The Lovesac Company

Greetings. Welcome to Lovesac's fourth quarter fiscal 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and one follow-up. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Mary Fox, President, and 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 with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now, I would like to turn the call over to Sean Nelson, Chief Executive Officer of the Lovesac Company. Sean?

Good morning, everyone, and thank you for joining us. I'll start today by sharing a high-level overview of our fourth quarter and full-year fiscal 2026 results. provide an update on our design for life product platforms and strategic priorities for the year ahead before passing the discussion over to Mary Fox, our president. Mary will discuss our tailored customer acquisition engines and key growth enablers. Finally, Keith Signer, our CFO, will review our financial results and provide detail on our fiscal 2027 outlook. Before getting into the details, I wanted to capture the bigger picture strategic accomplishments from fiscal 2026 that could be easily overlooked. These accomplishments support our evolution from a product-driven company into a multi-platform, multi-room lifestyle brand. A brand that we believe can be the most loved home brand in America in short order. And in one day, the most loved brand in America, full stop. That's our ambition. We build our strategies to that end. These accomplishments recognize the economic landscape and competitive realities of the time, such as tariffs, with some reorganization of priorities to better optimize the opportunity to create value for stakeholders over the long term. First, we reinforced our already strong position in the living room with a focus on harvesting the strong brand equity we have earned over our now 27 years of history. We launched a new seeding platform called Snug, that will expand further in the coming months into a full sectional entry-level platform with new accessories, including the swivel armchair that we previewed at ICR. We re-engineered our sectionals platform and accelerated plans to onshore the manufacturing of the most core pieces beginning this summer. Mary will share more about this exciting initiative later. And we developed and consumer tested a new high-end sectional sofa platform that we plan to bring to market later this year. That will help round out Love Sacks offerings in the living room and provide more options for more customer preferences in style and in function, all done in a uniquely Love Sack way. Second, we set the stage for a planned calendar 2027 launch of a full suite of Design for Life products for an entirely new room in the home. Yep, that's right, a full suite of products and with a category-defining launch that we intend to support with a significant splash in the first half of next year. Third, we strengthened our leadership teams, particularly in marketing, e-commerce, and technology, and soft-launched essential services, including enhanced delivery options that our customers have pled for. We are in early innings for these growth enablers, but are already seeing the benefits as evidenced in our fourth quarter results. such as double-digit growth in our internet channel. That's a perfect segue. So let's run through those specifics on fourth quarter and the full fiscal year 2026. Uncertainty in economic conditions, intensity in promotions, and ever-changing tariffs tested our consumers and challenged our teams in fiscal 2026. But we adapted successfully, achieving market share gains, driving positive omnichannel comparable sales growth, full-year profitability, positive free cash flow, and a record year-end cash balance with no debt. Fourth quarter net sales grew nearly 3% with positive omnichannel comparable net sales and new showroom contributions outpacing the category, which declined 3.3%. Very encouragingly, internet sales grew 12.3% in the fourth quarter, showing how much upside there is from the upgrades new leadership has been implementing over the last six months. Tariffs and category promotional pressures on gross margins were in line with our most recent expectations, as was net income, which was down slightly year over year as a result. For the full year, net sales grew 2.4% with positive omnichannel comparable net sales and new showroom contributions outpacing the category, which declined 3.4%. Leverage of SG&A and marketing. as well as extraordinary efforts from our teams to mitigate tariff costs, had a meaningful beneficial impact on operating profits. But in aggregate, the gross margin pressures from tariffs and category promotions led to lower net income year over year. Finally, our balance sheet remained strong with a record net cash balance as of the end of the year and inventory levels down closer to optimal levels as we've committed to all year long. As a result, We've entered fiscal 2027 in a position of strength with substantial flexibility to enhance growth or optimize returns on capital. I'd like to spend a few more minutes summarizing the substantial developments of fiscal 2026 regarding our brand evolution analysis, the clarity that provided on go-forward product hierarchies, and the acceleration of our Made in America initiative. First, the goal was always clear. Lovesac would transition from being a product-focused company to developing as a true lifestyle brand. And to do so, we needed to sharpen and focus our positioning through a brand evolution refresh. That work, which we completed mid-fiscal 2026, laid a clear and reliable foundation, whereon we could build Lovesac into a multifaceted home brand with an organized and prioritized product hierarchy and merchandising strategy. It clarified what would allow us to confidently extend the brand further, but also deeper into the categories where we already have strength in order to compete even more vigorously for market share. It also led us to rethink everything from product naming to some new products themselves and the channels through which some of these new and even existing products can and should be offered. Next, we took the framework from the brand work and refined our strategic product priorities. The fastest and most effective path to profitable growth was to balance the current with the new, harvesting the brand we have built, shoring up our place as a leader in sectional sofas and in the living room, and aiming to take even more share in those places. All this would reinforce our brand equity and put Love Sack in an even better position to compete in the new rooms, the more radical growth initiatives coming. It's essential to understand what this means. We are not looking to add a large number of SKUs. We plan to intentionally launch products and platforms, as few as we can get away with, to achieve dynamism, high ROI, and love for this brand. Additionally, these carefully curated products have been intentionally designed to create daylight between each platform so they are distinct to customers and are creative to the brand. This is exactly the case with Snug. Sectionals and the new high-end sectional sofa of a different style coming out later this year. This will also be the case with the new room at launch from day one, built on this multi-platform knowledge that we now have. Simultaneously with our brand work, we accelerated our Made in America initiative. While long a goal for Love SAC, it became even more imperative with the tariff developments, which still remain fluid. Love SAC has a differentiated competitive advantage, high volumes of limited SKUs. This specialization in sameness and the resultant high volumes unlocks radical automation, which for us means better and less expensive domestic manufacturing. This initiative begins with factional seat inserts this summer, which we completely redesigned, not only to optimize for automation, but we've added brand new features and benefits verified through layers of consumer research. We gained the opportunity to refresh our portfolio of patent and IP protections to boot. Over time, we will apply the same thinking to more and more of our products. Of course, these new Made in America sectionals will be reverse compatible and can be used seamlessly with all sectionals ever sold. Furthermore, we expect Made in America products will help mitigate volatility in cost, risk of disruption for overseas shipping, and reduce weeks of stock required to provide the fast shipping that we are known for. Finally, under our new CMO's leadership, we are building a modern marketing engine. By accelerating our digital transformation and expanding our data and analytical tools, we aim to increase Lovesac brand consideration, lower customer acquisition costs, increase demand generation, and drive repeat business and customer LTV lifetime value. You saw phase one of this in the fourth quarter with much more to come over the coming quarters. Hopefully, it's clear just how much foundational work was completed during fiscal 2026, which we believe sets us up very well as we enter fiscal 2027. After four difficult years of category declines, we really hope this coming year would see category demand return to growth. But we don't strategize and plan based on hope. And you're all aware of the geopolitical and economic uncertainties in our world. Recent months have seen category declines easing, though still declining, and as such, we are planning based on the assumption that the category will once again decline in this fiscal 2027 by approximately low single digits. Keith will share the specifics later, but we believe we have the necessary ingredients to grow irrespective of the category in the near term, while maintaining clarity around long-term thinking and value creation. We are expanding our addressable markets in existing and new rooms by leveraging our core brand equities in quality and comfort by capitalizing on our installed base of superfans to drive LTV through repeat business. And that's all while adding ever more households to our family through more effective marketing strategies and lower cost of customer acquisition. Our commitment is not solely to grow the top line regardless of macro, which is true, but for revenue growth to drive enhanced flow through to the bottom line growth and resulting in higher margins. We expect that Lovesac will also absolutely benefit from an eventual category rebound, and we'll take that as icing on the cake whenever it arrives. Lovesac enters fiscal 2027 from a position of strength. highlighted by a clear strategic roadmap and a world-class team focused on generating profitable growth and tremendous long-term value creation for all stakeholders. In closing, a sincere thank you to our team, our hashtag lovesack family, for their ongoing dedication, commitment, and creativity as we work to become the most loved home brand in America. With that, I'll hand it over to Mary.