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spk05: Greetings. Welcome to Lovesac's third quarter fiscal 2024 earnings conference call. At this time, all participants are in 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. At this time, I'll turn the conference over to Elizabeth Schneir. Ms. Schneir, you may now begin.
spk04: Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Mary Fox, President and Chief Operating Officer, and Keith Signer, 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 a discussion of these risks and uncertainties, you should review the company's filings to 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 financial 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 post-release. Now I would like to turn the call over to Sean Nelson, Chief Executive Officer of the Love Stack Company.
spk10: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll start this call off by reviewing the highlights of our third quarter fiscal 2024 briefly providing an update on our operational accomplishments and finishing up with our outlook. Then Mary Fox our president and COO will update you on the progress we made against our strategic initiatives. And finally Keith Signer our CFO will review our financial results and a few other items related to our outlook in more detail. Turning to the highlights of our results. Not a lot has changed since we spoke with you four weeks ago. Lovesac continues to deliver strong financial results and category outperformance, backed by a very strong balance sheet. For third quarter, we're pleased to confirm top and bottom line results that were in line with the outlook provided on our second quarter call on November 3rd. The headline is that third quarter net sales grew double digits in a double digit negative category. To be clear, the macro backdrop largely remains the same as last month. Lingering macro uncertainty leads to consumer caution and pressure on the furniture category, which we estimate was down mid to high teens in the third quarter. However, our playbook also remains largely unchanged and continues to deliver. Our disruptive design for life platforms, impactful product innovation, compelling marketing, and highly productive omnichannel footprint continue to distinguish our unique brand and engender customer love and loyalty. More specifically, for the third quarter, total net sales were 154 million, up 14.3% versus the prior year period and 32% on a two-year basis. Omnichannel comparable net sales growth was 2% for the quarter, a key metric for how we evaluate and manage our unique omnichannel business. We delivered gross margin expansion and substantial abatement in SG&A deleverage as expected, which led to materially improved profitability compared to the third quarter of fiscal 2023. Adjusted EBITDA reached a positive 2.5 million compared to a negative 6.9 million in the prior year period. Net losses also improved to 2 million compared to a net loss of 7 million in Q3 last year. And that's despite non-recurring expenses related to the restatement that are called out in our press release. The Lovesac team continues to execute across all our priorities, including our innovation agenda, physical footprint expansion, omni-channel experience from order to delivery, and marketing efficiencies. Mary will discuss in more detail the progress of these growth strategies in a moment. As we look to the final quarter of the year, which includes the all-important holiday selling weeks, I'd like to note the following. The macro environment and in turn the discretionary home category has remained challenging. As we said on our last call, we are not planning for any meaningful recovery and category growth in the near term. And yes, as expected, the promotional environment was more competitive over the Black Friday and Cyber Monday periods than last year. But as we discussed with you last month, we adapted our plans, increasing the discount slightly and delivering relevant and distinctive marketing with strong gross margins to boot. Taking all that into account and with the Black Friday and Cyber Week events behind us, I'm happy to say that Love Sack has continued to grow and outperform the category. As a result, we are further tightening our full-year net sales guidance range, now $710 million to $720 million. which represents high single to nearly double digit growth, even excluding the impact of the 53rd week this year, a truly standout performance. We are not ready to provide guidance for fiscal 2025 today. However, we will prudently control expenses and with a focus on efficiency, balanced against proactive investments in new products to drive profitable growth. In summary, We are pleased to deliver third quarter results that were in line with our expectations and which, once again, are ahead of the competition. The operational progress we are making against our growth strategies, along with disciplined investments in key foundational areas like technology, new product innovation, and insights, continue to fortify our flywheel, thereby driving consumer demand and expanding our market leadership, which we believe can last well into the future. Finally, I want to thank the entire Lovesac team for their tireless execution of our strategies and delivery of our goals, especially during this critical time of year. Our disruptive model enables us to continue to grow, thrive, innovate, and invest in this business. But it is our people who ensure an outstanding customer experience and are the reason that our Lovesac family is growing so steadily as we enjoy a great holiday season together. With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail. Mary?
spk07: Thank you, Sean, and good morning, everyone. As Sean discussed, with sales growth of 14.3%, our quarter three results again reflected industry-leading growth driven by our unique omnichannel business model. Importantly, on a four-year basis, our sales are up 196% from pre-pandemic levels. And our adjusted EBITDA margin has increased 880 basis points over the same time period. Category out performance has continued this quarter with strength in demand versus last year during Cyber 5 from Black Friday through Cyber Monday. And we are very pleased with our early results. Some highlights from Cyber 5 include having our two largest sales days and the largest week in our history. We believe this peak in sales that is unique to our business within our category is due in part to our investment in building a brand that is unmatched in the furniture category, coupled with delivery to customers' homes in just a few days. Our clear strategy for growth and the team's consistent execution against our growth strategies allows us to continue to fuel our flywheel and drive operational excellence across the business. I will now share the highlights of our operational progress in quarter three. Firstly, starting with product innovation. During quarter three, we expanded distribution of our newly launched Angleside, which is now available across our showroom base, as well as our e-comm platform. And we're very happy with the impact and feedback. Angleside performance is even above our original expectations, which were ambitious, emphasizing how it is a meaningful driver of our overall continued growth and category app performance. As I shared before, we partnered with Architectural Digest to launch HangulSide to the consumer and designer world. The event was well attended by influencers, as well as media outlets such as Vogue and Glamour, and of course, Architectural Digest. In addition to generating over one billion impressions, the event was surrounded by Architectural Digest paid media, further empowering the success we've seen since launch, In short, we're very happy with the early performance of Angleside as it's approaching becoming Lovesac's number one style choice after only a few months. We're also launching some strong collaborations into the holidays, including a partnership with Nordstrom and Swarovski to develop a foot sack that will be featured within Nordstrom and on nordstrom.com this holiday. We continue to demonstrate that we will gain market share through our new product introductions and brand collaborations. as awareness and appreciation continue to grow, all of which reinforce the strength of our customer-centric business model. Our omnichannel experience. This model is driven by a combination of our physical touchpoints and our digital platform. During third quarter, we opened 10 showrooms and 16 Best Buy shop and shops. With regards to our Best Buy partnership, sales were up 42.8% in quarter three, driven by increased shop-in-shop presence versus last year. Our e-commerce channel performance continued to show strong growth and increased 20% for last year and contributing meaningfully to our category outperformance. Our omni-channel model and investments into touchpoint and website technology continues to drive improved customer satisfaction scores as we continuously monitor feedback and improve the overall customer shopping experience. We made significant improvements to the website shopping experience before entering our holiday code freeze, including new configurators to ease the customer rebuy journey, updates to post-purchase experience, and platform security enhancements. Strong collaboration across touchpoints and e-commerce enable us to continuously improve the omnichannel experience. Third is our brand ecosystem. At the center of our ecosystem lies our efficient marketing and effective rival brand awareness, familiarity, love, and ultimately customer acquisition, which supports our strong customer lifetime value to customer acquisition cost ratio. Overall, we continue to be agile with our marketing mix as the backdrop for customers' interaction with our category continues to change. Let me share a few highlights of what we've been working on. For awareness more broadly, increasing efficiency in achieving reach enabled us to drive reach and also improve targeting simultaneously. Live sports up front are a key example of this improvement. While on this subject, hopefully you all have seen our newest commercial that tested very strongly across all metrics. We continue to closely scrutinize digital marketing program optimizations to our SEM and social programs, which have driven improvements in our overall ad exposure and cost metrics, along with improving conversion rates and ROI. We've had strong success with some social partnerships that reinforce the resonance of our brand with culture. Charli D'Amelio posted from her new home on LoveSac products she'd requested. And as you know, she has more than 151 million followers on TikTok and over 9 million YouTube subscribers. We collaborated with Justin Pugh on a special sack when his Saturday night football intro referenced straight off the couch. And these two collaborations garnered over 35 million impressions and are just a few examples of the work our team are doing building brand love and stickiness. And not to be forgotten, direct mail campaigns once again delivered strong ROIs for us and not only drove customer acquisition, but aided increasing lifetime value of our customers. Lastly, we were really excited to see that Esquire named Celtech one of its best 37 gadgets for 2023. Yes, that is right. A couch made the best gadgets list, reinforcing the strength of design for live products powered by technology. And finally, disciplined infrastructure investments and efficiencies. During quarter three, we continue to make investments in technology and research and development as we scale our business for the long term. We completed the national rollout of PredictSpring, our new POS system, in all of our touchpoints. This rollout enhances the customer experience through speed of transactions and unlocks new and modern payment options like pay-by-link capability. Our quick delivery continues to drive customer satisfaction and our investments in supply chain, which we remain on track to deliver by the end of this year, are expected to help drive inventory productivity improvements of 20%. as we have previously stated. As mentioned last quarter, we continue to make progress on our circular operations and open box inventory, as we focus on improving the executional effectiveness and brand experience. And we are seeing over 48% improvement in units back to stock versus last year. As a result of these initiatives, we expect to see improvements in working capital, as well as associated cost reductions across inbound freight and warehousing. which we saw in quarter three and will continue to realize in quarter four. Investments in Gladly, our customer service platform, has allowed us to better serve customers as part of our sales and service strategy, driving over eight points of increase in C-Love customer satisfaction scores in quarter three over the same quarter last year, an impressive increase in service performance versus last year during Cyber 5.0. We are laser focused on operational excellence and we will continue to manage our cost structure and capital allocation as we deliver operational performance ahead of our competitors. In summary, we are pleased with our results for the third quarter and our continued and consistent track record of market share gains. I want to echo Sean's gratitude to our amazing team members for helping drive these financial and operational outcomes. So the big holiday weeks that we just covered and the ones to come, one thing that is certain is that we are ready for them and look forward to closing out our fiscal year, having built on our market share gains, expanded our physical footprint with highly productive locations, improved our digital go-to-market position, made important infrastructure investments and doing all of this while advancing our innovation agenda. I will now pass the call over to Keith to review our third quarter results and our outlook for the fourth quarter. Keith.
spk11: Thanks, Mary. Let's jump right into a quick review of the third quarter, followed by our outlook for the rest of fiscal 24. Net sales increased 19.2 million, or 14.3%, to 154 million in the third quarter of fiscal 24, with the year-over-year increase being driven by web and showrooms. This was in line with what we projected for the quarter, driven by our 25th anniversary celebration and the launch of Angled Side. Showroom net sales increased 15.7 million, or 18.9%, to 98.7 million in the third quarter, as compared to 83 million in the prior year period. The increase in showroom sales was driven by an increase of 2% in omnichannel comparable net sales growth related to higher point-of-sale transactions, with higher promotional discounting than the prior year, as well as the net addition of 41 net new showrooms compared to the prior year period. You'll notice that beginning this quarter, we've replaced previously provided comparable sales growth metrics with a new metric, omnichannel comparable net sales growth. This is the metric most closely aligned with how we evaluate and manage the financial performance of our omnichannel business. It also eliminates noise caused through the inclusion of demand-based metrics in the past, such as orders placed but that have not been shipped, and should therefore be far more useful for your models. Internet net sales increased $6.7 million, or 20.1%, to $40 million in the third quarter of fiscal 24, as compared to $33.3 million in the prior year period. Other net sales, which include pop-up shop, shop-in shop, and open-box inventory transactions, decreased 3.1 million, or 17.1%, to 15.4 million in the third quarter of fiscal 24. The decrease was principally due to a lower open-box inventory transaction level, only 2.5 million compared to 4.2 million in the third quarter fiscal 23. Our open-box inventory transactions with ICON are a part of our circular operations, Design for Life, and ESG initiatives. As we discussed last quarter, these transactions are waning in materiality as our initiatives to optimize our process for return product kick in. This better aligns with our sustainability goals and should retain more profits for Lovesac at the same time. We may engage in limited open box inventory transactions with ICON going forward to ensure that our warehouses are operating as efficiently as possible. By product category, in the third quarter, our sectional net sales increased 18%. SAC net sales decreased 10%. And our other net sales, which includes decorative pillows, blankets, and accessories, decreased 15% over the prior year. Gross margin increased 920 basis points to 57.4% of net sales in the third quarter versus 48.2% in the prior year quarter, primarily driven by a decrease of 1,070 basis points in total distribution and related tariff expenses. This was offset partially by 150 basis points of pressure from higher promotional discounting. The decrease in total distribution and related tariff expenses over the prior year is principally related to the positive impact of 1,160 basis points decrease in inbound transportation costs partially offset by 90 basis points in higher outbound transportation and warehousing costs. SG&A expense as a percent of net sales increased by 420 basis points in the third quarter, or half the deleverage seen in the second quarter. The deleverage was primarily due to deleverage within employment costs, selling related expenses tied to the Lovesac credit card, continued investments to support current and future growth, and also professional fees. In dollars, overhead expenses increased 10 million, consisting mainly of increases of $6.3 million in professional fees and $3.7 million in infrastructure investments and other miscellaneous items. Employment costs increased by $2.9 million, primarily driven by an increase in new hires in fiscal 24. Selling related expenses increased $1.5 million, principally due to credit card fees related to the increase in net sales and an increase in credit card rates. We estimate non-recurring incremental fees associated with the restatement of prior period financials was approximately $1.7 million in the third quarter. Advertising and marketing expenses increased $2 million, or 10.8%, to $21.1 million for the third quarter of fiscal 24, compared to $19.1 million in the prior year period. Advertising and marketing expenses were 13.7% of net sales in the third quarter as compared to 14.1% of net sales in the prior year period. Operating loss for the quarter was $3.6 million compared to operating loss of $10.1 million in the third quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss 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 this morning. Net loss for the quarter was 2.3 million or negative 15 cents per diluted share compared to a net loss of 7.4 million or negative 48 cents per diluted share in the prior year period. During the third quarter of fiscal 24, we recorded an income tax benefit of 1 million as compared to 2.8 million for the third quarter of fiscal 23. The change in benefit is primarily driven by the reduction in net loss for the quarter. Adjusted EBITDA for the quarter was an income of 2.5 million as compared to adjusted EBITDA loss of 6.9 million in the prior year period. Adjusted EBITDA for the third quarter was ahead of our expectations principally driven by the upside to gross margins. Turning to our balance sheet, our total merchandise inventory levels are in line with our projections and have leveled out as we discussed on our prior call. This is despite the addition of angled side skews, and we believe this is a clear highlight of the uniqueness of our business model. We feel exceptionally good about both the quality and quantity of our inventory, and our ability to maintain industry-leading in-stock positions and delivery times. We ended the third quarter with a very healthy balance sheet, inclusive of $37.7 million in cash and cash equivalents, as well as $36 million in availability on our evolving line of credit with no borrowings. Please refer to our earnings press release for other details on our third quarter financial performance. So now our outlook, and let's start with the fiscal fourth quarter. We estimate net sales of $260 to $270 million. We expect adjusted EBITDA between $48 to $56 million. This includes gross margins just under 60%, merchandising and advertising of 10.5% to 11% as a percentage of net sales, and SG&A of 31% to 32% as a percent of net sales. We estimate net income to be 29 million to 33 million. This includes approximately 1.5 million of non-recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per share is expected to be $1.77 to $2.02 with 16.6 million diluted weighted average shares outstanding. Now for the full year fiscal 2024. We are tightening the range of our full year outlook for net sales to $710 to $720 million. We expect adjusted EBITDA between $54 million and $62 million. This includes gross margins of $57 to $57.5, merchandising and advertising of approximately 13% as a percentage of net sales, and SG&A of approximately 38 as a percentage of net sales. We estimate net income to be between 22 and 26 million. These fiscal 2024 estimates include 4.5 to 5 million of non-recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per common share in the range of $1.35 to $1.60 and approximately 16.5 million estimated diluted weighted average shares outstanding. As a reminder, the 53rd week in the fourth quarter is expected to contribute approximately 6 million in net sales. Quickly on our cash balance outlook, we were very pleased to have reported such a strong cash position for the third quarter, which is typically our lowest quarter-ending cash balance of the year, given the inventory build ahead of the strong holiday sales period. As we monetize inventories through the busy season, we continue to estimate we will end fiscal 24 with a higher net cash balance than we ended fiscal 23. So, in conclusion, we're pleased with our third quarter results and how early holiday sales have supported the continuation of competitively superior results as is reflected in our outlook. Market share gains, strengthening foundations, exciting new growth drivers, and a healthy balance sheet put Lovesac in an enviable position. The more I get to know the teams, the more excited I get about our collective commitment to optimizing the opportunity ahead of us. With a strong focus on growth underpinned by an ROI-based approach to measured reinvestment, I'm confident in the outlook. Now, I'll turn the call back to the operator to start our Q&A session.
spk05: Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question at this time, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are 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. Thank you. Our first question today is from the line of Maria Rips with Canaccord Genuity. Pleased to see you with your questions.
spk06: Good morning, and thanks for taking my questions. First, recognizing that it's too early and you're not guiding to next year, but maybe can you talk about sort of your current expectations for the category growth and consumer demand next year? And what kind of macro assumptions are embedded in your sort of internal forecast for next year?
spk07: Hey, Maria, lovely to hear from you. Thank you for the question. Yes, as obviously we're fully focused on quarter four and this all-important holiday season. We'll share more when we come through to our earnings for quarter four. In terms of our plans for next year, we still anticipate the macro environment will be choppy and the category will be remaining challenging. And we have planned that way. But as we've demonstrated with our results this year, last year, we've to obviously really outperform the category really driving tremendous growth and and I think just so much of that goes back to the fact our brand strength continues to you know just really grow I think you know our customers even just being asked in showroom last week you know they just love the brand they believe in design for life so you know we're planned continue to be pragmatic prudent in terms of our investments with obviously a deep focus on ROI. But obviously, as soon as things turn, we hope it will as the category starts to improve, then we'll be the ones that will be the fastest to be able to chase into that growth. We saw it through COVID, so we feel good. And obviously, that's the advantage of our supply chain.
spk11: Yeah, Maria, this is Keith. Just to add to that a little bit, I mean, that's one of the really, really alluring aspects of this business model to me. Because of our approach not being merchandise-led but primarily selling seats and sides and sacks with the various covers, our ability to scale up with upside surprises to the macro is really advantageous. You know, starting from a position of shipping in less than two weeks, even if we needed to potentially extend that a tiny bit in order to, if it was a really material upside macro surprise, we could do so. So we sort of retain the ability to participate in upside macro surprises in a way that I think is sort of unmatched.
spk06: Got it. That's helpful. And then secondly, you've made a lot of progress on gross margin expansion over the past couple of quarters. Can you maybe talk about your philosophy around preserving that margin versus maybe passing on some of the savings to the consumer to drive volumes, especially kind of here in the new term in this macro environment?
spk11: Sure. I'll start off on this one. So we've been really pleased with this, and there's a whole host of factors behind it that we walked through on the call or that I walked through on the call earlier. And you can see as we get into fourth quarter with the guidance that we gave, that we're looking for continued gross margin expansion through the fourth quarter. You know, let's call it heavily rounded half the benefit year over year that we saw here in the third quarter. You know, but I think I would say this. We've sort of settled into where we think is a healthy range for us. Barring any material shocks, whether it's on inbound freight or outbound freight, there's always potential for some type of systemic shock. But barring anything like that, I think we feel pretty good about this. Then what it becomes for us is a balancing act across pricing, across promotions, across managing all of those inbound and outbound freight cross, plus how we leverage our marketing and our ineffective promotions we offer through the financing through the Lovesac credit card. So put it all together, I think these feel like pretty sustainable and healthy levels for us, again, barring any systemic shock.
spk06: Got it. Thank you for the call.
spk05: Our next question is from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.
spk03: Good morning. Nice quarter. Nice start to the holiday season.
spk02: Congrats. Thank you. The first question I want to ask, and I think it's a bit of a follow-up just to that prior gross margin question. You mentioned in the comments, and we've heard this elsewhere too, that it's more promotional out there. It's more of a promotional backdrop. So I guess the question I have with regard to gross margins is we look at the results you've put up today for Q3 and the guidance for Q4. To what degree do your consumers react more favorably to price promotions? How much of a driver, as you do that strategically, how much of a driver of the business has that become?
spk03: Yeah.
spk10: Look, I think promotions is a very powerful tool in our arsenal, especially given our high growth margins to begin with and the competitive nature of our unique products. We try to be very strategic with them. As you know, we're trying to build a business that's here forever, for 50 years. We're trying to build a generational brand and a brand that means something. We have long leveraged promotions at fairly healthy levels because in this industry in particular, it's a considered purchase. And so people spend quite a long time researching products, researching competitors, researching our product before they make the decision to purchase. And what we found, especially during the holidays, is while our business spikes, as we all know during Q4, kind of uniquely in our category. Love Sack, and sometimes we look at that, is that a blessing or a curse? But we enjoy... the extra business that comes by the exposure being out there in shopping centers during this time of year when there's foot traffic, et cetera. But actually, most of those sales, as we observe them and as I observe them in the wild on the front lines and showrooms, come from these considered processes where customers are weighing the value. And then frankly, they leverage the holiday season to push them over the edge and make that purchase finally for themselves. It actually most of the time is not a gift or even related to gifting. It's just kind of a psychological excuse to purchase. And so during this time of year in particular, the way that we manage promotions is really critical because we have people that have been shopping us maybe throughout the entire year and finally pull the trigger and are waiting to see if they might get better, etc. So We've exercised, I think, a pretty disciplined hand this season, particularly because it's maybe the most promotional season it's ever been, at least in recent history, given the industry right now. And so our promotions are lower than what we observe by really any of our competitors. And as you can see by the numbers, we are competing very robustly. I think we probably have the strongest growth in the category. And so we think we have that right balance of promotion and healthy fundamentals in the business for the category right now. And the nice thing is, you know, should things in the category get worse or just continue to languish, we have a strong opportunity to leverage promotions further to drive the business if necessary. But, you know, we're not chasing business to chase business. You know, again, we're trying to balance building a brand that people can love and trust and have consistency, as well as, of course, compete in real time and generate cash and generate profits, returns for investors.
spk07: I think, Sean, just maybe, Brian, to add a little bit more. I mean, what we see as well is, you know, consumers, they love the deal and the excitement of that deal, but it doesn't mean about the lowest price. And we've shared with you before nearly 40% of consumers that come into our brand, they don't even cross us with anyone else. So, you know, we feel very good in terms of gross margin kind of being maintained. We have been doing some selective price increases in places as we ladder out, particularly on our more premium fills, and we've seen great performance from that. So, you know, we're constantly adjusting the leases that we have available. And as you can see from our results, you know, gaining huge market shares, outperforming everyone else. And, you know, this algorithm has been working for us. You know, we saw from the Goldman Sachs report yesterday, the promotional level, you know, was high through quarter three at about 40% and at a similar level through November. And we are substantially lower. So I think, again, just that we do feel good on the gross margins.
spk02: that's very helpful that's very helpful my follow-up question um different topic so i think it's mary i think you were talking your comments it's about the you know the highlighting i guess the ongoing success of the relationship with with best buy so the question i have is you know i know you're you're you always as a company very guarded by your future plans but i mean should we expect additional newer you know distribution type partnerships with you know with with companies like best buy to help
spk07: basically getting the love sack products out there yeah no but before i think you know where we always want to be is best-in-class partners where you know consumers it's really on their mind so costco has obviously been an incredible partner for us particularly as we advance where home meets tech, there's no one better to partner with than Best Buy. We want to be where the footsteps are. So, yes, you know, we've continued to expand the relationship with Best Buy and more to come, and we'll share more, obviously, at the end of this year. But we're gaining share. They're very happy in terms of relationships and want to continue to advance it. And then we're always considering, Brian, in terms of any other you know, best-in-class partners that we should be partnering with as you consider the whole ecosystem, whether it be showrooms, whether it be Costco, Best Buy, you know, our own e-com platform, just where should we be and where are those footsteps. So, you know, always on our minds strategically, but very thoughtful how we do it to ensure that we really, you know, drive the way that we believe and consumers expect to find us.
spk03: Very helpful. Rats, again, happy holidays. Thanks.
spk07: Yeah, thank you, Brian. Thank you.
spk05: The next questions are from the line of Matt Caranda with Roth MKM. Please receive your questions.
spk00: Hey, guys. Good morning. Thanks for taking the questions. Just wanted to spin back to the Black Friday, Cyber Monday commentary and the holiday commentary in general that you had. Just wondering if you could maybe speak to sort of consumer behavior that you're observing One of the things we've seen sort of quarter to date from a number of folks is that consumers seem to be responding to promotions, but then kind of sitting on their hands in between those promotional periods. I'm just curious if that's the trend that you're seeing and then any willingness to sort of quantify the Black Friday, Cyber Monday growth that you said. I know you mentioned two record days and a record week, but any further quantification would be appreciated there.
spk07: Yeah, no, thank you for the question, Matt. So I think first of all, we were incredibly happy with our performance of Cyber 5, as you mentioned. And from all industry reports, we know we outperformed the category significantly upon a lot of market share. I think in terms of dynamics, all of our channels contributed to this strong performance. It really felt like we were back to 2019. Strong traffic in showrooms, e-commerce growth well into the late evening. And it was great being back in the front line. I think we saw consumers coming in that had done their research, were very focused in what they wanted to buy. And as we shared with you back in the last call a month ago, we're not seeing anything in terms of trade down. I saw some trade up, particularly in the fill, but also just storage seats and other things that really drive up AOV so you know that continued financing that all continued I think as you talked about were people waiting for sure and we saw that across the industry with others come out with deals you know even earlier than Halloween sure we were later we promised that we gave them the best deal and we were holding to that and we did So you did see a little bit more of that pent-up demand come in, which is obviously, you know, the results that we've had. So super happy from obviously everything we've done, and we've baked all of that performance into our guidance for this year. You know, we're a third of the way through, so there's still a lot to come. But it was, you know, obviously amazing to see the performance and just really reinforcing the brand's presence. and just a great job to our teams. I mean, managing those record days is our little showrooms with incredible productivity. It was great to sit in there and they did an amazing job.
spk00: Okay. Very helpful, Mary. Thank you. And then maybe for Keith, just on the gross margin, I wanted to attack it from a different angle. So in the third quarter, you had an upside surprise versus sort of the commentary that you had last call. Um, Just wondering what drove the upside. And then for the fourth quarter, in terms of product margin, are we baking in a deeper headwind in that sub-60 outlook that you talked about? Just maybe talk about the bridge, especially as it pertains to product margin in the fourth quarter. Thank you.
spk11: Yeah, sure. So starting with the third quarter and where maybe some of that upside came from, I think it gets back to what Mary was just saying, which is we've been seeing some decent premium upgrades, things like Glovesoft, things like storage seats and add-ons along those lines, as well as a little bit more shift towards sectionals within the mix of product versus where we might have been. The surgical price increases we've been taking on certain of those products has also been beneficial. it's not been broad-based or materially large in terms of price increase, but put the whole package together and that got us a little upside on the quarter. When you're thinking about fourth quarter, really what's happening is we're lapping some of the abatement of the inbound freight costs that were really pressuring last year. That's why we're seeing less of a year-over-year benefit in the Q4. It's more the easing of the tailwind on a year-over-year basis that's causing that deceleration and expansion. You'll notice that we do get a higher absolute gross margin in Q4 than Q3 because we do get some leverage. The higher sales gives us some leverage over things like warehouse costs and so on and so forth. But that's why what I was saying earlier was when we think about holistically where we are in gross margins here in these high 50s, this feels like a good level for a full year basis for us and barring any systemic shocks. I think the way the business is trending, we feel good here.
spk03: Okay. Much appreciated, and best of luck for holiday, guys. Thanks. Thank you.
spk05: Our next question is from the line of Alex Furman with Craig Callum Capital. Please just use your question.
spk08: Hey, guys. Thanks very much for taking my question, and congratulations on a really strong year. You know, Mary, I think you mentioned a couple times and Sean, you know, touched on as well that you set new records for peak days and weeks here during the holiday season so far. You know, you guys have done a really good job historically over the last couple of years of being able to handle those volumes without any kind of shipping delays or anything like that. But can you talk about the profitability aspect? of those orders on peak days? Are there any incremental costs that you start to incur when you're operating near your peak capacity? And would it be more profitable if there were ways to smooth out demand a little bit more?
spk07: Yeah, no, thank you, Alex. Great question. And yes, it was phenomenal seeing those record performances. I think the team had planned for everything. And as we go through different scenarios and working with our last marketing team, partners, you know, we planned for that capacity. So, therefore, there wasn't any incremental costs, you know, that really came in. So, from that side, certainly, you know, to what we planned for, and the team did a great job smoothing that through. I think the second piece, you know, as we think about investing, we talked about PredictSpring. We completed that full rollout. And that's significantly improving the speed of transaction. So when you have five or six customers in the showroom on those peak days or even more, just having that speed and the technology to be able to transact has really, really helped. You know, web performance, you know, customers often choose to then, you know, convert at home and close the sale. So again, just racked to the kind of reinforcement of the omnichannel model, but nothing that we see in terms of any profitability impact. It was as we planned.
spk08: Okay, that's really helpful. Thank you, Mary.
spk07: Thank you, Alex.
spk05: Thank you, Alex. Our next question is from Thomas Forte. Please proceed with your question.
spk09: Great, thanks. So, Sean, Mary, and Keith, congrats on the quarter and strong start to the fourth quarter. So, two questions. The first one is, can you give your updated thoughts on your ability to generate free cash flow and your thoughts on what you intend to do with the free cash flow as you advance the model?
spk11: Absolutely. So, and I appreciate the question. Thanks. So we're going to, you know, we're looking to provide more details about this with Q4 earnings when we get into the outlook for next year. But I think little bits and pieces of everything we've been talking about are sort of, you know, starting to lay the foundations for how we're going to approach this on a go forward basis, which is as we transition into, you know, generating more substantial free cash flow off of seats and sides and sex, you know, it's how do we, how do we appropriately balance the reinvestment in the future sales growth drivers with other options for that cashflow? So, you know, we, we fully anticipate ending this year, having been, um, in a cash generative position, You know, new systems and other tools and optimization programs are being put in place all the time. You know, we are going to balance that, you know, as Sean has said, as Mary has said, and I have said, against those future sales drivers. Our goal is to, you know, translate more of the top-line growth to bottom-line growth going forward, and that should create more cash flow and out of the business which we can use strategically along those balance lines I was just talking about.
spk09: Great, thanks Keith. And then you've pretty consistently generated a lot of market share gains. Sean, you talked in the past about your ability to consistently outperform the market at high teens, perhaps low 20 percentage point rate. I wanted to talk about the source of the market share. do you feel like you're getting market share from the same players or do you think it's changed over time?
spk10: Yeah, that's a great question. Um, I, you know, it's, it's hard for us to know for sure, but, uh, I, you know, our observations on the category and, and we try very hard to stay abreast of every player who sells couches, you know, that's our core business. And, uh, therefore any, any, uh, firm that sells couches. We consider a competitor and we track them all. I think that I think I think there's kind of in our in our world, there are two main buckets of competition. And remember, of course, we are operating at a certain price point. But this brand love sack stretches across broad, I think, fairly broad demographics because You know, we can sell to the very high-end customer who has a massive home and is excited to put a 20-seat Saxonals with Stealth Tech in their basement or entertainment room. And we can sell to Middle America, where this is their main piece of furniture, and we pull them up to our price point through the real value that Saxonals create. And so we compete with all of the established brands in home that we maybe be in the mall with or otherwise. We compete with brand new startups who kind of copycat the sectionals format, modularity, et cetera, and try to mimic that value prop. And so I think that, you know, in this environment, we're taking market share from all of them. And as you can see with most of our competitors, negative growth, and obviously our positive growth, we are certainly taking market share. So I think that it ebbs and flows based on the health of that marketplace. And for instance, I think that in startup land, capital is much more dear than it was over the last number of years. And so they're not spending in necessarily the same ways across the board, just chasing growth. And I think the incumbents have some of their own problems to deal with in this environment where there is still a massive hangover in the home category. Meanwhile, we have very low – within the category, that is. This category is known for very low-aided awareness, and it's very fragmented. And so we are taking market share based on the competitor's unaided awareness. You know, it's hard for furniture brands to gain real brand awareness because consumers buy from furniture brands and home brands sporadically and sometimes with years in between. And therefore, you know, as you observe Love Sack's strategy of building a brand in between, you know, leveraging pop culture, being in the zeitgeist through celebrity, influencer, of course, our very sticky brand name. All of these things give us strength where I think many of our competitors can't mimic that aspect of what we do and how we do things. And I think the SAC is a major player in establishing that brand. And so for all these reasons, I think that I think that we certainly are taking market share. It's hard for us to pin down exactly where and who it's coming from, and I think that does change based on the state of the category, which also has been in flux recently. Great.
spk09: Thanks for taking my question.
spk03: Great to hear from you.
spk05: Thank you. We've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.
spk10: Yes, thank you so much for joining the Lovesac 3Q conference call for fiscal 2024. We look forward to reporting again at the wrap-up of our fiscal year, and we want to just thank investors and all of the hashtag Lovesac family for building this brand that we hold so dear.
spk05: This will conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.
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