenomenal. The stealth tech index for return customers is higher than anything we've seen before. So again, it just bodes very well for us as we continue to raise the awareness and drive the demos that we feel very confident around the stealth tech performance through the year. But as Sean said, it's at the early stage of adoption, and we will continue to really get people excited and get them to see, hear, and feel it.
spk10: as they come to our showrooms or even just understanding about it on the web.
spk09: Thank you. There are no further questions at this time. I would like to turn the floor back over to Sean Nelson for any closing comments.
spk05: Yes, thank you. Thank you to all the investors and supporters joining the call that continue to invest and support Lovesac. A huge thank you to our Lovesac team. who are amazing and resilient, capable, and who drive our business forward with lots of love. As we say at Love Sack, these results are their fault. Have a great day.
spk11: Looking forward to another great year. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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