The Lovesac Company

Greetings and welcome to the Lovesac second quarter fiscal 2023 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, Rachel Schachter with 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 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 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 second 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 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. We are pleased with our second quarter results and with top and bottom line performance that exceeded expectations against a still dynamic macro backdrop. After recognizing some pullback in consumer spending at the outset of the quarter, as we said on our last call, the pursuant attenuation was less dramatic than anticipated. This was up against last year's very strong Q2 when we achieved our highest quarterly growth rate ever as a public company. I'll also remind you that our results are perhaps some of the most recent and real-time results in the home category because we typically ship out and deliver goods just days after order and do not carry much of a backlog ever. Now, let me review the highlights of our second quarter performance. Total sales were 148.5 million, up 45% versus the prior year period. We delivered total comparable sales growth of 31% with broad-based strength from both new and existing customers. Adjusted EBITDA grew to 14.1 million from 12.4 million in the prior year period, despite expected supply chain-driven gross margin pressure as we managed our expense structure with discipline. We continue to invest in high ROI marketing and advertising, which is a key contributor of the brand awareness gains and resulting sales success that we're seeing. Importantly, we deliver these results against an industry backdrop that proved challenging for many, illustrating our market share gains off a very small base in a large and fragmented total addressable couch plus foam audio market of $46.2 billion. The home category is down year on year into the double digits. Our very high growth rate quarter after quarter and four and a half years now should speak for itself. This growth is fueled primarily by the compelling value proposition of our design for life product platforms, which are reaching brand awareness and customer adoption rates that are currently at important inflection points, building strength on strength. So why has Lovesac proved to be so resilient throughout the past number of tumultuous years and even the most recent quarters? Sustainability, in-stock position, best-in-class showroom economics, rapid product adoption, and growth with profitability are all a direct result of our Design for Life business model in action. We believe this will continue to be made apparent as we continue to grow. We do not merchandise a broad assortment like most of our peers. We do not operate on seasonal cycles like most of our peers. We don't create all the operational and executional inefficiencies that come along with that model for the business or for the consumer. We invent and patent new solutions in categories with big ticket items and high margins to be had. We will continue to expand on this with superior products Paired with deft marketing comes superior market share, and we are well on our way to achieving that with a long way to grow still. We believe we can ultimately take an outsized portion of market share with superior solutions like these. Factionals, with their myriad advantages, are currently the best example of the scale that is possible for a design-for-life product. Having only achieved between 1% and 2% market share so far in a highly fragmented couch category, we believe we are finally through that early adopter phase and on to the early majority phase of that classic product adoption curve. For this reason, we believe the best is yet to come. Word of mouth is now driving nearly a third of Factionals' purchases because of their unique and highly competitive qualities. This bolsters our marketing ROIs ongoing versus other competitors who essentially sell well-designed but generic solutions. We have demonstrated the more we sell, the more we will sell. And with our customer satisfaction scores improving even as we scale due to our continued investments in process, systems, services, and infrastructure, we believe Lovesac is a brand that can continue to gain further strength in the mind of the consumer. This is, in part, why our growth has been so resilient. Our growth was very high before COVID, during COVID, after COVID, and now even in this challenging macro environment, continues to be extremely strong versus the broader home furnishings category, which is down overall this year, even as we are way up. Finally, we have built our brand with the right consumer in mind. The young parent want it all. we are targeting with our pricing, marketing, and advertising are a resilient group during times like these. These are high earners at the peak of their household establishment and furniture investment years. Typically 35 to 45 years old, our narrow focus on the couch as a subcategory of the broader furniture category is no accident. There are many objects within the home that are truly discretionary spends. But as we know, through our considerable investments in research, when households need to replace worn-out sofas, relocate, or remodel, the couch is on the top of the list in furniture priorities. And our marketing is there to highlight the unique attributes of our platform and win their business. Our marketing spend in absolute dollars growing nearly as fast as our top-line sales have. This further strengthens our moat the bigger we get. Our now 174 Lovesac touchpoints, 158 showrooms, 14 kiosks, and two mobile concierge Lovesac trucks, and seamless omnichannel execution drives conversion. Those three drivers, replacement, relocation, and remodeling, are the top three drivers of sales for factionals, only lastly followed by new home purchases. That dynamic is unique to Lovesac versus the broader category, which is why Lovesac Even in times like these, we believe we can continue to thrive. Our growth strategies are designed to fortify our position and build on our market share gains, and I am proud of the progress we continue to make against each initiative. From the more recent strong reception of our key innovation, Stealth Tech, to the effectiveness of our marketing and brand awareness investments, to the expanding productivity of our showrooms and healthy digital channel growth, We are thrilled to see the impact of the work we are doing across all these areas continue to drive our top line performance and fuel our market share gains. The runway we have with our growth initiatives, combined with our focus on disciplined execution, gives me confidence in our ability to continue our share gains in any type of macro environment. Even as we navigate the supply chain challenges the industry is facing, Our teams have demonstrated strong expense discipline and prioritized high ROI marketing spending as well as investments in key systems, talent, and infrastructure in order to solidify our foundation to support the long runway of growth that lies ahead. It is the supply chain and technology investments we have made and continue to make that have enabled our industry-leading in-stock positions and improving customer satisfaction scores. So in support of our actual and planned market share gains, we're accelerating growth investments in these areas, as Mary and Donna will discuss momentarily. While we could easily deliver adjusted EBITDA margin expansion this year, redeploying approximately 100 basis points of EBITDA margin toward these important technology and supply chain areas is the right decision for the operational efficiency of our business and, in turn, customer satisfaction. which will set us up to win ongoing. Finally, our commitment to sustainability is foundational to how we operate and continues to lead us to unique and competitive outcomes that resonate with consumers in these changing times. Sustainability at Lovesac means not only sustained hyphenable products, things that actually sustain, but a sustained hyphenable business model that you are seeing the fruits of every time we report. We will marry our long-term Design for Life products with long-term focused services, programs, and policies according to our circle-to-consumer philosophy, ultimately resulting in long-term relationships with customers who love our brand for myriad reasons. Even in high-growth mode, we have always and will always operate this business with great discipline, managing our expenses and investments, and balancing our growth goals with a focus on profitability and returns. Our stated mission includes the mandate to build the world's most beloved home brand while achieving targets of zero waste and zero emissions by 2040. We're rapidly on our way. Lastly, I want to thank the entire Lovesac team for their commitment and execution that have enabled our financial and operational performance. We call them the hashtag Lovesac family. We are able to deliver what we deliver because you do what you do. With that, I'll hand it over to Mary to cover our strategic priorities and progress. Mary?