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spk05: Greetings. Welcome to Lovesac Fourth Quarter Fiscal 2023 Earnings Conference 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. Please note this conference is being recorded. I will now turn the conference over to Rachel Schachter of ICR. Thank you. You may begin.
spk12: 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 projections 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 you 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 Logstaff Company.
spk11: Thank you, Rachel. Good morning, everyone, and thank you for joining us to review our record results for fiscal 2023 and to discuss our outlook and plans for fiscal year 2024, which is already underway. I will begin by sharing a high-level overview of both. Then, Mary Fox, our President and COO, will discuss our key growth initiatives for fiscal 2024. Finally, Donna Delamo, our CFO, will review our financial results and a few other items related to our outlook in more detail. Starting with our fourth quarter and fiscal 2023 performance, we put up record results for the fourth quarter and for the full year, building on our long track record of outperforming the industry and driving share gains. For the quarter, we delivered sales growth of 21.7%. and adjusted EBITDA growth of 51%, both ahead of the outlook we shared on our Q3 call. For the year, we generated a total annual net sales increase of 30.8% to $651.5 million, total Omnicom sales growth of 21.9%, and an adjusted EBITDA earnings increase of 8.7% to $60.4 million. We ended the year with total liquidity of $79.5 million, which includes cash of $43.5 million and availability on our line of credit. Notably, our strong debt-free balance sheet positions us well to navigate a difficult macro backdrop. To put perspective on the significance of these results, fiscal 2023 was a challenging year for the furniture industry given the macro pressures facing the consumer. As of year end, our data sources showed the home category overall to be down 16% versus the prior year. In contrast, our full year sales increased 30.8%, indicating meaningful market share gains. More importantly, these industry-leading sales results were achieved by converting real-time demand as we typically ship just days after an order is placed. We never had any meaningful backlog inflating our revenue results. We also contended with inflation across our cost base to varying degrees. Additionally, we were up against the record financial results that were delivered in fiscal 2022 and 2021 stacked. Our strong financial and operational results continue to be reflective of our unique competitive and operational advantages across our people, brand, business model, and operating platform. Lovesac is a sustained growth story with a four-year net sales CAGR of 40.8% and four-year adjusted EBITDA CAGR of 105%. Shifting gears back to FY23 full year results, we are very proud of our accomplishments for the year, which were driven by our unique omni-channel business model centered around our infinity flywheel, where success drives more success. Our Infinity Flywheel allows us to do business differently and consistently outperform the category in which we operate. In a nutshell, it goes like this. Customers see our highly advantaged, high ticket, proprietary products via advertising of every kind. They seek to experience it in one of our various branded physical touchpoints, configure it online or in showroom as they research, Invest in it because Designed for Life products are so long lasting and investable. Evolve and upgrade it to drive lifetime value because Designed for Life products uniquely facilitate this kind of repeat behavior. And finally, they advocate it actively because their experience with the product and our brand was so good thanks to the investments we've continued to make that improve our customer experience model ongoing. This then drives more people to see us again, which starts the process all over again and further drives the flywheel. Mary will expound on each note of this flywheel, sharing specific results to validate it and our plans to enhance it further through the investment for our future we have made of late and continue to make, even as we hold ourselves accountable to produce meaningful profits. In terms of our outlook for FY24, We expect the macro backdrop to remain challenging as elevated inflation and higher interest rates drive a more cautious consumer and put pressure on the high-ticket, more discretionary home category overall. We are highly cautious operationally in this environment. We are controlling expenses very tightly in every realm in the name of efficiency. We also expect to realize significant benefits from amortization of last year's inbound freight costs. This will drive up gross margins beginning in Q2 especially and serve as a partial offset to known SG&A increases year over year. The net result will be EPS growth. We will continue to make surgical investments in our future because we believe very strongly in the TAM headroom for the seating and home audio categories where we have less than 2% penetration and the massive total available markets that await in adjacent categories not yet announced, which will leverage our highly competitive design for life approach. Recent investments begin to pay back as soon as the second half of this year in expected results from a key product launch and a sectional family of products. We have a schedule for physical touchpoint expansion and product launches that will drive reliable sales growth with positive cash flows. for another year of strong market share gains versus broader decelerating category. Donna will provide more detail on guidance. This is a continuation of a multi-year trend for Lovesac. We greatly outperform our category, and this further strengthens the infinity flywheel effect spoken of. At Lovesac, we are maniacally focused on the long term because we are convinced that our business model has tremendous potential for continued high margin revenue growth in our current categories, adjacent categories, and related services. Because of our differentiated approach, these opportunities are unique to us. We make very long-term Design for Life products. We pair these with long-term focused programs, policies, and services that will eventually be monetized. The intended result is long-term relationships with customers, a brand that people just love. Our pursuit of this long-term vision is relentless and sustained. We view the need to run a very disciplined, efficient cash generating business right now in this challenged macro environment so that we may unlock our promising future. This means preserving cash, managing expenses tightly, and being surgical with investments, but investing nonetheless. We are willing to be this disciplined because we can be patient, looking forward to the expanding opportunity ahead. Management is 100% committed to this way of thinking. This is a big part of what we mean when we speak of sustainability. Products that can actually sustain and a pragmatic cash generating business that can actually sustain. Sustainability in all its forms is our greatest passion. So in summary, it was a strong end to another great year at Lovesac. We made important strides against each of our strategic growth initiatives and made good progress strengthening our foundation to support the long runway of growth still ahead. We are already more than six times the size we were at IPO in 2018, cash generative in the year ahead and profitable ongoing, even with significant headwinds contemplated. We are braced for a choppy macro backdrop and will continue to execute with discipline, willing to adjust to changing conditions and deliver bottom line results as we grow and drive long-term value for all stakeholders. Before turning the call over to Mary, I want to thank the entire Lovesac team for all they accomplished in fiscal 2023. while navigating much uncertainty. We have a great team and a culture that exudes the sentiment inferred by our timeless ticker symbol. Both at our hubs and on the front lines and in all our various touch points, we are so thankful for their discipline and commitment and generally cool disposition. We look forward to building on our success in fiscal 2024. With that, I will hand it over to Mary to cover our strategic priorities and progress. Mary?
spk04: Thank you, Sean, and good morning, everyone. We are pleased with our strong end to fiscal year as we delivered record results in fiscal 23, even in a difficult operating environment. As Sean shared, our net sales growth in fiscal 23 was 30.8%, and using fiscal 29 as a baseline, our four-year demand comp stack is up 293%. Every year since then, we have delivered profitable growth with a four-year net sales CAGR of 40.8% and a four-year adjusted EBITDA CAGR of 105.5%. This consistent financial outperformance every year is ahead of any other brand in our category, underpinned by our customer and product-centric focus and our unique omni-channel business model with an infinity flywheel unlike anyone else. A few highlights of our unique Infinity Flywheel include, firstly, we compete in a large addressable market of over $46 billion, with 48% of households having an annual income of over $75,000 per year. We have the number one best-selling couch in America. We continue to take market share every year, and yet we've barely scratched the surface of this huge and fragmented category. Customers love our Design for Life brand and product platform, and they tell their friends and family this, which has resulted in word of mouth becoming our number one awareness driver. 38% of our customers report that they don't even cross shop with any other brand. Second highlight, our brand health is stronger than ever with innovation that is changing the landscape of the home. This is exemplified by our marketing ROIs, which continue to be very strong. In addition, the innovation of stealth tech has helped us to continue to have incredibly efficient marketing with a customer lifetime value, customer acquisition cost ratio of over five that is unsurpassed. This in turn enables us to continue to drive sales with market leading levels of investment. Thirdly, we have best in class touch points economics second only to Apple and Tiffany. with incredible payback periods under a year and four times the sales per foot productivity of our competitors. We continue to see improvements in our new showroom ramp-up rate, which gives us additional confidence in our ability to expand penetration with our touchpoint expansion plan. And finally, our advantage supply chain delivers orders to our customers in a matter of days with evergreen inventory. This results in customer satisfaction of over 84% increasing customer loyalty, and the strength of our infinity flywheel. We are uniquely positioned to continue to profitably take market share, even through the current market dynamics that Sean discussed. As you are aware, we run our business with a strong focus on growth and an ROI-driven investment discipline. As demonstrated by our results in fiscal 23 and before, we will continue to grow ahead of the industry, fueled by disciplined investments in our strategic initiatives and our capabilities. I will now provide key progress highlights on our go-forward plans on each of our strategic initiatives. Firstly, starting with product innovation. Stealth Tech continues to be the highlight for us. Notably, the product continues to gain share, and we believe we have merely scratched the surface with respect to its potential, which we believe will grow past 100 million and more in annual sales in the future. For fiscal 23, sectionals that were sold with Stealth Tech had an average order value close to $8,500, or nearly three times the average sectional average order value. Total transactions for sectionals with Stealth Tech included were over $100 million for fiscal 23 and building throughout the year. As we have shared, looking out to the next two to three years, we have planned new product launches for each year, And in the second half of fiscal 24, we will launch a significant innovation that will further open up the aperture of our share in the couch category. We look forward to sharing more details with you closer to the launch date. Looking ahead in terms of product innovation, we are excited about our innovation agenda. We are consistently adding to our product portfolio and thus expanding our addressable TAM from SACs to Factionals to home entertainment with stealth tech and more to come where home needs tech. We are focused on unlocking the future runway with disruptive design for life innovations planned steadily over the next 10 years, some in new product categories. Secondly, our omni-channel experience. We have become a true omni-channel retailer through a combination of our physical touchpoints and digital platform. Our continued focus on first-party data is enabling us to be a leader in utilizing the right customer and prospect data to drive a truly personalized omnichannel experience and meets the needs and expectations of our shoppers wherever they choose to experience our brand and products. For e-commerce, we had a very strong quarter four with sales growth of 26.4%, bucking the furniture e-commerce trend by over 4,600 basis points, as one of the only brands to grow and be profitable. Traffic and conversion increased for fiscal 23 overall, and conversion in particular has accelerated in quarter four as we benefited from a full quarter of our redesigned configuration tool, which enhanced the overall experience. In terms of our showrooms, from a financial standpoint, they continue to generate very high four-wall contribution. and deliver increasingly strong returns with cash on cash payback in under a year and reduced occupancy costs year over year. We now see opportunity to roughly double our current showroom fleet from 195 to more than 400 locations over the next five years. And we'll continue exploring shop and shop opportunities with additional retailers. Looking at our other channels, our Best Buy shop and shops are very powerful. as they allow shoppers to experience our product, including our immersive surround sound system and Stealth Tech embedded technologies that are most effective when experienced in person. Importantly, Best Buy Shop and Shop attachment rates for Stealth Tech are roughly double that of our standalone showrooms and four times online, and they continue to grow. For Costco, we continue to strengthen our partnership with growth in physical roadshows planned for this year. which are managed by our team and are delivering improved economics to pre-pandemic levels. Our omnichannel model is resonating with consumers, as is shown by our improving customer satisfaction scores. Overall customer satisfaction in quarter four improved from quarter three to our highest levels recorded, driven in particular by strategic investments in resources and technology in our customer service capabilities, supply chain, and our digital experience. As we look ahead, we will continue to expand and improve our omnichannel strategy. And for fiscal 24, we expect to open 30 new showrooms. Our real estate strategy continues to evolve, leveraging both our predictive analytics tools and consistently updating our site selection model. Thirdly, our ecosystem. Our ecosystem is unique and robust with leading indicators that are all positive and best in class, including a customer lifetime value to CAC ratio that grew year over year, strong ROIs in marketing, and word of mouth as our number one awareness driver. Our ecosystem is centered around circle to consumer philosophy and the development of a circular ecosystem for our customers and products, driving optimal value for our customers and their design for live product platforms they have invested in. The goal is long-term relationships. During the year, we continue to market our products and brand using national advertising in traditional formats, including TV and established media, coupled with various digital strategies leveraging social media, nonlinear TV, and influencer advertising. Our digital marketing efforts focus heavily on localized and targeted tactics, driving shoppers into a lovesack touchpoint to experience our products in person. This reinforces our commitment to a truly omnichannel business model, meeting customers where they choose to interact with us. In fiscal 23, we gained over 130,000 new customers, and our first-year purchase margin was up double digits from fiscal 22. Importantly, our full first-year customer lifetime value CAC ratio continued to increase versus fiscal 22, in spite of some headwinds in cost inflation throughout the year. Included in our measure of customer lifetime value is actually only the first purchase plus any repeat business within the same fiscal year. We more than break even at the first purchase, and we know our customers do repeat, adding to or upgrading their design for live sectionals or SACs for decades. Our repeat business increased to 38% of overall transactions from 35% at the end of fiscal 22. We perceive these ROI metrics and our overall top and bottom line performance to be at the highest range of performance in the home and many other categories. We are proud of these results, especially when they were strong like this before the pandemic, during and even after the pandemic. For fiscal 24, we will deploy new marketing tactics and notable endeavors that include continuing to invest in high ROI performing programs such as search, and continuing to grow our hyper-local marketing to drive relevant traffic to our touchpoints. We will also be leveraging prime and linear TV buys to continue to drive reach. And we expect to spend at a rate of 12% of net sales in fiscal 24, in line with last year. We also maintained our strong focus on ESG priorities, publishing our second annual ESG report in December of 22. where we outlined long-term targets for diversity, equity, and inclusion. Our roadmap to reach zero emissions by 2040, new ESG targets in focus areas we designate as earth, love, and purpose, among other items. Along these lines, in fiscal 23, we repurposed more than 70 million plastic bottles into upholstery fabrics for factionals and packs. And to date, we have diverted more than 179 million plastic bottles from the waste stream. We believe we have diverted thousands of couches from the landfill as well, giving the extremely durable and adaptable nature of Satchel. And then lastly, making disciplined infrastructure investments. In fiscal 23, we made critical investments and enhanced our best-in-class supply chain, including opening our fifth third-party operated DC in the Fort Worth area. And this was fully at scale by the end of the fourth quarter and ahead of our target. We also invested in technology, talent, and working capital to ensure best in class delivery times in a highly volatile supply chain environment. In fiscal 24, our investments for growth will be primarily in the areas of technology and research and development to continue to fuel our flywheel. This year, we will also expect to sustain our customer satisfaction by delivering orders in just days while also delivering inventory productivity improvements of around 20% enabled by our recent investments. This will have significant effects on the efficiency of working capital as well as associated cost reductions across inbound freight and warehousing, which we will start to see in the second half of the year following our upcoming launch. So in summary, we are very pleased with our fourth quarter results that cap a very strong year for the Lovesac brand against a difficult backdrop. We made strong progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive as well as support the substantial growth that lies ahead in fiscal 24 and beyond. I will now pass the call over to Donna to review our quarter four and fiscal 23 results. and her outlook to fiscal 24.
spk02: Donna? Thank you, Mary, and good morning, everyone. I will begin my remarks with a review of our fourth quarter results and then discuss her outlook for fiscal 2024. Net sales increased 42.6 million, or 21.7%, to 238.8 million in the fourth quarter of fiscal 2023, with the year-over-year increase driven by growth in all channels. This increase was stronger than what we had originally projected for the quarter, primarily driven by higher-than-planned internet net sales. Showroom net sales increased 24.1 million, or 20.5%, to $141.9 million in the fourth quarter of fiscal 2023, as compared to $117.8 million in the prior year period. The increase in showroom net sales was driven by an increase of 10.2% in comparable showroom sales related to strong holiday promotional campaigns and the net addition of 44 new showrooms and five kiosks compared to the prior year period. As a reminder, point of sale transactions that we reflect in our comparable sales metrics 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. Internet net sales increased $16 million, or 26.5%, to 76.4 million in the fourth quarter of fiscal 2023, as compared to 60.4 million in the prior year period, driven by a strong holiday promotional campaign. Other net sales, which includes pop-up shop, shop-and-shop, and barter inventory transactions, increased 2.4 million, or 13.3%, to $20.5 million in the fourth quarter of fiscal 2023, as compared to $18.1 million in the prior year period. The increase was largely driven by continued, planned, open-boxed, returned inventory transactions with Icon, our inventory barter partner. We hosted an additional 33 new Costco in-store pop-up shops, and we continue to operate 22 Best Buy shopping shops. As a reminder, our inventory transactions with ICON are part of our C2C, EFL, and ESG initiatives. We repurpose returned open box inventory in exchange for media credits, which are being used to support our advertising initiatives to create brand awareness and drive net sales growth. Our current fiscal 2024 projections only reflect open box inventory transactions in the first quarter, as we continue to review all options available to align with our C2C, DFL, and ESG initiatives. Any of these initiatives beyond the first quarter will be upside to our fiscal 2024 projections. By product category in the fourth quarter, our Saxonal net sales increased 23.6%, BAC next sales increased 6.9%, and other category net sales, which includes decorative pillows, blankets, and other accessories, increased 10.7% over the prior year period. Gross margin increased 70 basis points to 56.6% of net sales in the fourth quarter of fiscal 2023 from 55.9% of net sales in the prior year quarter, primarily driven by a decrease of approximately 190 basis points in total freight partially offset by a decrease of 120 basis points in product margin. The decrease in total freight, which includes inbound and outbound freight and warehousing costs, was principally related to a 290 basis point decrease in inbound container freight costs, partially offset by a 100 basis point increase due to higher outbound transportation costs and warehousing. The product margin decrease was driven by higher promotional discounting. Our growth margin rate came in slightly below our projections by 40 basis points due to lower deleverage in inbound freight than originally projected in the fourth quarter. Given the decrease in inbound freight rates, we continue to expect to see associated benefits, which will be modest in Q1 and most impactful in Q2 and Q3 of fiscal 2024. The 18.9% year-over-year increase in SG&A was driven by an increase in employment costs due to new hires and variable equity compensation, increases in rent expense related to the addition of 49 new touch points with higher percentage rent on showroom net sales, increase in technology and professional fees, and an increase in credit card fees related to increases in both sales volume as well as interest rate. SG&A expense as a percentage of net sales decreased by 60 basis points as we leveraged in areas including infrastructure investments, selling-related expenses, and employment costs, even given the almost 22% sales increase. Advertising and marketing expenses increased $300,000 of 1.2%, $25.8 million for the fourth quarter of fiscal 2023, as compared to 25.5 million in the prior year period. Advertising and marketing expenses were 10.8% of net sales in the fourth quarter of fiscal 23, as compared to 13% of net sales in the prior year period. As a percentage of net sales, advertising and marketing decreased by 220 basis points due to improved performance in our media activities, which has driven an increase in net sales. As a reminder, Advertising and marketing investments benefit multiple fiscal periods. Depreciation and amortization increased $535,000 from the prior year to $2.6 million, principally related to capital investments for new and remodeled showrooms. Operating income for the quarter was $38.1 million compared to $24.2 million in the fourth quarter of last year, driven by the factors just discussed. Net interest expense of $16,000 for the fourth quarter was slightly lower than the prior year's period related to unused line of credit fees that increased due to the increase in our revolving line of credit earlier this year. 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 for the quarter was $27.6 million or $1.74 per diluted share compared to $32.6 million or $2.03 per diluted share in the prior year period. During the fourth quarter of fiscal 2023, the company recorded an income tax provision of $10.4 million as compared to an income tax benefit of $8.5 million in the fourth quarter of fiscal 2022. The tax benefit recognized in the prior year was primarily due to the release of the valuation allowance on the company's net deferred tax assets in fiscal 2022. The release of the full valuation reserve had a positive impact on both the fourth quarter and the fiscal year 2022 earnings per diluted share. Adjusted EBITDA for the quarter was $48.3 million as compared to $32 million in the prior year period. Adjusted EBITDA for the fourth quarter was ahead of our expectations, driven by higher net sales and leveraging of SG&A and marketing expenses. Turning to our balance sheet, our total merchandise inventory levels are in line with our projections and have leveled out as we had discussed on our prior call. Inventory increased 10.6% year over year, and we feel exceptionally good about the quality and the quantity of our inventory. Our evergreen in-stock inventory is a competitive advantage, and it is not comprised of seasonal merchandise. We do not run the risk of being overstocked or having to be promotional to reduce inventory levels. Our inventory levels are in line with our goals to maintain industry-leading in-stock positions and delivery times. As we move into fiscal 2024, inventory levels will moderate due to inbound freight relief and our technology investments, which enable us to programmatically allocate inventory more efficiently. We ended the fourth quarter with $43.5 million in cash and cash equivalents and $36 million in availability on our revolving line of credit with no borrowings. This reflects the timing of our inventory investments and the seasonality of our net sales, profitability, and cash generation. Please refer to our earnings press release for other details on our fourth quarter and fiscal year 2023 financial performance. Now, moving to our outlook, for fiscal 24, we expect the difficult macro backdrop to persist. Against this backdrop, we continue to expect to outperform our category and gain share, primarily driven by our planned innovation and touchpoint growth. For the year, we expect net sales of 700 to 740 million, driven by the net planned opening of approximately 30 new showrooms and total comparable sales in the high single-digit to low double-digit range. Our outlook embeds the expectation that the new product introduction that Sean and Mary discussed will launch in the second half of the year and does not include any assumption for open box inventory-related barter revenues beyond the first quarter, which was approximately $22 million in net sales for Q2 through Q4 in fiscal 2023. We expect adjusted EBITDA margins for the year to be 8% to 9%, with the year-over-year decline driven by our investments in payroll, technology, and research and development that support current and future growth, as well as the impact of higher interest rates on credit card fees. De-leverage across these areas of SG&A is expected to be only partially offset by gross margin expansion resulting from inbound freight due to lower container costs. Earnings per share are expected to be in the range of $1.83 to $2.24, with a weighted average diluted share count of 16.4 million shares. Additionally, fiscal 2024 will contain a 53rd week in the fourth quarter, which is expected to contribute approximately $6 million in net sales, $400,000 in adjusted EBITDA, and $0.02 in EPS, which is reflected in our fiscal 2024 guidance. For the first quarter, we expect net sales of 133 to 136 million being driven by the planned opening of approximately 16 showrooms and a total comparable sales decrease in the 3 to 5 percent range. As a reminder, we are up against our toughest comp comparison of the year in the first quarter, given our Q1 comp last year was 42%. We expect adjusted EBITDA loss in the $4 to $5 million range, driven by an expected gross margin decline of approximately 100 basis points, and SG&A be leveraged primarily in payroll, rent, and credit card fees. Loss per share is expected to be between 36 and 37 cents for the first quarter, with 15.2 million weighted average shares outstanding. We are making important investments in the business to support current and future growth, including the new product introduction discussed. These investments are critical to our ability to drive long-term growth and sustained market share gains. We are also investing from a position of strength when it comes to our balance sheet. We ended the year with 43 million of cash on the balance sheet and $36 million of availability under our ABL and no borrowings. With the second half of our year traditionally being the strongest in net sales, the timing of our new touchpoint openings and new product launches, and our planned flow of inbound inventory, we expect to use cash during the first three quarters of the year before generating substantial free cash flow in the fourth quarter to end the fiscal 2024 with a significantly higher year-over-year cash balance and no borrowings under the ABL. So, in conclusion, we are very pleased with how we finished fiscal 2023. Despite the challenging macro environment and inflationary impacts, our team continues to execute our growth strategies and operate the business with discipline. We are braced for what promises to be a dynamic fiscal 2024 and will continue to prioritize disciplined execution to drive long-term growth, market share gains, and value for all of our stakeholders.
spk08: With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?
spk05: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question. Our first question is from Brian Nagel with Oppenheimer. Please proceed.
spk09: Hi, good morning. Nice quarter.
spk10: Congratulations.
spk09: Thank you.
spk10: So the question I have, and I'll kind of merge two questions together. First off, with regard to gross margins, and Sean and Donna, you both mentioned, I guess, improving dynamics as the year progresses, and particularly Q2. The question I have is, could you help us better size how much that kind of magnitude of that headwind to tailwind dynamic for Lovesac? And then philosophically, I know we've discussed in the past, but as these costs begin to moderate, will there be some type of reinvestment in that or would you allow to kind of renormalize? And then the second question I have, just on sales, and you mentioned a number of times just the overall more challenging backdrop. If I look at the growth rates, you know, recognizing there's some noise here, but the growth rates in Q4 were better than what they were in Q3. Did something from a macro perspective ease up or improve at all for you?
spk04: Brian, it's Mary. I think Donna's having an issue with her phone. So apologies for that delay. So let me take the second question while Donna gets back on. So in terms of your points, in terms of sales for Q4, obviously we were thrilled to see the improvements. When we talked to you, at the beginning of December. At that point, we were tracking, I think we shared with you, at the high end of our guidance. December and January were stronger than we had expected. And in particular, it was actually driven by our e-commerce business that I think Donna had called out. So with that, plus also we saw a good uptick. We had a New Year's Eve flash sale and a couple of other promotional cadences. which really did deliver the outperformance that we saw. So very happy to see the performance kind of translate through to that quarter four result that you saw. And I think particularly like e-commerce, we outperformed the industry by over 4,600 basis points. We had just relaunched our configurator for e-commerce with an amazing digital experience. We're seeing conversion up, traffic up. So just all of the fundamentals as well as everything else that we saw in the business in our touch points, et cetera, really drove great performance. I think then in terms of the question that you had in terms of on gross margins, so in Q2 onwards, we do see, I think, just over 240 basis points improvement from inbound freight, and then Donna, I think you can touch on, we have a little bit of a headwind, Brian, with outbound freight, but Donna, maybe I'll hand to you for that.
spk08: Yeah, hopefully. Brian, can you hear me?
spk09: Yep, I can hear you fine.
spk02: Okay, good. I don't know. Technology. Well, good morning. So, yeah, so as Mary mentioned, we do see, we do plan in all the guidance that we provided earlier about 340 basis points, leverage or tailwind on inbound freight costs, but there's about 100 basis points of headwind that's netting up against that related to increase in outbound and warehousing, which would be everything around warehousing, labor, just operating costs in total. As I said, we're going to use this year specifically that net gain of about 240 basis points is going to help mitigate some of the investments in our future, continued investments in our future that you see in some of the deleverage around SG&A. So this year, it's helping mitigate some of those investments, and we would hope as we go into future years out as we continue to grow and get the continued deleverage, which we'll probably see a little bit more, or the leverage, I should say, on inbound freight costs we will see going into fiscal 25 as well. But right now there's about 340 basis points of leveraging related to inbound freight in the guidance that we've provided.
spk09: Great. That's all very helpful. I appreciate it. Thank you.
spk05: Our next question is from Thomas Forte with DA Davidson. Please proceed.
spk09: Great.
spk05: Thanks, Sean, Mary, Donna, Jack.
spk09: Great quarter, great year. So for my one question, Sean, I'm going to use my once-a-year question for your current thoughts on international expansions. Yeah, we are very excited by the prospects of international expansion.
spk11: We hold our patents and trademarks all over the world, and we intend to get there, but likely not this year. We are very focused on the opportunity domestically. We've done a fair amount of research to understand the opportunity internationally, understand the size of the prize, and frankly, we have barely scratched the surface in terms of what we think we can do against the total available market just in the United States, just in the categories we compete in now. And that's definitely the best use of investment dollars in the near term. And so we'll continue to focus on the U.S. We'll continue to gain market share, we believe. But we do look forward to international expansion sometime in the future.
spk09: Great. Thank you.
spk05: Our next question is from Maria Ripps with Canaccord. Please proceed.
spk03: Great, good morning and congrats on strong results. So it seems like your guidance factors in some level of conservatism. Are you noticing any changes in consumer trends or purchase behavior sort of over the past few months as inflation has been decelerating but the broader sort of macro environment remains highly uncertain? And maybe related to that, given that your products carry a higher price point, how has your design for life philosophy been resonating with consumers in this macro environment?
spk04: Okay. Good morning, Maria. Hi. Thank you for your questions. I'll take the first one and then I think Sean will talk a bit more around Design for Life. So I think as we've shared before, you know, we do see varying shifts in how our customers are transacting, how they're experiencing our brands. But actually of late, you know, we're seeing more stabilization. So the high end continues to be strong. AOV has been strong. At the low end, we sometimes see a little bit of shift in terms of configuration size and so forth. I would say the one clear trend that we are seeing is a little bit more of an uptick on Lovesac credit cards, which we factored in fully for the year. So, you know that. And then I think, you know, our customer traffic continues to be very strong. And I think we saw that in quarter four. And I think that just bodes well to the strength of our flywheel because, you know, whether it be 30% of our customers aren't even cross-shopping with anyone, it just goes back to the strength of the brand continuing. So as you called out, you know, we've baked in the conservatism for this year, but as we have strong line of sights for the year from the very exciting innovation that we talked about that's launching halfway through this year, that really will cause us to widen significantly our aperture to gain even more share through to the touchpoint expansions that continue to overperform pro forma with amazing economics. And then the marketing machine that we have around just the sheer gains of customer lifetime value with incredible CAC ratio performances that you just don't see anywhere else. So all baked in, but obviously with pragmatism to the macros, And the team's agility will continue to reflect in how we think about everything. And then I think, Sean, do you want to answer the second question Maria had as well?
spk11: Yeah, I think that in this environment, we feel really confident based on what we're seeing. Clearly, we're already into the first quarter of our new year. And we're all watching the same news, and we recognize that the consumer is under pressure in many respects. But our design for life products and business model, we think, has resilience that others don't. So while we're not seeing the 50% and 60% kind of growth we saw for a few years past, we're seeing stronger growth in the rest of the category. This has been a trend the entire entire time before the pandemic, through the pandemic, post pandemic. And here we are today. And we feel really good about that. And I think that many onlookers, you know, question why, why that is. And I think the biggest, most glaring answer to that is our product. We have a very different product in the rest of the category. It's designed for life built to last a lifetime designed to evolve. This resonates with people. who have a brain who can, you know, do the math and understand that they are, they are investing in something that can be within the rest of their lives. And we're very proud of that. With that said, the evidence I think is apparent, not just in our, in our, in our results, financial results, but we have, have experienced recently the highest rate of customer satisfaction we've seen. And, and, You know, this is through all of this choppiness and through all of the supply chain choppiness. And here we are on the other side of that. And, you know, I think it shows our investments that we've made in the infrastructure of the business and our team bearing fruit. And that will, again, further strengthen this flywheel of people spreading the word of mouth about the Love Sack brand, about our Design for Life products. And we intend to continue to take massive market share, particularly in this environment when others are beleaguered in various ways. And so we feel really confident about our product, about our brand, the way that we've wrapped it around the Design for Life ethos, what, of course, it means for the environment and everything that we stand for.
spk08: Great. Thank you so much.
spk05: Our next question is from Matt Caranda with Roscoe. MKM, please proceed.
spk01: Hey guys, good morning and nice job on the quarter. Just wanted to see if you could provide any commentary on growth by channel that's embedded in the fiscal 24 outlook. Just for example, you know, in terms of showroom comps versus location expansion that's embedded in the outlook and then, you know, curious if you're going to grow across online and the other channels as well. And then how are you factoring in stealth tech attach rates. Notice the data point you shared suggests that stealth tech attach rates are probably in the high teens this last year. There's probably maybe some room for improvement there, but just curious if you're factoring that into the fiscal 24 outlook.
spk04: Yeah, good morning, Matt, and thank you for your questions. I'll take the stealth tech one, and then Donna can talk a little bit about the mix for the year. So, yes, obviously, stealth tech we've had in market for just over a year. And whilst we always, you know, are very excited about the performance I shared earlier in terms of the growth and particularly where we see the long-term runway and all of the success that we've had, we have built in for continued growth, both in terms of just overall AOV in the business, as well as also attracting new customers. Because one of the great advantages we saw last year, and I think in quarter four are customer traffic was up nearly 18% was really driven as new customers came in to dry to test this new technology, this new experience, and really to hear and feel it. So continuing to plan for that to grow. And Hika shared earlier that we expect it to be over 100 million as the brand continues to build out in our flywheel. And I think one of the great successes for us is the marketing strength. And if you look at the customer acquisition costs, the ratio just continues to improve. So it just really does enable us to be able to continue to share the message about what we see as the best home audio system in the market with an amazing experience coupled with our sectionals. And then Donna, I think, do you want to touch on the channel mix for the year?
spk02: Yeah, so for the channel mix, we are projecting both internet and showrooms to increase year over year relative to all the things we discussed through showrooms, product innovation. The one channel, which I specifically called out, is the other channel, which right now we're not projecting because of the returned box inventory transactions. That was about $22 million that we're not today has not been built into being repeated in any of our guidance. So that's the one channel just by removing the inventory, those barred inventory transactions that in our current projections is not projected to increase. But the other, the Costco and the Best Buy within the other channel is, but in total, the other channel is not projecting to increase just because of the extraction of those inventory, barred inventory transactions. So showroom increasing, internet increasing. Obviously, we look at it all as omni-channel, so it's increasing in total and it's increasing separately as well. And the other channel, just as a highlight, because of the return box inventory transactions not currently being reprojected to happen again, so that, you know, Q2 through Q4, that is coming down slightly. But Costco and Best Buy increasing year over year within that channel. Hopefully that helps.
spk07: Very helpful. I'll come back and see you. Thanks, guys. Okay.
spk05: Our next question is from Alex Furman with Craig Callum Capital Group. Please proceed.
spk06: Hey, guys. Thanks for taking my question. I wanted to ask about the increasing lifetime value to customer acquisition costs. ratios, which is really impressive and counterintuitive, I think, given everything going on with the economy and high inflation and interest rates. So curious what's been driving that. Has it been more about more efficient customer acquisition, or is it more as you add more products that you're seeing more of an increase in the lifetime value over time, or maybe you're seeing it from both sides of it? But any color you can give us there would be very helpful. Thanks.
spk04: Yeah, great. Thank you, Alex. And yes, equally, we're very thrilled to see results that we just don't see from anyone else. And I think what's really also exciting is that you get full payback just from the first transaction or more. And, you know, we only use, I think, as we taught, the first fiscal year of purchases. And we know they come back to us for decades. And I think, as I shared Our repeat business is actually up to 38% of our transactions. So, you know, we are getting much more efficient in terms of customer acquisition. The team do a great job, whether it be hyper local marketing through to just optimization on search. nonlinear and even just you know sharing out the awareness of the brand all the way through to acquisition um i think the second piece um you know that we really have seen um a benefit is you know as we advance into other categories expand our total addressable market as you know stealth tech is part of our adverts and the creatives that we do alongside sectionals just think of that you literally get the advertising for free So as we continue in our flywheel expansion, going into new categories over time and everything that we've shared, you can just start to see even more of the efficiency opportunities that will continue. And the team have done a great job. There's been some inflation, but they continue to optimize, shift, and really manage the mix incredibly well. And we're very proud of all of their hard work because we really do see that big industry leading.
spk06: Great. That's really helpful. Thank you very much.
spk08: No, thank you, Alex.
spk05: We have reached the end of our question and answer session. I would like to turn the conference back over to Sean Nelson for closing comments.
spk11: Yes, we'd like to thank all of the amazing Lovesac associates who have made these results come to pass and thank our investors as well for supporting the company. And we're off to another great year at Lovesac.
spk05: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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