The Lovesac Company

Greetings. Welcome to Lovesac First Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are the 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. Please note this conference is being recorded. I will now turn the conference over to 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, 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 measures 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 Lovesac Company.

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. Today, we will start by reviewing the highlights of our first quarter fiscal 2023 performance and then discuss Lovesac's strong positioning within the industry. Then, Mary Fox, our President and COO, will update you on the progress we made against our strategic initiatives this quarter. And finally, Donna Delamo, our CFO, will review our financial results and a few other items related to our outlook in more detail. Jack Krause, Chief Strategy Officer, is also in the room to participate in the Q&A session. Let me now review some key highlights of our first quarter financial performance. We are very pleased with our first quarter results with top and bottom line performance that exceeded expectation despite a dynamic macro backdrop. Total sales were $129.4 million, up 56% versus the prior year period. We delivered total comparable sales growth of 42.2% and continue to be very encouraged by the broad-based strength from both new and existing customers. We again saw strong growth across our showroom, internet, and other channels. Notably, we grew adjusted EBITDA to $6.4 million from $5.3 million in the prior year period despite gross margin pressure of 450 basis points driven by supply chain headwinds, which Mary and Donna will share more details around. I want to take a moment to share why we believe we have and will continue to deliver higher growth at a more consistent rate than much of our category. Lovesac is not a furniture retailer. Lovesac is not just a direct consumer marketing engine selling clever seating solutions in a sea of comparable furniture. At our core, Lovesac is a branded consumer products company. We sell proprietary home furnishing inventions that are more useful, longer lasting, and more sustainable than all comparable products. We sell only direct to the consumer through our website and physical touch points, including shop-in-shop partnerships that we directly operate. This means the way we approach doing business from the standpoint of product, pricing, go-to-market strategy, insights, and even talent is different than all others within the home furnishings category. We aim to build lasting and meaningful relationships with each customer. And because of this direct-only model, we have a powerful set of data and insights for each one of our customers. We are focused on building a brand that is based on product platforms, not a brand built around a broad merchandising assortment that includes thousands of products or that competes mostly on aesthetic, like most of our competitors. This approach leads to fundamentally different outcomes for our business compared to the category. As a result, Lovesac's business performance and customer experience was not subject to some of the ups and downs that some of our peers were subject to throughout the different stages of COVID. I'd like to focus on three main differences that drive our reliable performance, making the point that these strengths will continue to benefit us through other macro hand winds and distortions to come. First, our approach allows us to continuously strengthen our product platforms by relentlessly investing in research to understand our customers. We invent new concepts and platform additions that no competitors have ever thought of. We test them and we develop them to succeed from launch. instead of endlessly chasing new seasonal styles and collections based on a desire's whim or a merchandiser's point of view. We are totally focused on making a product that meets our customers' current and future needs by evolving the platform with them. We will apply this approach to other product categories in the home, most recently home audio. Our research shows us that Lovesac's brand perception among our target audience is, quote, a good value for my money, end quote, is advantaged versus our core competitive set, and that these perceptions increased year on year in Q1 FY23. We are driving increasing value perception at a higher rate than our price increases. Secondly, because we are selling a branded product platform, not just commodity furniture versus like commodities, Every sectional we sell is a legitimate opportunity for those customers to share our brand with friends and family, and they do. Our products are truly unique, and the most unique aspects of them are truly novel and readily demonstrable right in our customers' living room. They know how to operate and manipulate their sectionals because they did not just have them delivered and set in place. They had to configure, cover, and perhaps even connect Stealth Tech with their own two hands. This is powerful and disruptive since our competitors sell numerous unbranded lines of couches, each with limited appeal or comparable benefits. This is why we are seeing nearly one third of our customers in the purchase phase tell us that they learned about Lovesac from a friend or family member. Every time we sell a product, it becomes a marketing asset unique to us as our broadly appealing product is being showcased and demonstrated by our own customers in their own homes. Lastly, From an operations perspective, this focus is a critical advantage versus the category. We do not have to worry about obsolete inventory. The benefits of scale are leveraged against these few core products, not many, and our people truly become experts in the products we make. We see these benefits of scale manifest in the resiliency of our supply chain, the efficiency of our inventory carry, and marketing spends, just to name a few. This approach is what gives us confidence of continued success in the categories we compete in, and we will apply it in the new categories that we decide to enter thereafter. We have proven we can innovate successfully into new home categories, having chosen one of the most technologically complex ones to go after first following factional, that is home audio. Based on the performance of stealth tech to date, we are confident that over time we will gain significant market share, even as we are working on the next platform to launch. We have great confidence in our ability to generate high growth and continually improving profitability on an annual basis as the business leverages rapidly with size and scale, even in the face of macro headwinds or disruptions that affect all players in our category. And we believe that the attributes of our unique model can provide some insulation from these potential disruptions as they have over the past few years. We are committed to delivering results to that end as proof. Now, let me provide an overview of our positioning within the current environment. Macro headwinds appear to have intensified in the last few months. We have observed some moderation in demand only within the last few weeks. We continue to operate from a position of strength as our 56% top-line growth in the first quarter reflects. which is a testament to our robust business model and momentum-driven brand appeal. We believe that we are still in the early majority phase of the product adoption curve for both SACs and Factionals, as evidenced by their growing strength from word of mouth. Our recent Stealth Tech introduction is just entering the early adopter phase of that same curve and has a long way to go. We continue to be in stock, delivering nearly all orders direct to the consumer in just days, Whereas industry lead times from others selling soft seating can be several weeks or even months of late. In-stock positions and lead times continue to be a competitive advantage for us, driving up Love Saks brand affinity and customer satisfaction at a time when many other brands are driving some discord and disappointment. Our trajectory of consistent strength and performance has extended pre, during, and post-pandemic. And we have seen meaningful gains in awareness. In short, the business is firing on all cylinders. Since our IPO four years ago, trailing 12-month sales have quintupled. We've driven trailing 12-month EBITDA from being negative into the double digits. And even with this monstrous increase in top-line sales and commensurate marketing spends, our CLV to CAC ratio has grown from about 4X to 5.3X. I could not be prouder of the execution of the entire Lovesac team. Given the backdrop, I know many people believe there is the prospect of a recession, and how consumer-facing companies might fare during one is top of mind. While Lovesac was a far smaller business back in 2008, here are the reasons I am optimistic about our ability to outperform the competition should we enter into a recessionary environment. 1. Our product platform is built for life and utilitarian in nature. It is an investment and more of a need than a want driven by aesthetic only. Two, the fact that we are so early in our adoption curve, we are driving our growth with market disruptions and share gains. So short run market contractions may impact us to a lesser degree than more mature brands. Three, We sell to a younger upper middle income customer demographic who takes pride in what we stand for in terms of our commitment to sustainability. These are high earners and more resistant to inflation than those buying at the lower end of the market without as heavy an impact from the wealth effect that participants at the highest end of the market may experience in a volatile market. Four, we have a rock solid balance sheet. And five, We were much smaller during previous market pullbacks and receptions, but even then, the sheer momentum of our extremely high growth rate, while even higher in times of abundance, allowed us to grow straight through those pullbacks and even take advantage of other opportunities to further disrupt the category that come at times like these. Looking to the remainder of the year, while we are very pleased with our Q1 performance, given the recent uncertain macro backdrop and the fact we are only one quarter into the year, We are not changing our full year outlook at this time. We remain very confident in the future of the Lovesac brand and its proliferation. We are a nimble and capable team that has built this business up organically through lean times in the past and through every kind of headwind. I believe we can continue to navigate well in whatever operating environment we are faced with. It was a great first quarter. We've made significant operational progress on our growth initiatives that continue to drive Lovesac's financial outperformance. I would like to thank the entire Lovesac team for their constant hard work and dedication to our brand and customers. Without them, our strong performance would not be possible. And with that, I'll hand it over to Mary to cover our strategic priorities and progress. Mary. Mary.