The Lovesac Company

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.

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.

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?